VALHI INC quarterly report, Q1 FY2014

Valhi, Inc. — Q1 2014 Form 10-Q

Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are with December 31, 2013. Unaudited consolidated results cover Valhi and its subsidiaries. Valhi is a holding company with operating segments in chemicals (Kronos), component products (CompX), waste management (WCS), and real estate management and development (BMI and LandWell). BMI and LandWell were consolidated beginning January 1, 2014.

Financial results and liquidity

Metric	Q1 2013	Q1 2014
Net sales	$499.2 million	$462.4 million
Gross margin	$12.9 million	$85.8 million
Operating income (loss)	$(45.2) million	$22.8 million
Net income (loss)	$(48.2) million	$4.6 million
Net income (loss) attributable to Valhi stockholders	$(39.8) million	$0.8 million
Basic and diluted EPS attributable to Valhi stockholders	$(0.12)	Nil, as reported
Operating cash flow	$(34.3) million	$(5.8) million

Revenue declined 7% year over year. Gross margin was approximately 18.6% of sales versus 2.6%; operating margin was approximately 4.9% versus a loss of 9.1%.
Cash and cash equivalents were $256.2 million at March 31, versus $142.8 million at year-end. Current assets were $1,095.3 million and current liabilities $402.1 million; working capital was $693.2 million.
Total debt increased to $929.0 million from $752.5 million, including current maturities; long-term debt was $917.2 million. The increase principally reflects Kronos’s new $350 million term loan. Consolidated cash, restricted cash and marketable securities totaled $310.8 million; management reported approximately $287.7 million of available credit.
Investing cash use was $25.0 million, including $19.9 million of capital expenditures. Financing provided $144.3 million, including term-loan proceeds and net borrowings. Valhi paid $0.05 per share in Q1 dividends.

Material changes and segment performance

Chemicals: Sales decreased 9% to $420.1 million; operating results improved from a $45.1 million loss to $27.6 million income. Lower feedstock and production costs more than offset lower TiO₂ prices and sales volumes. Sales volumes fell 7%, average selling prices fell 5%, and currency movements increased segment operating income by an estimated $8 million.
Component products: Sales rose 20% to $25.8 million and operating income increased to $3.3 million from $1.5 million, supported by demand and improved fixed-cost absorption.
Waste management: Sales fell to $7.0 million from $14.1 million and operating loss widened to $8.5 million from $1.6 million, mainly because of reduced disposal shipments and a shortage of transport containers.
Real estate: Newly consolidated BMI and LandWell recorded $9.5 million of sales and $0.4 million of operating income. Segment sales included $7.7 million from land sales. Management said significant operating income was not expected from certain contracted land sales because the land had been recorded at acquisition-date fair value.
Other notable items: Interest expense declined to $13.7 million from $15.4 million. The prior-year quarter included a $6.6 million debt-prepayment charge that did not recur. Q1 2014 included $6.8 million of securities earnings, primarily dividends and interest.

Outlook, risks and contingencies

Management expected Valhi to report full-year 2014 net income, compared with a net loss in 2013, citing anticipated Chemicals improvement, WCS revenue growth, the newly consolidated real-estate segment, and no repeat of 2013 debt-prepayment losses. This is management’s forecast, not a guarantee.
Management expected Chemicals operating income to exceed 2013, supported by lower feedstock costs and anticipated higher sales and production volumes; potential selling-price increases were subject to market conditions. It expected production to remain below capacity.
Management expected WCS results to improve as container availability and disposal volumes recovered, but did not expect significant segment profit until revenues covered the facilities’ high fixed costs. It also identified uncertainty about securing larger federal waste streams.
In May 2014, after quarter-end, Valhi reduced its regular quarterly dividend from $0.05 to $0.02 per share beginning with the second-quarter payment, citing its financial condition, cash needs and expected lower subsidiary distributions. NL also suspended its dividend in May.
Lead-pigment litigation: A California court had entered a $1.15 billion aggregate abatement judgment against NL and two other defendants. NL appealed after its new-trial motion was denied. Valhi stated that it had not accrued a loss because it did not consider a loss probable and could not reasonably estimate any liability; an adverse ultimate outcome could materially affect results, financial position and liquidity.
Environmental matters: Environmental remediation liabilities totaled $122.2 million, including $113.0 million noncurrent. NL’s estimated reasonably possible remediation-cost range extended to approximately $153 million, including amounts accrued; certain sites remained unestimable.
WCS permits: Texas appellate rulings in March and April 2014 favored WCS and regulators in Sierra Club challenges, but rehearing motions and potential further appeals remained pending.
Kronos’s European revolver waiver of a financial test ran through June 30, 2014; borrowing remained subject to an EBITDA requirement. The company reported covenant compliance at March 31. Other risks include cyclical TiO₂ demand and pricing, raw-material and currency exposure, taxes, environmental obligations, subsidiary dividend capacity, and financing availability.

Most important facts for investors to verify

Whether TiO₂ selling prices and volumes recover sufficiently to sustain lower production costs and Chemicals profitability.
Whether WCS receives the expected containers and larger disposal shipments, and whether it can reduce its operating losses and cash needs.
The status and potential financial exposure of the California lead-pigment appeal and environmental remediation matters; the filing records no accrual for the lead judgment.
Whether Kronos satisfies the European facility’s EBITDA condition after the waiver expires, and how the new term loan affects interest costs and leverage.
The timing and amount of future subsidiary distributions, the reduced Valhi dividend, and the liquidity and cash-generation outlook for the parent company.
The final purchase-price allocation for BMI and LandWell; the filing describes its acquisition valuation as preliminary and subject to refinement.