Valhi, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are against December 31, 2018. Valhi is a holding company with chemicals (Kronos), component products (CompX), and real estate management and development operations. It sold Waste Control Specialists in January 2018, and that business is reported as discontinued operations in the prior-year comparison. Contran owned approximately 92% of Valhi’s common stock at quarter-end.
Financial performance and liquidity
- Sales and earnings: Net sales were $479.6 million, up 2.9% from $466.0 million. Total revenue and other income was essentially flat at $486.2 million versus $486.4 million. Continuing-operations income attributable to Valhi stockholders fell to $18.2 million, or $0.05 per share, from $51.7 million, or $0.15 per share. Consolidated net income was $28.4 million versus $107.8 million; the 2018 period included a $37.6 million after-tax gain from the WCS sale within discontinued operations.
- Margins and operating income: Gross margin declined to $121.8 million from $185.3 million. Consolidated operating income fell to $60.4 million from $118.8 million. Chemicals operating income dropped 52% to $52.8 million; component products operating income was unchanged at $4.4 million; real estate operating income decreased to $3.2 million from $3.8 million.
- Cash flow: Operating activities used $2.2 million, compared with $47.7 million provided in Q1 2018. Management attributed the decline chiefly to lower operating income and increased cash use from changes in receivables, inventories, payables and accrued liabilities. Capital expenditures were $16.8 million. Cash, cash equivalents and restricted cash totaled $487.6 million at quarter-end.
- Debt and liquidity: Total debt was $789.2 million, down from $800.4 million at year-end; $2.9 million was current. The company reported $271.2 million of availability under specified credit facilities and $494.5 million of restricted and unrestricted cash, cash equivalents and marketable securities. Valhi reported compliance with debt covenants. Management expects sufficient liquidity for short- and long-term obligations, subject to actual results and conditions.
- Other balance-sheet items: Total assets were $2,724.7 million and total equity was $1,006.1 million. Environmental remediation liabilities were $102.5 million, including $96.1 million noncurrent. Adoption of the lease standard added $35.1 million of right-of-use assets and $34.5 million of lease liabilities at January 1, 2019; quarter-end lease obligations were $32.4 million.
Material changes versus Q1 2018
- Chemicals sales rose 1% to $436.5 million, but operating income fell to $52.8 million from $110.6 million. TiO₂ sales volumes increased 15%, while average selling prices declined 8%; higher feedstock and other production costs materially reduced margins. Currency movements reduced reported chemicals sales by an estimated $15 million but increased operating income by approximately $8 million.
- Component products sales increased 10% to $31.2 million, while operating income remained $4.4 million. Higher marine component sales were offset in part by higher labor and medical costs and less favorable product mix.
- Real estate sales increased to $11.9 million from $7.2 million, primarily reflecting higher land-sale revenue. The 2018 comparison included $12.5 million of gains on sales of land not used in operations and higher securities earnings.
- Interest expense decreased to $10.3 million from $15.4 million, primarily following the 2018 deemed repayment of $250 million of Snake River notes in connection with the sale of Valhi’s Amalgamated Sugar interest. Other income declined to $6.6 million from $20.4 million.
Outlook, commentary and principal risks
- Management expects lower consolidated operating income in 2019 than in 2018. Chemicals sales volumes are expected to rise, but management expects lower average selling prices and higher feedstock costs to more than offset volume benefits; chemicals operating income is expected to decline. The company anticipates higher real estate segment operating income from increased development activity and component-products sales above 2018 with profitability comparable to 2018.
- Management expects approximately $100 million of 2019 capital expenditures, including $85 million for chemicals, and approximately $34 million of LandWell development costs. It expects chemicals production volumes to be slightly higher than 2018 and notes that TiO₂ prices could stabilize or increase modestly later in 2019 if customer inventories decline as anticipated.
- Lead-pigment litigation: NL’s proposed $80 million Santa Clara settlement was not approved by the trial court; an appeal of that denial remained pending. The court had set the abatement fund at $409 million, later reduced by an $8 million offset to $401 million. NL and the other defendants were jointly and severally liable under the underlying ruling, while NL’s ultimate share and the amount ultimately spent remain uncertain. The filing warns that additional loss accruals could materially affect results, financial position and liquidity.
- Environmental and other contingencies: NL had accrued approximately $97 million for about 32 reasonably estimable remediation sites; the upper end of its estimated range was approximately $117 million, including the accrual. Costs could exceed estimates, and about five sites had no estimable range. The filing also discusses lead-paint claims, insurance-recovery uncertainty, tax contingencies and other litigation.
- Key business risks include TiO₂ supply, demand and pricing cycles; raw-material, energy and currency movements; global economic conditions; environmental regulation and remediation; litigation outcomes; subsidiary dividend capacity; and compliance with financing covenants. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the appeals process changes the outcome or settlement prospects in the Santa Clara case, and the timing and potential cash exposure for NL and Valhi.
- Whether TiO₂ pricing stabilizes and whether higher sales volumes can offset expected lower prices and feedstock costs.
- How operating cash flow, receivables and working capital develop after the Q1 cash outflow, and whether planned capital spending remains within expectations.
- Availability and terms of subsidiary dividends and credit facilities, including the parent company’s reliance on distributions from subsidiaries.
- Updates to environmental remediation estimates, insurance recoveries, tax positions and other contingencies.