VHI

Valhi, Inc. (VALHI) - 10-Q Summary for Quarter Ended September 30, 2003

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2003, and the nine-month period ended on that date. Valhi, Inc. operates primarily through its subsidiaries and affiliates: NL Industries, Inc. (Chemicals/TiO2), CompX International Inc. (Component Products), Waste Control Specialists LLC (Waste Management), and Titanium Metals Corporation ("TIMET"). The filing notes that Contran Corporation holds approximately 90% of Valhi's outstanding common stock.

Key Financial Metrics

Note: Debt figures represent total long-term debt plus current maturities. Cash figures exclude restricted cash equivalents.

Material Changes vs. Prior Period

• Profitability Turnaround: The Company reported a net income of $8.9 million for Q3 2003, a significant improvement from a net loss of $7.1 million in Q3 2002. For the nine months ended September 30, 2003, net income was $28.8 million compared to a loss of $4.5 million in the prior year.
• Chemicals Segment (NL): Net sales increased 4% in Q3 and 15% year-to-date, driven by higher average TiO2 selling prices and production volumes. Operating income rose 20% in Q3 and 39% year-to-date.
• Component Products (CompX): Sales increased 8% in Q3 due to currency effects and higher slide product volumes. However, operating income turned negative ($0.4 million loss) in Q3 due to a $3.5 million restructuring charge in the Netherlands and unfavorable product mix.
• Equity in TIMET: Valhi's equity in TIMET earnings improved significantly from a loss of $17.2 million in Q3 2002 to a gain of $0.2 million in Q3 2003. This improvement was aided by a $1.7 million reduction in accruals for tungsten contamination claims and higher plant operating rates, partially offset by a $6.8 million charge for terminating a contract with Wyman-Gordon.
• Waste Management: Sales declined and operating losses widened due to weak demand for waste services and permitting costs.
• Merger Activity: In February 2003, Valhi completed merger transactions to acquire the remaining minority interest in Tremont Group, making it a wholly-owned subsidiary. This resulted in a $51.9 million purchase price allocation and eliminated minority interest in Tremont.

Guidance, Outlook, and Risks

• Chemicals (NL): Management expects full-year 2003 average TiO2 selling prices, sales volumes, production volumes, and operating income to be higher than 2002. NL announced a plan to distribute shares of its subsidiary, Kronos Worldwide, to shareholders in December 2003.
• Component Products (CompX): CompX does not expect a significant change in customer orders for the remainder of 2003, citing a lag in the office furniture industry recovery. It expects to realize $3.5 million to $4 million in annual cost savings from recent headcount reductions.
• Waste Management: The segment expects to apply for a low-level radioactive waste disposal license in the first half of 2004, though a final decision is not expected before the end of 2007. Management believes the unit can become viable even without this license.
• TIMET: TIMET expects full-year 2003 sales of $375 million to $385 million. It anticipates an operating loss ranging from breakeven to $5 million and a net loss of $20 million to $25 million for the full year. TIMET has deferred distributions on its convertible preferred securities.
• Key Risks:
  • Legal & Environmental: Significant exposure to lead pigment litigation (NL) and environmental remediation costs. NL has accrued $88 million for environmental matters, with a reasonably possible upper range of $127 million.
  • Tax Matters: NL is involved in tax examinations in the U.S., Belgium, and Norway. A German tax refund of approximately $40 million is expected, with $24.6 million already received.
  • Liquidity: Valhi's parent-level liquidity depends on dividends from subsidiaries. TIMET is prohibited from paying dividends while preferred distributions are deferred.

Investor Verification Checklist

• TIMET Investment Valuation: Verify the carrying value of the investment in TIMET ($9.53/share book value vs. $33.75 market price) and monitor for potential future impairment charges if the decline is deemed other than temporary.
• Environmental Accruals: Review the adequacy of NL's $88 million environmental accrual against the $127 million upper range of reasonably possible costs and the status of the Granite City site settlement.
• Tax Refund Realization: Confirm the receipt of the remaining balance of the German tax refund (approx. $15 million) and the outcome of the IRS settlement initiative regarding the restructuring transaction ($33M-$45M liability).
• CompX Restructuring: Monitor the realization of cost savings from the Netherlands headcount reductions and the impact of the European office furniture market on future margins.
• Waste Control Licensing: Track the progress of the application for the low-level radioactive waste disposal license in Texas, a key strategic element for the segment's long-term viability.