Valhi, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed March 10, 2017. Valhi is a holding company with four reportable segments: chemicals (Kronos), component products (CompX), waste management (WCS), and real estate management and development (BMI/LandWell).
Financial results and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Net sales | $1,566.8 million | $1,532.9 million |
| Operating income (loss) | $81.2 million | $(5.4) million |
| Net income (loss) attributable to Valhi stockholders | $(15.9) million; $(0.05) per diluted share | $(133.6) million; $(0.39) per diluted share |
| Cash from operating activities | $79.8 million | $22.1 million |
| Capital expenditures | $58.9 million | $54.6 million |
| Total assets | $2,443.2 million | $2,537.4 million |
| Total consolidated debt | $965.0 million | $960.5 million |
| Total equity | $444.4 million | $526.9 million |
- At year-end, cash and cash equivalents were $159.8 million, restricted cash equivalents were $12.5 million, and marketable securities totaled $257.9 million. The company reported $204.5 million of combined cash, restricted cash and marketable securities across its entities; much of this liquidity is held at subsidiaries and is not freely available to Valhi.
- Available borrowing capacity was $179.4 million, including $46.1 million under a Contran facility at Contran’s discretion. Management said it expected sufficient liquidity for near- and long-term obligations and reported compliance with debt covenants at year-end.
- Interest expense was $63.2 million, up from $59.0 million. About 65% of debt was variable-rate before considering the interest-rate swap; the swap hedged Kronos borrowings.
- Annual common dividends were $0.08 per share. The board declared a further $0.02-per-share dividend for first-quarter 2017.
Material changes and segment performance
- Consolidated sales rose 2.2% year over year. Operating results improved substantially, while the attributable net loss narrowed by $117.7 million. The 2015 comparison included a $159.0 million noncash tax valuation allowance for German and Belgian deferred tax assets, as well as chemicals restructuring charges.
- Chemicals: Sales increased 1% to $1,364.3 million; operating income rose to $91.0 million from $7.1 million. TiO2 sales volumes increased 7%, while average selling prices fell 3% for the full year. Prices rose during the second half; year-end prices were 10% above year-end 2015. Production volume increased to 546,000 metric tons and capacity utilization reached 98%. Lower feedstock and production costs, higher volumes and cost reductions supported margins.
- Component products: Sales were essentially flat at $108.9 million; operating income increased to $15.6 million from $14.0 million, supported by favorable product and customer mix.
- Waste management: Sales increased to $47.4 million, but the operating loss remained high at $26.2 million. Lower higher-priced Compact disposal revenue and a shift toward lower-priced RCRA disposal weighed on gross margin. WCS has generated operating losses historically and has required financial support.
- Real estate: Sales increased to $46.2 million from $30.1 million, principally from land sales; operating income was $0.8 million. A 2016 amendment to the City of Henderson water contract reduced minimum volumes and pricing and eliminated automatic renewal, prompting a $5.1 million impairment of the related intangible asset.
- Fourth-quarter 2016 net sales were $407.9 million, operating income was $52.0 million, and net income attributable to Valhi stockholders was $9.1 million, or $0.03 per share. In fourth-quarter 2015, the company reported sales of $324.8 million, an operating loss of $24.9 million and an attributable net loss of $29.9 million, or $0.10 per share.
Outlook, risks and contingencies
- Management expected 2017 net income attributable to Valhi stockholders to exceed 2016, principally on anticipated higher TiO2 selling prices and, to a lesser extent, higher production volumes. It expected chemicals production slightly higher and sales volumes comparable to 2016; component-products income could decline as a large government security contract was completed.
- Management said a sustained positive earnings trend in Kronos’s German operations could permit reversal of a material portion of the deferred tax valuation allowance in 2017, creating a material noncash tax benefit. Timing and realization were uncertain; the Belgian operations continued to have recent cumulative losses.
- Valhi agreed to sell WCS for $270 million cash plus assumption of specified third-party debt and financial assurance obligations. The U.S. Department of Justice sued to block the deal; closing, then expected by the third quarter of 2017, depended on antitrust approval and other conditions. Failure to close could prompt alternative actions, including support reductions or impairment charges.
- NL had accrued $122.6 million for environmental and related matters overall. It reported approximately $117 million accrued for about 41 sites, with estimated reasonably possible costs up to approximately $160 million; costs at five additional sites could not be estimated. Lead-pigment claims remain unaccrued because NL said loss was not probable or estimable. A California court judgment ordered three defendants, including NL, to pay an aggregate $1.15 billion for abatement; NL appealed, and the outcome could materially affect Valhi.
- Other risks include cyclical TiO2 prices and competition, raw-material commitments, foreign-exchange exposure, pension obligations, tax examinations, environmental regulation, and reliance on subsidiary distributions. Total contractual commitments were $2,247.5 million, including $605.4 million of TiO2 feedstock commitments and $507.5 million due in 2017.
Investor facts to verify
- Progress and final regulatory outcome of the WCS sale, including the DOJ antitrust action, and the transaction’s net proceeds and debt/assurance treatment.
- TiO2 pricing, volumes, feedstock costs and capacity conditions against management’s 2017 outlook.
- Whether German earnings support reversal of the valuation allowance, and the continuing status of the Belgian tax assets and uncertain tax positions.
- Developments in the California lead-pigment appeal and environmental remediation estimates, including unestimable sites.
- Cash accessible to Valhi at the parent level, subsidiary distribution capacity, refinancing and covenant headroom, and the sustainability of dividends given leverage.