VALHI, INC. — 2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015; comparison is primarily with fiscal 2014. Valhi is a holding company with four reportable segments: chemicals (Kronos), component products (CompX), waste management (WCS), and real estate management and development (BMI and LandWell). Figures are in U.S. dollars unless noted.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $1,532.9 million | $1,862.6 million |
| Gross margin | $222.9 million; 14.5% of sales | $402.8 million; 21.6% of sales |
| Operating income (loss) | $(5.4) million | $170.2 million |
| Net income (loss) attributable to Valhi stockholders | $(133.6) million; $(0.39) per share | $53.8 million; $0.16 per share |
| Cash provided by operating activities | $22.5 million | $67.3 million |
| Interest expense | $59.0 million | $56.7 million |
| Total consolidated debt | $960.5 million | $929.0 million |
| Total assets / total equity | $2,537.4 million / $526.9 million | $2,945.2 million / $813.9 million |
- Cash and cash equivalents were $202.3 million and restricted cash was $7.2 million at year-end. Balance-sheet marketable securities totaled $256.9 million, including a $250 million investment in The Amalgamated Sugar Company LLC. Management separately reported $235.9 million of cash, restricted cash and marketable securities by entity; the availability and classification of these resources merit review.
- Available borrowing capacity was reported at $154.8 million, including $61.2 million under Valhi’s Contran facility, which is at Contran’s discretion. The company said it was in compliance with debt covenants at year-end.
- Approximately 64% of debt was variable-rate before the effect of an interest-rate swap; management said the swap brought the fixed-rate-equivalent share to about 72%. Aggregate contractual commitments were $524.6 million for 2016, including debt service, leases and supply commitments.
- Valhi paid $0.08 per share in dividends in 2015, down from $0.11 in 2014; the quarterly rate had been reduced to $0.02 in 2014.
Material changes versus 2014
- Sales declined 18%, primarily from lower TiO₂ selling prices and unfavorable foreign-exchange translation. Chemicals sales fell 18% to $1,348.8 million; average TiO₂ prices declined 14%, while sales volumes rose 6%.
- Chemicals operating income fell to $7.1 million from $156.8 million. Lower selling prices outweighed lower feedstock costs, higher volumes and currency benefits. A $21.7 million workforce-reduction charge was recorded in 2015.
- CompX sales rose 5% to $109.0 million and operating income increased to $14.0 million from $13.6 million.
- WCS sales fell to $45.0 million from $66.5 million and its operating loss widened to $26.5 million from $2.2 million. Shipping-container availability constrained shipments; 2014 also included a larger one-time nuclear-plant decommissioning campaign.
- Real-estate segment sales declined to $30.1 million from $40.3 million, largely as land-sale revenue fell. Operating income was approximately break-even.
- The net loss included a $159.0 million non-cash deferred-tax valuation allowance for German and Belgian operations, partly offset by a $29.3 million non-cash tax benefit related to Valhi’s investment in Kronos. The allowance reflected cumulative losses in those jurisdictions; management said full reversal would require sufficient positive evidence.
- Year-end cash and cash equivalents declined to $202.3 million from $255.8 million. Operating cash flow fell by $44.8 million, although working-capital changes provided net cash in 2015.
Outlook, commentary and risks
- Management expected higher 2016 net income than in 2015, citing the absence of the 2015 tax valuation allowance, expected improvement in Chemicals, cost savings and lower WCS losses. It cautioned that Chemicals could report an operating loss in first-quarter 2016.
- Kronos expected higher 2016 production and sales volumes, lower unit costs and near-capacity utilization. A TiO₂ price increase announced in late 2015 was expected to take effect in early 2016, subject to market conditions. The outlook depends on demand, pricing, competition, capacity changes, raw-material costs and currencies.
- In November 2015, Valhi agreed to sell WCS for $270 million cash, $20 million face amount of Rockwell Holdco Series A preferred stock, and assumption of WCS third-party debt and related financial-assurance obligations. Closing was expected in the first half of 2016, subject to conditions including antitrust approval; completion was not assured.
- WCS remained exposed to operational and regulatory uncertainty, including pending RCRA and TSCA renewals, shipping constraints and a TCEQ Agreed Order concerning stored DOE waste. Associated compliance costs were not estimable; WCS believed DOE or its contractor should reimburse them.
- NL’s lead-pigment litigation includes an appealed California judgment requiring three defendants to fund an aggregate $1.15 billion for abatement. Valhi recorded no accrual, stating loss was not probable and not reasonably estimable; an adverse outcome could materially affect results, financial position and liquidity.
- Environmental remediation liabilities totaled $120.4 million. NL’s accrued amount was approximately $113 million for about 42 sites; the upper end of reasonably possible costs for estimable matters was approximately $166 million, and costs at five additional sites could not be estimated.
- Other notable risks include high leverage and debt maturities, reliance on subsidiary distributions, related-party financing and services, TiO₂ cyclicality and concentrated suppliers, pension obligations, customer concentration, currency exposure, and the Henderson real-estate market. Contran held approximately 93% of Valhi’s common stock.
- Management expected 2016 capital expenditures of approximately $96 million, including $63 million for Chemicals and $19 million for WCS. The independent auditor reported that the financial statements were fairly presented under U.S. GAAP and that internal control over financial reporting was effective.
Investor facts to verify
- Whether the WCS sale closed, the final proceeds and debt assumed, and the gain or loss recognized.
- Whether TiO₂ pricing, shipment volumes, cost reductions and chemicals profitability developed as management forecast for 2016.
- How much of reported cash and securities was unrestricted and accessible to Valhi, and the terms and liquidity of the $250 million Amalgamated investment pledged in connection with debt.
- Debt repayment and refinancing capacity, particularly the 2017 and 2020 maturities, related-party facility terms, and covenant headroom.
- Progress and potential financial effects of the California lead-pigment appeal, environmental remediation matters, and WCS DOE-waste compliance issue.
- Whether German and Belgian operations generated sufficient evidence to support any reversal of the deferred-tax valuation allowance.