Valhi, Inc. — Q3 2015 Form 10-Q
Business context and reporting period. Valhi is a holding company with four principal segments: titanium dioxide (TiO₂) chemicals, component products, waste management and real estate management and development. This unaudited filing covers the quarter and nine months ended September 30, 2015; comparisons are with the same 2014 periods. Valhi reported results on a consolidated basis, including majority-owned subsidiaries.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $383.2 million | $476.5 million | $1,208.1 million | $1,430.6 million |
| Operating income (loss) | $(5.0) million | $60.2 million | $19.5 million | $129.7 million |
| Income (loss) before tax | $(22.8) million | $53.3 million | $(30.0) million | $86.9 million |
| Income tax expense (benefit) | $(9.5) million | $15.8 million | $105.4 million | $21.1 million |
| Net income (loss) attributable to Valhi | $(11.7) million | $28.7 million | $(103.7) million | $45.0 million |
| Basic and diluted EPS | $(0.03) | $0.08 | $(0.30) | $0.13 |
Margins and segments. Consolidated gross margin was $49.8 million in Q3 and $195.4 million for the nine months, versus $115.8 million and $305.8 million, respectively, in 2014. Chemicals revenue fell 19% in Q3 and 17% year to date; operating results shifted to a $1.3 million loss in Q3 from $49.7 million income, and were $24.8 million year to date versus $123.6 million. TiO₂ selling prices fell 15% in Q3 and 13% year to date; higher sales volumes partly offset lower prices and unfavorable currency translation. Component Products’ nine-month sales and operating income rose 5% and 8%, respectively. Waste Management recorded operating losses of $8.3 million in Q3 and $19.3 million year to date, versus income of $6.9 million in Q3 2014 and a $6.6 million loss year to date. Real Estate operating income was $1.2 million in Q3 and $2.6 million year to date.
Cash flow, debt and liquidity
- Operating cash flow was $33.1 million for the first nine months, up from $15.6 million in 2014. Investing cash flow was $(38.0) million, including $36.4 million of capital expenditures; financing cash flow was $(12.2) million. Cash and cash equivalents were $232.4 million at September 30, 2015, down from $255.8 million at year-end 2014.
- Total debt was $952.8 million, including $9.0 million current maturities, compared with $934.1 million at December 31, 2014. Long-term debt was $943.8 million. The filing reports $147.8 million available under existing credit facilities; $26.4 million available under Valhi’s Contran facility is at Contran’s discretion. Management stated the company was in compliance with debt covenants.
- Management reported $265.4 million of restricted and unrestricted cash, cash equivalents and marketable securities, including $84.5 million held outside the U.S. This liquidity figure is not the same as balance-sheet cash alone. The $250 million Amalgamated Sugar investment is separately reported among marketable securities and collateralizes $250 million of loans.
- Valhi paid $0.06 per share in dividends during the nine months; the quarterly dividend was $0.02 per share. Future dividends are discretionary.
Material changes, outlook and risks
- Tax charge: Valhi recorded a $152.6 million noncash deferred-tax valuation allowance, primarily in Q2, against German and Belgian tax assets, reflecting cumulative losses and insufficient positive evidence of future taxable income. A further $2.3 million allowance was recorded in Q3. The company also recorded a $29.7 million noncash tax benefit related to deferred taxes on its direct Kronos investment. These items drove the nine-month tax expense and loss despite a pretax loss.
- Restructuring: Kronos implemented workforce reductions affecting about 160 people and recorded $21.5 million in charges through September 30, mostly in Q2. The company expects these reductions and other cost initiatives to repay the charge in about one year; most accrued severance is expected to be paid by Q2 2018.
- Management outlook: Valhi expected a 2015 loss attributable to Valhi stockholders. It expected Chemicals operating income to be significantly below 2014 and considered a Q4 Chemicals operating loss likely, as lower TiO₂ prices were expected to outweigh volume gains and lower input costs. Management anticipated higher 2015 Chemicals sales volumes if economic conditions did not deteriorate. It cited long-term TiO₂ demand growth expectations of 2%–3% annually, while noting near-term pricing depends on market conditions.
- Waste Management: Disposal revenue and volumes were hurt by shipping-container availability and delays, severe winter weather, and the absence of a prior-year one-time nuclear plant decommissioning campaign. Dedicated leased containers were being phased into service. Management said profitability depends on winning and receiving larger waste streams, improving utilization and controlling costs; it could not assure WCS would improve cash flow and said strategic alternatives might be considered.
- Legal and environmental contingencies: NL’s appeal of a California lead-paint abatement judgment requiring defendants to fund $1.15 billion continued; Valhi did not accrue a loss, but disclosed that an adverse outcome could materially affect results, financial position and liquidity. Environmental remediation liabilities totaled $120.4 million; NL had accrued about $112 million for approximately 43 sites, with estimated possible costs up to about $166 million including the accrual. WCS’s October 2015 agreed order with Texas regulators concerning DOE waste could entail material compliance costs, though WCS expects reimbursement from DOE or its contractor. Kronos and WCS also faced antitrust litigation; management assessed the Valspar case as reasonably possible but not probable and not expected to be material.
- Other exposures: Key risks include cyclical TiO₂ demand and pricing, foreign exchange rates, raw-material costs, subsidiary dividend capacity, debt and liquidity needs, tax outcomes, environmental obligations, litigation and regulatory or permit developments. Management expected to have sufficient liquidity for its stated short- and long-term planning horizons, subject to actual results and cash demands.
Most important facts for investors to verify
- Whether TiO₂ prices stabilize or recover, and whether higher sales volumes and cost reductions offset continued pricing pressure.
- Whether German and Belgian operations return to sustained profitability and permit reversal of the deferred-tax valuation allowance; assess the noncash tax charge separately from operating performance.
- Whether WCS resolves shipping constraints, secures larger disposal contracts and improves operating cash flow, and whether DOE reimburses costs under the TCEQ order.
- Developments in the California lead-paint appeal, environmental remediation estimates and other material litigation or tax examinations.
- Availability and terms of subsidiary cash and credit facilities, including the discretionary Contran line, covenant compliance, and the company’s ability to service debt and sustain dividends.