Valhi, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017; unaudited. Valhi is a holding company with operations in chemicals (Kronos), component products (CompX), waste management (WCS), and real estate management and development (BMI and LandWell).
Financial results and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $502.2 million | $398.6 million | $929.1 million | $752.1 million |
| Net income (loss) attributable to Valhi stockholders | $8.8 million | $(8.5) million | $21.5 million | $(28.0) million |
| EPS attributable to Valhi stockholders | $0.03 | $(0.02) | $0.06 | $(0.08) |
| Operating cash flow | Not presented by quarter | $88.7 million | $(8.7) million |
- Q2 sales rose about 26%; first-half sales rose about 24%. First-half total gross margin was $262.7 million versus $104.2 million.
- First-half cash flow from investing was $(32.8) million, including $30.5 million of capital expenditures. Financing provided $6.0 million. Cash, cash equivalents and restricted cash ended at $267.0 million.
- At June 30, total debt was $992.6 million, including $7.6 million current maturities. Cash, restricted cash and marketable securities totaled $275.1 million. Reported current assets were $988.3 million and current liabilities $320.1 million.
- Quarterly cash dividends were $0.02 per share; first-half dividends were $0.04 per share.
Material changes and unusual items
- Chemicals: Q2 sales increased 24% to $441.4 million and operating income rose to $73.0 million from $12.7 million. First-half operating income was $128.0 million versus $15.7 million. TiO₂ pricing rose 20% in Q2 and 19% in the first half year over year; sales volumes increased 6% and 5%, respectively. Segment operating margins were 17% in Q2 and 16% year to date.
- WCS: A court enjoined the proposed $270 million sale to Rockwell following the DOJ antitrust action; Valhi terminated the agreement and received a $4.0 million termination fee. Valhi recorded a $170.6 million non-cash long-lived asset impairment, including $127.5 million of property and equipment and $42.0 million of permits. WCS operating loss before impairment improved to $1.0 million in Q2 and $0.4 million in the first half, but remained loss-making.
- Taxes: The Q2 income tax benefit was $167.4 million; the first-half benefit was $149.4 million. A major driver was a $149.9 million non-cash reversal of deferred-tax valuation allowance related to German and Belgian operations. Management said approximately $20 million remained to be reversed during the second half, subject to the stated accounting assessment. The tax benefit materially influenced reported earnings and is not an operating cash inflow.
- Other segments: Component Products first-half sales increased 11% to $60.0 million and operating income rose to $9.1 million. Real Estate first-half sales were $15.9 million and operating income was $1.8 million, including higher land-sale revenue.
Outlook, risks and contingencies
- Management expected higher 2017 net income attributable to Valhi stockholders than in 2016, citing improved Chemicals results and the tax benefit, alongside the WCS impairment and higher WCS-sale transaction expenses. This forecast is not a quantified earnings guidance range.
- For Chemicals, management expected higher full-year operating income, slightly higher production, sales volumes comparable to 2016, and slightly higher cost per ton. Feedstock costs incurred in the first half were expected to affect results beginning in Q3. Further pricing gains depend on market conditions.
- Management said WCS may not achieve recurring disposal volumes sufficient for positive operating results or cash flow. Valhi was pursuing other potential buyers and could consider alternatives to continued financial support if no transaction is achieved.
- Material exposures include NL’s lead-pigment litigation, environmental remediation, tax examinations and other legal matters. The Santa Clara lead-paint case includes a $1.15 billion trial judgment against NL and others; appeal oral argument was scheduled for August 24, 2017. Valhi had not accrued for the pending lead-pigment cases, citing uncertainty over probability and estimability.
- Environmental remediation accruals totaled $124.9 million at June 30, 2017. NL’s accrued amount was approximately $119 million; the upper end of its estimated reasonably possible costs was approximately $161 million, including the accrual. WCS compliance costs related to stored DOE waste were not currently estimable and could be material.
- Management reported compliance with debt covenants and expected adequate liquidity for its stated planning horizons, while noting access to subsidiary cash and dividends is constrained. Available credit facilities totaled approximately $270.8 million, some subject to availability conditions. Key risks include TiO₂ cyclicality, prices and input costs, currency movements, WCS operations and financing, environmental matters, litigation, taxes and subsidiary distributions.
Important facts for investors to verify
- How much of reported 2017 earnings reflects the non-cash tax valuation-allowance reversal, and whether the remaining reversal occurs as expected.
- WCS’s future operating cash needs, impairment assumptions, disposal volumes and prospects for a sale or other strategic outcome.
- Developments in the Santa Clara appeal and the potential range and timing of environmental and other legal liabilities.
- Whether TiO₂ pricing and demand remain strong as feedstock costs rise, and the resulting effect on Chemicals margins and cash generation.
- Debt maturities, covenant headroom, subsidiary dividend capacity and the availability of cash held outside the United States.