Business context and reporting period
Valhi, Inc. is a holding company reporting results for the quarter and nine months ended September 30, 2013. Its principal operating segments are chemicals (Kronos, primarily titanium dioxide), component products (CompX), and waste management (WCS). The unaudited interim results may not indicate full-year performance. Valhi is approximately 94% owned by Contran and related interests.
Financial performance and liquidity
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2012 periods.
| Metric | Q3 2012 | Q3 2013 | Nine months 2012 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $508.8 | $448.2 | $1,659.9 | $1,463.4 |
| Gross margin | $97.5 | $48.6 | $519.9 | $78.7 |
| Operating income (loss) | $41.1 | $(42.5) | $347.6 | $(134.5) |
| Net income (loss) attributable to Valhi stockholders | $22.9 | $(34.2) | $156.2 | $(113.7) |
| Basic and diluted loss per share | $0.07 income | $(0.10) | $0.46 income | $(0.33) |
| Operating cash flow | Not presented by quarter | $46.2 | $48.4 |
Consolidated gross margin was about 10.8% in Q3 2013 versus 19.2% in Q3 2012, and about 5.4% for the first nine months of 2013 versus 31.3% in 2012. The 2013 nine-month loss includes an $8.9 million debt-prepayment charge; Q3 also includes a $35 million titanium-dioxide litigation settlement charge.
- At September 30, 2013, cash and cash equivalents were $115.7, restricted cash equivalents $5.3, and marketable securities $253.6. Management reported aggregate restricted and unrestricted cash, equivalents and marketable securities of $148.4; this excludes the $250 million Amalgamated Sugar investment included in marketable securities.
- Current assets were $929.7 and current liabilities $372.8. Total assets were $2,777.4 and total equity $910.8.
- Total debt was $731.3, including $29.7 current maturities; debt was $910.1 at December 31, 2012. Long-term debt was $701.6. Valhi reported compliance with debt covenants.
- Available borrowing capacity was reported as approximately $140.5, but the $51.5 under the Contran facility is at Contran’s discretion. Kronos’ European facility had covenant constraints; its effective available borrowing was estimated at $32.4.
- Nine-month investing cash outflow was $47.3, including $54.4 of capital expenditures. Financing cash outflow was $252.6, primarily reflecting debt repayments. Cash and equivalents declined from $366.9 at year-end 2012 to $115.7.
Material changes and segment performance
- Chemicals: Sales fell 11% in Q3 and 14% year to date. Average TiO2 selling prices declined 18% and 21%, respectively, while sales volumes increased 4% and 8%. Segment operating results swung from income of $40.4 to a loss of $35.2 in Q3, and from income of $364.1 to a loss of $125.6 year to date. Lower selling prices and higher feedstock costs drove the deterioration; the year-to-date result also reflects the $35 million settlement charge.
- Component products: Sales rose 14% in Q3 and 9% year to date; operating income increased to $3.0 and $7.4, respectively, supported by security-product demand and improved cost efficiencies. The furniture-components business was sold in December 2012 and is reported as discontinued operations in the 2012 comparisons.
- Waste management: Q3 sales decreased to $4.9 from $14.5 and the operating loss widened to $10.3 from $1.0, mainly due to lower Compact facility shipments. Nine-month sales increased to $29.9 from $16.5 and the operating loss narrowed to $16.3 from $21.9 as the facilities began receiving more waste.
Outlook, risks and unusual items
- Management expected lower 2013 net income from continuing operations than in 2012. It expected Chemicals operating income to be significantly lower for 2013, but to improve in Q4 from the quarterly levels in the first nine months. These expectations depend on demand, pricing, costs and other market conditions.
- TiO2 prices had generally stabilized by Q3; price increases began taking effect in June, with further increases announced for October. Management cited stronger demand and low customer inventories, but stated that successful price increases were uncertain. Lower feedstock costs began benefiting results in Q3.
- A lockout at Kronos’ Canadian plant, representing about 19% of worldwide TiO2 capacity, remained unresolved. The plant was operating at about 15% capacity; management said it had been meeting customer demand using inventories and production elsewhere, but could not assure a settlement on acceptable terms.
- WCS expected a shortage of shipping containers to limit waste shipments until additional containers were delivered, expected in early 2014. Despite a five-year federal disposal contract with a potential value of up to $300 million, awarded tasks to date were smaller-volume streams; management did not expect significant operating profit until revenues cover the facilities’ high fixed costs.
- Kronos agreed to pay $35 million to settle a titanium-dioxide class action, without admitting wrongdoing, in two installments expected by mid-2014. A separate indirect-purchaser antitrust action remained ongoing.
- Environmental remediation accruals totaled $60.0. NL reported approximately $58 million accrued for about 50 sites; the estimated upper end of reasonably possible costs for estimable matters was approximately $154 million, including accrued amounts. Costs at five sites could not then be reasonably estimated. Lead-pigment litigation remained unaccrued because liability was not considered probable or reasonably estimable; an adverse outcome could materially affect results, financial condition and liquidity.
- Management expected 2013 capital expenditures of approximately $75 million and stated it expected sufficient liquidity for short- and long-term obligations. It also noted that cash at subsidiaries may not be freely available to the parent. Pension contributions expected for 2013 were $28.5 million, with $1.6 million for other postretirement plans.
Important facts for investors to verify
- Whether TiO2 pricing and lower feedstock costs improve Chemicals margins, and whether Q4 results meet management’s stated expectations.
- Resolution and operating impact of the Canadian labor lockout, and progress in obtaining additional WCS shipments and containers.
- Timing and funding of the $35 million settlement, plus developments in the separate antitrust, lead-pigment and environmental matters.
- Liquidity available at the parent versus subsidiaries, including the discretionary Contran facility and Kronos’ European covenant limitations.
- Whether operating cash flow, debt levels and planned capital expenditures remain sustainable alongside dividends and environmental and pension obligations.