Valhi, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Valhi is a holding company with consolidated businesses in chemicals (Kronos), component products (CompX), and real estate management and development (BMI and LandWell). Unless noted, financial figures are in millions of dollars.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2022 |
|---|---|---|
| Net sales | $509.0 | $629.0 |
| Operating income | $51.3 | $100.7 |
| Income before income taxes | $32.5 | $83.3 |
| Net income | $24.5 | $63.4 |
| Net income attributable to Valhi stockholders | $14.8 | $45.4 |
| Diluted earnings per share | $0.52 | $1.59 |
| Cash from operating activities | $56.6 | $(22.8) |
| Capital expenditures | $11.5 | $16.2 |
- Net sales increased 24%; operating income nearly doubled. Consolidated gross margin was $170.7 (27% of sales), versus $109.3 (21%) in Q1 2021.
- Chemicals drove the earnings increase: segment sales rose 21% to $562.9 and operating income rose 129% to $86.4. TiO2 selling prices increased 24% year over year, while sales volumes increased 2%; currency movements reduced sales by an estimated $22 and operating income by $5.
- Component Products sales increased 17% to $42.1, while operating income rose 8% to $6.3; higher input, shipping and labor costs pressured gross margin percentage.
- Real Estate sales increased to $24.0 from $8.1, mainly from land development activity. Operating income was $8.0 versus $7.8; the 2021 figure included a $6.2 tax-increment infrastructure reimbursement that did not recur in 2022.
- Cash used in operations was $22.8, versus $56.6 provided a year earlier. Management attributed the decline primarily to working-capital movements, including receivables, inventory, payables and accrued liabilities, despite higher operating income.
- At March 31, cash, restricted cash and marketable securities totaled $744.9, including amounts held by subsidiaries and restricted funds. Current assets were $1,704.2 and current liabilities were $451.0.
- Total debt was $641.3, including $3.1 current maturities; debt declined from $653.0 at year-end 2021. Valhi had $167.2 outstanding on its Contran facility, with $57.8 available at Contran’s discretion. Kronos had no borrowings on its $225 global revolver, which was fully available. The company reported covenant compliance.
- Valhi paid a quarterly dividend of $0.08 per share. Its common shares outstanding were 28,277,093 as of April 29, 2022.
Outlook, commentary and risks
- Management expected higher consolidated operating income in 2022 than in 2021. Expected higher Chemicals income was projected to more than offset lower real estate income, higher corporate expenses and the nonrecurrence of an aggregate $16 gain on 2021 land sales.
- For Chemicals, management expected strong demand, full practical-capacity production and higher selling prices, but anticipated feedstock, raw-material, shipping, energy and utility costs to keep rising. Supply-chain and logistics disruptions were expected to continue; management cautioned that costs would challenge margins.
- For Component Products, management expected 2022 sales and operating income to increase, while warning that higher materials, labor and freight costs, staffing constraints and supply-chain delays could pressure margins.
- LandWell expected substantially all residential-community land to be sold by year-end if sales in escrow closed as scheduled. Buyers can generally cancel before closing without penalty. Previously closed land sales carried $188.8 of deferred revenue, recognized over an expected three-to-five-year development period. Large infrastructure spending was expected to increase in 2022.
- Management expected sufficient liquidity to meet short- and long-term obligations and forecast approximately $103 of 2022 capital expenditures. These expectations depend on operating performance, subsidiary distributions and access to credit.
- Material contingencies include NL’s lead-pigment litigation and environmental remediation. No accrual was recorded for pending lead-pigment cases beyond the Santa Clara settlement obligations because liability was considered not probable or not reasonably estimable. NL had approximately $93 accrued for environmental matters at about 32 sites; the estimated upper end of reasonably possible costs was approximately $118, and costs at some sites could not be estimated. The filing warns that developments could materially affect results, financial condition or liquidity.
- Other risks include TiO2 market cyclicality, raw-material and energy costs, currency and interest rates, supply disruptions, environmental regulation, tax examinations, litigation, Lake Mead water levels and the ability of subsidiaries to pay dividends. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether TiO2 price increases can continue to offset higher feedstock, energy and other manufacturing costs, and the effect of demand or volume changes.
- How negative operating cash flow and working-capital needs evolve as earnings rise; distinguish unrestricted cash from restricted cash and subsidiary-held liquidity.
- Whether land-sale escrows close as scheduled, how deferred revenue converts to recognized revenue, and the cost and reimbursement timing of infrastructure projects.
- Updates to environmental remediation estimates and lead-pigment litigation, including any change in the probability, estimability or potential size of losses.
- Availability and terms of parent-company borrowing and subsidiary dividends, given the company’s reliance on subsidiaries and the discretionary nature of some funding sources.