Valhi, Inc. — Q1 2024 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2024, compared with Q1 2023. Valhi is a holding company with Chemicals (Kronos), Component Products (CompX), and Real Estate Management and Development (BMI and LandWell) segments. Unless noted, amounts are U.S. dollars in millions.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2024 |
|---|---|---|
| Net sales | $492.7 | $530.6 |
| Operating income | $2.5 | $31.5 |
| Income (loss) before taxes | $(9.8) | $18.0 |
| Net income (loss) | $(3.7) | $13.6 |
| Net income (loss) attributable to Valhi stockholders | $(4.9) | $7.8 |
| Diluted earnings (loss) per share | $(0.17) | $0.27 |
| Cash used in operating activities | $(126.8) | $(48.8) |
Total segment gross margin increased to $86.3 from $54.1. At March 31, 2024, cash and cash equivalents were $341.0, restricted cash was $58.6, and marketable securities were $37.2. The company reported aggregate restricted and unrestricted cash, cash equivalents and marketable securities of $436.8, including $69.9 held by non-U.S. subsidiaries. Cash, cash equivalents and restricted cash at quarter-end were $399.6.
Total debt was $511.9, down from $546.5 at December 31, 2023; current maturities were $0.7. Valhi had $77.2 available under its Contran credit facility, subject to Contran’s discretion. Kronos reported its full $225 million global revolving facility available. The company stated it was in compliance with debt covenants. The quarter’s $2.3 Valhi dividend was $0.08 per share.
Changes versus the prior comparable period
- Net sales rose about 8%, while operating income improved by $29.0 and Valhi-attributable results moved from a loss to a profit.
- Chemicals: Sales increased to $478.8 from $426.3 and operating results shifted to income of $22.8 from a loss of $15.1. TiO₂ sales volumes rose 28%, but average selling prices fell 11%. Higher volumes and lower production costs drove improved margins.
- Component Products: Sales declined to $38.0 from $41.2 and operating income fell to $3.7 from $7.0, mainly due to lower marine components sales and margins.
- Real estate: Sales declined to $13.8 from $25.2 and operating income to $5.0 from $10.6, reflecting a slower pace of development activity on previously sold parcels.
- Operating cash outflow narrowed by $78.0 year over year, helped by higher operating income and less cash used by working-capital changes. Cash used in operations remained negative.
- Interest expense rose to $11.3 from $7.0. The 2024 quarter included a $1.5 non-cash charge for writing off deferred financing costs; Q1 2023 included a $1.7 insurance recovery related to Hurricane Laura.
Outlook, commentary and risks
- Management expects 2024 consolidated operating income to exceed 2023, led by expected improvement in Chemicals and real estate, partly offset by weaker Component Products results.
- Kronos reported improving TiO₂ demand in Q1, though demand remained below historical averages. It expects 2024 sales volumes and operating results to exceed 2023, assuming continued demand improvement, higher realized selling prices and lower production costs. The company cautioned that demand, prices, input costs and geopolitical and economic conditions remain uncertain.
- In April 2024, Kronos announced a planned closure of its Varennes, Canada sulfate process line by Q3 2024. It expects approximately $2 million of workforce-related charges and $15 million of non-cash charges in Q2 and Q3.
- CompX expects lower 2024 sales in security products and marine components, with marine demand particularly exposed to weakness in the towboat and recreational marine markets, higher interest rates and reduced customer production schedules.
- LandWell expects about $55 million of 2024 land-development spending and estimates three to four years to complete post-closing development obligations. It reported $77.2 million of deferred revenue tied to these obligations and expects to collect up to $209 million in tax-increment reimbursements over seven to ten years, including $27.3 million collected to date.
- Management expects approximately $53 million of 2024 capital expenditures, principally $50 million for Chemicals. It expects higher interest expense in 2024 due to Kronos’s new, higher-rate borrowing and refinancing.
- Key exposures include cyclical TiO₂ demand and pricing, raw-material and energy costs, currency and interest rates, subsidiary cash distributions, environmental remediation, litigation, and the availability of financing. NL’s lead-pigment litigation liability is described as not probable or reasonably estimable; no accrual was recorded for those pending cases. The filing reports $96.4 million accrued for environmental costs, including approximately $91 million attributed to NL; estimated reasonably possible costs for NL sites were up to approximately $118 million, including accrued amounts, while some sites could not be estimated.
- NL has two remaining installments under the Santa Clara lead-paint settlement: $12.0 million due September 2024 and $16.7 million due September 2025. The final installment is expected to be funded from restricted cash already on deposit, subject to the settlement terms.
Important facts for investors to verify
- Whether TiO₂ demand and selling-price increases materialize sufficiently to sustain the Chemicals segment’s margin recovery.
- The effect of Kronos’s refinancing on future interest expense, debt-service capacity and liquidity, including its 9.50% secured notes and 11.5% Contran term loan.
- Whether negative operating cash flow improves as working capital and operating conditions change, and how much cash is accessible at the parent level given subsidiary and restricted-cash constraints.
- Actual costs and timing for environmental remediation, lead-pigment litigation and the Santa Clara settlement installments.
- Progress and costs on LandWell development obligations and the timing of tax-increment reimbursements.
- Execution and total charges associated with the Varennes line closure, and the expected decline in CompX sales and margins.