Valhi, Inc. — Q1 2017 Form 10-Q
Business context and period: Valhi is a holding company with four reporting segments: chemicals (Kronos), component products (CompX), waste management (WCS), and real estate management and development (BMI and LandWell). This unaudited report covers the three months ended March 31, 2017, compared with Q1 2016; balance-sheet figures are compared with December 31, 2016.
Financial performance
| Metric | Q1 2016 | Q1 2017 |
|---|---|---|
| Net sales | $353.5 million | $426.9 million |
| Gross margin | $42.0 million | $118.9 million |
| Income (loss) before income taxes | $(30.6) million | $39.8 million |
| Income tax expense (benefit) | $(8.6) million | $18.0 million |
| Net income (loss) | $(22.0) million | $21.8 million |
| Net income (loss) attributable to Valhi stockholders | $(19.5) million | $12.7 million |
| Diluted earnings (loss) per share | $(0.06) | $0.04 |
| Operating cash flow | $(33.1) million | $36.5 million |
| Capital expenditures | $(16.4) million | $(13.7) million |
- Net sales rose about 21%; gross margin improved to approximately 28% of sales from approximately 12%.
- At March 31, 2017, total assets were $2.542 billion, current assets $921.0 million, and current liabilities $320.0 million (current ratio approximately 2.9x).
- Total debt was $1.001 billion, including $7.6 million of current maturities; cash and cash equivalents were $200.6 million. The filing separately reports $253.0 million of aggregate restricted and unrestricted cash, cash equivalents and marketable securities across listed entities.
- Cash, cash equivalents and restricted cash increased by $49.2 million from operating, investing and financing activities; ending cash, cash equivalents and restricted cash was $246.9 million.
- Valhi paid a $0.02-per-share dividend. Total equity was $466.2 million at quarter-end.
Material changes and segment results
- Chemicals: Sales increased to $369.8 million from $318.5 million and operating income rose to $55.0 million from $3.0 million. TiO2 average selling prices were 17% higher and sales volume 3% higher year over year; lower feedstock costs and higher production efficiency also supported margins. Currency movements reduced segment sales by an estimated $7 million and operating income by $8 million.
- Component products: Sales rose 11% to $29.9 million and operating income increased to $4.5 million from $3.4 million, principally on higher security-product sales and production efficiencies.
- Waste management: Sales increased to $21.5 million from $5.2 million and the segment reported $0.6 million of operating income versus a $10.8 million loss. Higher disposal volumes helped, but $4.0 million from a backlog disposal campaign was not expected to recur; transportation revenue growth was largely offset by related costs.
- Real estate: Sales rose to $5.7 million from $2.7 million and operating income was $0.6 million versus a $5.9 million loss. The prior-year loss included a $5.1 million impairment charge.
- Q1 2017 included a $5.0 million noncash tax benefit from a reduction in the valuation allowance on German and Belgian tax assets. Q1 2016 included a $2.0 million business-interruption insurance recovery and the $5.1 million contract-intangible impairment.
Outlook, risks and contingencies
- Management expected higher 2017 net income than in 2016, primarily from stronger Chemicals results, partly offset by lower Component Products security sales following completion of a large contract. Chemicals operating income was also expected to exceed 2016, driven mainly by higher average TiO2 prices. No specific full-year earnings amount was provided.
- Management expected Chemicals production to be slightly higher and sales volumes comparable to 2016, with full-year cost per metric ton comparable to slightly higher. Higher-cost feedstock purchased in Q1 was expected to affect results beginning in Q2. Results remain sensitive to demand, selling prices, input costs, currency and industry capacity.
- The proposed WCS sale is for $270 million cash plus assumption of specified third-party debt and financial-assurance obligations. DOJ antitrust litigation sought to block the transaction; trial concluded May 5, 2017. The company expected a possible Q3 2017 closing if conditions, including antitrust approval, were met, but gave no assurance of completion. If the sale fails, management said impairment of WCS long-lived assets was probable; those assets totaled $178.3 million at quarter-end.
- WCS suspended NRC review of its proposed high-level-waste interim-storage license application pending the sale and cost-sharing issues. Valhi expected a Q2 2017 impairment of previously capitalized application costs; $3.3 million had been capitalized through March 31.
- Valhi reported $124.9 million of accrued environmental remediation and related costs. NL’s estimate covered approximately 41 sites, with a reasonably possible upper-end cost of approximately $160 million, including the accrued amount; costs at five other sites could not be estimated.
- NL continues to appeal the California lead-paint judgment requiring defendants to fund $1.15 billion of abatement. Valhi did not accrue the matter, citing its assessment that loss was not probable and could not be reasonably estimated, but disclosed that an adverse outcome could materially affect results, financial position and liquidity. Other lead-pigment, asbestos, environmental and tax matters also remain.
- Debt covenants were met at March 31, 2017. Available borrowing capacity was reported at approximately $209.3 million, including facilities whose availability is subject to conditions or, for the Contran facility, Contran’s discretion. Management expected sufficient liquidity to meet obligations, while noting outcomes could differ from expectations.
- Management expected 2017 capital expenditures of approximately $86 million, plus about $22 million of LandWell development costs. A new Chemicals ERP system was implemented for certain finance processes in January; remaining modules were not expected before January 2018 at the earliest. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the WCS sale receives antitrust clearance and closes, and the resulting proceeds, debt assumption and any impairment consequences.
- Whether TiO2 price increases, demand, volumes and feedstock costs develop as management expected, and how currency movements affect segment earnings.
- Whether German tax-asset valuation allowances are reversed; management said a material noncash tax benefit could result if earnings trends are sustained.
- Developments in the California lead-paint appeal, environmental remediation estimates and other litigation or tax contingencies.
- Cash availability by subsidiary, borrowing-facility conditions, subsidiary dividend capacity, and the ability to fund planned capital and development spending.