Valhi, Inc. — Second Quarter 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; financial statements are unaudited. Valhi is a holding company operating through Chemicals (Kronos), Component Products (CompX) and Waste Management (WCS). Contran and a subsidiary owned approximately 93% of Valhi’s common stock.
Financial performance and condition
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | 2013: $516.0 million; 2012: $568.3 million | 2013: $1,015.2 million; 2012: $1,151.1 million |
| Operating income (loss) | 2013: $(46.8) million; 2012: $103.2 million | 2013: $(92.0) million; 2012: $306.5 million |
| Net income (loss) attributable to Valhi stockholders | 2013: $(39.7) million; 2012: $44.4 million | 2013: $(79.5) million; 2012: $133.3 million |
| Net loss per share attributable to Valhi stockholders | 2013: $(0.12); 2012 net income per share: $0.13 | 2013: $(0.23); 2012 net income per share: $0.39 |
- Consolidated gross margin was $17.2 million, or about 3.3% of sales, in Q2 2013, compared with $162.0 million, or about 28.5%, in Q2 2012. For the first half, gross margin was $30.1 million, about 3.0% of sales, versus $422.4 million, about 36.7%.
- Q2 and first-half income tax benefits were $27.3 million and $49.1 million, respectively, primarily reflecting operating losses; the comparable 2012 periods recorded tax expense.
- Net cash used in operating activities was $16.6 million in the first half, an improvement from $76.4 million used in the 2012 period. Capital expenditures were $36.6 million. Cash and cash equivalents fell from $366.9 million at year-end to $179.9 million at June 30; first-half net cash change, including exchange effects, was a decrease of $187.0 million.
- At June 30, current assets were $1,056.0 million and current liabilities $349.2 million, a current ratio of about 3.0. Total debt was $821.1 million, including $30.8 million of current maturities; long-term debt was $790.3 million. Debt declined from $910.1 million at December 31, 2012.
- Valhi reported $254.1 million of noncurrent marketable securities, including a $250.0 million investment in The Amalgamated Sugar Company LLC. The filing describes borrowing availability of about $315 million across specified facilities, but $65 million under the Valhi-Contran facility was at Contran’s discretion. The company said it was in compliance with debt covenants.
Material changes versus the prior comparable period
- The Chemicals segment drove the deterioration. Its sales fell 12% in Q2 and 15% in the first half, while operating results shifted from income of $112.4 million and $323.7 million to losses of $45.3 million and $90.4 million, respectively. Average TiO2 selling prices declined 24% in Q2 and 22% in the first half; sales volumes increased 17% and 9%.
- Chemicals cost of sales rose 23% in Q2 and 37% in the first half, reflecting higher-cost feedstock ore, volumes and, for the first half, lower production. Management said a significant portion of 2013 sales used feedstock purchased at higher 2012 costs.
- Component Products improved: sales rose 9% in Q2 and 7% in the first half; operating income increased 35% and 17%, respectively, helped by postal products demand and improved cost efficiency.
- WCS sales increased to $10.9 million in Q2 and $25.0 million in the first half, compared with $0.9 million and $2.0 million. Its operating losses narrowed to $4.4 million and $6.0 million, but it remained loss-making.
- The 2012 comparisons included a $14.7 million real-estate litigation settlement gain. In 2013, Kronos recorded a $6.6 million noncash debt-prepayment charge in Q1.
Outlook, risks and unusual items
- Management expected 2013 net income from continuing operations attributable to Valhi stockholders to be lower than in 2012, primarily due to lower expected operating income from Chemicals and Component Products, partly offset by lower WCS losses.
- Management expected Chemicals’ second-half 2013 operating result to improve from the first half, as lower feedstock costs flow through and selling prices potentially rise. It nevertheless expected full-year Chemicals operating results to be significantly below 2012. TiO2 price increases announced in May began taking effect in June; further increases were expected, subject to market conditions.
- Unionized workers at Kronos’s Canadian TiO2 facility remained locked out after the labor agreement expired June 15, 2013. The facility, about 19% of worldwide capacity, was operating at approximately 15% capacity with non-union management employees. Management expected minimal customer disruption but could not assure an agreement or that its terms would avoid a material adverse effect.
- WCS had received its first Federal low-level radioactive waste shipments late in Q2 and held a five-year national disposal contract with potential value up to $300 million; only limited tasks had been awarded. Management did not expect significant WCS operating profit until revenues cover its high fixed costs.
- Environmental remediation liabilities totaled $61.8 million at June 30, including $55.3 million noncurrent. NL had accrued about $60 million for approximately 50 sites; the estimated upper end of reasonably possible costs for estimable sites was about $156 million, including the accrual. Costs for five sites could not then be reasonably estimated.
- NL had not accrued for pending lead-pigment litigation because it considered a loss not probable and not reasonably estimable; the filing warns that a future adverse development could materially affect results, financial condition or liquidity. NL also reported 1,125 asbestos-related cases involving about 1,643 plaintiffs, without an accrual on the stated grounds of uncertainty and inability to estimate.
- Tax authorities were examining returns. A disputed Canadian reassessment could result in approximately $15.6 million of cash tax liability if fully assessed; Valhi said it believed its accruals were adequate. WCS disposal-license challenges remained pending, while the relevant licenses remained in effect during appeals.
- Subsequent to quarter-end, Kronos prepaid the remaining $100 million term-loan principal using $50 million cash and $50 million drawn on its North American revolver; it expected an additional noncash charge of about $2.3 million in Q3. CompX also prepaid its remaining TIMET note in July. These transactions occurred after June 30.
Important facts for investors to verify
- Whether TiO2 selling-price increases take hold and lower feedstock costs meaningfully improve Chemicals margins in the second half.
- The duration and operational consequences of the Canadian labor lockout, including production recovery and customer fulfillment.
- WCS contract task awards, Federal waste shipment volumes, cash requirements and progress toward covering fixed costs.
- Available liquidity after the July debt prepayment, including facility availability, subsidiary-level restrictions and Valhi’s dependence on subsidiary distributions.
- Environmental accrual adequacy and developments in lead-pigment, asbestos, tax and WCS license proceedings.