Valhi, Inc. 10-Q Summary: Quarter Ended September 30, 2009
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2009, for Valhi, Inc., a holding company operating through three primary segments: Chemicals (majority-owned Kronos Worldwide, Inc., a producer of titanium dioxide), Component Products (majority-owned CompX International, Inc., a manufacturer of security and ergonomic products), and Waste Management (wholly-owned Waste Control Specialists LLC). The company is majority-owned by Contran Corporation.
Key Financial Metrics
| Metric (in millions) | Q3 2009 | Q3 2008 | 9 Months 2009 | 9 Months 2008 |
|---|---|---|---|---|
| Net Sales | $341.6 | $390.2 | $931.0 | $1,200.3 |
| Net Income (Loss) Attributable to Valhi | $8.4 | $(23.2) | $(30.6) | $(29.3) |
| Diluted EPS | $0.07 | $(0.20) | $(0.27) | $(0.25) |
| Operating Cash Flow (9 Months) | $61.0 (2009) vs $0.9 (2008) | |||
| Total Debt | $989.3 (Sep 30, 2009) vs $920.4 (Dec 31, 2008) | |||
| Cash and Equivalents | $69.5 (Sep 30, 2009) vs $37.0 (Dec 31, 2008) |
Material Changes vs. Prior Period
- Profitability Turnaround in Q3: The company reported a net income of $8.4 million in Q3 2009, a significant improvement from a $23.2 million loss in Q3 2008. This was driven by higher operating income in the Chemicals segment and the absence of a $10.1 million goodwill impairment charge recorded in Q3 2008.
- Revenue Decline: Net sales decreased 12% in Q3 and 22% for the nine-month period compared to 2008, primarily due to lower demand in the global economy and unfavorable currency exchange rates.
- Segment Performance:
- Chemicals: Operating income improved to $22.3 million in Q3 2009 from $8.8 million in Q3 2008, aided by increased sales volumes and lower maintenance costs, though the nine-month period showed a loss due to production curtailments in H1.
- Component Products: Continued to struggle with lower order rates, reporting an operating loss of $0.1 million in Q3 2009.
- Waste Management: Reported an operating loss of $9.0 million in Q3 2009 as the segment navigated regulatory licensing and construction of new facilities.
- One-Time Gains: The nine-month 2009 results included significant non-operating gains: $23.0 million from litigation settlements and $6.3 million from the sale of a research business.
Guidance, Outlook, and Risks
- 2009 Outlook: Management expects a higher net loss for the full year 2009 compared to 2008. This is attributed to lower expected operating income from the Chemicals segment (due to unabsorbed fixed costs from H1 production curtailments) and lower litigation settlement gains compared to the prior year.
- Chemicals Segment: Production curtailments in H1 2009 resulted in approximately $80 million of unabsorbed fixed costs. Capacity utilization increased to ~96% in Q3 and is expected to remain at 90-95% in Q4. Price increases announced in Q3/Q4 are expected to improve average selling prices.
- Liquidity and Debt: The company terminated its $85 million bank credit facility in July 2009 and replaced it with a $70 million revolving facility with Contran. Total debt increased to $989.3 million. Management believes it has sufficient liquidity to meet short-term obligations.
- Key Risks:
- Legal Proceedings: Significant exposure remains regarding lead pigment litigation (NL Industries) and patent infringement suits against CompX (Humanscale and Accuride). A jury verdict in October 2009 awarded plaintiffs $28.2 million in contract damages and $33.7 million in fiduciary duty damages (plus potential punitive damages) in a dispute with former minority shareholders; Valhi intends to appeal.
- Environmental Liabilities: Accrued environmental costs were $49.1 million, with potential additional costs for sites where liability cannot yet be estimated.
- Covenant Compliance: Subsidiaries Kronos and CompX have amended credit facilities with financial covenants that require monitoring; non-compliance could restrict borrowing or accelerate debt.
Investor Verification Checklist
- Legal Exposure: Verify the status of the appeal regarding the $61.9 million jury verdict against NL/Valhi and the potential impact on cash reserves.
- Chemicals Segment Recovery: Monitor Q4 2009 results to confirm if price increases and higher capacity utilization offset the H1 unabsorbed fixed costs.
- Debt Covenants: Review the specific financial ratios required by the amended Kronos European and CompX credit facilities to ensure ongoing compliance.
- Waste Management Progress: Track the commencement of construction for the Low-Level Radioactive Waste (LLRW) facility and the timeline for operational status (expected late 2010/early 2011).
- Dividend Policy: Note that Kronos suspended its dividend in 2009; assess the impact on Valhi's ability to fund its own dividends and debt service.