VALHI INC quarterly report, Q1 FY2015

Valhi, Inc. — Form 10-Q Summary

Reporting period: Three months ended March 31, 2015. Valhi is a holding company with businesses in titanium dioxide chemicals, component products, waste management and real estate. Results consolidate majority-owned subsidiaries, including Kronos, NL, CompX and WCS.

Financial performance and position

Metric	Q1 2014	Q1 2015
Net sales	$462.4 million	$416.1 million
Income before taxes	$8.4 million	$21.6 million
Net income	$4.6 million	$17.3 million
Net income attributable to Valhi stockholders	$0.8 million	$11.9 million
Diluted earnings per share	—	$0.04
Operating cash flow	$(5.8) million	$(30.2) million

• Net sales declined 10%; chemicals sales fell 13%, mainly from lower TiO₂ prices and adverse currency translation. Higher sales volumes partly offset those effects.
• Consolidated gross margin was $89.3 million, compared with $85.8 million. Operating income across reportable segments increased to $34.6 million from $22.8 million.
• Q1 2015 segment operating results: Chemicals income $34.0 million; Component Products income $3.7 million; Waste Management loss $2.9 million; Real Estate loss $0.2 million.
• Cash and cash equivalents were $199.5 million at March 31, 2015, down from $255.8 million at year-end. The company reported $230.5 million of restricted and unrestricted cash, cash equivalents and marketable securities, including $57.9 million held outside the U.S.
• Total debt was $938.1 million, including $9.2 million of current maturities. Debt was $934.1 million at December 31, 2014. Cash used in investing was $11.6 million; financing used $6.3 million. Capital expenditures were $13.3 million.
• Available borrowing capacity was approximately $217.6 million, including $45.8 million under Valhi’s Contran facility, which is at Contran’s discretion. The company said it complied with debt covenants and expected liquidity to meet short- and long-term obligations.

Changes, outlook and management commentary

• Valhi-attributable earnings improved by $11.1 million year over year. Management cited higher Chemicals operating income, reduced Waste Management losses, increased insurance recoveries and a $2.7 million non-cash tax benefit from releasing part of an uncertain-tax-position reserve.
• Chemicals operating income rose to $34.0 million despite lower sales and gross-margin dollars. Lower feedstock and other manufacturing costs, higher volumes, and favorable currency effects supported results. TiO₂ average selling prices fell 11% year over year and were 7% lower at quarter-end than at year-end 2014.
• Management expected higher Valhi-attributable income for full-year 2015 than in 2014, with improved WCS results expected to more than offset lower anticipated insurance recoveries. Chemicals operating income was expected to be comparable to 2014; higher volumes and moderating raw-material costs were expected to be largely offset by lower selling prices. Chemicals production was expected to remain below full capacity during improvement projects and maintenance shutdowns.
• Management expected improved WCS results as disposal volumes increased, but noted shipment delays, including severe winter weather disruptions. The company said positive WCS results depend on larger and more regular waste shipments, cost efficiencies and utilization of its facilities.
• Expected 2015 capital expenditures were approximately $83 million, plus about $12 million of LandWell development costs. Management expected interest expense to be higher for the year, as higher average debt was expected to outweigh lower borrowing rates.
• The quarterly dividend was reduced to $0.02 per share beginning in Q2 2014; Q1 2015 dividends paid were $6.8 million. Future dividends remain discretionary and depend partly on distributions from subsidiaries.

Risks, contingencies and unusual items

• NL is appealing a California judgment finding it and two other defendants jointly and severally liable for $1.15 billion to fund lead-paint abatement. Valhi said a loss was not considered probable and recorded no accrual; an adverse outcome could materially affect results, financial position and liquidity.
• Environmental remediation liabilities totaled $118.1 million at March 31, 2015. NL had accrued approximately $110 million for about 47 sites; the estimated upper end of reasonably possible costs for estimable matters was approximately $149 million, including amounts accrued. Costs at five additional sites could not be reasonably estimated.
• WCS faces pending challenges to its disposal licenses and an antitrust counterclaim from EnergySolutions. The relevant licenses remained in effect; proceedings were ongoing.
• Other exposures include asbestos and silica litigation, tax examinations, environmental claims and insurance-reimbursement uncertainty. The filing states that additional legislation or adverse litigation outcomes could have a material effect.
• Q1 comprehensive loss attributable to Valhi stockholders was $38.6 million, largely reflecting currency translation losses; accumulated other comprehensive loss increased to $199.1 million.
• Foreign-exchange movements materially affected reported results: management estimated a $33 million reduction in Chemicals sales but a $14 million benefit to Chemicals operating income versus Q1 2014. Outstanding currency forwards had a $4.5 million net liability.

Important facts for investors to verify

• Whether TiO₂ pricing and demand stabilize, and whether volume gains and lower input costs can offset price pressure.
• Whether WCS receives larger, regular disposal shipments and narrows or eliminates operating losses.
• The progress and potential financial consequences of NL’s California lead-paint appeal, environmental matters and WCS litigation.
• Cash generation, working-capital needs, subsidiary distributions, debt availability and compliance with covenants, including the discretionary nature of the Contran facility.
• The extent to which Q1 earnings benefited from the $2.7 million tax reserve release and $3.1 million of insurance recoveries, and whether such items recur.