Business context and reporting period
Valhi, Inc. is a holding company reporting for the year ended December 31, 2017. Its continuing businesses are chemicals (Kronos, titanium dioxide or TiO₂), component products (CompX security and marine products), and real estate management and development in Henderson, Nevada. Valhi controls approximately 80% of Kronos and 87% of CompX. WCS is presented as discontinued operations; its sale closed on January 26, 2018.
Key financial results
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $1,879.4 million | $1,519.4 million |
| Operating income | $362.9 million | $107.4 million |
| Income before tax, continuing operations | $291.8 million | $39.6 million |
| Income tax benefit (expense) | $120.0 million benefit | $18.6 million expense |
| Net income (loss) attributable to Valhi shareholders | $207.5 million | $(15.9) million |
| Diluted earnings (loss) per share | $0.61 | $(0.05) |
| Cash provided by operating activities | $259.3 million | $79.8 million |
Continuing-operations income attributable to Valhi shareholders was $316.7 million, or $0.93 per diluted share, versus $8.1 million, or $0.02, in 2016. Discontinued operations generated a $109.2 million net loss in 2017. Consolidated gross margin was approximately 32% of sales, compared with approximately 20% in 2016.
- Chemicals: Sales rose 27% to $1,729.0 million; operating income increased to $341.1 million from $91.0 million. Average TiO₂ selling prices rose 22%, sales volume increased 5%, and production reached a record 576,000 metric tons at full practical capacity. Gross margin increased to 32% of segment sales from 19%.
- Component products: Sales increased 3% to $112.0 million; operating income eased to $15.2 million from $15.6 million. Higher volumes were partly offset by unfavorable product mix, higher zinc and brass prices, and employee medical costs.
- Real estate: Sales declined to $38.4 million from $46.2 million, while operating income rose to $6.6 million from $0.8 million. Land-sale revenue was $29.9 million, versus $37.8 million.
Cash, debt, and liquidity
Investing activities used $74.4 million, including $71.3 million of capital expenditures; financing activities provided $93.6 million. Year-end balance-sheet cash and cash equivalents were $435.7 million, with $16.1 million of restricted cash. Marketable securities were $258.7 million, including a $250 million Amalgamated Sugar investment that is collateral for Valhi’s Snake River loans. Management separately reported $470.4 million of cash, restricted cash, cash equivalents, and marketable securities attributable to continuing operations.
Continuing-operations debt was $1,043.1 million at year-end, up from $893.8 million in 2016; interest expense was $58.9 million. Kronos issued €400 million of 3.75% secured notes due 2025 and used proceeds primarily to repay its term loan. Approximately 73% of debt was fixed-rate, versus 35% in 2016. The company reported compliance with debt covenants and $281.6 million of availability under existing facilities at year-end, although $75.7 million of Valhi’s Contran facility availability was at Contran’s discretion. Contractual commitments totaled $496.4 million for 2018.
Material changes, outlook, and notable items
- The improvement in operating results was led by Kronos, reflecting higher TiO₂ prices and volumes. Management expected 2018 operating income to exceed 2017, principally on higher expected TiO₂ prices, partly offset by higher feedstock costs. It expected 2018 TiO₂ sales and production volumes to be slightly below 2017 records, while also describing sales as expected to be higher, principally due to pricing; volume outlook is therefore not fully consistent in the filing.
- Management expected 2018 consolidated operating income to increase but net income attributable to Valhi shareholders to decline, because the 2017 tax benefits were not expected to recur. It forecast approximately $79 million of 2018 capital expenditures, plus about $15 million of LandWell development costs.
- The $120.0 million 2017 income tax benefit included a $186.7 million noncash reversal of German and Belgian deferred-tax valuation allowances and a $77.1 million benefit from the lower U.S. federal tax rate, partly offset by a $76.2 million provisional repatriation-tax expense and other tax charges. Tax Act accounting amounts were provisional and subject to refinement through December 2018.
- WCS recorded a $170.6 million long-lived-asset impairment in 2017 after a prior sale agreement was blocked on antitrust grounds. Valhi completed a different sale in January 2018 for the purchaser’s assumption of WCS third-party debt and other liabilities; management expected a roughly $57 million pretax discontinued-operations gain in first-quarter 2018.
- Environmental remediation liabilities were $117.5 million at year-end; NL’s estimated costs for reasonably estimable matters were approximately $112 million, with a possible-cost range up to $154 million. Five additional sites had no reasonably estimable range.
- Risks include cyclical TiO₂ demand and pricing, higher or constrained feedstock supply, foreign exchange exposure, leverage and subsidiary dividend dependence, commodity-cost pressure at CompX, Nevada real-estate conditions, environmental obligations, and litigation. In the Santa Clara lead-pigment case, the appellate court narrowed the abatement scope and remanded the case; NL said loss was probable but not reasonably estimable. The filing also contains a later, apparently conflicting passage stating loss was not probable.
Important facts for investors to verify
- Reconcile the Santa Clara litigation disclosure: the filing states both that a loss is probable and that it is not probable; neither an accrual nor a loss range was recorded as estimable.
- Assess how much of 2017 earnings reflects recurring operations versus tax-accounting benefits, and confirm the final effects of provisional Tax Act estimates.
- Review the 2018 TiO₂ price, volume, and feedstock-cost assumptions, including the filing’s differing statements about expected sales volumes.
- Confirm post-sale WCS liabilities, financial-assurance releases, and recognition and amount of the expected $57 million gain.
- Evaluate debt service and liquidity in light of $1,043.1 million of debt, 2018 commitments, related-party financing, and reliance on subsidiary distributions.