Valhi, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. Valhi is a holding company whose principal segments are Chemicals (Kronos), Component Products (CompX) and Waste Management (WCS). Comparisons are with Q1 2011 unless noted. Amounts are in millions except per-share data.
Key financial results
| Metric | Q1 2011 | Q1 2012 |
|---|---|---|
| Net sales | $455.7 | $597.9 |
| Gross margin | $148.9 | $263.9 |
| Income before taxes | $83.9 | $179.1 |
| Net income | $53.2 | $119.5 |
| Net income attributable to Valhi stockholders | $38.0 | $88.9 |
| Diluted EPS | $0.33 | $0.78 |
| Operating cash flow | $2.5 | $(114.4) |
- Sales increased 31%; consolidated gross margin was approximately 44% of sales, versus 33% in Q1 2011. Net income attributable to Valhi rose 134%.
- Chemicals sales rose 34% to $561.3 and operating income increased to $211.3 from $103.5, primarily reflecting TiO₂ price increases and higher volumes. Average TiO₂ selling prices rose 34%; sales and production volumes each rose 5%.
- Component Products sales increased 2% to $35.5, but operating income declined to $2.9 from $8.8, principally because Q1 2011 included a $7.5 patent-settlement gain. WCS sales were $1.1 and operating loss widened to $9.6 from $9.0.
- Interest expense fell to $13.5 from $17.2. The 2011 period included a $3.3 debt-prepayment charge. Income tax expense increased to $59.6 from $30.7 as earnings improved.
- At March 31, current assets were $1,160.8 and current liabilities $400.8; cash and cash equivalents were $57.7. The company reported $167.4 of combined unrestricted and restricted cash, cash equivalents and marketable securities, including $33.2 held outside the U.S.
- Total debt was $852.3, including $18.9 of current maturities; long-term debt was $833.4. Debt increased from $736.4 at year-end, mainly reflecting Kronos’ €80 million revolving-facility borrowing. Total equity was $1,102.6.
- Operating cash use of $114.4 reflected working-capital outflows, including increases in receivables and inventories, and an $18.8 contribution to the TiO₂ manufacturing joint venture. Capital expenditures were $34.6.
Material changes and notable items
- Receivables rose to $451.4 from $316.0 and inventories to $605.5 from $464.5, contributing to negative operating cash flow. Kronos’ days sales outstanding increased to 69 days and days sales in inventory to 110 days.
- Corporate expenses rose to $20.3 from $6.6, primarily because environmental remediation and related expense was $12.8 versus $0.1. Environmental remediation liabilities totaled $55.3 at quarter-end, including $42 million accrued by NL for approximately 50 sites.
- Marketable securities declined to $344.3 from $376.6; the company liquidated mutual funds during the quarter. Other comprehensive income included an $11.1 loss on marketable securities, partly offset by currency translation gains.
- Valhi declared cash dividends of $0.125 per share for the quarter, up from $0.10. A 3-for-1 common-stock split was approved; the filing said distribution was expected May 10, 2012, subject to customary approvals. The company also approved an increase in authorized common shares to 500 million.
- In May 2012, NL received $15.6 in cash in the third and final closing of a New Jersey property settlement; Valhi expected a pre-tax gain of approximately $14.9 in Q2 2012.
Outlook, risks and contingencies
- Management expected higher 2012 net income than in 2011, led by stronger Chemicals results and lower expected WCS losses; Component Products was expected to have lower operating income than in 2011, which included the patent-settlement gain.
- For Chemicals, management expected demand and average selling prices to strengthen during 2012, with sales volumes above 2011. It also projected TiO₂ production cost per metric ton to increase approximately 50%–60% versus 2011, mainly due to higher feedstock ore costs; further price increases were expected to offset cost inflation. These are forward-looking expectations, not reported results.
- WCS’s Compact low-level radioactive-waste facility became operational in April 2012; the Federal facility was expected to become operational later in 2012. Management expected WCS to continue operating at a loss until sales volumes and utilization improve.
- Approximately €279.2 million principal amount of Kronos 6.5% Senior Secured Notes, reported as $371.0, was due in April 2013. Valhi had begun refinancing efforts and said it believed refinancing was achievable, but gave no assurance. Management reported compliance with debt covenants and approximately $128 million available under existing facilities, including $100 million under a Contran facility at Contran’s discretion.
- Risks include TiO₂ supply, demand and pricing; raw-material, energy and currency fluctuations; working-capital and liquidity needs; ability to refinance debt; WCS licensing and commercial ramp-up; tax examinations; and environmental and other litigation. NL had not accrued for lead-pigment litigation because liability was not considered probable and could not be reasonably estimated. Environmental costs could exceed recorded accruals.
- Management said expected liquidity was sufficient for near- and longer-term obligations, while noting that actual developments differing from expectations could adversely affect liquidity. 2012 capital expenditures were forecast at approximately $102 million.
Investor verification points
- Track whether TiO₂ price increases offset the projected 50%–60% rise in unit production costs, and whether demand and sales volumes meet management’s expectations.
- Monitor working-capital conversion, inventory levels and operating cash flow after the substantial Q1 cash use.
- Verify progress and terms of refinancing the €279.2 million notes due April 2013, as well as covenant compliance and availability of related-party credit.
- Assess WCS facility certification, customer volumes, operating losses and funding requirements as the facilities ramp up.
- Follow environmental accrual developments, lead-pigment and asbestos claims, tax disputes, and receipt/accounting for the anticipated Q2 New Jersey settlement gain.
- Confirm completion and share-count/per-share effects of the approved 3-for-1 stock split.