Valhi, Inc. — Q1 2013 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2013, compared with Q1 2012. Valhi is a holding company with Chemicals (Kronos), Component Products (CompX) and Waste Management (WCS) segments. Contran and its subsidiary owned approximately 93% of Valhi’s common stock at quarter-end.
Key financial results
| Metric | Q1 2012 | Q1 2013 |
|---|---|---|
| Net sales | $582.8 million | $499.2 million |
| Gross margin | $260.4 million; 44.7% of sales | $12.9 million; 2.6% of sales |
| Operating income (loss) | $203.3 million | $(45.2) million |
| Income (loss) from continuing operations | $118.8 million | $(48.2) million |
| Net income (loss) attributable to Valhi stockholders | $88.9 million | $(39.8) million |
| Diluted earnings (loss) per share | $0.26 | $(0.12) |
| Cash used in operating activities | $114.4 million | $34.3 million |
At March 31, 2013, cash and cash equivalents were $179.7 million, restricted cash equivalents were $6.6 million, total debt was $800.2 million, and equity was $1,002.6 million. Total assets were $2,996.8 million. Cash and cash equivalents decreased from $366.9 million at year-end 2012. Management reported approximately $215.1 million of restricted and unrestricted cash, cash equivalents and marketable securities, and approximately $363 million of available borrowing capacity; $76 million of the latter depended on Contran’s discretion.
Material changes and drivers
- Chemicals: Sales fell 17% to $463.6 million; operating results moved from $211.3 million income to a $45.1 million loss. TiO2 prices declined 21% year over year, while sales volume rose 1% and production volume fell 13%. Higher feedstock and other raw-material costs, together with lower production, sharply compressed margins. Currency movements reduced segment operating income by an estimated $6 million.
- Component Products: Sales rose 5% to $21.5 million; operating income was $1.5 million versus $1.6 million. The prior-year comparison includes furniture-components operations sold in December 2012, presented as discontinued operations.
- Waste Management: Sales increased to $14.1 million from $1.1 million, and operating loss narrowed to $1.6 million from $9.6 million as the Compact low-level radioactive waste facility accepted shipments. WCS had not received waste at its Federal facility by quarter-end.
- Operating cash outflow improved by $80.1 million year over year, despite the operating loss, primarily because working-capital movements were less adverse. Investing activities used $16.3 million; financing activities used $134.6 million.
- Total debt declined from $910.1 million to $800.2 million. Kronos prepaid $290 million of term-loan principal, funded with $100 million of its cash and a new $190 million Contran loan; the prepayment generated a $6.6 million non-cash charge. Valhi also paid dividends of $0.05 per share.
Outlook, risks and contingencies
- Management expected Valhi’s 2013 continuing-operations income attributable to stockholders to be lower than in 2012, primarily because of lower expected Chemicals and Component Products income, partly offset by lower expected WCS losses.
- Management expected Chemicals operating income in 2013 to be significantly below 2012. It anticipated lower unit costs later in 2013 as higher-cost inventory worked through, and announced TiO2 price increases for implementation beginning in Q2. Realization of price increases and recovery in demand remained uncertain.
- WCS received a five-year national disposal contract for its Federal facility in April 2013, with potential value up to $300 million; no tasks had been awarded and no amounts authorized as of the filing. Management said significant operating profit would require sufficient revenue to cover high fixed costs.
- Management forecast approximately $70 million of 2013 capital expenditures and expected to have sufficient liquidity for near- and longer-term obligations, subject to actual operating performance and access to subsidiary cash and credit facilities. Debt covenants were reported in compliance at March 31.
- Environmental remediation accruals totaled $50.5 million. NL had accrued approximately $48 million for about 50 sites; the estimated upper end of reasonably possible costs for estimable sites was approximately $139 million, including the accrual. Costs for about five sites could not be estimated.
- NL had not accrued for pending lead-pigment litigation or asbestos-related personal-injury claims, citing uncertainty and inability to estimate liability. Adverse outcomes could materially affect results, financial condition or liquidity. WCS disposal licenses also faced ongoing legal challenges, though the licenses remained in effect pending appeals.
- Tax authorities were examining certain returns. A Canadian tax reassessment, which Kronos contested, could result in an estimated $15.7 million cash tax liability if fully upheld. Management believed existing accruals were adequate and that the examination outcomes should not materially adversely affect the company.
Most important facts for investors to verify
- Whether TiO2 prices and margins recover enough to offset elevated input costs, and whether demand and production volumes improve.
- Whether the Federal WCS contract receives task awards and generates actual shipments and cash flow, and whether WCS can cover its fixed costs.
- Usable liquidity at Valhi and its subsidiaries, including restrictions on moving subsidiary cash, the discretionary Contran facility and related-party debt terms.
- Developments in environmental, lead-pigment, asbestos and WCS licensing matters, including potential exposure beyond recorded accruals.
- Tax examination outcomes and the continued recoverability of German net operating loss carryforwards.