Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
VHI > SEC Filings for VHI > Form 10-Q on 6-Nov-2012All Recent SEC Filings

Show all filings for VALHI INC /DE/

Form 10-Q for VALHI INC /DE/


6-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Business Overview

We are primarily a holding company. We operate through our wholly-owned and majority-owned subsidiaries, including NL Industries, Inc., Kronos Worldwide, Inc., CompX International Inc., Tremont LLC and Waste Control Specialists LLC ("WCS"). Kronos (NYSE: KRO), NL (NYSE: NL) and CompX (NYSE MKT: CIX) each file periodic reports with the U.S. Securities and Exchange Commission ("SEC").

We have three consolidated operating segments:

Chemicals - Our chemicals segment is operated through our majority control of Kronos. Kronos is a leading global producer and marketer of value-added titanium dioxide pigments ("TiO2"), a base industrial product used in a diverse range of customer applications and end-use markets, including coatings, plastics, paper, food, cosmetics, inks, textile fibers, rubber, pharmaceuticals, glass, ceramics and other industrial and consumer markets.

Component Products - We operate in the component products industry through our majority control of CompX. CompX is a leading manufacturer of engineered components utilized in a variety of applications and industries. CompX manufactures engineered components that are sold to a variety of industries including office furniture, recreational transportation (including boats), mailboxes, toolboxes, home appliances, banking equipment, vending equipment and computer related equipment. CompX has production facilities in North America and Asia.

Waste Management - WCS is our subsidiary which operates a West Texas facility for the processing, treatment, storage and disposal of a broad range of low-level radioactive, hazardous, toxic and other wastes. WCS obtained a byproduct disposal license in 2008 and began disposal operations at this facility in October 2009. WCS received a low-level radioactive waste ("LLRW") disposal license in September 2009. The Compact LLRW disposal facility was fully certified and operational in April 2012, and the Federal LLRW site was fully certified and operational in September 2012.

General

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Statements in this Quarterly Report that are not historical facts are forward-looking in nature and represent management's beliefs and assumptions based on currently available information. In some cases, you can identify forward-looking statements by the use of words such as "believes," "intends," "may," "should," "could," "anticipates," "expects" or comparable terminology, or by discussions of strategies or trends. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we do not know if these expectations will be correct. Such

- 33 -


Table of Contents

statements by their nature involve substantial risks and uncertainties that could significantly impact expected results. Actual future results could differ materially from those predicted. The factors that could cause actual future results to differ materially from those described herein are the risks and uncertainties discussed in this Quarterly Report and those described from time to time in our other filings with the SEC include, but are not limited to, the following:

Future supply and demand for our products;

The extent of the dependence of certain of our businesses on certain market sectors;

The cyclicality of certain of our businesses (such as Kronos' titanium dioxide pigment ("TiO2") operations);

Customer inventory levels;

Unexpected or earlier-than-expected industry expansion;

Changes in raw material and other operating costs (such as energy, ore and steel costs) and our ability to pass those costs on to our customers or offset them with reductions in other operating costs;

Changes in the availability of raw materials (such as ore);

General global economic and political conditions (such as changes in the level of gross domestic product in various regions of the world and the impact of such changes on demand for, among other things, TiO2 and component products);

Competitive products and prices, including increased competition from low-cost manufacturing sources (such as China);

Possible disruption of our business or increases in the cost of doing business resulting from terrorist activities or global conflicts;

Customer and competitor strategies;

The impact of pricing and production decisions;

Competitive technology positions;

The introduction of trade barriers;

The ability of our subsidiaries to pay us dividends;

The impact of current or future government regulations (including employee healthcare benefit related regulations);

Uncertainties associated with new product development and the development of new product features;

Fluctuations in currency exchange rates (such as changes in the exchange rate between the U.S. dollar and each of the euro, the Norwegian krone, the Canadian dollar and the New Taiwan dollar) or possible disruptions to our business resulting from potential instability resulting from uncertainties associated with the euro;

