Business context and reporting period
Valhi, Inc. is primarily a holding company reporting for the fiscal year ended December 31, 2011. Its consolidated segments are chemicals (80%-controlled Kronos, a titanium dioxide pigment producer), component products (87%-controlled CompX) and waste management (WCS). Contran and its subsidiaries owned approximately 95% of Valhi’s common stock at year-end. The filing is an annual report, not a standalone fourth-quarter report.
Financial performance and condition
| Metric | 2011 | 2010 |
|---|---|---|
| Net sales | $2,084.1 million | $1,592.7 million |
| Operating income, total of reported segments | $530.5 million | $161.8 million |
| Gross margin | $757.7 million; 36.4% of sales | $362.8 million; 22.8% of sales |
| Net income attributable to Valhi stockholders | $217.5 million; $1.91 per diluted share | $50.3 million; $0.42 per diluted share |
| Cash from operating activities | $292.4 million | $122.2 million |
| Capital expenditures | $146.2 million | $44.7 million |
| Total debt | $736.4 million | $940.3 million |
| Cash and cash equivalents | $96.4 million | $325.1 million |
Year-end unrestricted and restricted cash, cash equivalents and marketable securities totaled $235.8 million; available credit under existing facilities was reported at $231.5 million, including a facility whose availability was at Contran’s discretion. Current assets were $944.2 million and current liabilities $415.6 million. Interest expense was $61.9 million. The reported segment operating income is not the same as income before taxes, which was $469.9 million after corporate items, interest and other items.
Performance was led by chemicals: segment sales were $1,943.3 million and operating income $553.0 million. Component products reported sales of $138.8 million and operating income of $15.5 million. WCS reported sales of $2.0 million and an operating loss of $38.0 million. Consolidated income tax expense was $174.9 million.
Material changes versus the prior comparable period
- Sales increased 31% and net income attributable to Valhi stockholders rose to $217.5 million from $50.3 million, principally reflecting stronger TiO2 pricing and chemicals profitability.
- Chemicals sales rose 34%, as TiO2 average selling prices increased 40%; sales volumes fell 5% amid fourth-quarter customer destocking. Production reached a record 550,000 metric tons, versus 524,000 in 2010.
- Component products sales increased 3% and operating income improved, including a $7.5 million patent-settlement gain. Gross margin edged down amid higher material costs and facility-consolidation inefficiencies.
- WCS operating losses widened to $38.0 million from $30.8 million, while sales declined as a prior customer-specific project wound down and new disposal facilities were not yet operating.
- Operating cash flow increased, but cash and cash equivalents declined by $228.7 million during the year. Investing outflows included $146.2 million of capital expenditures and purchases of securities; working capital used cash, notably as inventories increased by $184.3 million.
- Debt declined by $203.9 million, including through redemption and repurchase of Kronos notes and repayment of CompX debt. Valhi’s quarterly dividend rose from $0.10 to $0.125 per share during 2011.
Outlook, commentary and key risks
Management forecast higher 2012 net income than in 2011, mainly from expected higher chemicals operating income and lower WCS losses; it expected lower component-products operating income partly because 2011 included the patent-settlement gain. For chemicals, management expected stronger selling prices and sales volumes to more than offset a projected 50%–60% increase in TiO2 production cost per metric ton, driven mainly by feedstock ore. Management expected production near 2011 levels and planned approximately $74 million of 2012 chemicals capital spending. These are forecasts, not guarantees.
WCS’s Compact low-level radioactive waste facility was expected to be certified and operational by the end of March 2012; the Federal facility was expected later in 2012. Utilization depends on certification, import approvals and securing disposal business, including a DOE-related contract for the Federal facility. Management expected WCS to continue operating at a loss until sales volumes increase.
Material risks include TiO2 market cyclicality, customer destocking, competition and the ability to pass higher feedstock, energy and freight costs through to customers. The company also faces foreign-exchange exposure, debt and refinancing risk, and dependence on subsidiary distributions to fund parent-company obligations. The 6.5% Kronos Senior Secured Notes had a $360.6 million carrying value and were due in 2013; consolidated debt maturities included substantial amounts in 2013. The filing reports approximately $3.97 billion of contractual commitments, including long-term feedstock purchase commitments, and estimates $886.8 million due in 2012 across the listed commitment categories.
NL’s lead-pigment litigation remained unresolved, with no amounts accrued because liability was not considered probable and reasonably estimable; an adverse outcome could materially affect results and liquidity. Environmental remediation liabilities were $43.2 million, including approximately $41 million for NL sites; the estimated upper end of reasonably possible costs for estimable NL matters was approximately $72 million. Valhi also reported asbestos claims without an accrual, citing uncertainty and inability to estimate liability. Related-party transactions and governance merit attention: Contran control, intercompany financing, management-service fees, and affiliate relationships are significant features of the structure.
Important facts for investors to verify
- Review the full audited statements and segment disclosures, especially the distinction between segment operating income, consolidated pretax income and earnings attributable to Valhi stockholders.
- Track TiO2 prices, sales volumes, customer inventory levels and whether pricing offsets the forecast increase in feedstock and other production costs.
- Confirm WCS facility certification, required import approvals and contracts, and assess the cash and earnings impact if utilization ramps more slowly than forecast.
- Examine the 2013 Kronos note maturity, refinancing plans, debt covenants, subsidiary dividend capacity and the parent company’s reliance on affiliate funding.
- Monitor NL litigation and environmental exposures, including the unaccrued lead-pigment and asbestos claims and the range of potential remediation costs.
- Assess the quality and availability of reported liquidity: $235.8 million includes restricted amounts and marketable securities, while some stated credit availability was discretionary or subject to facility conditions.