Valhi, Inc. — Q2 2019 Form 10-Q
Business context and reporting period
Valhi is a holding company with operating segments in chemicals (primarily Kronos titanium dioxide, or TiO₂), component products, and real estate management and development. The report covers the quarter and six months ended June 30, 2019; financial statements are unaudited. Valhi sold its Waste Management Segment in January 2018, and its results are presented as discontinued operations in the 2018 comparative periods.
Financial performance and position
Amounts are in millions of U.S. dollars except per-share data. Comparisons are with the corresponding 2018 period.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $528.6 | $510.2 | $1,008.2 | $976.2 |
| Gross margin | $123.2 | $184.0 | $245.0 | $369.3 |
| Operating income | $65.9 | $130.0 | $126.3 | $248.8 |
| Income from continuing operations before tax | $31.2 | $42.0 | $73.8 | $148.4 |
| Net income attributable to Valhi stockholders | $7.1 | $11.7 | $25.3 | $101.0 |
| Basic and diluted earnings per share | $0.02 | $0.03 | $0.07 | $0.29 |
- Consolidated gross margin was approximately 23% in Q2 and 24% for the first half of 2019, versus approximately 36% and 38%, respectively, in 2018. Operating margin was approximately 12% in Q2 and 13% for the first half, versus approximately 25% and 25% in 2018.
- Chemicals drove the deterioration: first-half segment operating income fell 56% to $103.3, while sales rose 2% to $921.0. TiO₂ sales volumes increased 15%, but average selling prices fell 8%; higher feedstock ore and other production costs also pressured margins.
- Component Products first-half sales increased 7% to $64.9, but operating income declined 4% to $10.0, reflecting higher labor costs and less favorable product mix. Real Estate segment sales rose to $22.3 from $13.2 and operating income to $13.0 from $4.2, including infrastructure reimbursement income.
- Operating cash flow for the first half was $32.8, down from $159.7. Capital expenditures were $28.3; dividends paid by Valhi were $13.6. Cash, cash equivalents and restricted cash totaled $493.6 at June 30, compared with $523.7 at year-end 2018.
- Total debt was $793.0, down from $800.4 at year-end; current maturities were $2.9. Cash, restricted cash and marketable securities totaled approximately $501.1. Available borrowing under listed facilities was $271.8; the filing says the $47.0 available under Valhi’s Contran facility is at Contran’s discretion. The company reported compliance with debt covenants.
- Current assets were $1,431.2 and current liabilities $318.3 at June 30. The balance sheet also included $96.6 of accrued Santa Clara litigation settlement costs and $102.1 of environmental remediation costs.
Material changes versus the prior comparable period
- First-half operating income fell by $122.5, principally because of weaker Chemicals results. Lower TiO₂ prices and higher input costs outweighed volume growth.
- First-half attributable income from continuing operations declined to $25.3 from $63.0. The 2018 comparison included a $12.5 gain on land sales; total 2018 net income also included a $38.6 after-tax gain on the WCS disposal, classified as discontinued operations.
- Interest expense decreased to $20.4 for the first half from $31.4, mainly following the deemed repayment of $250 million of Snake River notes in connection with the 2018 sale of Valhi’s Amalgamated Sugar interest.
- Cash from operations fell substantially, reflecting lower operating income, higher net cash taxes paid, and increased cash use from changes in receivables, inventories, payables and accrued liabilities.
- Valhi adopted lease accounting standard Topic 842 on January 1, 2019, recognizing $35.1 of operating lease right-of-use assets and $34.5 of lease liabilities at adoption, with no opening retained-earnings impact.
Outlook, management commentary and risks
- Management expects lower consolidated operating income for 2019 than in 2018, principally because lower expected TiO₂ selling prices and higher feedstock costs are expected to more than offset higher sales volumes. It expects Chemicals production and sales volumes to be slightly higher than in 2018 and anticipates possible further market price increases, subject to demand, supply and other conditions.
- Component Products expects 2019 sales above 2018 and operating income broadly comparable to 2018; marine sales growth is expected to moderate in the second half. Management reported minimal tariff impact to date but is monitoring developments.
- Management expects increased real estate development activity and higher full-year land-sale operating income than in 2018. Expected 2019 capital expenditures are approximately $93, including $78 for Chemicals; LandWell expects about $34 of land-development spending. These are expectations, not guarantees.
- On July 24, 2019, a court approved the global settlement of the Santa Clara lead-pigment case. The three defendants will collectively pay $305; NL’s stated share is $101.7, including $25 due within 60 days and $76.7 in six annual installments. Valhi recorded a $19.6 Q2 settlement expense and a $96.6 accrual, including the discounted value of future installments; it also recorded a $15.6 insurance-recovery receivable tied to funds on deposit for the final payment. NL denies liability; the settlement resolves the case.
- Environmental exposures remain uncertain. NL had approximately $97 accrued for about 32 sites; the estimated upper end of reasonably possible costs for estimable sites was approximately $117, including the accrual. NL could not estimate costs for about five other sites. Additional lead litigation, environmental costs, insurance-recovery uncertainty, currency movements, TiO₂ industry cyclicality, raw-material prices and subsidiary dividend capacity are significant risks.
- Management expects sufficient liquidity for short- and long-term obligations based on its forecasts, but notes that adverse operating results or restricted subsidiary distributions could impair liquidity. Interim results may not indicate full-year performance.
Important facts for investors to verify
- Whether TiO₂ pricing stabilizes or rises, and whether feedstock ore costs and currency effects continue to pressure Chemicals margins.
- Whether weaker operating cash flow reverses as receivables and working capital normalize, and how cash is distributed among subsidiaries and the parent.
- Payment timing and funding of NL’s $101.7 Santa Clara settlement share, including the expected insurance recovery and any remaining exposure from other litigation.
- Environmental remediation estimates, including unestimable sites, and the potential effect of additional claims or regulatory changes.
- Availability and terms of credit facilities, covenant compliance, and the reliability of subsidiary dividends supporting Valhi’s parent-level obligations.