VALHI INC annual report, FY2022

Valhi, Inc. — FY2022 Form 10-K

Business context and reporting period. Valhi is a holding company reporting for the year ended December 31, 2022, with three operating segments: Chemicals (Kronos, primarily titanium dioxide, or TiO₂), Component Products (CompX security and marine products), and Real Estate Management and Development (BMI and LandWell in Henderson, Nevada). Figures below are in U.S. dollars unless noted.

Financial and operating performance

Metric	FY2022	FY2021
Net sales	$2,222.5 million	$2,296.4 million
Operating income	$239.4 million	$318.6 million
Income from continuing operations attributable to Valhi stockholders	$90.2 million; $3.16 per diluted share	$127.2 million; $4.46 per diluted share
Gross margin	$490.4 million; approximately 22.1% of sales	$580.2 million; approximately 25.3% of sales
Operating cash flow	$34.9 million	$459.7 million
Capital expenditures	$67.6 million	$64.1 million
Consolidated debt at year-end	$559.5 million	$653.0 million
Cash, restricted cash and marketable securities attributable to continuing operations	$638.3 million	Not stated here on a comparable basis

Operating cash flow less capital expenditures was approximately negative $32.7 million in 2022. The cash and securities total includes restricted balances and is held across subsidiaries; it should not be treated as freely available parent-company cash. Valhi reported $265 million of borrowing availability under existing facilities, including $54 million under a Contran facility whose availability is at Contran’s discretion. Current assets were $1,589.5 million and current liabilities $492.8 million at year-end.

Segment results

Chemicals: Sales of $1,930.2 million, down slightly from $1,939.4 million; operating income fell to $174.6 million from $200.8 million. TiO₂ selling prices rose 21%, but sales volumes fell 15%; higher raw material and energy costs, production curtailments and currency effects pressured results. Fourth-quarter sales volumes were down 40% year over year, and the segment recorded a $15.3 million operating loss in that quarter.
Component Products: Sales increased 18% to $166.6 million and operating income rose to $25.4 million from $20.5 million, led by marine components and higher security-products sales. Higher costs weighed on security-products margins.
Real Estate Management and Development: Sales declined to $125.7 million from $216.2 million; operating income declined to $39.4 million from $97.3 million. 2021 included $70 million of land sales recognized at closing. 2022 results included $19.7 million of charges related to Basic Water Company (BWC).

Material changes and unusual items

Net sales fell 3% and operating income fell 25% from 2021; attributable continuing-operations income declined 29%.
Operating cash flow fell sharply, primarily reflecting lower operating income and a $273.1 million year-over-year deterioration in cash used/provided by changes in working capital. Inventory increased to $640.8 million from $458.7 million.
Lake Mead water levels prevented BWC from safely pumping water from June 30, 2022. Valhi recorded a $16.4 million impairment of water-system assets, a $2.0 million loss on deconsolidation after BWC filed for Chapter 11, and $1.3 million of bad-debt expense on an intercompany receivable. BWC ceased water delivery and its bankruptcy outcome remains uncertain.
2022 included $16.0 million of tax-increment infrastructure reimbursement income and a $2.7 million business-interruption insurance gain related to Hurricane Laura. By comparison, 2021 included a $16.0 million gain on sales of land not used in operations.
Interest expense decreased to $27.9 million from $32.5 million, while income tax expense decreased to $33.8 million from $60.1 million. Pension and other postretirement expense was $13.9 million, versus $17.0 million.

Outlook, risks and contingencies

Management expects consolidated operating income in 2023 to be broadly consistent with 2022: higher real-estate segment income, including non-recurrence of BWC-related charges, is expected to offset lower Chemicals and Component Products income. This outlook is uncertain.
Kronos expects weaker full-year 2023 operating results than in 2022. It anticipates gradual demand recovery, especially in Europe and export markets, and expects to ramp production toward full practical capacity by the end of the second quarter. Higher manufacturing costs may outweigh expected selling-price increases.
CompX expects lower 2023 sales and operating income at both reporting units. Marine demand faces higher interest rates and customer production reductions; security-product margins may remain pressured by higher-cost inventory and limited pricing flexibility.
LandWell expects approximately $63 million of 2023 development spending, with post-closing obligations estimated at $140 million and expected to take three to five years to complete. It reported $123.0 million of deferred revenue related to land sales; timing of remaining land sales and reimbursement approvals is uncertain.
Debt was $559.5 million at year-end, including Kronos’ euro-denominated notes due in 2025 and Valhi’s $121.4 million Contran facility due no earlier than December 2024. Management expects higher 2023 interest expense. Management cited approximately $790 million of 2023 payments under debt, lease and other agreements, including supply commitments.
Kronos had approximately $1.0 billion of minimum feedstock purchase commitments extending through 2026, including about $600 million committed for 2023, plus $84 million of other long-term supply and service commitments. Feedstock and energy cost, availability, and TiO₂ demand and pricing are key risks.
Environmental remediation accruals totaled $97.3 million. NL’s estimated accrual for approximately 33 sites was about $92 million; the upper end of the estimable range was approximately $119 million, and costs at five additional sites could not be reasonably estimated. Pending lead-pigment claims have no accrual because loss was not considered probable or reasonably estimable; an adverse resolution could be material.
Other key risks include foreign-exchange exposure, competition, economic and geopolitical uncertainty, climate and energy regulation, cybersecurity, pension assumptions, and Valhi’s dependence on subsidiary distributions. Valhi disclosed that Contran owns approximately 92% of its common stock and that related-party services and financing arrangements continue.

PricewaterhouseCoopers issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective at December 31, 2022.

Most important facts for investors to verify

Whether 2023 consolidated operating income holds broadly steady despite management’s expectation of lower results at Kronos and CompX, and whether TiO₂ demand, pricing and costs develop as forecast.
Cash conversion and liquidity quality: the drivers of the 2022 operating-cash-flow decline, inventory levels, restricted cash, subsidiary-level cash availability and the discretionary nature of Contran facility availability.
BWC’s Chapter 11 outcome, any further costs or asset recoveries, and whether Lake Mead conditions permit any future water operations.
LandWell’s remaining development costs, deferred-revenue recognition, sales pace and tax-increment reimbursement timing.
Environmental and litigation exposures, especially the range and timing of NL remediation liabilities and outcomes of lead-pigment and insurance-coverage proceedings.
Debt refinancing and interest-rate exposure, euro-denominated debt, and the ability to meet substantial 2023 contractual and feedstock commitments.