Valhi, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Financial statements are unaudited. Valhi is a holding company with chemicals (Kronos), component products (CompX) and waste management (WCS) segments. Contran owned approximately 94% of Valhi’s common stock.
Key financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $573.1 million | $415.7 million | $1,028.8 million | $772.5 million |
| Income before taxes | $114.5 million | $18.2 million | $198.4 million | $3.3 million |
| Net income attributable to Valhi stockholders | $52.4 million | $4.5 million | $90.4 million | $18.1 million |
| Diluted earnings per share | $0.46 | $0.04 | $0.79 | $0.14 |
Consolidated gross margin was $200.7 million in Q2 2011 versus $89.4 million a year earlier, approximately 35% versus 21% of sales. For the first six months, gross margin was $349.6 million versus $155.5 million, approximately 34% versus 20% of sales. Interest expense was $15.9 million in Q2 and $33.1 million for the half-year.
- Segments: Chemicals sales were $537.6 million in Q2 and $958.0 million for the half-year; operating income was $145.9 million and $249.4 million, respectively. TiO2 price increases drove results: average selling prices rose 39% in Q2 and 36% in the first half year over year. Volumes were nearly flat, while production volumes increased.
- Component Products sales were $35.2 million in Q2 and $70.0 million for the half-year. Operating income was $3.1 million and $11.9 million; the half-year improvement included a $7.5 million patent settlement gain.
- WCS sales were $0.3 million in Q2 and $0.8 million for the half-year, with operating losses of $9.2 million and $18.2 million, respectively.
Cash, debt and liquidity
- Operating cash flow was $61.1 million for the first half of 2011, compared with an $11.1 million use of cash in 2010. Working-capital changes used $140.3 million, primarily reflecting higher sales and production; capital expenditures were $54.0 million.
- Cash and cash equivalents were $83.9 million at June 30, down from $325.1 million at year-end 2010. The company reported $299.6 million in total cash, restricted cash and marketable securities. It also reported $80.8 million of current and $376.1 million of noncurrent marketable securities.
- Total debt was $904.7 million, including $17.6 million of current maturities, versus $940.3 million at year-end. Credit availability was approximately $201.7 million; management reported compliance with debt covenants.
- Valhi paid dividends of $0.10 per share in Q1 and $0.125 in Q2. The filing reported $25.5 million of Valhi dividends paid in the first half.
Changes, outlook and notable items
- Higher TiO2 selling prices and improved chemicals operating performance drove the earnings increase. Valhi’s ownership of Kronos declined from 95% to 80% following Kronos’s November 2010 secondary offering, increasing the earnings attributable to noncontrolling interests.
- Management expected higher 2011 net income attributable to Valhi stockholders than in 2010. It anticipated continued strong TiO2 demand, further significant price increases and higher chemicals operating income; expected TiO2 production costs per metric ton to rise approximately 10%–15% for 2011 versus 2010.
- WCS’s low-level radioactive waste facility was under construction and expected to be operational in late 2011. Management expected continued WCS operating losses until disposal capacity and sales increase. Planned 2011 capital expenditures were approximately $155 million, including $80 million for WCS.
- CompX recognized a $7.5 million gain from a patent litigation settlement. Kronos redeemed €80 million of 6.5% notes, recording a $3.3 million pretax debt-prepayment charge. The first half of 2010 included a $35.2 million noncash German tax benefit and a $33.3 million litigation settlement and contract termination expense; insurance recoveries were also higher in 2010.
- Environmental remediation liabilities totaled $49.2 million, including $47 million accrued by NL for approximately 50 sites. NL estimated the upper end of reasonably possible costs for estimable sites at approximately $80 million, including accrued amounts; costs at five sites could not be estimated. Valhi did not accrue for pending lead pigment litigation, which it said could produce material losses if outcomes were adverse.
- Other risks include tax examinations, environmental and asbestos litigation, volatile raw-material and energy costs, currency movements, cyclical TiO2 markets, and the ability to complete WCS construction and obtain expected revenues. A Canadian tax proposal could have an estimated $6.0 million net impact if fully assessed. Management stated liquidity was expected to cover short- and long-term obligations, but actual results could differ from expectations.
Important facts for investors to verify
- Whether TiO2 pricing, demand and cost assumptions—and the forecast for higher 2011 earnings—were realized.
- WCS construction, licensing conditions, capital requirements and the timing and economics of commercial operations.
- Environmental exposure beyond recorded accruals, including sites where costs cannot yet be estimated, and developments in lead pigment and other litigation.
- Availability and restrictions on cash and securities, subsidiary dividend capacity, debt maturities and covenant headroom.
- The composition and liquidity of marketable securities and the effect of the lower Kronos ownership interest on earnings attributable to Valhi stockholders.