Valhi, Inc. — Q3 2018 Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2018; financial statements are unaudited. Valhi is a holding company with Chemicals (Kronos), Component Products (CompX), and Real Estate Management and Development as its continuing reportable segments. The Waste Management segment was sold in January 2018 and is reported as discontinued operations.
Key financial results
| Metric | Q3 2017 | Q3 2018 | Nine months 2017 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $496.5m | $455.2m | $1,383.6m | $1,431.4m |
| Income from continuing operations before taxes | $76.9m | $56.9m | $181.5m | $205.3m |
| Income tax expense (benefit) | $14.7m | ($91.4m) | ($67.5m) | ($33.2m) |
| Net income attributable to Valhi stockholders | $45.9m | $143.5m | $67.4m | $244.5m |
| Continuing-operations diluted EPS attributable to Valhi | $0.13 | $0.42 | $0.51 | $0.60 |
| Cash provided by operating activities | Not provided | Not provided | $204.3m | $191.5m |
Q3 net sales fell about 8% year over year, while nine-month net sales rose about 3%. Q3 continuing-operations income attributable to Valhi rose sharply, principally because of a $113m noncash tax benefit related to Valhi’s investment in Kronos; this benefit contributed approximately $0.33 per diluted share. The nine-month comparison also reflects unusually large tax benefits in 2017, including reversal of German and Belgian deferred-tax valuation allowances.
Consolidated gross margin was $132.7m in Q3 2018 versus $164.4m in Q3 2017, and $502.0m for the first nine months of 2018 versus $424.8m a year earlier. Q3 operating income was $69.2m versus $103.1m; nine-month operating income was $318.0m versus $250.3m. Interest expense was $14.0m in Q3 and $45.4m year to date. Cash dividends were $0.02 per share in Q3 and $0.06 per share year to date.
Segments and period-to-period changes
- Chemicals: Q3 sales declined 12% to $410.3m and operating income fell 38% to $61.0m. TiO2 sales volume fell 19%, partly offset by 9% higher average selling prices; maintenance, lower production, and higher raw-material costs pressured quarterly margins. For nine months, sales increased 3% to $1,312.5m and operating income rose 26% to $295.2m, supported by higher selling prices and currency effects despite lower volumes.
- Component Products: Q3 sales increased 11% to $30.0m and operating income increased 34% to $4.5m. Nine-month sales rose 4% to $90.8m and operating income rose 19% to $14.9m, reflecting stronger sales, mix, efficiencies, and fixed-cost leverage.
- Real Estate: Q3 sales rose to $14.9m from $5.1m, including $13.4m of land sales. Nine-month sales were $28.1m versus $21.0m; operating income was $7.9m versus $3.1m, including $3.1m from recognition of a tax-increment reimbursement note.
Cash, debt, and liquidity
- At September 30, 2018, cash and cash equivalents were $571.5m; total restricted and unrestricted cash, cash equivalents, and marketable securities were $603.4m, including $205.5m held outside the U.S.
- Total debt was $811.3m, including $314.3m under Valhi’s Contran facility and $463.0m carrying value of Kronos senior notes. Debt was down from $1,043.1m at December 31, 2017, chiefly after the $250m Snake River loan was deemed repaid in the Amalgamated sale. Valhi also had $45.7m available under its Contran facility; total reported credit availability across facilities was $257.6m. The Contran availability is at Contran’s discretion.
- Operating cash flow for the first nine months was $191.5m, down from $204.3m. Investing activities used $34.5m and financing activities used $42.4m. The filing attributes lower operating cash flow principally to working-capital movements and the sale of WCS, partly offset by higher operating income.
- Current assets were $1,470.0m and current liabilities $381.9m at quarter end. Valhi reported compliance with debt covenants.
Outlook, unusual items, and risks
- Management expected 2018 consolidated operating income to be slightly higher than 2017, but net income from continuing operations attributable to Valhi to be lower, as the 2018 litigation charge and 2017 tax benefits were expected to outweigh the favorable factors.
- Management expected Chemicals sales and operating income to be comparable to 2017; lower volumes and higher feedstock and other costs were expected to offset higher prices. It expected full-year Component Products sales and operating earnings to exceed 2017, and higher real-estate operating income from increased development activity.
- WCS was sold on January 26, 2018, with the buyer assuming its third-party debt and other liabilities. Valhi recorded a pre-tax gain of $58.4m. The disposed business had historically struggled to generate positive operating results or cash flows.
- Valhi sold its Amalgamated Sugar investment on August 31 for $12.5m cash and deemed repayment of $250m of Snake River debt, recognizing a $12.5m securities gain. It also sold land outside its operations for $19.5m proceeds and recorded a $12.5m gain.
- NL recorded a $62m pre-tax charge for a proposed $80m settlement of the Santa Clara lead-pigment case. The trial court denied approval in September 2018; NL appealed in October. The court had set a recalculated abatement fund of $409m, but NL’s ultimate share and the outcome of the appeal and remand proceedings remain uncertain. Additional loss could materially affect results, financial position, and liquidity.
- Environmental remediation accruals totaled $116.7m, including approximately $111m for NL sites; the estimated upper end of reasonably possible costs for those sites was approximately $130m. Some sites remain unestimable. Other risks include TiO2 demand, pricing and capacity, raw-material costs, foreign exchange, tax matters, and litigation.
- Expected 2018 capital expenditures were approximately $77m, plus about $15m of LandWell development spending. Management expected sufficient liquidity for near- and longer-term obligations, subject to operating results and other assumptions.
Important facts for investors to verify
- Whether the California appellate court will hear and grant NL’s appeal of the denied settlement, and the potential cost and timing if the case proceeds.
- How much of reported earnings and EPS reflects noncash tax adjustments and asset-sale gains, rather than recurring operations.
- Whether TiO2 volumes, selling prices, production rates, and feedstock costs develop in line with management’s outlook.
- Availability of cash and borrowing capacity at the parent level, including the discretionary nature of the Contran facility and limits on subsidiary distributions.
- Whether environmental and other contingencies, tax-law measurement-period adjustments, or covenant conditions change materially after quarter end.