AVX Corporation (AVX) announced a $366 million settlement with the US Environmental Protection Agency on Wednesday, agreeing to fund the cleanup costs of the New Bedford Superfund site in Massachusetts. The settlement was no surprise; AVX had taken a $266 million charge against earnings in the first quarter, boosting its total reserves for the litigation to the $366 million figure now reported. According to the Consent Decree (Exhibit 92.2), AVX will pay $366.25 million, plus interest, in three payments over the next two years. (Interest will start accruing immediately at the Superfund Interest Rate, currently set at 0.78% annually. Total interest on the payments should be no more than about $4.5 million.)
The settlement should remove an overhang from the stock; as I noted back in May, AVX had, in its most recent 10-K filed that month, estimated potential costs related to the Superfund site cleanup of $100 to $730 million. The latter figure represented some $4.30 per share, and nearly half of AVX's current market capitalization of $730 million. The $366 million figure is still a hit, but remains far more manageable; in addition, the current consent decree does not allow the government to re-open the case, according to Bloomberg. AVX had originally settled the claims in 1992 for $72 million, only to have the EPA return in April -- some 20 years later -- and ask for additional cleanup funds.
With the settlement behind it, AVX may offer some value. Even after accounting for $371 million (including interest) in EPA payments, the company retains some $681 million in cash and investments, or about $4.02 per share. Trailing twelve-month earnings are $1.04 per share, excluding the charges related to settlement. And the company offers a dividend yield of 3.2 percent, easily covered by earnings and further protected by the hefty cash balance.
There are some risks for AVX. The company is 72 percent owned by Kyocera Corporation (KYO), severely limiting shareholder control. $470 million of the company's cash is held outside the US, leaving just about $211 million available after the EPA payments are made. And the company's capacitor business sees constantly declining prices, pressuring margins and limiting AVX's room for error.
Still, at Friday's close of $9.28 per share, those issues seem priced in. AVX trades at a P/E just over 9 -- barely 5 when backing out the net cash -- with TTM free cash flow at about 15% of its enterprise value. With the settlement finally accounted for, investors can have finally faith that AVX's solid fundamentals won't be destroyed by another EPA intervention. With excellent cash flow, strong shareholder-friendly credentials -- including the 3 percent yield and a modest repurchase program -- and a long history of operating profits, AVX has a lot going for it. And with the New Bedford issue finally in the rearview mirror, its shareholders will have a lot less to worry about.