Valhi, Inc. — Q3 2011 Form 10-Q
Business context and period: Valhi is a holding company with Chemicals (Kronos), Component Products (CompX) and Waste Management (WCS) operations. This unaudited report covers the quarter and nine months ended September 30, 2011. Valhi controlled 80% of Kronos at quarter-end.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $584.1 million | $413.2 million | $1,612.9 million | $1,185.7 million |
| Income before taxes | $148.5 million | $42.1 million | $346.9 million | $45.4 million |
| Net income attributable to Valhi stockholders | $71.5 million | $14.4 million | $161.9 million | $32.5 million |
| Diluted earnings per share | $0.63 | $0.13 | $1.42 | $0.27 |
| Operating cash flow | Not stated separately | Not stated separately | $220.5 million | $61.5 million |
For the nine-month period, cost of sales was $1,050.6 million and gross margin was $562.3 million, about 34.9% of sales, versus $255.6 million, about 21.6%, in 2010. Q3 gross margin was $212.7 million, about 36.4% of sales, versus $100.1 million, about 24.2%.
- Cash flow and investment: Operating cash flow rose to $220.5 million. Investing used $185.2 million, including $91.1 million of capital expenditures; financing used $232.5 million. Cash and equivalents ended the period at $128.4 million, down from $325.1 million at year-end 2010.
- Liquidity: Current assets were $960.3 million and current liabilities $391.8 million. Management reported $285.1 million of cash, cash equivalents, restricted cash and marketable securities, plus approximately $242 million available under credit facilities; $100 million of the latter was under a Contran facility at Contran’s discretion.
- Debt: Total debt was $802.4 million, including $22.6 million of current maturities, compared with $940.3 million at year-end 2010. Long-term debt was $779.8 million. Valhi reported compliance with debt covenants.
Material changes and segment results
- Chemicals: Nine-month sales rose 40% to $1,505.9 million and operating income rose to $407.8 million from $121.3 million. TiO2 average selling prices increased 37% for the period; sales volume declined 1%, while production volume increased 4%. Higher prices more than offset higher raw-material and maintenance costs.
- Component Products: Nine-month sales increased 3% to $105.8 million. Operating income rose to $13.4 million from $7.8 million, principally reflecting a $7.5 million patent settlement gain. Q3 operating income declined to $1.5 million from $3.1 million amid lower gross margin and a $1.1 million held-for-sale asset write-down.
- Waste Management: Nine-month sales fell to $1.2 million from $6.4 million and operating loss widened to $27.9 million from $22.8 million. Facility construction and readiness costs continued ahead of the planned start of licensed disposal operations.
- Higher consolidated earnings also reflect prior-year unusual items, including a $35.2 million noncash German tax benefit and $33.3 million litigation settlement and contract termination expense in 2010. The comparison is also affected by Kronos’s lower Valhi ownership following its November 2010 secondary offering.
Outlook, risks and unusual items
- Management expected higher 2011 net income attributable to Valhi stockholders than in 2010, driven mainly by Chemicals performance and the prior-year settlement expense. No specific earnings-per-share guidance was provided.
- Management expected Chemicals selling prices and operating income to remain higher, with production facilities operating near practical capacity. It forecast 2011 TiO2 unit production costs to rise approximately 10%–15% versus 2010, with expected price increases to offset those costs. These expectations depend on industry demand, competition, capacity and costs.
- The Compact Waste Disposal facility was completed in October 2011 and was expected to begin operations in December 2011, subject to regulatory reviews. The Federal Waste Disposal facility was expected to be operational in spring 2012. WCS was expected to continue operating at a loss until sales and capacity utilization increase.
- Planned 2011 capital expenditures were approximately $164 million, including about $80 million for WCS, $80 million for Chemicals and $4 million for Component Products.
- Environmental remediation accruals totaled $43.7 million at September 30; NL estimated an upper range of approximately $73 million for sites where costs could be estimated, and could not estimate costs for five sites. Pending lead-pigment litigation had no accrual because liability was not considered probable and reasonably estimable. The filing warns that future losses or remediation costs could materially affect results and liquidity.
- A Canadian tax reassessment was disputed; a Cdn. $4.9 million letter of credit was expected to be posted, and the potential cash tax liability if fully assessed was approximately $11.9 million. The filing also describes tax audits, currency and market-price exposure, and reliance on subsidiary distributions and credit availability.
- In October 2011, CompX collected a $15 million real-estate note receivable and prepaid $15 million on an affiliate note. Kronos also repurchased additional notes after quarter-end.
Important facts for investors to verify
- Whether Chemicals pricing, demand and cost assumptions held through year-end, and the extent to which higher earnings were sustainable.
- Whether WCS facilities obtained required reviews and commenced operations on schedule, and the resulting funding needs and losses.
- Developments in environmental matters, lead-pigment and other litigation, and the Canadian tax reassessment.
- Availability and terms of subsidiary dividends and credit facilities, including the discretionary Contran facility and restrictions on subsidiary cash.
- Cash conversion and working-capital demands: receivables and inventories increased, while nine-month operating cash flow benefited from earnings and included substantial working-capital movements.