Valhi, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; balance-sheet comparisons are against December 31, 2014. Amounts are in millions of dollars except per-share data. Valhi is a holding company with businesses in titanium dioxide chemicals, component products, waste management and real estate.
Financial performance
| Metric | Q2 2014 | Q2 2015 | Six months 2014 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $491.7 | $408.8 | $954.1 | $824.9 |
| Gross margin | $104.2 | $56.3 | $190.0 | $145.6 |
| Income (loss) before tax | $25.2 | $(28.8) | $33.6 | $(7.2) |
| Income tax expense | $1.5 | $110.6 | $5.3 | $114.9 |
| Net income (loss) attributable to Valhi | $15.5 | $(103.9) | $16.3 | $(92.0) |
| Basic and diluted loss per share | $0.05 income | $(0.30) | $0.05 income | $(0.27) |
| Operating cash flow | Not presented quarterly | $3.3 | $(5.2) |
- Q2 sales fell 17% year over year; gross margin was 13.8% of sales versus 21.2%. For the first half, sales fell 14% and gross margin was 17.7% versus 19.9%.
- The $150.3 non-cash tax valuation allowance for German and Belgian deferred tax assets was the principal driver of the reported loss. A separate $29.3 non-cash tax benefit related to Valhi’s investment in Kronos partly offset the tax expense.
- Cash and cash equivalents were $211.3 at June 30, down from $255.8 at year-end. Current assets were $992.2 and current liabilities $305.8. Total debt was $943.8, including $9.1 current maturities; long-term debt was $934.7. Management reported $242.6 of restricted and unrestricted cash, equivalents and marketable securities, including $62.6 held outside the U.S.
- Capital expenditures were $23.0 in the first half. Valhi paid dividends of $0.04 per share during the period; the regular quarterly dividend had been reduced to $0.02 per share beginning in 2014.
Material changes and segment results
- Chemicals: Q2 sales declined 19% to $360.2 and operating results swung to a $7.9 loss from $46.3 income. First-half sales fell 16% to $725.3 and operating income declined 65% to $26.1. TiO₂ prices fell 13% in Q2 and 12% in the first half, while sales volumes rose 5% and 6%, respectively. Currency translation reduced sales by an estimated $44 in Q2 and $77 for the half. The segment recorded $21.1 of workforce-reduction costs.
- Component products: Q2 sales increased 8% to $28.9 and operating income rose 10% to $4.3. First-half sales rose 8% to $56.8 and operating income increased 11% to $8.0, primarily on government security-product demand.
- Waste management: Q2 sales fell to $10.0 from $11.9 and operating loss widened to $8.1 from $5.0, partly because of limited availability of certain shipping containers. First-half sales increased to $25.0 from $18.9 and operating loss narrowed to $11.0 from $13.5.
- Real estate: First-half sales declined to $17.8 from $19.0 and operating income to $1.4 from $1.9. Land sales generated $13.4 of first-half revenue; management does not expect significant operating income on parcels currently under contract.
Outlook, risks and unusual items
- Management expects a Valhi stockholder loss for full-year 2015, versus income in 2014, primarily due to the tax valuation allowance and lower Chemicals segment operating income. It expects Chemicals operating income to be significantly below 2014, with lower TiO₂ prices more than offsetting higher expected volumes and moderating raw-material costs.
- Chemicals production ran at 97% of practical capacity in the first half; management expects practical-capacity operation in the second half and higher full-year sales volumes, assuming global economic conditions do not deteriorate. It cited uncertain prospects for near-term price increases. Further workforce reductions affecting 50–60 people are expected over the second half of 2015 and first half of 2016; associated costs were not yet estimable.
- Management expects 2015 capital expenditures of about $65 and says current liquidity is expected to cover near- and longer-term obligations. Available borrowing capacity was reported at approximately $186.5; availability under the Contran facility is at Contran’s discretion. Valhi was in compliance with debt covenants at June 30.
- WCS remains loss-making. Management cited delayed shipments, winter weather and container availability; it is pursuing additional disposal contracts and says profitability is not assured. WCS’s operating licenses face ongoing legal challenges, though the licenses remain in effect while proceedings continue.
- Contingencies include NL’s appeal of the California lead-paint abatement judgment, which ordered $1.15 billion in damages against NL and two other defendants. Valhi said a loss was not probable and could not be reasonably estimated, but an adverse outcome could materially affect results, financial position and liquidity. Environmental remediation liabilities totaled $120.7, including $112 accrued for approximately 46 NL-related sites; the estimated upper end for estimable NL matters was approximately $165, including the accrual.
- Other risks include TiO₂ market cyclicality and competition, foreign-exchange movements, tax examinations, environmental obligations, and restrictions on subsidiary dividends. Management noted that subsidiary distributions are important to parent-company liquidity and are not assured.
Important facts for investors to verify
- Whether future profitability in Germany and Belgium supports reversal of the $150.3 deferred-tax valuation allowance, and the potential effect of tax rules on those NOL carryforwards.
- TiO₂ pricing, demand, currency impacts and the expected timing and benefits of restructuring and other cost reductions.
- WCS shipment volumes, container access, customer contracts, licensing litigation and funding needs.
- Developments in the Santa Clara appeal and the estimation or recognition of any lead-pigment or environmental liabilities.
- Cash available to the parent, subsidiary dividend capacity, borrowing availability and continued covenant compliance.