Valhi, Inc. — Q1 2020 Form 10-Q Summary
Reporting period: Three months ended March 31, 2020; filed May 7, 2020. Amounts are in millions of dollars except per-share data. Valhi is a holding company with chemicals (Kronos), component products (CompX), and real estate management and development businesses (BMI and LandWell).
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Net sales | $459.3 | $479.6 |
| Other income, net | $34.9 | $6.6 |
| Operating income | $71.0 | $60.4 |
| Income before taxes | $49.3 | $42.6 |
| Net income | $37.9 | $28.4 |
| Net income attributable to Valhi stockholders | $24.4; $0.07 per share | $18.2; $0.05 per share |
| Cash used in operating activities | $18.2 | $2.2 |
| Cash, cash equivalents and restricted cash | $529.0 at March 31, 2020 | $583.8 at December 31, 2019 |
| Total debt | $783.5 | $794.3 at December 31, 2019 |
| Total current assets / current liabilities | $1,371.2 / $277.3 | $1,425.4 / $322.5 at December 31, 2019 |
Net sales declined about 4%, while total costs and expenses were nearly flat at $444.9. Gross margin was $99.7, compared with $121.8 a year earlier. Interest expense fell to $9.7 from $10.3; income tax expense fell to $11.4 from $14.2. Q1 operating cash flow was negative, and investing and financing activities used a further $13.1 and $19.6, respectively. Capital expenditures were $16.0. Valhi reported $536.6 of restricted and unrestricted cash, cash equivalents and marketable securities, including $109.5 held outside the U.S. Available borrowing capacity under listed facilities was $263.2; the Contran facility’s availability is at Contran’s discretion. The company said it expected sufficient liquidity for short- and long-term obligations and was in compliance with debt covenants.
Material changes and segment results
- Chemicals: Sales were $421.0, down 4%; operating income was $46.8, down 11%. TiO₂ sales volume fell 5%, average selling prices were comparable, and production volume fell 1%. Higher raw-material and other production costs reduced margins; currency transaction gains supported operating income.
- Component products: Sales rose 4% to $32.3 and operating income rose 14% to $5.0, reflecting higher security and marine product sales and favorable product mix.
- Real estate: Sales fell to $6.0 from $11.9, but operating income rose to $19.2 from $3.2. The main driver was $19.1 of tax-increment infrastructure reimbursement income, versus $1.1 in Q1 2019. This was recognized through a note receivable from the City of Henderson, not described as cash received in the quarter.
Valhi’s reported net income increase was substantially supported by the infrastructure reimbursement; management said it contributed $0.03 per share. Other income also included $12.2 of net currency transaction gains and $1.6 of insurance recoveries.
Outlook, risks and unusual items
- Management expected lower consolidated operating income in 2020 than in 2019, with COVID-19 expected to reduce chemicals and component-products results. It expected lower sales and earnings for the remainder of 2020; the magnitude and duration were uncertain.
- Management anticipated reduced component-products revenue and operating income in Q2 versus Q1, and lower real-estate land sales in Q2. LandWell reported requests to delay or cancel some parcel closings; delays in development could also defer further infrastructure reimbursement recognition.
- COVID-19 had limited Q1 operational impact, but management cited risks from economic contraction, customer demand, facility interruptions, supply chains, and employee health. It said it could reduce production, capital spending, inventories, or development activity if needed.
- Environmental remediation liabilities totaled $99.1, including approximately $94 million associated with about 32 NL sites. The estimated upper end of reasonably possible costs for those sites was approximately $115 million, including amounts accrued; costs for about five other sites could not be estimated. Lead-pigment litigation exposure, apart from the settled Santa Clara case, was not accrued because liability was not considered probable and could not be reasonably estimated.
- On April 24, 2020, NYSE notified Valhi that it did not meet the $1.00 average share-price requirement. The company had at least six months to regain compliance and intended to seek stockholder approval for a 1-for-8, 1-for-10 or 1-for-12 reverse split. A stockholder vote was scheduled for May 28, 2020.
- After quarter-end, the company disclosed the April 22 death of Serena Simmons Connelly. Under the Contran stockholders agreement, Lisa Simmons was to have specified voting rights over certain shares through April 22, 2030; the filing said Simmons and the Family Trust could be deemed to control Contran and Valhi.
- Valhi expected approximately $66 million of 2020 capital expenditures and approximately $19 million of pension contributions. Its quarterly dividend was $0.02 per share; future dividends remain discretionary.
Key facts for investors to verify
- Whether the $19.1 million infrastructure reimbursement note is collectible on expected terms, and how much additional reimbursement may be recognized.
- COVID-19 effects on TiO₂ volumes and pricing, customer shipment delays, land closings, and the company’s full-year outlook.
- Cash availability at the parent versus subsidiaries, revolver access, covenant headroom, and dependence on subsidiary distributions.
- Changes in environmental-remediation estimates, lead-pigment and other litigation outcomes, and potential insurance recoveries.
- NYSE listing compliance and the outcome and terms of the proposed reverse stock split.