Valhi, Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. Valhi is primarily a holding company, operating through Chemicals (Kronos), Component Products (CompX), and Real Estate Management and Development (BMI and LandWell). Results below are consolidated; amounts are in U.S. dollars.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $1,820.1 million | $1,879.4 million |
| Gross margin | $609.2 million; 33.5% of sales | $612.9 million; 32.6% of sales |
| Operating income | $370.7 million | $380.3 million |
| Income from continuing operations attributable to Valhi stockholders | $228.1 million; $0.67 per diluted share | $316.7 million; $0.93 per diluted share |
| Net income attributable to Valhi stockholders | $262.2 million; $0.77 per diluted share | $207.5 million; $0.61 per diluted share |
| Cash provided by operating activities | $165.5 million | $259.3 million |
| Capital expenditures | $61.4 million | $71.3 million |
| Interest expense | $55.7 million | $58.9 million |
- Chemicals: Sales were $1,661.9 million, down 4%; operating income was $342.9 million, down 4%. TiO2 sales volume fell 16% from the 2017 record, while average selling prices rose 13%. Gross margin was 34% of segment sales, versus 33%.
- Component Products: Sales increased 6% to $118.2 million and operating income increased 17% to $17.8 million, reflecting stronger marine and security product sales and improved production leverage.
- Real Estate: Sales rose to $40.0 million from $38.4 million; operating income increased to $10.0 million from $6.6 million. Results included $3.1 million of income from recognition of tax-increment reimbursement notes.
- Liquidity and balance sheet: At year-end, cash and cash equivalents were $499.8 million, restricted cash $15.0 million, and marketable securities $7.3 million. Total assets were $2,709.6 million and total equity $989.0 million. Total debt was $800.4 million, down from $1,043.1 million; long-term debt was $797.5 million. Valhi reported $250.2 million of available credit under existing facilities and compliance with debt covenants.
- Working capital absorbed cash: inventory increased to $515.8 million from $398.4 million, and operating cash flow fell by $93.8 million year over year. The filing attributes much of the operating cash flow decline to working-capital movements, including inventory, receivables, payables and accruals.
Material changes and unusual items
- Valhi completed the sale of its Waste Management Segment on January 26, 2018, with the buyer assuming its third-party debt and other liabilities. The transaction produced a $58.4 million pretax gain, reported in discontinued operations. Valhi said the divested business had struggled to generate recurring positive operating results or cash flows.
- Continuing-operations income attributable to Valhi fell from 2017, despite higher total net income. Comparability was affected by significant tax items: 2018 included a $112 million noncash deferred tax benefit related to Valhi’s investment in Kronos; 2017 included a $186.7 million noncash benefit from reversing German and Belgian deferred-tax valuation allowances, among other tax effects.
- Valhi recognized a $62 million pretax charge for the proposed settlement of NL’s California lead-pigment litigation. The proposed $80 million settlement included $65 million payable by Valhi and $15 million from a former insurer. The trial court denied approval in September 2018; Valhi appealed. The $62 million accrual reflects the present value of Valhi’s proposed payments, not a final approved settlement.
- Valhi sold its Amalgamated Sugar interest in August 2018. Consideration included $12.5 million cash and deemed repayment of $250 million of Snake River debt. The transaction generated a $12.5 million securities gain and reduced interest expense and debt.
- Year-end inventories were elevated at Kronos: days sales in inventory rose to 113 from 62 at December 31, 2017. Kronos’ days sales outstanding also increased to 76 from 63.
- In the fourth quarter, consolidated sales were $388.7 million, operating income $52.7 million, and net income attributable to Valhi stockholders $17.7 million ($0.06 per share). The comparable 2017 quarter reported sales of $495.9 million, operating income of $130.0 million, and net income attributable to Valhi stockholders of $140.1 million; prior-year earnings included substantial tax benefits.
Outlook, risks and contingencies
- Management expected lower consolidated operating income in 2019 than in 2018. For Chemicals, higher expected sales volumes were expected to be more than offset by lower average selling prices and higher raw-material costs, particularly feedstock ore. Management expected Chemicals production and sales volumes to increase modestly and plants to operate near full practical capacity.
- Management expected higher Real Estate segment operating income in 2019, with increased development activity and more operating income from sales of certain parcels. It expected lower general corporate expenses and lower interest expense, but significantly lower securities earnings following the Amalgamated sale.
- Management forecast approximately $100 million of 2019 capital expenditures, including $85 million for Chemicals, and approximately $34 million of LandWell development spending. It expected adequate liquidity for near- and longer-term obligations, while noting outcomes could differ from assumptions.
- Key business risks include cyclical TiO2 demand and pricing, industry competition and capacity additions, higher or constrained feedstock supplies, currency and interest-rate movements, and the ability to pass through input costs. TiO2 feedstock purchase commitments were approximately $593.5 million; other long-term service and supply commitments were approximately $156.4 million.
- The California lead-pigment case remains material and unresolved. The trial court set the abatement fund at $409 million, but NL’s share is undetermined; the proposed settlement remained subject to appeal and court action. Additional liability could materially affect results, financial position or liquidity.
- Environmental remediation accruals totaled $103.4 million at year-end. NL had accrued approximately $98 million for about 35 sites, with reasonably possible costs estimated up to approximately $117 million including the accrual; costs for several other sites could not be estimated.
- Other risks include the parent company’s dependence on subsidiary distributions, related-party financing and governance, pension obligations, real-estate development conditions in Henderson, and potential effects of environmental regulation and information-system or cybersecurity disruptions.
Important facts for investors to verify
- Progress and final outcome of the California settlement appeal, including any final liability allocation, payment timing and insurer recovery.
- Whether TiO2 pricing, sales volumes, ore costs and inventory levels develop in line with management’s 2019 expectations.
- Operating cash conversion and the reduction of Kronos’ elevated inventory and receivable days.
- Availability and terms of subsidiary dividends and credit facilities, given Valhi’s holding-company structure and related-party debt.
- Actual 2019 capital and land-development spending, and the timing and profitability of LandWell sales under its revenue-recognition estimates.
- Potential changes in environmental remediation estimates, pension funding needs, and tax liabilities or benefits.