Valhi, Inc. — Form 10-Q Summary
Business context and reporting period. Valhi is a holding company with consolidated businesses in chemicals (Kronos, primarily titanium dioxide pigments), component products (CompX), and real estate management and development (BMI and LandWell). This unaudited filing covers the quarter and six months ended June 30, 2023, compared with the corresponding 2022 periods. Unless noted, amounts are in millions of dollars.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $507.1 | $634.6 | $999.8 | $1,263.6 |
| Gross margin | $65.5 | $146.7 | $119.6 | $317.4 |
| Operating income | $12.0 | $71.9 | $14.5 | $172.6 |
| Income (loss) before tax | $(7.1) | $56.4 | $(16.9) | $139.7 |
| Net income (loss) attributable to Valhi | $(5.1) | $28.0 | $(10.0) | $73.4 |
| Diluted earnings (loss) per share | $(0.18) | $0.98 | $(0.35) | $2.57 |
Consolidated gross margin was approximately 12.9% of sales in Q2 2023 versus 23.1% in Q2 2022, and 12.0% for the first half versus 25.1% a year earlier. The filing reports an income tax benefit of $4.9 in Q2 and $11.0 for the first half of 2023, compared with tax expense of $14.0 and $33.9, respectively, in 2022. Interest expense was $7.2 in Q2 and $14.2 for the first half of 2023, broadly comparable to prior-year periods.
Segment results and changes
- Chemicals: Q2 sales fell 22% to $443.2; first-half sales fell 23% to $869.5. Segment operating results shifted to a $2.6 Q2 loss and a $17.7 first-half loss, from income of $69.2 and $155.6, respectively. TiO₂ sales volumes declined 26% in Q2 and 28% for the first half. Weak demand, reduced production, elevated feedstock and energy costs, and unabsorbed fixed costs compressed margins. First-half capacity utilization was 70%, compared with 98% a year earlier.
- Component products: Q2 sales decreased 12% to $36.6 and operating income decreased 44% to $4.4. First-half sales fell 7% to $77.8 and operating income fell 19% to $11.4. Lower security-product and marine-component sales and margins were key factors.
- Real estate management and development: Q2 sales were $27.3, versus $27.7; operating income was $10.2 versus a $5.0 loss. First-half operating income rose to $20.8 from $3.0. Comparisons reflect the prior-year $16.0 impairment of the BWC water system and subsequent bankruptcy-related deconsolidation. Land sales were the main source of segment revenue.
Valhi attributed the overall earnings decline mainly to weaker Chemicals and Component Products results. Comparisons also reflect unusual items: the 2022 BWC impairment, a $6.2 non-cash U.K. pension-plan termination loss in 2023, a $1.5 gain on a 2023 land sale, and $2.2 of first-half 2023 Chemicals insurance recoveries. The 2023 loss per share included a $0.13 adverse effect from the pension termination and $0.04 gains each from the land sale and insurance recovery.
Cash flow, balance sheet, debt, and liquidity
- For the first six months of 2023, operating cash flow was a use of $95.1, compared with a source of $27.8 in 2022. Investing used $56.7 and financing used $36.7. Cash, cash equivalents and restricted cash decreased by $189.4, including exchange-rate effects, to $372.6.
- At June 30, 2023, cash and cash equivalents were $297.5; restricted cash was $75.1; current marketable securities were $99.0. Total restricted and unrestricted cash, cash equivalents and marketable securities were $474.9. Current assets were $1,401.3 and current liabilities $393.8.
- Total debt was $551.2, including $105.6 under Valhi’s Contran facility, Kronos notes with a $432.4 carrying value, and $12.5 of LandWell bank debt. Debt declined from $559.5 at year-end 2022. Valhi repaid $15.8 under the Contran facility; its June 30 rate was 9.25%, with $69.4 available, subject to Contran’s discretion. Kronos had the full $225.0 revolving facility available and no borrowings under it. The company reported compliance with all debt covenants.
- Capital expenditures were $34.4 for the first half. Management expected approximately $46 of 2023 capital expenditures and about $63 of LandWell development costs. Valhi paid $4.5 of dividends in the first half, or $0.16 per share.
Outlook, risks, contingencies, and other notable matters
Management expected consolidated operating income in 2023 to be below 2022. It cited weaker demand and higher production costs in Chemicals, expected normalization of marine-component sales from 2022 levels, and higher real estate segment income partly because BWC-related 2022 charges would not recur. Chemicals management expected near-term demand to remain below historical norms, with pricing pressure and higher-cost inventory weighing on margins into Q3; it anticipated cost reductions and lower input costs could support margins later in the year. Component Products expected weak order rates to continue through Q3 and lower full-year operating income. LandWell expected to sell its remaining approximately 75 residential saleable acres within a year, while approximately 15 commercial/light-industrial acres may take longer to sell.
- Liquidity outlook: Management said it expected sufficient liquidity for obligations over the next 12 months and five years, while noting actual developments could adversely affect liquidity. LandWell expects negative operating cash flow as it completes development obligations, expected to take three to five years; it had $93.8 of deferred revenue tied to post-closing obligations.
- Environmental matters: Environmental remediation liabilities totaled $96.3 at June 30, including $91 attributed to NL across approximately 33 sites. The estimated upper end of reasonably possible costs at estimable NL sites was approximately $118, including accrued amounts; costs at some sites could not be estimated. Additional costs could be material.
- Lead-pigment litigation: NL said it had not accrued for pending lead-pigment cases because it did not consider loss probable and could not reasonably estimate any liability. The filing notes potential material effects if circumstances change. Three Santa Clara settlement installments remain: $12.0 for each of the next two and $16.7 for the final installment, which is expected to be funded from restricted court deposits and any remaining balance.
- Subsequent legal developments: In July 2023, after a limited-issues trial, a California court found NL liable in a Department of Toxic Substances Control case; allocation and damages remained for later proceedings. Pennsylvania lead-paint claims were ordered dismissed, with county governments seeking state supreme court review. Another case against NL continued only as to a $0.4 million settlement-payment claim after other claims were dismissed.
- Other unusual disclosure: Valhi revised the December 2022 presentation of gross property and equipment and accumulated depreciation by $19.1 each, with no impact on net property and equipment; it concluded the misclassification was not material to previously issued statements. BWC ceased pumping from Lake Mead in June 2022 amid historically low water levels and filed for Chapter 11 in September 2022; Valhi deconsolidated BWC at the bankruptcy filing.
Key risks identified include cyclical TiO₂ demand and pricing, input and energy costs, currency movements, interest rates, supply interruptions, environmental obligations, litigation outcomes, and the ability of subsidiaries to generate and distribute cash. Valhi 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 volumes, prices, production rates, and unit costs recover from the first-half downturn, and how quickly higher-cost inventory clears.
- Whether operating cash flow improves and how the $474.9 of combined cash, restricted cash, and securities is distributed among subsidiaries and available to Valhi itself.
- Funding and timing for LandWell’s expected development spending, deferred-revenue recognition, and tax-increment reimbursements.
- Developments in the California liability finding, other lead-pigment cases, Santa Clara settlement payments, and environmental remediation estimates.
- Progress against management’s expectation of lower 2023 operating income and the stated liquidity outlook; these are forward-looking estimates, not guarantees.