Valhi, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. Valhi is a holding company with chemicals (Kronos), component products (CompX), and real estate management and development operations. Contran owned approximately 93% of Valhi’s common stock.
Financial results and liquidity
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q1 2017 | Q1 2018 |
|---|---|---|
| Net sales | $405.3 | $466.0 |
| Gross margin | $116.6 | $185.3 |
| Operating income | $64.1 | $118.8 |
| Continuing income before tax | $42.1 | $106.4 |
| Income tax expense | $18.6 | $36.2 |
| Net income from continuing operations | $23.5 | $70.2 |
| Net income attributable to Valhi stockholders | $12.7 | $89.3 |
| Operating cash flow | $36.5 | $47.7 |
- Net sales increased 15%; gross margin rose to approximately 40% of sales from 29%. Operating income increased 85%.
- Continuing income attributable to Valhi stockholders was $51.7 million, or $0.15 per diluted share, versus $14.4 million, or $0.04, a year earlier. Total net income attributable to Valhi was $89.3 million, or $0.26 per share, including the WCS disposal gain.
- Cash, cash equivalents and restricted cash totaled $503.5 million at quarter-end. Current assets were $1,382.2 million and current liabilities $324.5 million.
- Total debt was $1,091.0 million, including $1.6 million current and $1,089.4 million long-term, versus $1,043.1 million at year-end. The increase included a $36.3 million deemed borrowing under Valhi’s Contran facility related to the WCS sale. Valhi reported $265.4 million available under specified credit facilities and stated it was in compliance with debt covenants.
- Capital expenditures were $16.9 million; dividends paid to Valhi shareholders were $6.8 million ($0.02 per share). Management forecast approximately $79 million of 2018 capital expenditures.
Material changes and unusual items
- Chemicals: Sales rose 16% to $430.4 million and operating income rose 87% to $110.6 million. TiO₂ average selling prices increased 26%, while sales volumes fell 13% from a record prior-year quarter. Currency translation added approximately $31 million to sales; higher feedstock and other production costs partly offset pricing gains.
- Component products: Sales declined 5% to $28.4 million and operating income was approximately flat at $4.4 million. Lower security-product sales were partly offset by improved cost performance and marine-component sales.
- Real estate: Sales increased to $7.2 million from $5.6 million. Operating income of $3.8 million included $3.1 million from recognition of tax-increment reimbursement receivables and benefited from higher land-sale revenue.
- WCS disposition: Valhi sold its Waste Management Segment on January 26, 2018, with the buyer assuming its third-party debt and other liabilities. The company recorded a $58.4 million pretax gain ($38.2 million after tax) in discontinued operations. WCS had historically struggled to generate sufficient disposal volumes for positive operating results or cash flows.
- Other income included $12.5 million of gains on land sales. Corporate expenses increased 37%, primarily due to litigation and environmental costs. Interest expense increased to $15.4 million from $14.5 million.
- Operating cash flow improved, but receivables and inventory used more cash; inventories rose to $447.3 million from $398.4 million. Cash flow also reflected the WCS sale, land-sale proceeds and working-capital movements.
Outlook, risks and contingencies
- Management expected higher 2018 consolidated operating income, principally from higher anticipated TiO₂ prices and increased real-estate development activity, but lower continuing income attributable to Valhi stockholders than in 2017 because of favorable tax benefits recorded in 2017.
- For chemicals, management anticipated slightly lower full-year production and sales volumes than the 2017 records, moderately higher cost per ton, and higher sales and operating income, principally from pricing. It cited demand, producer inventories, capacity, raw-material costs, currencies and ERP implementation as important uncertainties.
- Management expected component-products sales to meet or exceed 2017, supported by security-market and marine growth, while noting continued softness in transportation demand. It expected higher 2018 corporate expenses and interest expense than in 2017.
- Management said it expected sufficient liquidity for short- and longer-term obligations. Its outlook depends on operating performance, subsidiary distributions, credit availability and compliance with covenants; subsidiary cash and dividends are not fully available to the parent.
- Santa Clara lead-paint litigation: NL considered a loss probable after appellate and California Supreme Court developments, but said the amount or a range could not yet be reasonably estimated. The case was remanded to recalculate a restricted abatement fund; potential future liability could materially affect results, financial position or liquidity.
- Environmental matters: Environmental remediation accruals totaled $121.3 million, including $19.7 million current. NL had approximately $116 million accrued for about 38 sites; its estimated upper range for those sites was approximately $147 million, and costs could not be estimated for five other sites.
- 2017 Tax Act accounting remained provisional, with measurement-period adjustments possible through December 22, 2018. The company also recorded a $5.9 million noncash tax expense related to a valuation allowance on business-interest carryforwards. Management reported disclosure controls were effective; the Chemicals segment implemented a new ERP system in January 2018.
Key facts investors should verify
- How much of reported Q1 earnings and cash generation reflects recurring operations versus the WCS gain, land sales and tax-related items.
- Whether TiO₂ pricing can offset lower volumes, higher feedstock costs and any additional capacity or demand changes.
- The parent’s access to subsidiary cash and dividends, available borrowing capacity, debt-service needs and covenant headroom.
- Developments in the Santa Clara case, environmental remediation estimates and the potential for currently unestimable liabilities.
- The final impact of the 2017 Tax Act and the expected balance-sheet effects of adopting lease accounting in 2019.
- Reconcile management’s stated $512.2 million of aggregate restricted and unrestricted cash, cash equivalents and marketable securities with the separately reported balance-sheet cash, restricted cash and marketable securities; the filing text does not provide a clear reconciliation.