Valhi, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; unaudited. Valhi is a holding company with operating segments in chemicals (primarily Kronos titanium dioxide), component products, waste management (WCS), and real estate management and development.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $398.6 million | $408.8 million | $752.1 million | $824.9 million |
| Revenue and other income | $409.3 million | $416.2 million | $774.2 million | $844.4 million |
| Loss before income taxes | $(7.5) million | $(28.8) million | $(38.1) million | $(7.2) million |
| Income tax expense (benefit) | $0.2 million | $110.6 million | $(8.4) million | $114.9 million |
| Net loss attributable to Valhi stockholders | $(8.5) million | $(103.9) million | $(28.0) million | $(92.0) million |
| Loss per share | $(0.02) | $(0.30) | $(0.08) | $(0.27) |
Q2 consolidated gross profit was $62.2 million, about 15.6% of net sales, versus $56.3 million, about 13.8%, a year earlier. For the first half, gross profit was $104.2 million, about 13.9% of sales, compared with $145.6 million, about 17.7%.
- Cash flow: First-half operating cash use was $8.7 million, versus $5.2 million in 2015. Investing activities used $30.3 million, including $26.6 million of capital expenditures. Financing activities provided $27.1 million. Cash and cash equivalents ended at $190.5 million, down from $202.3 million at year-end 2015.
- Liquidity: Current assets were $879.6 million and current liabilities $310.7 million at June 30. Valhi reported $227.0 million of restricted and unrestricted cash, cash equivalents and marketable securities, including $77.9 million held outside the U.S. It also reported approximately $106.3 million of available credit, some of which is subject to lender or affiliate discretion.
- Debt and equity: Total debt was $1,009.3 million, including $38.8 million of current maturities, compared with $960.5 million at December 31, 2015. Total equity declined to $486.7 million from $526.9 million.
- Dividends: Valhi paid $0.04 per share during the first half. Future dividends are discretionary.
Material changes and segment results
- Chemicals: Q2 sales decreased 1% to $356.0 million, while operating results improved from a $7.9 million loss to $12.7 million income. First-half sales fell 7% to $674.5 million and operating income declined 40% to $15.7 million. First-half TiO₂ average selling prices were down 11% year over year, partly offset by 6% higher sales volumes and lower feedstock costs. Q2 prices had begun recovering; end-Q2 average prices were 4% above end-Q1.
- Component products: First-half sales fell 5% to $54.2 million and operating income fell 12% to $7.1 million, mainly reflecting the nonrecurrence of a government security-products program sold in 2015.
- Waste management: First-half sales declined to $16.3 million from $25.0 million, and operating loss widened to $17.9 million from $11.0 million. Results reflected lower disposal volumes and the absence of a one-time 2015 disposal campaign.
- Real estate: First-half sales were $7.1 million versus $17.8 million; operating loss was $5.4 million versus $1.4 million income. The 2016 result included a $5.1 million impairment of a water-contract intangible asset after amended City of Henderson terms reduced minimum volumes and pricing and removed automatic renewal.
Outlook, risks and unusual items
- Management expected higher 2016 net income than in 2015, principally because 2015 included a large noncash tax valuation allowance and because of anticipated Chemicals segment operating income and cost savings. This expectation also reflected lower expected Component Products income and insurance recoveries. Management’s outlook is conditional on market and operating assumptions.
- For Chemicals, management expected higher 2016 sales and production volumes, lower unit costs, benefits from restructuring and announced price increases. The 2015 workforce reductions affected about 160 employees and were expected to produce approximately $19 million of annual savings. TiO₂ demand, pricing, competition, input costs, currency movements and capacity changes remain important uncertainties.
- The filing reports a $150.3 million noncash deferred-tax valuation allowance recognized in Q2 2015 for German and Belgian operations, and a further $2.9 million in the first half of 2016. The allowance can affect tax expense and the ability to recognize tax benefits from future losses.
- Valhi agreed to sell WCS for $270 million cash, $20 million face amount of Rockwell preferred stock and assumption of specified WCS debt and financial-assurance obligations. Closing was expected in the second half of 2016, subject to conditions including antitrust approval; completion was not assured.
- Litigation and environmental exposure: NL’s appeal of the California lead-paint abatement judgment of $1.15 billion was pending. The company had not accrued for the case, stating a loss was not probable and could not be reasonably estimated; an adverse resolution could materially affect results, financial position and liquidity. Environmental remediation accruals totaled $122.1 million. NL estimated an upper range of approximately $173 million for estimable site costs, including accrued amounts, and could not estimate costs at five sites.
- WCS faces TCEQ and NRC matters concerning DOE waste stored at its facility. Compliance costs were not estimable and could be material; WCS believed DOE or its contractor should reimburse the costs. Other risks include tax examinations, asbestos and other litigation, environmental regulation, debt covenant and refinancing needs, and the ability of subsidiaries to distribute cash to Valhi.
- Management stated that disclosure controls and procedures were effective as of June 30, 2016 and that there was no material change in internal control over financial reporting during the quarter. The filing also states that results for interim periods may not indicate full-year results.
Key facts investors should verify
- Whether the WCS divestiture closed, on what final terms, and how proceeds and debt assumptions affected Valhi’s liquidity and earnings.
- Whether TiO₂ pricing recovery, volumes and cost reductions persisted, and how they affected Chemicals segment margins.
- Changes in debt balances, available credit, covenant compliance and Valhi’s access to subsidiary cash and dividends.
- Developments in the Santa Clara appeal, environmental remediation estimates, and the WCS DOE-waste compliance and reimbursement matters.
- Further changes to the German and Belgian deferred-tax valuation allowance and the resulting impact on reported tax expense and net income.