Valhi, Inc. 10-Q Summary: Quarter Ended March 31, 2009
Business Context and Reporting Period
This Form 10-Q covers the three-month period ended March 31, 2009, filed by Valhi, Inc. on May 6, 2009. Valhi operates as a holding company with three primary consolidated segments: Chemicals (majority-owned Kronos Worldwide, Inc., producing titanium dioxide), Component Products (majority-owned CompX International, Inc., manufacturing security and ergonomic products), and Waste Management (wholly-owned Waste Control Specialists LLC). The company is majority-owned by Contran Corporation, controlled by the Simmons family.
Key Financial Metrics
| Metric (in millions) | Q1 2009 | Q1 2008 |
|---|---|---|
| Net Sales | $277.3 | $373.9 |
| Net Loss (Attributable to Valhi) | $(20.0) | $(5.9) |
| Diluted Loss Per Share | $(0.18) | $(0.05) |
| Cash and Cash Equivalents | $48.0 | $37.0 |
| Total Debt (Current + Long-term) | $952.2 | $920.4 |
| Operating Cash Flow | $(18.8) | $(33.6) |
| Capital Expenditures | $(19.3) | $(18.9) |
Segment Performance: The Chemicals segment reported an operating loss of $25.5 million (vs. $11.0 million income in 2008). Component Products reported an operating loss of $1.0 million (vs. $3.0 million income). Waste Management reported an operating loss of $6.5 million (vs. $4.4 million loss).
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 26% to $277.3 million, driven primarily by a 25% drop in Chemicals sales due to a 24% reduction in TiO2 sales volumes caused by weak global economic conditions.
- Margin Compression: The Chemicals segment gross margin collapsed from 17% in Q1 2008 to 1% in Q1 2009. This was caused by a 52% reduction in production volumes, resulting in approximately $50 million of unabsorbed fixed production costs charged to expense.
- Unusual Gains: The reported net loss was mitigated by two significant non-operating gains: a $11.9 million litigation settlement gain (related to environmental remediation costs) and a $6.4 million gain from the sale of a research and laboratory business.
- Debt Structure: Current maturities of long-term debt increased significantly from $9.4 million to $89.3 million. This reclassification was due to the company's inability to comply with a financial ratio covenant on its European credit facility, despite obtaining waivers from lenders.
Guidance, Outlook, and Risks
Outlook: Management expects a higher net loss for the full year 2009 compared to 2008. The Chemicals segment is expected to report operating losses due to reduced capacity utilization and unabsorbed fixed costs. Production volumes are expected to remain at 70-80% of attainable capacity for the remainder of 2009. The Waste Management segment expects to begin construction on a low-level radioactive waste facility in Q3 2009, with operations expected in Q3 2010.
Liquidity and Debt Covenants: A critical risk involves the Kronos European credit facility. The company has obtained waivers for financial ratio compliance for periods ending March 31 and April 30, 2009, but believes it will not be able to comply for the next 12-month period. Consequently, the outstanding balance of this facility ($68.9 million) is classified as a current liability. Management is negotiating an amendment to eliminate the covenant or seeking refinancing.
Legal and Environmental Risks: Significant contingencies remain regarding lead pigment litigation (NL Industries) and environmental remediation costs. While no accruals are made for lead pigment litigation due to uncertainty, the company has accrued $51.8 million for environmental costs. New patent infringement claims have been filed against CompX by Humanscale and Accuride.
Investor Verification Checklist
- Covenant Compliance: Verify the status of negotiations to amend or waive the financial ratio covenant on the Kronos European credit facility to prevent debt acceleration.
- Production Costs: Monitor the impact of unabsorbed fixed costs on the Chemicals segment margins as production volumes remain below capacity.
- Litigation Exposure: Review updates on lead pigment and asbestos litigation, as well as the outcome of the patent infringement suits against CompX.
- Waste Management Financing: Confirm the approval of the $75 million bond sale in Andrews County, Texas, required to fund the construction of the new waste disposal facilities.
- Dividend Policy: Note that Kronos suspended its quarterly dividend in February 2009, impacting Valhi's cash flow from subsidiaries.