VALHI INC quarterly report, Q1 FY2016

Valhi, Inc. — Q1 2016 Form 10-Q

Reporting period: Three months ended March 31, 2016; financial statements are unaudited. Valhi is a holding company with businesses in chemicals, component products, waste management and real estate, primarily through majority-owned subsidiaries.

Financial performance and liquidity

Metric	Q1 2015	Q1 2016
Net sales	$416.1 million	$353.5 million
Gross margin	$89.3 million	$42.0 million
Operating income (loss)	$34.6 million	$(10.3) million
Net income (loss) attributable to Valhi stockholders	$11.9 million	$(19.5) million
Diluted earnings (loss) per share	$0.04	$(0.06)
Cash used in operating activities	$30.2 million	$33.4 million

Sales fell about 15%; gross margin declined to approximately 12% of sales from 21%. The operating margin was approximately negative 3%, compared with positive 8% a year earlier.
Q1 2016 investing cash outflow was $17.3 million and financing cash inflow was $9.3 million. Cash and cash equivalents declined from $202.3 million at year-end to $162.2 million at March 31.
At March 31, total debt was $980.8 million, including $9.4 million of current maturities, versus $960.5 million at December 31. Long-term debt was $971.4 million. The company reported compliance with its debt covenants.
Current assets were $876.0 million and current liabilities $272.3 million. The filing reports $196.5 million of restricted and unrestricted cash, cash equivalents and marketable securities available across entities; $55.5 million was held outside the U.S. Credit availability under existing facilities was approximately $135.1 million, though $48.5 million under the Contran facility is at Contran’s discretion.
The quarterly dividend remained $0.02 per share.

Material changes and segment results

Chemicals: Sales declined 13% to $318.5 million and operating income fell from $34.0 million to $3.0 million. TiO₂ sales volume increased 5%, but average selling prices fell 14%; currency translation reduced sales by an estimated $11 million. Lower feedstock costs, higher production and cost reductions partly offset pricing pressure. Q1 capacity utilization was 97%.
Component products: Sales decreased 3% to $27.1 million and operating income was $3.4 million versus $3.7 million. A prior-year government security program did not recur, partly offset by stronger marine component demand.
Waste management: Sales fell to $5.2 million from $15.0 million; operating loss widened to $10.8 million from $2.9 million. The prior-year period included $4.0 million from a one-time disposal campaign, and Q1 2016 shipments were affected by an industry-wide slowdown.
Real estate: Sales were $2.7 million versus $8.1 million, and operating loss widened to $5.9 million. The quarter included a $5.1 million noncash impairment of a water-contract intangible asset after the City of Henderson contract was amended, lowering minimum volumes and pricing and removing automatic renewal.
Consolidated results also reflected higher corporate expenses, higher interest expense and the absence of prior-year insurance recoveries and a $2.7 million tax benefit. Q1 2016 included $2.0 million of business-interruption insurance income and an $8.6 million income tax benefit.

Outlook, risks and unusual items

Management expected 2016 net income attributable to Valhi stockholders to exceed 2015, citing the prior year’s $159.0 million noncash deferred-tax valuation allowance, expected improvement in Chemicals, and other factors. This is an expectation, not a quantified earnings forecast.
For Chemicals, management expected higher 2016 sales and production volumes and lower unit costs than in 2015, but noted that TiO₂ prices, demand, competition, currencies and raw-material costs remain uncertain. Long-term expected industry demand growth was 2%–3% annually. Announced price increases were subject to market conditions.
Management expected Component Products sales to be relatively comparable with the prior year, excluding more than $5 million of 2015 sales to one government security customer that were not expected to recur. The company forecast approximately $96 million of 2016 capital expenditures, plus about $12 million of LandWell development costs.
Valhi had agreed to sell WCS for $270 million cash, $20 million face amount of Rockwell preferred stock and assumption of specified WCS third-party debt and financial-assurance obligations. Closing was expected in the first half of 2016, subject to conditions including U.S. antitrust approval; completion was not assured. WCS would not be classified as discontinued operations if sold.
WCS’s DOE waste-storage matter remains a contingency: a TCEQ agreed order requires a compliance plan whose cost was not estimable, and the NRC had opened an investigation without asserting formal claims. WCS says DOE or its contractor should reimburse the costs and filed an administrative claim in April 2016.
Environmental remediation liabilities totaled $122.9 million at March 31. NL had accrued approximately $116 million for about 42 sites where costs were estimable; the upper end of the reasonably possible range was approximately $175 million. Costs for five other sites could not then be estimated.
NL continued to appeal the California lead-pigment judgment imposing $1.15 billion of aggregate abatement liability on NL and two other defendants. Valhi reported no accrual, stating loss was not probable and could not be reasonably estimated; an adverse outcome could materially affect results, financial position and liquidity.
Other key risks include cyclical TiO₂ markets, environmental and litigation exposures, currency and interest-rate movements, dependence on subsidiary distributions, and the ability to maintain liquidity. Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

Whether WCS’s sale closed, on what final terms, and how proceeds and debt or financial-assurance obligations were treated.
Subsequent TiO₂ pricing, volumes, margins and the sustainability of the projected cost savings and 2016 earnings improvement.
Developments in the California lead-pigment appeal, environmental remediation estimates, and the WCS DOE/TCEQ/NRC matters.
Cash accessibility at the parent-company level, subsidiary dividend capacity, debt maturities and covenant headroom.
Effects of the amended Henderson water contract and progress in land development and related revenue recognition.