Valhi, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual filing, not a standalone fourth-quarter report. Valhi is a holding company operating through Chemicals (Kronos), Component Products (CompX), and Waste Management (WCS), among other subsidiaries.
Financial results and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Net sales | $1,863.6 million | $2,087.3 million |
| Operating income (loss) | $(138.7) million | $345.4 million |
| Net income (loss) attributable to Valhi stockholders | $(98.0) million | $159.8 million |
| Diluted earnings (loss) per share | $(0.29) | $0.47 |
| Cash provided by operating activities | $117.1 million | $71.9 million |
| Capital expenditures | $74.6 million | $98.8 million |
| Long-term debt | $741.8 million | $880.5 million |
Consolidated gross margin was $134.2 million, or approximately 7% of sales, versus $575.2 million, or approximately 28%, in 2012. The deterioration was principally in Chemicals. At year-end, total assets were $2,967.2 million, current assets $949.0 million, and current liabilities $394.7 million. Management reported $193.5 million of cash, restricted cash and marketable securities under its liquidity presentation; this includes restricted amounts and should not be read as wholly available cash. Cash and cash equivalents on the balance sheet were $142.8 million.
Consolidated debt was $752.5 million at December 31, 2013. In February 2014, Kronos refinanced with a $350 million term loan and used $170 million of proceeds to repay its Contran note; the filing states adjusted consolidated debt would be approximately $932.5 million after the transaction. Valhi reported $240.4 million of available borrowing capacity at year-end, subject to facility terms and restrictions.
Segments and changes versus 2012
- Chemicals: Sales fell 12% to $1,732.4 million; operating loss was $125.4 million versus $366.8 million of operating income. TiO₂ average selling prices declined 19%, while sales volumes rose 6%. Cost of sales rose 14%; the segment’s gross margin fell to $109.8 million, about 6% of sales, from $558.1 million, about 28%. Higher-cost feedstock, price declines, and Canadian facility disruption were major factors.
- Component Products: Sales rose 11% to $92.0 million and operating income increased 72% to $9.3 million, helped by demand for high-security locks and improved cost efficiency. CompX sold its furniture components business in December 2012, so prior-period comparisons reflect a different business mix.
- Waste Management: Sales rose to $39.2 million from $27.8 million; the operating loss narrowed to $22.6 million from $26.8 million. WCS remained loss-making as its newly operating disposal facilities had not yet generated enough volume to cover fixed costs.
Fourth-quarter 2013 net sales were $400.1 million, gross margin $55.5 million, operating loss $4.2 million, and net income attributable to Valhi stockholders $15.7 million. The fourth-quarter attributable result included a $46.6 million after-tax gain related to the BMI and Landwell acquisition.
Outlook, risks, contingencies and unusual items
- Management expected 2014 income from continuing operations attributable to Valhi stockholders, versus a loss in 2013, but provided no earnings estimate. It cited expected Chemicals recovery, increased WCS receipts, the BMI/Landwell gain recognized in 2013, lower expected corporate expenses, and the absence of 2013 debt-prepayment charges.
- Kronos expected higher 2014 sales and production volumes and lower feedstock costs, with selling-price increases dependent on market conditions. It expected to operate below full capacity amid the Canadian plant ramp-up and planned maintenance work.
- The Canadian Kronos plant was affected by a labor lockout from June through late November 2013. The disruption and new labor agreement generated approximately $28 million of costs, including $19 million of unabsorbed fixed costs and $9 million of agreement-related costs. Production resumed in February 2014.
- WCS faced an industry-wide shortage of approved shipping containers, reducing waste receipts in the second half of 2013. Management expected additional containers to ease the constraint during 2014, but said profitability depended on obtaining substantially more business and reaching volumes sufficient to cover high fixed costs. Its Federal disposal contract has a five-year term and a potential value of up to $300 million; awarded tasks to date were smaller-volume streams.
- Unusual 2013 items included a $54.6 million non-cash gain from obtaining control of BMI and Landwell; a $35 million Kronos TiO₂ antitrust class-action settlement charge; $8.9 million of debt-prepayment charges; and $69.0 million of environmental remediation and related expense within corporate expenses. The BMI/Landwell purchase-price allocation and related gains were preliminary.
- NL had accrued $122.7 million for environmental remediation and related matters at year-end, including approximately $114 million for about 45 sites; the estimated upper end for sites where costs could be estimated was $154 million. Costs for some sites could not be estimated.
- In January 2014, a California court found NL and two other defendants jointly and severally liable for lead-paint abatement and ordered aggregate payment of $1.15 billion. NL disputed the judgment, sought a new trial and planned to appeal. Valhi had not accrued for lead-pigment litigation, stating that loss was not considered probable and could not be reasonably estimated; a material future charge remains possible.
- WCS’s operating licenses faced third-party legal challenges, although the licenses remained in effect at filing. The company’s reliance on a single disposal site makes permit loss or restriction a significant risk.
- Kronos’ European revolving-credit facility had a covenant waiver through June 30, 2014; borrowing availability was conditional on maintaining specified EBITDA. The company reported compliance at December 31, 2013 under the waiver. Valhi also depends on subsidiary distributions to meet parent-level obligations; subsidiary debt agreements and operating needs can limit distributions.
- Other material risks include cyclical TiO₂ prices and demand, feedstock supply and cost, foreign-exchange exposure, environmental and asbestos claims, pension obligations, and related-party financing and governance. Contran and related parties held approximately 94% of Valhi’s common stock at year-end. Harold C. Simmons died in December 2013; the filing describes a February 2014 voting agreement governing Contran board designations.
Important facts for investors to verify
- Whether TiO₂ prices and margins recovered in 2014, and whether lower feedstock costs flowed through to reported cost of sales as management expected.
- The final terms, covenant headroom, interest cost and use of proceeds for Kronos’ February 2014 refinancing, including the reported increase in adjusted consolidated debt.
- Whether WCS received and could use the additional shipping containers, secured sufficient Compact and Federal waste volumes, and improved operating cash flow.
- The status and potential financial exposure of the California lead-paint judgment, related appeals, and Valhi’s unaccrued lead-pigment claims.
- The development of environmental remediation liabilities beyond the $122.7 million accrued balance and the $154 million estimated upper range for currently estimable sites.
- The final purchase-price allocation and sustainable cash contribution of BMI and Landwell, given the preliminary valuation and one-time acquisition gain.
- The availability of parent-company liquidity and subsidiary dividends, including restrictions under credit agreements and the concentration of control among Contran and related parties.