Valhi, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited consolidated results cover Valhi and majority-owned subsidiaries. Valhi operates Chemicals (Kronos), Component Products (CompX), and Real Estate Management and Development (BMI and LandWell). Contran owned approximately 92% of Valhi’s common stock.
Financial performance
Amounts are in millions of dollars except per-share data. Q3 and nine-month comparisons are against the corresponding 2021 periods.
- Q3 revenue: Net sales were $556.3, down 4% from $578.9. Total revenues and other income were $579.4, versus $592.0.
- Q3 earnings: Income before tax was $49.0, down from $71.4. Net income attributable to Valhi stockholders was $26.2, or $0.92 per diluted share, versus $39.0, or $1.36.
- Nine-month revenue and earnings: Net sales were $1,819.9, up 13% from $1,613.2. Net income attributable to Valhi stockholders rose to $99.6, or $3.49 per diluted share, from $75.2, or $2.64. Income before tax was $188.7, compared with $144.5.
- Margins: Consolidated gross margin was $120.4 in Q3, versus $152.7; as a percentage of sales, approximately 21.6% versus 26.4%. Nine-month gross margin was $437.8 versus $386.6, approximately 24.1% versus 24.0%. Chemicals segment operating income fell 43% in Q3 to $34.3, but rose 31% for the nine months to $189.9. Component Products operating income increased to $6.0 in Q3 and $20.0 for the nine months. Real Estate segment operating income was $29.1 in Q3 and $32.1 for the nine months, including unusual reimbursement income and BWC-related charges.
- Cash flow: Operating cash flow was $27.9 for the first nine months, down from $189.2. The filing attributes the decline primarily to a $158.4 adverse swing in cash from changes in receivables, inventories, payables and accrued liabilities. Investing cash outflow was $57.6, including $48.0 of capital expenditures; financing cash outflow was $84.5. Cash, cash equivalents and restricted cash ended at $663.1, down from $792.9 at year-end 2021.
- Liquidity and debt: September 30 cash, restricted cash and marketable securities totaled $669.6, of which $115.3 was held outside the U.S. Total debt was $540.2, down from $653.0 at December 31, 2021. Valhi had $134.8 outstanding on its Contran facility, with $90.2 available at Contran’s discretion; Kronos had no Global Revolver borrowings and approximately $207 available. The company reported compliance with debt covenants.
- Other balance-sheet items: Current assets were $1,629.0 and current liabilities $487.5. Inventories increased to $545.8 from $458.7. Accrued environmental remediation and related costs were $97.4, including $93.6 noncurrent.
- Shareholder distributions: Valhi paid $0.24 per share in dividends during the first nine months of 2022. The board retains discretion over future dividends.
Material changes and drivers
- Chemicals: Q3 TiO2 sales volumes declined 20% year over year, while average selling prices rose 21%; net sales still fell 8%, reflecting lower volumes and an estimated $31 currency-related sales impact. Higher raw-material and energy costs, lower production and currency effects reduced Q3 operating income. For the nine months, higher pricing lifted Chemicals sales and operating income despite lower volume and an estimated $83 adverse currency impact on sales.
- Component Products: Nine-month net sales rose 19%, driven mainly by marine components and higher security-product sales. Cost pressure—especially higher-cost inventory—reduced gross margin percentage.
- Real estate and BWC: Land sales and development activity increased. BWC stopped pumping from Lake Mead on June 30 amid historically low water levels, impairing its water-system assets by $16.4. BWC filed for Chapter 11 on September 10; Valhi deconsolidated it and recorded a $2.0 loss and $1.3 bad-debt charge. BWC-related charges totaled $19.7 for the nine months.
- Currency and other income: Currency transactions and infrastructure reimbursements contributed to reported income. Q3 2022 included a $10.0 tax-increment reimbursement and a $2.7 Hurricane Laura business-interruption insurance gain. Q3 2021 included a $10.4 gain on a land sale; the nine-month 2021 period included a $16.0 gain.
- Comprehensive income: Nine-month currency translation losses contributed to other comprehensive loss of $43.6, leaving comprehensive income attributable to Valhi stockholders at $67.4, below net income attributable to stockholders of $99.6.
Outlook, risks and contingencies
- Management expects lower consolidated income before taxes for full-year 2022 than in 2021, primarily due to lower Real Estate segment income, BWC-related charges and the absence of the 2021 $16.0 land-sale gain.
- Management expects near-term Chemicals sales volumes and operating results to be adversely affected by weaker demand and higher costs. European and export demand weakened sharply; production curtailments at two European facilities began in Q4. Management expects feedstock costs to moderate, but energy costs, availability, economic conditions and geopolitical developments remain uncertain. Its long-term TiO2 industry demand expectation is 2%–3% annual growth.
- Management expects Component Products to report higher full-year 2022 sales and operating income than in 2021, while noting cost-recovery, labor, supply-chain and raw-material risks. Security-products margins were expected to remain pressured in Q4.
- Management expects approximately $71 of 2022 capital expenditures and approximately $20 of pension contributions. It stated that it expected sufficient liquidity for short- and long-term obligations, while noting that actual developments could adversely affect liquidity.
- LandWell had $131.2 of deferred revenue on previously closed land sales, recognized over the expected three-to-five-year development period. Timing and amount of future revenue depend on development activity; land under escrow may generally be cancelled before closing. BWC’s reorganization outcome and any additional costs are uncertain.
- NL’s lead-pigment litigation exposure is not accrued because management does not consider liability probable or reasonably estimable; an adverse resolution could materially affect earnings, financial condition or liquidity. Three annual Santa Clara settlement installments remained: $12.0 for each of the next two installments and $16.7 for the final installment, which management expected to fund from restricted cash on deposit.
- Environmental remediation liabilities are subject to estimation uncertainty. NL had accrued approximately $93 for about 32 sites; the upper end of reasonably possible costs for estimable matters was approximately $107, including the accrued amount. NL could not estimate costs for approximately five other sites. The filing also identifies tax examinations, insurance-coverage disputes, other litigation, currency and interest-rate movements, and cyclical TiO2 demand as risks.
- Disclosure controls and procedures were reported effective as of September 30, 2022, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether TiO2 demand, sales volumes, selling prices and energy/feedstock costs developed as management expected after Q3, particularly in Europe and export markets.
- The cash-flow and liquidity impact of working-capital movements, subsidiary cash availability, debt maturities and the discretionary Contran credit line.
- Developments in BWC’s Chapter 11 case, Lake Mead water availability, any further impairment or costs, and the effect on BMI and LandWell.
- LandWell’s remaining acreage sales, development timetable, deferred-revenue recognition and approvals or timing of tax-increment reimbursements.
- Changes in lead-pigment litigation, environmental remediation estimates and other contingencies, including the funding status of settlement installments.
- Full-year results versus management’s forecast for lower pretax income, and whether the stated capital spending, pension contributions and liquidity expectations were met.