Valhi, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Valhi is a holding company with three reportable segments: Chemicals (Kronos titanium dioxide), Component Products (CompX), and Real Estate Management and Development (BMI and LandWell). Amounts below are U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $468.9 | $556.3 | $1,468.7 | $1,819.9 |
| Gross margin | $60.6 | $120.4 | $180.2 | $437.8 |
| Operating income | $2.5 | $69.4 | $17.0 | $242.0 |
| Income (loss) before tax | $(9.5) | $49.0 | $(26.4) | $188.7 |
| Net income (loss) attributable to Valhi stockholders | $(6.0) | $26.2 | $(16.0) | $99.6 |
| Basic and diluted EPS | $(0.21) | $0.92 | $(0.56) | $3.49 |
- Consolidated gross margin was approximately 12.9% in Q3 2023 versus 21.6% in Q3 2022, and 12.3% for the first nine months versus 24.1% a year earlier.
- Operating cash flow was a use of $61.2 million for the first nine months of 2023, compared with $27.9 million provided in 2022. Capital expenditures were $42.7 million; financing activities used $53.2 million.
- At September 30, cash and cash equivalents were $342.3 million; restricted cash was $54.4 million, and marketable securities totaled $86.4 million. The company reported aggregate cash, restricted cash and marketable securities of $483.1 million.
- Total debt was $533.4 million, including $97.7 million drawn under Valhi’s Contran facility and $422.5 million carrying value of Kronos senior notes. Debt was down from $559.5 million at year-end 2022. Valhi had $77.3 million available under its Contran facility; Kronos reported its full $225 million revolver available. The company said it was in compliance with debt covenants.
- Current assets were $1,370.1 million and current liabilities $403.4 million. Reported total equity was $1,265.2 million.
Material changes and segment results
- Chemicals: Q3 sales declined 14% to $396.9 million and the segment recorded a $21.8 million operating loss, versus $34.3 million operating income in Q3 2022. Nine-month sales fell 20% to $1,266.4 million and the segment recorded a $39.5 million operating loss, versus $189.9 million operating income. Lower TiO2 sales volumes and prices, weaker demand, higher production costs, and under-absorbed fixed costs weighed on results. Nine-month sales volume fell 22%; production volume fell 26%. Capacity utilization was 71% for the first nine months, compared with 96% in 2022.
- Component Products: Q3 sales decreased 6% to $40.3 million, while operating income rose to $6.6 million from $6.0 million, reflecting stronger security products and improved margins, partly offset by weaker marine components. Nine-month sales declined 7% to $118.1 million and operating income fell 10% to $18.0 million.
- Real Estate Management and Development: Q3 sales fell to $31.7 million from $53.8 million, primarily reflecting a slower pace of land development; operating income was $17.7 million versus $29.1 million. Nine-month sales were $84.2 million versus $105.5 million, while operating income increased to $38.5 million from $32.1 million, partly because $19.7 million of BWC-related charges recorded in 2022 did not recur.
- Inventory declined to $532.9 million from $640.8 million at year-end 2022. Receivables increased to $332.5 million from $281.9 million, while accounts payable and accrued liabilities fell to $392.9 million from $477.7 million.
Outlook, commentary and notable items
- Management expects 2023 consolidated operating income to be lower than 2022, primarily because of weaker Chemicals results. It cited lower TiO2 selling prices, weak demand, higher manufacturing costs, and low operating rates. Management expects near-term TiO2 demand to remain below historical norms; low-cost imports are pressuring prices, particularly in Europe. It anticipates input-cost reductions and cost actions may improve Chemicals margins in 2024, but timing and demand recovery remain uncertain.
- Kronos began workforce reductions affecting approximately 100 people. The company expects a $6 million charge in Q4 2023, with most cash payments expected by Q1 2024.
- Management expects Component Products to have slightly lower 2023 sales and operating income than 2022, citing soft demand in several markets, especially the towboat market. For real estate, approximately 20 residential saleable acres and 15 commercial/light-industrial acres remained. LandWell had $96.5 million of deferred revenue tied to post-closing obligations and expects development work to continue for three to five years.
- LandWell expects approximately $50 million of 2023 land-development spending; consolidated capital expenditures were forecast at approximately $48 million. Management stated it expects sufficient liquidity for short- and long-term obligations, while noting actual developments could adversely affect liquidity.
- BWC: After quarter-end, the bankruptcy court approved a plan for sale of BWC assets and transfer of agreements to an industrial customer. Proceeds will go to creditors and may be insufficient to repay them fully. BMI also agreed to sell Basic Power Company, contingent on the BWC asset sale; Valhi expects an approximately $2 million loss when that sale closes.
- A U.K. pension plan buy-out was completed in May 2023 using plan assets; Valhi recognized a $6.2 million noncash termination loss. Expected 2023 contributions to defined benefit pension plans were approximately $18 million.
- Valhi disclosed approximately $96.1 million of accrued environmental remediation and related costs, including $93.3 million noncurrent. NL’s estimated accrued liability for approximately 32 sites was about $91 million; the estimated upper end of reasonably possible costs was approximately $118 million, including the accrual. Costs for about five other sites could not be reasonably estimated.
- NL’s lead-pigment litigation remains unresolved. The filing says liability in pending cases is not considered probable or reasonably estimable; a loss, if ultimately recognized, could materially affect results and liquidity. In a California environmental matter, NL and other defendants were found liable for certain cleanup costs, but the amount and NL’s share had not been determined.
- The filing identifies a prior-period classification error in gross property and equipment and accumulated depreciation; both were revised by the same amount, with no effect on net property and equipment. Management determined the changes were not material to previously issued financial statements.
Most important facts for investors to verify
- Whether TiO2 demand, selling prices, production volumes, and margins stabilize, and how quickly anticipated input-cost savings take effect.
- Whether operating cash flow recovers and the company maintains liquidity amid weak Chemicals performance and LandWell’s development spending.
- Progress and proceeds from BWC’s asset sale, creditor recoveries, and the contingent Basic Power Company sale and expected loss.
- Changes in environmental and lead-related litigation exposures, including the California cleanup cost allocation and amounts not currently estimable.
- Execution and cash costs of Kronos’s workforce reductions, and LandWell’s deferred revenue recognition and remaining development obligations.