Q2 10-Q Comments
Here are comments on the Second Quarter 10-Q released earlier today.
Cash Flow from operations was only $13 Million. Profits of $56 Million were largely consumed by a $30 Million increase in inventories, and (net) payment of $17 Million in taxes, with other operating items generating $4 Million of cash. Capital expenditures (largely Henderson sponge expansion, plus the melt expansion) totaled $18 Million, exceeding the operating cash flow, for a net use of $5 Million of cash in the Quarter. This result suggests that instituting a dividend on the Common Shares will likely not soon be forthcoming.
During the Second Quarter, a HUGE 88% of the remaining Series A Preferred Stock not held by Annette Simmons was converted to Common shares, diluting Harold Simmons’ control from 49.9% at March 31, to 47.2% at June 30. Annette Simmons now owns 93.3% of the Series A Preferred, and Valhi (controlled by Harold) owns 0.9%, so only 5.8% of the remaining Preferred was not controlled by Harold as of June 30.
During Q2, the vast majority of the remaining Preferred Shares not controlled by Simmons chose to convert to Common Shares, presumably for liquidity to facilitate sale. We'll see when institutional activity is reported, likely later this month, whether institutions took advantage of the strong TIE share surge in April and early May to significantly lighten up on their TIE ownership. Presumably, the landslide of Preferred Share conversions durning Q2 was part of such a move out of the shares of TIE by large holders.
To reclaim a 50% control level, Harold will have to buy 4.6 Million shares. So far in Q3, he’s bought 426 thousand shares, so he’ll have to buy another 4.2 Million shares to return to a 50% control level, unless his wife starts converting some of her Preferred Shares (she holds 21.3 Million Common Share Equivalents through her Preferred Shares). The remaining Preferred Shares not controlled by the Simmons's are convertible to another 1.5 Million Common shares; as those convert, Harold would have to buy still another 0.8 Million shares to maintain 50% control - - or a total of:
***5 Million shares Harold will have to buy to achieve outright control without converting his wifes (or Valhi's minimal) Preferred shares.***
During Q2 TIE operated at about 91% of capacity.
SG&A costs surged in Q2, and included $3.9 Million of costs associated with relocation of the company’s headquarters operations to Dallas and to Exton, PA.
Backlog declined from $925 Million March 31, to $870 Million at June 30, reflecting the omission from reported backlog of orders not yet confirmed that TIE expects to acknowledge in the Third and Fourth Quarters, presumably principally because pricing has not yet been determined on the orders received. The short of this is that, as I’ve previously suggested, the “backlog” numbers have become meaningless.