Operating interruptions (including, but not limited to, labor disputes, leaks, natural disasters, fires, explosions, unscheduled or unplanned downtime and transportation interruptions);

The timing and amounts of insurance recoveries;

Our ability to renew, amend, refinance or establish credit facilities;

Our ability to maintain sufficient liquidity;

The ultimate outcome of income tax audits, tax settlement initiatives or other tax matters;

Our ultimate ability to utilize income tax attributes or changes in income tax rates related to such attributes, the benefits of which have been recognized under the more-likely-than-not recognition criteria (such as Kronos' ability to utilize its German net operating loss carryforwards);

- 34 -


Table of Contents
Environmental matters (such as those requiring compliance with emission and discharge standards for existing and new facilities, or new developments regarding environmental remediation at sites related to our former operations);

Government laws and regulations and possible changes therein (such as changes in government regulations which might impose various obligations on former manufacturers of lead pigment and lead-based paint, including NL, with respect to asserted health concerns associated with the use of such products);

The ultimate resolution of pending litigation (such as NL's lead pigment litigation, environmental and other litigation and Kronos' class action litigation);

Our ability to comply with covenants contained in our revolving bank credit facilities;

Our ability to complete and comply with the conditions of our licenses and permits;

Our ability to successfully overturn any currently-pending or possible future challenge to WCS' operating licenses and permits; and

Possible future litigation.

Should one or more of these risks materialize (or the consequences of such development worsen), or should the underlying assumptions prove incorrect, actual results could differ materially from those currently forecasted or expected. We disclaim any intention or obligation to update or revise any forward-looking statement whether as a result of changes in information, future events or otherwise.

Operations Overview

Quarter Ended September 30, 2012 Compared to the Quarter Ended September 30, 2011 -

Net income attributable to Valhi stockholders was $22.9 million, or $.07 per diluted share, in the third quarter of 2012 compared to $71.5 million, or $.21 per diluted share, in the third quarter of 2011. As more fully discussed below, our diluted income per share decreased from 2011 to 2012 primarily due to the net effects of:

decreased operating income from our Chemicals Segment, partially offset by increased operating income from our Component Products Segment and a decreased operating loss at our Waste Management Segment in 2012 compared to 2011;

the reversal of accrued contingent consideration at our Component Products Segment in 2012;

a higher asset held for sale write-down at our Component Products Segment in 2011;

higher insurance recoveries in 2011; and

lower general expenses in 2012, primarily due to decreased environmental remediation and related expenses.

Our net income attributable to Valhi stockholders in 2011 includes income of $.03 per diluted share related to insurance recoveries and $.02 per diluted share related to a net decrease in the reserve for uncertain tax positions.

- 35 -


Table of Contents

Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011 -

Net income attributable to Valhi stockholders was $156.2 million, or $.46 per diluted share, in the first nine months of 2012 compared to $161.9 million, or $.47 per diluted share, in the first nine months of 2011. As more fully discussed below, our diluted income per share decreased from 2011 to 2012 primarily due to the net effects of:

decreased operating income from our Chemicals Segment in 2012 compared to 2011 and lower operating income from our Component Products Segment (primarily due to the effect of the 2011 patent litigation settlement), partially offset by a lower operating loss from our Waste Management Segment;

a real-estate related litigation settlement gain in 2012;

a higher loss on prepayment of debt in 2012 as compared to 2011;

the reversal of accrued contingent consideration at our Component Products Segment in 2012;

a higher asset held for sale write-down at our Component Products Segment in 2011;

higher insurance recoveries in 2011; and

higher general expenses in the first half of 2012, primarily due to increased environmental remediation and related expenses in the first quarter of 2012.

Our net income attributable to Valhi stockholders in 2012 includes income of $.02 per diluted share related to a litigation settlement gain and a loss on the prepayment of debt of $.01 per diluted share.

Our net income attributable to Valhi stockholders in 2011 includes:

insurance recoveries of $.03 per diluted share;

income of $.02 per diluted share related to a net decrease in our reserve for uncertain tax positions; and

income of $.01 per diluted share related to a patent litigation settlement we recognized.

