Valhi, Inc. — Second-Quarter 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Valhi is a holding company with operating segments in chemicals (primarily Kronos TiO₂), component products (CompX), and real estate management and development (BMI and LandWell). Amounts below are in millions unless otherwise noted. The filing says COVID-19 significantly affected second-quarter results.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $415.0 | $528.6 | $874.3 | $1,008.2 |
| Gross margin | $104.0 | $123.2 | $203.7 | $245.0 |
| Operating income | $39.3 | $65.9 | $110.3 | $126.3 |
| Income before taxes | $17.0 | $31.2 | $66.3 | $73.8 |
| Net income (loss) attributable to Valhi stockholders | $(9.1) | $7.1 | $15.3 | $25.3 |
| Basic and diluted EPS | $(0.32) | $0.25 | $0.54 | $0.89 |
Consolidated gross margin was approximately 25.1% in Q2 2020 versus 23.3% in Q2 2019; operating margin was approximately 9.5% versus 12.5%. For the first half, gross margin was approximately 23.3% versus 24.3%, and operating margin was approximately 12.6% versus 12.5%.
- Cash flow: First-half operating cash flow was $6.0, down from $32.8. Capital expenditures were $26.7; investing cash outflow was $23.1 and financing cash outflow was $32.2. Cash, cash equivalents and restricted cash totaled $534.1 at June 30, 2020.
- Liquidity: Cash, cash equivalents, restricted cash and marketable securities totaled $541.3. Available credit under existing facilities was $276.7, including $50.8 under Valhi’s Contran facility, subject to Contran’s discretion. Management said it expected liquidity to cover short- and long-term obligations.
- Debt: Consolidated debt was $786.4, including $783.3 of long-term debt and $3.1 of current maturities, compared with $794.3 total debt at year-end 2019. Valhi owed $309.2 under its Contran facility; Kronos had €400 million principal outstanding on 3.75% senior notes due 2025. The company reported compliance with debt covenants.
- Balance sheet: Total assets were $2,751.1, down from $2,794.4 at December 31, 2019. Current assets were $1,398.6 and current liabilities $295.8.
Material changes and operating trends
- Q2 net sales fell 21% year over year and first-half sales fell 13%. COVID-related demand declines affected all three segments, with chemicals the largest contributor to the sales decline.
- Chemicals: Q2 sales fell 20% to $386.0 and operating income fell 29% to $35.9. TiO₂ sales volume declined 22%; average selling prices declined 1%. First-half chemicals sales fell 12% and operating income fell 20%. Q2 gross margin percentage improved, but first-half gross margin percentage declined amid lower prices and higher raw-material costs.
- Component products: Q2 sales declined 29% to $23.8 and operating income declined 57% to $2.4. First-half sales fell 14% and operating income fell 26%, reflecting lower customer demand and production volumes.
- Real estate: Q2 sales fell to $5.2 from $10.4, and segment operating income was $1.0 versus $9.8. First-half operating income rose to $20.2 from $13.0, including $19.1 of tax-increment infrastructure reimbursement income in 2020 versus $8.8 in 2019; land-sale revenue declined.
- First-half operating cash flow was pressured by lower operating income and working-capital movements, including a $59.2 reduction in accounts payable and accrued liabilities. Lower income-tax cash payments partly offset these effects.
Outlook, risks and unusual items
- Management expected lower consolidated operating income for full-year 2020 than in 2019, with COVID-19 expected to reduce chemicals and component-products results. Higher real-estate segment income from infrastructure reimbursement was expected to more than offset lower anticipated land sales. No quantified earnings or sales guidance was provided.
- Management expected chemicals sales volumes and earnings to remain below prior periods for the rest of 2020. Component Products also expected lower full-year revenue and operating income; staffing and production were adjusted to expected demand. LandWell reported delayed or cancelled builder closings and was curtailing infrastructure development where possible.
- Management cited uncertainty around the duration of the pandemic, customer demand and operations, supplier disruptions, exchange rates, raw-material costs and the timing of economic recovery. It said facilities remained operational aside from a one-week closure at a Component Products facility in April; supply-chain disruptions were limited.
- Q2 2019 included a $19.6 litigation settlement expense, $4.7 of insurance recoveries and $7.7 of infrastructure reimbursement income. These items affect the year-over-year comparison. First-half 2020 included $19.1 of infrastructure reimbursement income and a $1.5 property-damage insurance gain.
- Environmental remediation liabilities totaled $99.0, including approximately $94 million accrued by NL for about 32 sites. The estimated upper end of reasonably possible costs for estimable NL matters was approximately $115 million, including amounts accrued; costs for five other sites could not be estimated. Potential future costs could exceed accruals.
- NL’s Santa Clara lead-pigment litigation settlement was concluded; NL’s share of the settlement was $101.7, payable in installments, with a remaining accrued settlement liability. Other lead-pigment cases remain, and the company said any potential liability beyond the Santa Clara matter was not probable or reasonably estimable.
- A 1-for-12 reverse stock split became effective June 1, 2020; presented share and per-share amounts reflect the split. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether post-quarter demand, pricing and customer operations support management’s expectation of lower 2020 operating income, and how COVID-19 affected subsequent results.
- How much cash is available to Valhi at the parent level versus held by subsidiaries, and whether subsidiary dividends or intercompany funding can be relied on; the filing notes that access is subject to restrictions and discretion.
- Whether the $19.1 infrastructure reimbursement is recurring and whether delays in development will affect future reimbursements and revenue recognition.
- Potential changes in environmental remediation costs, lead-pigment litigation exposure and insurance recoveries, including matters that are not currently estimable.
- Debt covenant headroom, borrowing availability and the ability to maintain liquidity if operating results fall below expectations.