Valhi, Inc. — Q1 2023 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2023, compared with Q1 2022. Valhi is a holding company whose principal segments are chemicals (Kronos, titanium dioxide), component products (CompX), and real estate management and development (BMI and LandWell). Contran owned approximately 92% of Valhi’s common stock.
Key financial results
| Metric | Q1 2022 | Q1 2023 |
|---|---|---|
| Net sales | $629.0 million | $492.7 million |
| Total revenues and other income | $629.0 million | $505.8 million |
| Operating income | $100.7 million | $2.5 million |
| Income (loss) before income taxes | $83.3 million | $(9.8) million |
| Income tax expense (benefit) | $19.9 million | $(6.1) million |
| Net income (loss) attributable to Valhi stockholders | $45.4 million | $(4.9) million |
| Diluted earnings (loss) per share | $1.59 | $(0.17) |
| Net cash used in operating activities | $22.8 million | $126.8 million |
- Margins: Consolidated net sales less cost of sales (gross margin) were $54.1 million, or about 11% of sales, versus $170.7 million, or about 27%, in Q1 2022. Chemicals gross margin fell to $30.5 million (7% of segment sales) from $149.0 million (26%).
- Segment performance: Chemicals recorded an operating loss of $15.1 million, versus $86.4 million operating income. Component Products operating income rose to $7.0 million from $6.3 million. Real Estate operating income rose to $10.6 million from $8.0 million.
- Liquidity and debt: At March 31, cash and cash equivalents were $298.1 million; restricted cash was $78.1 million and marketable securities were $102.6 million. The company reported $478.8 million in combined cash, restricted cash and marketable securities. Total debt was $561.5 million, including $1.6 million current maturities. Available borrowing included $60.8 million under Valhi’s Contran facility, subject to Contran’s discretion, and $225 million under Kronos’s revolver. Valhi reported compliance with debt covenants.
- Cash flow and investment: Operating cash use increased to $126.8 million, reflecting lower operating income and working-capital movements, including reduced accounts payable and accrued liabilities. Investing cash use was $42.0 million, including $16.7 million of capital expenditures and net marketable-security purchases. Financing cash use was $16.3 million.
- Other balance-sheet items: Total assets were $2.718 billion and total equity was $1.289 billion at quarter-end. Accrued environmental remediation and related costs were $96.3 million, including $93.4 million noncurrent.
Material changes versus Q1 2022
- Net sales declined 22%, primarily because Chemicals sales fell 24%. Chemicals TiO₂ sales volumes decreased 29%; average selling prices were 4% higher year over year.
- Chemicals production volumes declined 24%, and facilities operated at 76% of practical capacity versus full practical capacity a year earlier. Higher raw-material and energy costs, reduced volumes, and $22 million of unabsorbed fixed production costs pressured results.
- Other income increased to $13.1 million, including $5.4 million of net currency transaction gains and a $1.7 million Hurricane Laura business-interruption insurance recovery. The recovery contributed about $0.03 per share.
- Cash and cash equivalents declined from $478.5 million at December 31, 2022 to $298.1 million at March 31, 2023; combined cash, restricted cash and marketable securities declined from $599.9 million to $478.8 million.
Outlook, risks and unusual items
- Management expects 2023 consolidated operating income to be below 2022. It anticipates weaker Chemicals results as expected price improvement may not offset higher manufacturing costs and weak demand; lower Component Products results as marine demand normalizes; and higher Real Estate results partly because $19.7 million of BWC-related charges recognized in 2022 are not expected to recur.
- Kronos expected gradual demand recovery and higher TiO₂ selling prices later in 2023, but planned reduced production rates in the second quarter. Management emphasized uncertainty around demand, energy and feedstock costs, currency movements, and geopolitical and economic conditions.
- Component Products management expected lower 2023 sales and operating income at both reporting units, with soft order rates, higher-cost inventory, and weaker marine demand; electronic-component shortages remained a risk.
- LandWell expected approximately $63 million of 2023 development spending and three to five years to complete post-closing development obligations. It had $107.8 million of deferred revenue related to closed land sales; revenue recognition depends on progress completing development work.
- BWC, a BMI subsidiary, filed for Chapter 11 in September 2022 after Lake Mead water levels prevented normal water pumping. Valhi deconsolidated BWC and cannot predict the bankruptcy outcome or whether additional costs will arise.
- NL’s lead-pigment litigation remains unresolved; Valhi recorded no accrual for pending cases because it considers liability not probable and not reasonably estimable. Three Santa Clara settlement installments remain: $12.0 million for each of the next two and $16.7 million for the final installment, with funds already on deposit intended to cover the final payment. Environmental liabilities, insurance recoveries, and tax examinations also involve estimation uncertainty.
- Management stated it expects sufficient liquidity for obligations through March 2024 and over the five years through March 2028, based on its operating expectations. This outlook depends on performance and access to subsidiary cash and financing. Expected 2023 capital expenditures were approximately $46 million, in addition to LandWell development costs.
Important facts for investors to verify
- Whether TiO₂ demand, sales volumes, prices, and input costs recover enough to improve Chemicals margins as management anticipates.
- Cash generation and working-capital trends, including funding needs for LandWell’s development commitments and the accessibility of subsidiary cash.
- Debt availability, interest-rate exposure, covenant compliance, and the discretionary nature of borrowing under Valhi’s Contran facility.
- Potential costs and outcomes of BWC’s Chapter 11 case, NL lead-pigment litigation, and environmental remediation matters.
- Timing of LandWell infrastructure completion, recognition of deferred revenue, and reimbursement approvals from the City of Henderson.