Current Forecast for 2012 -

We currently expect to report lower net income attributable to Valhi stockholders in 2012 as compared to the same period in 2011 primarily due to the effects of:

lower expected operating income from our Chemicals and Component Products Segments; partially offset by

lower expected operating losses at WCS as we expect more revenue from the opening of our Compact LLRW disposal facility in April 2012 and the opening of the Federal LLRW disposal facility in September 2012.

- 36 -


Table of Contents

Segment Operating Results - 2011 Compared to 2012 -

Chemicals -

We consider TiO2to be a "quality of life" product, with demand affected by gross domestic product, or GDP, and overall economic conditions in our markets located in various regions of the world. Over the long-term, we expect demand for TiO2 will grow by 2% to 3% per year, consistent with our expectations for the long-term growth in GDP. However, even if we and our competitors maintain consistent shares of the worldwide market, demand for TiO2 in any interim or annual period may not change in the same proportion as the change in GDP, in part due to relative changes in the TiO2 inventory levels of our customers. We believe that our customers' inventory levels are influenced in part by their expectations for future changes in market TiO2 selling prices as well as their expectations for future availability of product. Although certain of our TiO2 grades are considered specialty pigments, the majority of our grades and substantially all of our production are considered commodity pigment products, with price and availability being the most significant competitive factors along with quality and customer service.

The factors having the most impact on our reported operating results are:

our TiO2 sales and production volumes,

TiO2 selling prices,

currency exchange rates (particularly the exchange rate for the U.S. dollar relative to the euro, Norwegian krone and Canadian dollar) and

manufacturing costs, particularly raw materials, maintenance and energy-related expenses.

Our Chemicals Segment's key performance indicators are our TiO2 average selling prices and our TiO2 sales and production volumes. TiO2 selling prices generally follow industry trends and prices will increase or decrease generally as a result of competitive market pressures.

- 37 -


Table of Contents
                                             Three months ended                           Nine months ended
                                                September 30,                               September 30,
                                      2011         2012        % Change          2011           2012         % Change
                                                                   (Dollars in millions)
Net sales                            $ 547.9      $ 472.9            (14 )%    $ 1,505.9      $ 1,579.5              5 %
Cost of sales                          337.7        387.5             15           953.5        1,070.5             12

Gross margin                         $ 210.2      $  85.4            (59 )%    $   552.4      $   509.0             (8 )%

Operating income                     $ 158.4      $  40.4            (75 )%    $   407.8      $   364.1            (11 )%

Percent of net sales:
Cost of sales                             62 %         82 %                           63 %           68 %
Gross margin                              38           18                             37             32
Operating income                          29            9                             27             23

Ti02 operating statistics:
Sales volumes*                           136          116            (15 )%          406            368             (9 )%
Production volumes*                      134           98            (27 )           409            356            (13 )%

Percent change in net sales:
Ti02 product pricing                                                   5 %                                          20 %
Ti02 sales volumes                                                   (15 )                                          (9 )%
Ti02 product mix                                                       2                                            (1 )
Changes in currency exchange rates                                    (6 )                                          (5 )%

Total                                                                (14 )%                                          5 %

* Thousands of metric tons

Current Industry Conditions - The TiO2 industry has experienced decreased sales and production volumes as the majority of TiO2 producers and consumers have been undertaking inventory correction initiatives in response to continued global economic weakness and uncertainty. While our Chemicals Segment operated its production facilities at full practical capacity rates throughout 2011 and the first quarter of 2012, our Chemicals Segment operated its facilities at reduced rates during the second and third quarters of 2012 (approximately 86% of practical capacity in the second quarter, and approximately 71% in the third quarter) in order to align production levels and inventories to current and anticipated near-term customer demand levels.

