Valhi, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; statements are unaudited. Valhi is a holding company with businesses in titanium dioxide and chemicals, component products, waste management, and real estate. Its consolidated results include majority-owned subsidiaries, so reported earnings and equity include noncontrolling interests.
Key financial results
Amounts in millions, except per-share data and percentages.
| Metric | Q3 2015 | Q3 2016 | Nine months 2015 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $383.2 | $406.8 | $1,208.1 | $1,158.9 |
| Gross margin | $49.8 | $85.3 | $195.4 | $189.5 |
| Income (loss) before taxes | $(22.8) | $11.6 | $(30.0) | $(26.5) |
| Net income (loss) attributable to Valhi | $(11.7) | $3.0 | $(103.7) | $(25.0) |
| Basic and diluted EPS | $(0.03) | $0.01 | $(0.30) | $(0.07) |
- Q3 sales rose about 6% year over year, while nine-month sales declined about 4%. Nine-month gross margin was down about 3%.
- Operating cash flow was $39.7 million for the first nine months of 2016, versus $33.1 million in 2015. Capital expenditures were $38.7 million; operating cash flow less capital expenditures was approximately $1.0 million, before capitalized permit costs.
- At September 30, cash and cash equivalents were $205.0 million; restricted cash equivalents were $7.3 million. Marketable securities were $256.9 million, including a $250 million investment in Amalgamated Sugar. Management separately reported $242.0 million of restricted and unrestricted cash, cash equivalents and marketable securities in its liquidity discussion.
- Total debt was $998.0 million, up from $960.5 million at year-end 2015; current maturities were $26.9 million. Total current assets were $892.4 million and current liabilities $306.3 million. Management reported $123.7 million of facility availability, including $36.7 million under the Contran facility at Contran’s discretion. The company was in compliance with debt covenants.
- Interest expense for the first nine months rose to $47.4 million from $43.5 million. The filing attributes the increase primarily to higher average debt balances and interest rates, and the interest-rate swap.
Material changes and operating drivers
- Chemicals: Q3 segment sales increased 6% to $356.1 million and operating income improved to $30.1 million from a $1.3 million loss. TiO2 sales volumes rose 6% in both Q3 and the nine-month period. Q3 average selling prices increased 2% year over year; nine-month average prices fell 7%. Prices had risen 8% from year-end 2015 by the end of Q3. Lower feedstock and other production costs, higher volumes and favorable currency translation supported earnings.
- Component products: Q3 sales rose 7% to $28.4 million and operating income rose to $4.4 million. Nine-month sales were down 1% to $82.6 million, while operating income was approximately flat at $11.5 million. A new government-customer project began shipping in August.
- Waste management: Q3 sales increased to $13.6 million and operating loss narrowed to $5.1 million. Nine-month sales fell to $29.9 million and operating loss widened to $23.0 million, reflecting lower disposal volumes and fixed costs. WCS continued to rely on intercompany funding; it borrowed $21.9 million during the first nine months.
- Real estate: Nine-month sales fell to $15.8 million from $28.1 million, and the segment reported a $5.1 million operating loss. This included a $5.1 million noncash impairment of a water-contract intangible asset after the City of Henderson contract was amended. The revised contract is expected to reduce annual water sales by about $1 million versus 2015.
Outlook, risks and unusual items
- Management expected 2016 net income attributable to Valhi to exceed 2015, chiefly because 2015 included a $152.6 million noncash tax valuation allowance, and because of expected improvement in Chemicals earnings. It expected 2016 Chemicals operating income to exceed 2015, with higher volumes, lower costs, workforce savings and implemented price increases as contributors. This outlook is subject to market and other uncertainties; no specific full-year earnings estimate was provided.
- Management forecast approximately $78 million of 2016 capital expenditures. It also expected Chemicals production and sales volumes to be higher than in 2015, assuming global economic conditions did not deteriorate. TiO2 pricing, industry supply and demand, raw-material costs, currencies and customer inventories remain important uncertainties.
- 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, then expected in the first half of 2017, remained subject to customary conditions including U.S. antitrust approval; completion was not assured. Management expected a gain if completed.
- The U.S.-Canada Advance Pricing Agreement finalized in Q3 produced a $5.5 million current tax benefit. A related Canadian tax payment of about $2.3 million was accrued and unpaid at quarter-end. Management expected the Canada-Germany APA within 12 months and did not expect it to materially harm financial position, results or liquidity.
- Environmental remediation accruals totaled $124.1 million. NL had accrued approximately $117 million for about 42 sites; the upper end of estimated reasonably possible costs for estimable matters was approximately $160 million, and costs for five sites could not then be estimated.
- NL’s California lead-paint case includes an adverse $1.15 billion abatement judgment against NL and two other defendants, which NL is appealing. Valhi recorded no accrual, citing its view that a loss was not probable and could not be reasonably estimated; the filing warns that an eventual loss could materially affect results, financial position and liquidity.
- Other exposures include environmental proceedings, asbestos-related claims and a titanium-dioxide antitrust class action. Management stated that it did not consider loss reasonably possible in the described TiO2 cases. WCS also faced a TCEQ compliance matter involving DOE waste; compliance costs were not estimable and could be material, although WCS believed DOE or its contractor should reimburse the costs.
- Management cited risks including cyclical TiO2 markets, competition and capacity changes, raw-material and currency fluctuations, liquidity and refinancing, subsidiary dividend capacity, tax matters, environmental obligations, litigation, permits and WCS disposal volumes. Disclosure controls were evaluated as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the WCS sale receives required approvals and closes on the stated terms and timetable.
- Whether TiO2 price increases, sales volumes and lower input costs persist, and how currency movements affect reported earnings.
- Debt maturities, refinancing or extension of Kronos revolvers, covenant compliance, and the availability of cash held at subsidiaries or subject to restrictions.
- Developments in the California lead-paint appeal, environmental remediation estimates, and the WCS DOE-waste compliance matter.
- Progress on the Canada-Germany APA and evidence supporting future use or reversal of the German and Belgian deferred-tax valuation allowance.