Business Context and Reporting Period
Company: Valhi, Inc. (NYSE: VHI)
Reporting Period: Fiscal Year Ended December 31, 2009
Structure: Primarily a holding company operating through majority-owned subsidiaries: NL Industries, Inc. (NL), Kronos Worldwide, Inc. (Kronos), CompX International Inc. (CompX), and Waste Control Specialists LLC (WCS).
Ownership: Approximately 93% owned by Contran Corporation, controlled by Harold C. Simmons.
Key Financial Metrics (2009)
| Metric | 2009 Value | 2008 Value |
|---|---|---|
| Total Net Sales | $1,272.1 million | $1,485.3 million |
| Operating Income (Loss) | $(41.6) million | $36.0 million |
| Net Income (Loss) Attributable to Valhi | $(34.2) million | $(0.8) million |
| Diluted EPS | $(0.30) | $(0.01) |
| Cash Flow from Operations | $76.0 million | $(24.5) million |
| Total Assets | $2,410.3 million | $2,389.4 million |
| Total Debt (Long-term + Current) | $990.9 million | $920.4 million |
| Stockholders' Equity | $428.7 million | $468.8 million |
Material Changes vs. Prior Period
- Revenue Decline: Total net sales decreased 14% to $1,272.1 million, driven by a 13% drop in the Chemicals segment (Kronos) due to a 7% volume decline in TiO2 sales caused by the global economic downturn. Component Products sales fell 30% due to weak demand in North America.
- Operating Loss: The company reported an operating loss of $41.6 million in 2009 compared to operating income of $36.0 million in 2008. All three operating segments (Chemicals, Component Products, Waste Management) reported operating losses in 2009.
- Chemicals Segment: Kronos reported an operating loss of $10.6 million (vs. $52.0 million income in 2008). Gross margin compressed to 11% from 17% due to unabsorbed fixed production costs from plant curtailments in the first half of 2009.
- Component Products: CompX reported an operating loss of $4.0 million (vs. $5.5 million income in 2008), impacted by lower order rates and patent litigation expenses.
- Waste Management: WCS operating loss widened to $27.0 million (vs. $21.5 million in 2008) as the segment began limited byproduct disposal operations in Q4 2009 but lacked sufficient revenue to offset the new cost structure.
- Non-Operating Items: The 2009 net loss was partially offset by litigation settlement gains ($23.1 million pre-tax) and a gain on the sale of a business ($6.3 million). A significant non-cash income tax benefit of $14.0 million was recognized due to a decrease in reserves for uncertain tax positions.
Guidance, Outlook, and Risks
- 2010 Outlook: Management expects to report net income in 2010, driven by expected operating income from Chemicals (higher volumes/prices) and Component Products (lower legal expenses). A non-cash income tax benefit of approximately $24.4 million is expected in Q1 2010 following a European Court ruling on German tax issues.
- Chemicals Outlook: TiO2 demand is expected to increase in 2010. Capacity utilization is expected to rise to 90-95% (up from 76% in 2009). Price increases announced in late 2009 are expected to continue into 2010.
- Waste Management Outlook: WCS expects to continue reporting operating losses until the new low-level radioactive waste (LLRW) facility is operational (expected early 2011). Construction is expected to begin mid-2010.
- Key Risks:
- Litigation: Significant exposure to lead pigment litigation (NL) and environmental remediation costs. No accruals for lead pigment cases as liability is not estimable, but potential liability could be material.
- Liquidity: Dependence on subsidiary dividends to service parent-level debt. Kronos suspended its dividend in 2009.
- Debt Covenants: Kronos and CompX have credit facilities with financial covenants. While compliant at year-end, future operating losses could restrict borrowing availability.
- Raw Materials: Exposure to commodity price fluctuations (zinc, steel, titanium feedstock) and currency exchange rates (Euro, Canadian Dollar).
Investor Verification Checklist
- Lead Pigment Litigation Status: Verify the status of pending lead pigment lawsuits against NL and any new filings, as the company has not accrued for these but notes potential material liability.
- WCS Financing: Confirm the status of financing for the $75 million LLRW facility construction, specifically the issuance of county bonds mentioned as a potential funding source.
- German Tax Ruling: Monitor the realization of the expected $24.4 million non-cash tax benefit in Q1 2010 and the utilization of German net operating loss carryforwards.
- Debt Covenant Compliance: Review quarterly reports for compliance with financial covenants on Kronos's European credit facility and CompX's credit facility, particularly given the operating losses in 2009.
- Dividend Policy: Assess the sustainability of the parent company's $0.10 quarterly dividend given the suspension of dividends from Kronos and the operating losses in 2009.