Valhi, Inc. 10-Q Summary: Quarter Ended June 30, 2009
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2009, and the six-month period ended on that date. Valhi, Inc. is 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, controlled by the Simmons family.
Key Financial Metrics
| Metric (in millions) | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Net Sales | $589.4 | $810.1 |
| Net Loss (Total) | $(44.0) | $(4.7) |
| Net Loss Attributable to Valhi Stockholders | $(39.0) | $(6.1) |
| Diluted Loss Per Share | $(0.34) | $(0.05) |
| Operating Cash Flow | $42.7 | $(40.0) |
| Cash and Cash Equivalents (Ending) | $100.0 | $55.4 |
| Total Debt | $993.5 | $920.4 |
| Current Maturities of Long-Term Debt | $120.1 | $9.4 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 27% year-over-year to $589.4 million, driven by a 27% drop in the Chemicals segment and a 31% drop in Component Products due to weak global economic conditions and reduced demand.
- Operating Losses: All three operating segments reported operating losses in the first half of 2009. The Chemicals segment swung from a $21.8 million operating income in 2008 to a $45.5 million loss in 2009, largely due to unabsorbed fixed production costs from plant curtailments.
- Inventory Reduction: Total inventories decreased significantly from $408.5 million to $267.7 million, contributing $139.0 million to operating cash flow as the company reduced stockpiles to match lower demand.
- Debt Restructuring: Current maturities of long-term debt increased sharply to $120.1 million. This includes the reclassification of Kronos' European credit facility ($71.8 million) to current liabilities because the company could not comply with a financial ratio covenant, despite obtaining waivers from lenders.
- Unusual Items: The net loss was partially offset by non-operating gains, including a $23.0 million gain from litigation settlements (related to environmental remediation and property condemnation) and a $6.3 million gain 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 operating income in the Chemicals segment (due to unabsorbed fixed costs) and lower expected gains from litigation settlements.
- Chemicals Segment: Production volumes were curtailed to 58% capacity in the first half to reduce inventory. Management expects to operate near full capacity in the second half of 2009 and anticipates price increases for TiO2 products.
- Liquidity and Debt Covenants:
- Kronos Europe: The company has obtained waivers for a debt-to-EBITDA covenant through August 31, 2009, but expects to remain non-compliant for the rest of the year. Discussions are ongoing to amend the facility to eliminate the covenant.
- CompX: The company expects to be unable to comply with an interest coverage ratio covenant as of September 30, 2009, and is negotiating amendments with lenders.
- Legal Risks: Significant ongoing litigation includes lead pigment lawsuits against NL Industries (no accrual made as liability is not probable/estimable) and patent infringement suits against CompX. A recent jury verdict in an unrelated shareholder dispute awarded plaintiffs over $200 million, though Valhi intends to appeal and believes the verdict will be set aside.
Investor Verification Checklist
- Covenant Compliance: Verify the status of negotiations to amend or waive financial covenants for Kronos' European facility and CompX's credit facility, as failure to do so could trigger acceleration of debt.
- Chemicals Segment Recovery: Monitor second-half production volumes and TiO2 pricing to confirm the ability to absorb fixed costs and return to profitability.
- Litigation Exposure: Review updates on the lead pigment litigation and the recent shareholder verdict appeal, as adverse outcomes could result in material, unaccrued liabilities.
- Waste Management Capital Needs: Confirm the financing status for the Waste Control Specialists (WCS) facility construction, which relies on potential county bond issuance and intercompany loans.
- Dividend Sustainability: Assess the impact of Kronos suspending its dividend and the company's ability to maintain its own dividend payments given the operating losses.