Valhi, Inc. — FY 2012 Form 10-K
Business context and reporting period. Valhi is a holding company with three consolidated segments: chemicals (primarily Kronos titanium dioxide, or TiO₂), component products (CompX) and waste management (WCS). The filing covers the fiscal year ended December 31, 2012; the “2012 Q4” metadata refers to the fourth quarter within that fiscal year. Contran and its subsidiaries owned approximately 93% of Valhi’s common stock at year-end.
Key financial metrics
| Metric | 2012 | 2011 |
|---|---|---|
| Net sales | $2,087.3 million | $2,025.1 million |
| Operating income | $345.4 million | $521.4 million |
| Income from continuing operations attributable to Valhi stockholders | $141.4 million; $0.41 diluted EPS | $214.5 million; $0.63 diluted EPS |
| Net income attributable to Valhi stockholders | $159.8 million; $0.47 diluted EPS | $217.5 million; $0.64 diluted EPS |
| Cash provided by operating activities | $71.9 million | $292.4 million |
| Cash and cash equivalents at year-end | $366.9 million | $96.4 million |
| Total consolidated debt | $910.1 million | $736.4 million |
| Total assets / total equity | $3,170.5 million / $1,091.7 million | $2,838.0 million / $993.0 million |
Consolidated gross margin was $575.2 million, about 27.6% of sales, versus $746.7 million, about 36.9%, in 2011. Interest expense was $56.3 million, down from $61.8 million; income tax expense was $104.8 million, down from $169.9 million. Year-end current assets were $1,363.4 million and current liabilities $398.5 million. Valhi reported $337.3 million of available credit facilities, including $67.4 million under a Contran facility subject to Contran’s discretion. These figures do not imply that all subsidiary cash or credit is freely available to the parent.
Material changes versus 2011
- Net sales rose 3%, but operating income fell 34% and continuing income attributable to Valhi stockholders fell 34%, reflecting weaker Chemicals and Component Products results, partly offset by a lower WCS operating loss.
- Chemicals sales increased 2% to $1,976.3 million as average TiO₂ prices rose 10%; sales volume fell 6%, production volume fell 15%, and operating income declined 34% to $366.8 million. Feedstock and other manufacturing costs rose sharply; cost of sales increased 18% and the segment’s gross margin contracted from 38% to 28%.
- CompX sales rose 4% to $83.2 million, while operating income declined 15% to $5.4 million. In December, CompX sold its furniture components business for approximately $58 million net cash proceeds and recorded a $23.7 million pretax gain. The gain contributed $18.4 million to Valhi-attributable discontinued-operations income for the year.
- WCS sales increased to $27.8 million from $2.0 million, and its operating loss narrowed to $26.8 million from $38.0 million, as its Compact and Federal low-level radioactive waste facilities became operational during 2012.
- Operating cash flow dropped by $220.5 million, principally from lower operating income, higher net contributions to the TiO₂ joint venture and lower insurance recoveries. Inventory growth used $184.6 million of cash.
Outlook, risks and unusual items
- Management forecast lower 2013 income from continuing operations attributable to Valhi stockholders. It expected Chemicals operating income to be significantly lower than in 2012, despite potential volume recovery and planned price increases; WCS results were expected to improve as disposal revenues grew. Management also expected lower general corporate expenses but higher interest expense.
- For Chemicals, management cited 2012 year-end TiO₂ prices 17% below year-end 2011 and high-cost feedstock carried into early 2013. It expected lower ore costs during 2013 but said the moderation then observed was insufficient to offset price declines. Industry demand, customer inventory levels, pricing, capacity additions, raw-material availability and foreign exchange remain material uncertainties.
- WCS had completed facility certification, but routine Compact shipments began only in July 2012. Access to the Federal facility’s market depends on a prime contract with the Department of Energy, which management expected to pursue in 2013. WCS expected continued operating losses until revenue covers its high fixed costs. Its licenses face legal challenges; the licenses remained in effect pending appeals.
- Valhi’s 2012 results included a $21.8 million pretax securities transaction gain, principally from selling its TIMET shares for $107.6 million; a $14.7 million real-estate litigation settlement gain; a $3.2 million gain on excess property; a $6.4 million goodwill impairment; and a $7.2 million debt-prepayment charge. The TIMET sale also affected tax decisions and discontinued-operation gains.
- Environmental remediation liabilities totaled $50.2 million at year-end. NL had accrued approximately $48 million for about 50 sites; the upper end of reasonably possible costs for estimable matters was approximately $144 million, including accrued amounts. Costs for about five sites could not then be estimated. Valhi recorded no accrual for pending lead-pigment litigation, which it said it would defend; an adverse outcome could have a material effect.
- Contractual commitments totaled $3.58 billion, including $1.83 billion of TiO₂ feedstock commitments and $521.8 million of scheduled interest; $767.7 million was due in 2013. WCS also faced substantial future financial-assurance funding requirements, including a $122.4 million payment scheduled for November 2016 under the disclosed plan.
- In February 2013, Kronos prepaid $290 million of term-loan principal, funding $100 million from cash and $190 million from a new Contran loan. Management expected an approximately $7 million noncash pretax charge. The filing stated Valhi was in compliance with debt covenants at December 31, 2012.
Important facts for investors to verify
- Whether TiO₂ selling prices, sales volumes and feedstock costs recover sufficiently to support the 2013 outlook, and how much of the early-year cost burden is attributable to prior-period ore purchases.
- WCS’s progress in securing DOE-related business, attracting Compact and Federal waste shipments, and resolving challenges to its licenses; assess the cash and funding needed before the operation reaches break-even.
- The accessibility of subsidiary cash and dividends, the terms and availability of Contran-related financing, and the impact of Kronos’s February 2013 refinancing on consolidated leverage and interest expense.
- Developments in NL’s environmental matters and lead-pigment litigation, including the unestimated sites and any changes to the probability or estimability of loss.
- Nonrecurring gains and discontinued operations when assessing sustainable earnings; 2012 reported profit included material disposal, securities and settlement items.