Valhi, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Valhi is a holding company operating through chemicals (Kronos), component products (CompX), waste management (WCS), and real estate (BMI and LandWell). BMI and LandWell were consolidated beginning January 1, 2014.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $476.5 million | $448.2 million | $1,430.6 million | $1,463.4 million |
| Net income (loss) attributable to Valhi stockholders | $28.7 million | $(34.2) million | $45.0 million | $(113.7) million |
| Per-share earnings (loss), diluted | $0.08 | $(0.10) | $0.13 | $(0.33) |
| Operating income (loss), consolidated segments | $60.2 million | $(42.5) million | $129.7 million | $(134.5) million |
| Cash provided by operating activities | Not presented quarterly | $15.6 million | $48.4 million |
- Consolidated gross margin was $115.8 million in Q3 and $305.8 million for the first nine months, versus $48.6 million and $78.7 million, respectively, in 2013. Calculated gross margin as a share of net sales was approximately 24% for Q3 and 21% year to date, compared with approximately 11% and 5%.
- Interest expense was $13.8 million for Q3 and $42.1 million year to date. The filing reports no debt-prepayment loss in 2014; 2013 included $8.9 million of such charges.
- At September 30, total debt was $936.8 million, up from $752.5 million at December 31, 2013. Cash and cash equivalents were $240.7 million; restricted cash equivalents were $14.8 million. The balance sheet also reported $258.5 million of marketable securities, including a $250 million investment in The Amalgamated Sugar Company LLC. Available borrowing capacity was reported as approximately $231.4 million, subject in part to facility terms and Contran discretion.
- Total assets were $2,996.1 million and total equity was $941.3 million at September 30, 2014. Current assets were $1,085.1 million versus current liabilities of $349.4 million.
- Capital expenditures were $49.7 million for the first nine months. Cash dividends paid by Valhi were $30.4 million.
Material changes and operating drivers
- Profitability rebounded substantially, chiefly because Kronos’ chemicals segment moved from operating losses to income as lower feedstock and other production costs more than offset weaker TiO₂ selling prices. Chemicals segment operating income was $49.7 million in Q3 and $123.6 million year to date, versus losses of $35.2 million and $125.6 million.
- TiO₂ average selling prices were down 6% in Q3 and 5% year to date; sales volumes increased 4% in Q3 but declined 4% year to date. Lower raw-material costs, higher production, and currency effects supported margins.
- Component products sales rose 9% in Q3 and 13% year to date; operating income increased to $3.4 million and $10.6 million, respectively.
- WCS reported Q3 sales of $24.5 million and operating income of $6.9 million, compared with sales of $4.9 million and an operating loss of $10.3 million in Q3 2013. Year-to-date operating loss narrowed to $6.6 million from $16.3 million.
- Newly consolidated real estate operations reported $29.7 million in nine-month sales and $2.1 million in operating income. Land sales contributed $23.6 million of revenue year to date; management said significant operating income was not expected on parcels then under contract because of acquisition-date fair-value accounting.
- Operating cash flow fell despite improved earnings, mainly due to working-capital movements, especially receivables and the absence of the large inventory-related cash benefit recorded in 2013.
Outlook, risks and unusual items
- Management expected 2014 net income attributable to Valhi stockholders, compared with a 2013 loss, citing improved chemicals and waste-management results, the contribution from real estate, lower expected corporate expenses, and the absence of 2013 debt-prepayment losses.
- For chemicals, management expected 2014 operating income to exceed 2013, supported by lower feedstock costs and higher production. It expected fourth-quarter cost of sales per metric ton to be lower than the first nine months, but noted that selling prices had declined and future pricing depended on market conditions.
- Management expected WCS results to improve in Q4 2014 versus Q4 2013, while cautioning that significant operating profit depends on obtaining sufficient disposal volumes to cover high fixed costs. The national federal-site contract is for up to $300 million over five years, but awards to date had been for smaller waste streams.
- Valhi reduced its regular quarterly dividend from $0.05 to $0.02 per share beginning with the second quarter of 2014, citing financial condition, cash needs, and expected lower subsidiary distributions. Future dividends are discretionary.
- Unusual items include $8.8 million of Q3 insurance recoveries, mainly for past litigation defense costs; $5.9 million of second-quarter noncash tax benefits from reserve releases; and a $2 million Q3 cash tax benefit tied to tax credits. 2013 Q3 results included a $35 million Kronos litigation-settlement charge.
- NL is appealing a California lead-paint abatement judgment ordering defendants jointly to pay $1.15 billion. Valhi recorded no accrual, concluding a loss was not probable and could not be reasonably estimated; the filing warns a future loss could materially affect results, financial position, and liquidity.
- Environmental remediation liabilities totaled $124.8 million at September 30, including $117 million for approximately 45 NL sites. The estimated upper end of reasonably possible NL costs for estimable sites was approximately $156 million, including accrued amounts; costs for several sites could not be estimated.
- Other risks include cyclical TiO₂ demand and pricing, raw-material and currency fluctuations, environmental obligations, tax examinations, litigation, WCS licensing and operating volumes, and dependence on subsidiary distributions. Management stated it was in compliance with debt covenants and expected liquidity to cover near- and longer-term obligations, subject to actual results and conditions.
Important facts for investors to verify
- Whether TiO₂ prices and volumes, feedstock costs, and currency effects support the expected improvement in chemicals earnings.
- Whether WCS can secure larger and recurring waste streams, sustain utilization, and improve cash flow without additional support.
- The progress and eventual outcome of NL’s appeal of the $1.15 billion California judgment, along with developments in environmental matters.
- Availability and restrictions on reported liquidity, including subsidiary-level cash, borrowing conditions, and the discretionary nature of Contran facility availability.
- Whether reduced subsidiary distributions and the lower Valhi dividend remain consistent with parent-company cash requirements and debt service.
- Finalization of the preliminary BMI and LandWell acquisition accounting and the valuation of development land and other acquired assets.