Our Chemicals Segment also increased its TiO2 average selling prices throughout 2011, and as a result average selling prices in the third quarter 2012 were 5% higher as compared to the third quarter of 2011. Our average selling prices at the end of the second quarter of 2012 were comparable to the end of 2011, but our average selling prices at the end of the third quarter of 2012 were 7% lower than at the end of the second quarter of 2012.

Net Sales - Our Chemicals Segment's net sales in the third quarter of 2012 decreased 14% compared to the third quarter of 2011 primarily due to the net effects of a 15% decrease in sales volumes (which decreased net sales by approximately $82 million) and a 5% increase in average TiO2 selling prices (which increased net sales by approximately $27 million). TiO2 selling prices will increase or decrease generally as a result of competitive market

- 38 -


Table of Contents

pressures, changes in the relative level of supply and demand as well as changes in raw material and other manufacturing costs. Based on the current conditions in the TiO2 industry, we currently expect our average selling prices in the fourth quarter of 2012 to be lower than the fourth quarter of 2011.

Our sales volumes decreased 15% in the third quarter of 2012 as compared to the third quarter of 2011 due to lower customer demand, primarily in European markets. In addition, we estimate the unfavorable effect of changes in currency exchange rates decreased our net sales by approximately $34 million, or 6%, as compared to the third quarter of 2011.

Our Chemicals Segment's net sales in the nine months ended September 30, 2012 increased 5% compared to the nine months ended September 30, 2011 primarily due to the net effects of a 20% increase in average TiO2 selling prices (which increased net sales by approximately $300 million) and a 9% decrease in sales volumes (which decreased net sales by approximately $136 million). TiO2selling prices will increase or decrease generally as a result of competitive market pressures, changes in the relative level of supply and demand as well as changes in raw material and other manufacturing costs.

Our sales volumes decreased 9% in the first nine months of 2012 as compared to the first nine months of 2011 due to decreased customer demand, primarily in European markets. In addition, we estimate the unfavorable effect of changes in currency exchange rates decreased our net sales by approximately $70 million, or 5%, as compared to the first nine months of 2011.

Cost of Sales - Our Chemicals Segment's cost of sales increased 15% in the third quarter of 2012 compared to 2011 due to the net impact of higher raw material costs of approximately $85 million (primarily feedstock ore and petroleum coke), a 15% decrease in sales volumes, a 27% decrease in TiO2 production volumes and currency fluctuations (primarily the euro). Cost of sales as a percentage of net sales increased to 82% in the third quarter of 2012 compared to 62% in the third quarter of 2011, primarily due to the net effect of higher raw material costs, the unfavorable effects of unabsorbed fixed production costs resulting from reduced production volumes and higher average selling prices. The reduction in our TiO2 production volumes during the third quarter of 2012, as discussed above, resulted in approximately $25 million of unabsorbed fixed production costs which were charged directly to cost of sales. We expect further increases in our manufacturing costs during the remainder of 2012, as discussed below.

Our Chemicals Segment's cost of sales increased 12% in the nine months ended September 30, 2012 compared to the same period in 2011 due to the net impact of higher raw material costs of approximately $201 million (primarily feedstock ore and petroleum coke), a 9% decrease in sales volumes, a 13% decrease in production volumes and currency fluctuations (primarily the euro). Cost of sales as a percentage of net sales increased to 68% in the first nine months of 2012 compared to 63% in the same period in 2011 primarily due to the net effects of higher raw material costs, the unfavorable effects of unabsorbed fixed production costs resulting from reduced production volumes and higher average selling prices. The reduction in our TiO2 production volumes during the first nine months of 2012, as discussed above, resulted in approximately $25 million of unabsorbed fixed production costs which were charged directly to cost of sales. Additionally, the first nine months of 2012 reflects the benefit of lower raw material costs (as compared to current costs) in the first quarter of 2012 as lower cost raw materials purchased at the end of 2011 were used in the 2012 production process.

