Valhi, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; financial statements are unaudited. Valhi is a holding company whose main segments are chemicals (Kronos, TiO₂ pigments), component products (CompX), and real estate management and development (BMI and LandWell). Results were significantly affected by the COVID-19 pandemic.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $458.6 million | $475.2 million | $1,332.9 million | $1,483.5 million |
| Income before taxes | $8.0 million | $21.9 million | $74.3 million | $95.6 million |
| Net income attributable to Valhi stockholders | $15.4 million | $13.1 million | $30.7 million | $38.5 million |
| Diluted earnings per share | $0.54 | $0.46 | $1.08 | $1.35 |
Q3 consolidated gross margin was $89.7 million, or about 19.6% of sales, versus $98.4 million, or 20.7%, a year earlier. For the first nine months, gross margin was $293.4 million, or about 22.0% of sales, versus $343.5 million, or 23.2%.
Segment operating income in Q3 was $28.9 million versus $41.4 million; for nine months it was $139.2 million versus $167.6 million. Chemicals segment operating income declined to $21.6 million in Q3 and $104.3 million year to date, versus $36.3 million and $139.6 million, respectively. Component Products operating income fell to $2.1 million and $9.5 million, versus $4.3 million and $14.3 million. Real Estate Management and Development operating income rose to $5.2 million and $25.4 million, versus $0.8 million and $13.7 million.
- Cash flow: Operating cash flow for the first nine months was $45.2 million, down from $113.0 million. Capital expenditures were $40.3 million. Investing activities used $36.6 million and financing activities used $51.6 million.
- Cash and liquidity: Cash, cash equivalents and restricted cash totaled $546.7 million at September 30, 2020. Valhi reported $553.7 million of restricted and unrestricted cash, cash equivalents and marketable securities, plus $289.4 million available under specified credit facilities. Management expected liquidity to cover short- and long-term obligations.
- Debt: Total debt was $799.4 million, including $301.2 million under the Contran facility and Kronos senior notes with a $464.7 million carrying value. Debt was $794.3 million at year-end 2019. The company reported compliance with all debt covenants.
- Dividends and equity: Valhi paid $11.3 million in dividends in the first nine months, or $0.40 per share. In August, Contran contributed Valhi’s $667.3 million Series A preferred stock to Valhi’s capital for no consideration; the transaction did not affect consolidated results, financial position or liquidity.
Material changes and unusual items
- Nine-month net sales fell about 10%, principally due to lower TiO₂ sales volumes and prices amid pandemic-related demand weakness. Chemicals sales volumes declined 11% and average selling prices declined 2% year over year; production utilization was 92% versus 97%.
- Q3 attributable earnings rose despite lower pretax income, primarily because of an $11.4 million income tax benefit, compared with $4.7 million of tax expense in Q3 2019. The filing attributes the change mainly to a lower expected annual effective tax rate.
- For the first nine months, the comparison included 2019 litigation settlement expense of $19.3 million, while 2020 included $19.6 million of infrastructure reimbursement income, a $4.0 million gain related to a prior land sale and a $1.5 million property-damage insurance gain. These items affect period comparability.
- The decline in operating cash flow reflected lower operating income and less favorable working-capital movements; lower cash taxes partly offset the decrease.
- The 1-for-12 reverse stock split took effect June 1, 2020. Per-share data shown in the filing reflects the split.
Outlook, commentary and risks
Management expected lower consolidated operating income in 2020 than in 2019: weaker Chemicals and Component Products results were expected to outweigh higher real estate segment income, primarily from infrastructure reimbursements. Management anticipated lower sales and earnings for the remainder of 2020, while noting that the full COVID-19 impact was uncertain.
- Chemicals sales improved from Q2 levels, but management expected pandemic-related demand weakness to continue. Production was reduced early in Q3 and increased later as demand improved. Raw-material availability had not been adversely affected as of the filing.
- Component Products sales began recovering in Q3, especially marine components, but remained below pre-pandemic expectations. Management expected lower 2020 sales and operating income versus 2019; higher fixed costs per unit associated with reduced production weighed on margins.
- LandWell reported improved Q3 land-sale activity, but builder escrow agreements can generally be canceled before closing. Delayed development and permitting could reduce recognized revenue and defer additional infrastructure reimbursements.
- Hurricane Laura temporarily halted production at the Louisiana Pigment Company joint venture from August 24 to September 25. Hurricane Delta caused a further temporary shutdown in October, with production resuming within five days. Insurance was expected to cover most losses, subject to deductibles, but recoveries had not been recognized because claim amounts were not yet determinable.
- Contingencies include lead-pigment litigation, environmental remediation, tax matters and other claims. NL had approximately $94 million accrued for environmental matters at about 32 sites; the estimated upper end of reasonably possible costs for estimable sites was approximately $114 million. The filing notes additional sites for which costs could not be estimated.
- Key risks include prolonged COVID-19 effects, cyclical TiO₂ demand and pricing, raw-material and currency movements, production or supply disruptions, environmental requirements, litigation outcomes, and the ability of subsidiaries to provide cash to the parent.
Investor verification points
- Track subsequent TiO₂ demand, pricing, sales volumes and production utilization, and confirm whether segment margins recover.
- Reconcile recurring earnings with tax benefits, infrastructure reimbursements, land-sale gains and insurance recoveries.
- Monitor operating cash generation, working capital, capital spending, debt maturities and availability under revolving facilities.
- Check whether land in escrow closes and whether development delays affect revenue recognition or tax-increment reimbursements.
- Review updates on environmental accruals, lead-pigment litigation and hurricane insurance claims.
- Assess whether subsidiary dividend capacity and debt restrictions support Valhi’s parent-level liquidity and future dividends.