Valhi, Inc. — 2019 Form 10-K Summary
Business context and reporting period
Valhi is a holding company reporting for the fiscal year ended December 31, 2019. Its three consolidated segments are Chemicals (majority-owned Kronos Worldwide, producer of titanium dioxide, or TiO₂), Component Products (majority-owned CompX, security and marine products), and Real Estate Management and Development (BMI and LandWell, primarily in Henderson, Nevada). Valhi is majority-controlled by Contran. The Waste Management Segment was sold in January 2018 and is reported as discontinued operations.
Financial performance and liquidity
- 2019 net sales were $1.898 billion, up 4% from $1.820 billion in 2018. Operating income fell to $192.7 million from $370.7 million; income from continuing operations before tax was $104.7 million.
- Net income attributable to Valhi stockholders was $49.2 million, or $0.14 per share, versus $262.2 million, or $0.77 per share, in 2018. 2018 included a $112 million non-cash deferred tax benefit related to Valhi’s Kronos investment; 2019 included $26.5 million of income tax expense.
- Operating cash flow was $177.2 million, compared with $165.5 million in 2018. Investing activities used $50.7 million and financing activities used $64.1 million. Capital expenditures were $59.9 million.
- At year-end, cash and cash equivalents were $523.8 million, restricted cash was $27.0 million, and marketable securities totaled $8.3 million. Valhi reported $592.1 million in combined cash, restricted cash and marketable securities. Available borrowing capacity under existing facilities was $252.6 million.
- Consolidated debt was $794.3 million, including $313.0 million outstanding under Valhi’s Contran credit facility and Kronos’ euro-denominated senior notes. Interest expense declined to $40.8 million from $55.7 million. The company reported compliance with debt covenants.
- Chemicals sales increased 4% to $1.731 billion, but segment operating income declined 53% to $160.1 million. Its gross margin rate fell to 22% from 34%, reflecting lower TiO₂ prices and higher feedstock and other production costs. TiO₂ sales volume rose 15%; average selling prices fell 6%.
- Component Products sales rose 5% to $124.2 million; operating income was $17.8 million, essentially unchanged. Real Estate sales rose to $42.1 million and operating income increased to $14.8 million, including higher tax-increment infrastructure reimbursement income.
- Quarterly unaudited results: fourth-quarter 2019 sales were $414.1 million, operating income $25.0 million, and net income attributable to Valhi stockholders $10.8 million, or $0.03 per share. Fourth-quarter 2018 figures were $388.7 million, $52.7 million, and $17.7 million, or $0.06 per share.
Material changes versus 2018
- Lower Chemicals operating income was the principal operating pressure: higher sales volumes did not offset lower TiO₂ pricing, higher raw-material costs and unfavorable currency translation.
- Overall attributable earnings declined sharply, also reflecting the absence of 2018’s $112 million deferred tax benefit and $12.5 million Amalgamated Sugar securities gain. Valhi sold its Amalgamated interest in 2018, with the associated $250 million Snake River debt deemed repaid.
- NL’s California lead-pigment settlement was revised from the 2018 arrangement. In 2019, Valhi recognized $19.3 million of additional settlement expense; NL paid $25 million in September and recorded discounted future installments.
- Real Estate operating income benefited from $8.8 million of tax-increment reimbursement income in 2019, versus $3.1 million in 2018. CompX marine-component sales continued to grow.
Outlook, risks and unusual items
- Management expected lower consolidated operating income in 2020, chiefly from lower expected Chemicals sales volumes and higher feedstock costs, partly offset by higher Real Estate income. It expected TiO₂ production slightly above 2019, sales volumes slightly lower, and selling prices stable in the first quarter, assuming stable economic conditions.
- Management cited the uncertain effects of the coronavirus outbreak on demand, operations and supply chains. The filing also identifies TiO₂ market cyclicality, competition and capacity additions, raw-material availability and cost, currency and interest-rate movements, and reliance on subsidiary distributions as key risks.
- The EU published a classification of TiO₂ powder as a suspected carcinogen by inhalation in February 2020, effective October 1, 2021. Valhi said it intended to comply; possible effects include labeling, compliance costs, and demand or marketability impacts.
- NL had a $101.7 million share of the global Santa Clara settlement, payable in installments. At year-end, the discounted settlement liability was approximately $71.9 million, including $11.8 million current and $60.1 million noncurrent. Other lead-pigment claims remain unresolved and generally were not accrued because liability was not considered probable or reasonably estimable.
- Accrued environmental liabilities were $99.7 million. NL’s estimated accrual covered about 32 sites; the upper end of its estimable range was approximately $115 million, and costs at five other sites could not be estimated.
- Contractual commitments totaled $2.178 billion, including $897 million of TiO₂ feedstock commitments and $73.7 million of other long-term supply and service commitments. Management stated it expected sufficient liquidity for short- and long-term obligations, subject to operating results and other uncertainties.
- The 2019 results also included $7.7 million of insurance recoveries, a $4.4 million gain on land sales, a $3.0 million gain on the sale of NL’s insurance and risk management business, and $8.8 million of tax-increment reimbursement income. These items affected comparability.
Important facts for investors to verify
- Whether TiO₂ pricing, volumes and feedstock costs develop as assumed in the 2020 outlook, and how the coronavirus and industry capacity affect demand.
- The cash availability and distribution capacity of subsidiaries, including restrictions under their debt agreements; the parent’s $313 million Contran borrowing and its terms.
- Settlement payment timing and funding, and potential additional exposure from lead-pigment litigation, environmental sites and insurance-recovery disputes.
- Whether the $897 million feedstock commitments and other contractual obligations remain appropriate if production or demand weakens.
- Land-development progress, tax-increment reimbursement approvals and collections, and the assumptions underlying revenue recognized over time.
- Valhi reported an unqualified audit opinion and effective internal control over financial reporting as of December 31, 2019.