- 39 -


Table of Contents

Gross Margin and Operating Income - Our Chemicals Segment's operating income decreased in the third quarter of 2012 and operating income as a percentage of net sales decreased to 9% in the third quarter of 2012 from 29% in the same period of 2011. This decrease was driven by the decline in gross margin, which decreased to 18% for the third quarter of 2012 compared to 38% for the third quarter of 2011. As discussed and quantified above, our gross margin has decreased primarily due to the net effects of higher manufacturing costs (primarily raw materials), lower sales volumes, unabsorbed fixed costs related to lower production volumes and higher selling prices. Additionally, changes in currency exchange rates have positively affected our gross margin and operating income. We estimate that changes in currency exchange rates increased operating income by approximately $2 million in the third quarter of 2012 as compared to the same period in 2011.

Our Chemicals Segment's operating income decreased in the first nine months of 2012 and operating income as a percentage of net sales decreased to 23% in the first nine months of 2012 from 27% in the same period of 2011. This decrease was driven by the decline in gross margin, which decreased to 32% for the first nine months of 2012 compared to 37% for the same period in 2011. As discussed and quantified above, our gross margin has decreased primarily due to the net effects of higher manufacturing costs (primarily raw materials), higher selling prices, lower sales volumes and unabsorbed fixed costs related to lower production volumes. Additionally, changes in currency exchange rates have negatively affected our gross margin and operating income. We estimate that changes in currency exchange rates decreased operating income by approximately $1 million in the first nine months of 2012 as compared to the same period in 2011.

Our Chemicals Segment's operating income is net of amortization of purchase accounting adjustments made in conjunction with our acquisitions of interests in NL and Kronos. As a result, we recognize additional depreciation expense above the amounts Kronos reports separately, substantially all of which is included within cost of sales. We recognized additional depreciation expense of $2.1 million and $1.9 million in the first nine months of 2011 and 2012, respectively which reduced our reported Chemicals Segment operating income as compared to amounts reported by Kronos.

Currency Exchange Rates - Our Chemicals Segment has substantial operations and assets located outside the United States (primarily in Germany, Belgium, Norway and Canada). The majority of our sales generated from foreign operations are denominated in currencies other than the U.S. dollar, principally the euro, other major European currencies and the Canadian dollar. A portion of our sales generated from our foreign operations is denominated in the U.S. dollar. Certain raw materials used worldwide, primarily titanium-containing feedstocks, are purchased in U.S. dollars, while labor and other production costs are purchased primarily in local currencies. Consequently, the translated U.S. dollar value of our foreign sales and operating results are subject to currency exchange rate fluctuations which may favorably or unfavorably impact reported earnings and may affect the comparability of period-to-period operating results. In addition to the impact of the translation of sales and expenses over time, our foreign operations also generate currency transaction gains and losses which primarily relate to the difference between the currency exchange rates in effect when non-local currency sales or operating costs are initially accrued and when such amounts are settled with the non-local currency.

- 40 -


Table of Contents

Overall, fluctuations in currency exchange rates had the following effects on our Chemicals Segment's net sales and operating income:

                                      Impact of changes in currency exchange rates
                              Three months ended September 30, 2012 vs. September 30, 2011
                                                                                                                 Total
                                                                                           Translation         currency
                                                                                          gain (loss) -         impact
                                                Transaction gains recognized                impact of          2012 vs.
                                           2011              2012           Change        rate changes           2011
                                                                          (In millions)
Impact on:
Net sales                                $     -           $     -          $    -       $           (34 )     $     (34 )
Operating income                               (2 )              (1 )             1                    1               2

                                      Impact of changes in currency exchange rates
                              Nine months ended September 30, 2012 vs. September 30, 2011
                                                                                                                 Total
                                                                                           Translation         currency
                                                                                          gain (loss) -         impact
                                                Transaction gains recognized                impact of          2012 vs.
                                           2011              2012           Change        rate changes           2011
                                                                          (In millions)
Impact on:
Net sales                                $     -           $     -          $    -       $           (70 )     $     (70 )
Operating income                               -                 -               -                    (1 )            (1 )

. . .

  Add VHI to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for VHI - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.