Valhi, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Valhi is a holding company with operating segments in chemicals (primarily Kronos TiO₂), component products, and real estate management and development. The figures below are in millions of dollars, except per-share data and where noted.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2019 | Nine months 2018 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $455.2 | $475.2 | $1,431.4 | $1,483.5 |
| Income from continuing operations before tax | $56.9 | $21.9 | $205.3 | $95.6 |
| Income tax expense (benefit) | $(91.4) | $4.7 | $(33.2) | $31.8 |
| Net income attributable to Valhi stockholders | $143.5 | $13.1 | $244.5 | $38.5 |
| Basic and diluted EPS | $0.42 | $0.04 | $0.71 | $0.11 |
- Consolidated operating income declined to $41.4 in Q3 2019 from $69.2, and to $167.6 for the first nine months from $318.0. Consolidated gross margin was $98.4 in Q3 versus $132.7; for nine months it was $343.5 versus $502.0.
- Operating cash flow was $113.0 for the first nine months, down from $191.5. Capital expenditures were $37.9. Cash, cash equivalents and restricted cash totaled $549.5 at September 30, 2019; unrestricted cash and cash equivalents were $504.4.
- Total debt was $775.4, including $4.3 of current maturities; long-term debt was $771.1. Debt declined from $800.4 at December 31, 2018. The company reported compliance with debt covenants.
- Current assets were $1,366.8 and current liabilities $280.0. Credit available under existing facilities was $263.9, though $47.0 under Valhi’s Contran facility is at Contran’s discretion. Total restricted and unrestricted cash, cash equivalents and marketable securities were $557.9.
- Valhi paid $20.4 in dividends during the first nine months ($0.06 per share). The board’s future dividend decisions are discretionary.
Material changes and drivers
- Net sales rose 4% in Q3 and 4% for the nine-month period, but earnings fell substantially, largely reflecting weaker Chemicals segment profitability and the absence of a large 2018 tax benefit.
- Chemicals segment operating income fell 40% in Q3 to $36.3 and 53% for nine months to $139.6. Nine-month TiO₂ sales volumes increased 16%, but average selling prices fell 7%; higher feedstock and other production costs compressed gross margin to 22% from 35%.
- Component Products operating income was $4.3 in Q3 and $14.3 for nine months, versus $4.5 and $14.9. Security-product labor costs and weaker customer conditions pressured results; marine-component sales supported year-to-date revenue.
- Real Estate segment operating income was $0.8 in Q3 and $13.7 for nine months, versus $3.7 and $7.9. Nine-month results included $8.8 of tax-increment infrastructure reimbursement income, compared with $3.1 in 2018.
- 2018 comparisons included a $113 noncash tax benefit related to deferred taxes on Valhi’s Kronos investment and a $12.5 securities gain from the Amalgamated Sugar sale. 2018 also included $38.7 of income from discontinued operations, including the WCS disposal gain; there was no discontinued-operations income in 2019.
- Interest expense declined to $30.7 for nine months from $45.4, mainly after the 2018 deemed repayment of $250 of Snake River debt associated with the Amalgamated Sugar transaction.
- NL recorded $19.3 of litigation settlement expense for the Santa Clara lead-pigment case in the first nine months of 2019, compared with $62.0 in 2018.
Outlook, risks and contingencies
- Management expected lower consolidated operating income for full-year 2019 than in 2018, principally because lower TiO₂ selling prices and higher raw-material costs were expected to outweigh higher sales volumes. It forecast higher Chemicals sales volumes, higher per-ton costs, and stable selling prices for the remainder of 2019, assuming global conditions remained stable.
- Management expected Component Products full-year sales to exceed 2018 absent further economic slowdown. It anticipated higher Real Estate segment operating income in 2019, primarily from tax-increment reimbursement.
- Planned 2019 capital expenditures were approximately $81, including $75 in Chemicals, of which about $25 was for environmental compliance, protection and improvement. LandWell expected about $34 of land-development spending, classified in operating activities.
- Management stated it expected sufficient liquidity to meet short-term and long-term obligations, while noting that results differing materially from expectations could affect liquidity and covenant compliance. The company depends in part on subsidiaries’ distributions to meet parent-level obligations.
- NL’s Santa Clara settlement requires $101.7 in total payments. NL paid $25.0 in September 2019; the remaining installments extend over six years. The balance sheet included $11.8 current and $59.8 noncurrent settlement liabilities, and restricted cash was set aside for the settlement.
- NL had accrued approximately $95 for environmental remediation at about 32 sites; the estimated upper end of reasonably possible costs for estimable sites was approximately $115, including the accrual. Costs at five additional sites could not be estimated. Lead-pigment and other litigation, environmental liabilities, tax matters, currency exposure and cyclical TiO₂ demand remain risks.
Important facts for investors to verify
- Whether TiO₂ pricing and feedstock costs stabilize as management forecast, and whether higher sales volumes translate into improved segment margins.
- Cash generation, working-capital trends, subsidiary dividend capacity and the availability and terms of borrowing facilities, especially the discretionary Contran credit line.
- Future cash requirements for the Santa Clara settlement and environmental remediation, including developments in cases and sites for which liability or cost estimates remain uncertain.
- The sustainability of tax-increment reimbursement income and land-development proceeds, and the timing of related cash receipts.
- The impact of the 2018 tax benefit and discontinued-operation items when assessing year-over-year earnings; 2019 earnings are not directly comparable without those effects.