Valhi, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods. Amounts are in millions of dollars unless stated otherwise. Valhi is a holding company with chemicals, component products, and real estate management and development businesses. It sold its Waste Management Segment in January 2018, and reports that business as discontinued operations.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $510.2 | $481.8 | $976.2 | $887.1 |
| Income from continuing operations before tax | $42.0 | $62.5 | $148.4 | $104.6 |
| Income tax expense (benefit) | $22.0 | ($100.8) | $58.2 | ($82.2) |
| Continuing-operations income attributable to Valhi stockholders | $11.3 | $117.0 | $63.0 | $131.4 |
| Net income attributable to Valhi stockholders | $11.7 | $8.8 | $101.0 | $21.5 |
| Basic and diluted net income per share | $0.03 | $0.03 | $0.29 | $0.06 |
| Operating cash flow | Not presented by quarter | $159.7 | $88.7 |
- Segment performance: Chemicals sales were $471.8 in Q2 and $902.2 for the first half; operating income was $123.6 and $234.2, respectively. Component Products operating income was $6.0 and $10.4. Real Estate operating income was $0.4 and $4.2; first-half results included $3.1 of tax-increment reimbursement income.
- Margins: Chemicals gross margin was 36% in Q2 and 38% for the first half, up from 30% and 29%. Higher TiO₂ prices more than offset lower sales volumes and higher feedstock costs.
- Cash flow and investment: First-half capital expenditures were $27.6; cash used in investing activities was $36.7 and cash used in financing activities was $25.2. Cash, cash equivalents and restricted cash totaled $577.9 at June 30, compared with $489.4 at the start of the year.
- Debt and liquidity: Total debt was $1,063.3 at June 30, up from $1,043.1 at year-end; $1.6 was current maturities. Management reported $262.2 available under credit facilities and $586.3 of restricted and unrestricted cash, cash equivalents and marketable securities. The company reported compliance with debt covenants.
- Balance sheet: Total assets were $3,000.9 and total equity was $870.4 at June 30. Current assets were $1,443.2 against current liabilities of $383.6.
Material changes and unusual items
- Net sales rose 6% in Q2 and 10% in the first half. Chemicals sales increased on higher TiO₂ pricing, despite volume declines of 12% in Q2 and 13% year to date. Component Products sales increased modestly; real estate sales declined.
- Q2 continuing income attributable to Valhi fell sharply versus 2017, principally because Q2 2017 included a $157.6 noncash tax benefit from reversing valuation allowances on German and Belgian deferred tax assets. Q2 2018 included a $62.0 pretax California lead-pigment litigation settlement charge, as well as higher litigation-related costs.
- First-half net income attributable to Valhi increased to $101.0 from $21.5, largely reflecting the $38.6 after-tax gain on the WCS sale and the prior-year WCS operating loss and impairment. Continuing-operations income attributable to Valhi declined to $63.0 from $131.4, reflecting the tax-benefit comparison and settlement charge.
- Other income for the first half included a $12.5 gain on land sales. Interest expense increased to $31.4 from $29.2, mainly because of higher average debt and variable interest rates.
- Valhi agreed to sell its Amalgamated Sugar Company interest for $12.5 cash and deemed repayment of its $250.0 Snake River loans. The proposed August 31, 2018 closing remained contingent on lender consents that had not been obtained at quarter-end.
Outlook, risks and contingencies
- Management expected higher 2018 consolidated operating income than in 2017, led by Chemicals and increased real estate development, but lower continuing-operations net income attributable to Valhi because of the prior-year tax benefits and the 2018 litigation charge.
- For Chemicals, management expected higher full-year sales and operating income, principally from higher average TiO₂ prices, partly offset by higher feedstock costs. It expected production and sales volumes below record 2017 levels, while anticipating that temporary customer inventory effects would not persist beyond Q3. The company cited demand, pricing, capacity additions, raw-material costs, currencies and customer inventories as important uncertainties.
- Management expected Component Products sales for 2018 to meet or exceed 2017. It expected real estate development spending to accelerate in the second half of 2018 and forecast approximately $79 of 2018 capital expenditures.
- The California settlement agreement would require $65 to be paid by NL, with $45 due upon trial-court approval and $20 in installments beginning four years after approval; a former insurer would contribute another $15. Court approval remained a condition, and other defendants objected to the agreement. The filing records the $62 charge and related liabilities and insurance receivable.
- Environmental remediation accruals totaled $120.9. NL reported approximately $115 accrued for about 38 sites, with reasonably possible costs estimated up to approximately $145, and five sites for which it could not estimate a range. Lead-pigment, asbestos, environmental and other litigation could result in additional costs.
- The company said its 2018 business-interest deduction was limited under the Tax Act and recorded a $7.1 noncash deferred tax valuation allowance. Several Tax Act amounts remained provisional pending further guidance. Management expected sufficient liquidity for near- and longer-term obligations, but noted results differing from expectations could affect liquidity or covenant compliance.
Investor verification points
- Confirm court approval and payment terms of the California settlement, and the timing and collectability of the related insurance recovery.
- Check whether lender consents were obtained and the Amalgamated sale closed, including the resulting repayment of the $250.0 Snake River loans.
- Track TiO₂ pricing, sales volumes, customer inventories, feedstock costs and the effects of the ERP implementation on production and shipments.
- Monitor environmental and other litigation exposures, Tax Act measurement-period adjustments, and the availability of subsidiary cash and credit facilities to meet parent-company obligations.