Valhi, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; filed November 4, 2021. Valhi is a holding company with Chemicals (Kronos), Component Products (CompX), and Real Estate Management and Development (BMI and LandWell) segments. Comparisons below are against the corresponding 2020 periods. Amounts are in millions except per-share data.
Financial performance and liquidity
- Third quarter: Net sales were $578.9, up 26% from $458.6. Income attributable to Valhi stockholders was $39.0, or $1.36 per diluted share, versus $15.4, or $0.54. Income before taxes was $71.4; income tax expense was $16.9, compared with a $11.4 tax benefit in Q3 2020.
- First nine months: Net sales were $1,613.2, up 21% from $1,332.9. Income attributable to Valhi stockholders was $75.2, or $2.64 per diluted share, versus $30.7, or $1.08. Income before taxes was $144.5 and income tax expense was $35.2.
- Margins and segments: Consolidated gross margin was $152.7 in Q3 and $386.6 for the nine months, versus $89.7 and $293.4, respectively. Total segment operating income rose to $81.2 in Q3 from $28.9, and to $188.1 for nine months from $139.2. Chemicals operating income was $60.3 in Q3 and $145.4 year to date; Component Products was $5.1 and $16.7; Real Estate was $15.8 and $26.0.
- Cash flow: Operating cash flow for the first nine months was $189.2, versus $45.2 in 2020. Investing activities used $12.4, including $39.2 of capital expenditures, partly offset by $23.4 of land-sale proceeds. Financing activities used $124.2, including $69.5 of debt principal payments and $45.3 of distributions to noncontrolling interests. Cash, cash equivalents and restricted cash ended the period at $615.2.
- Liquidity and debt: Current assets were $1,516.7 and current liabilities $336.6 (current ratio approximately 4.5). Total debt was $695.5, down from $788.6 at December 31, 2020; long-term debt was $693.0. Valhi had $554.7 of cash and cash equivalents and $22.9 of current restricted cash. Including noncurrent restricted cash and marketable securities, total restricted and unrestricted cash, cash equivalents and marketable securities were $621.3. Available borrowing was $115.5 under the Contran facility, at Contran’s discretion, and $225 under Kronos’s revolver. The company reported compliance with debt covenants.
Material changes and drivers
- Chemicals sales increased 20% in Q3 and 18% year to date. TiO2 pricing rose 11% in Q3 and 4% year to date, while sales volumes increased 6% and 8%, respectively. Higher selling prices, volumes and production utilization supported margins; raw-material, energy and shipping costs also increased.
- Component Products sales rose 22% in Q3 and 26% year to date, with higher security-products and marine-components volumes. Management reported rising labor, materials and shipping costs, and expected higher-cost inventory to pressure Q4 margins despite price increases and surcharges.
- Real Estate segment sales increased to $44.6 in Q3 and $63.1 year to date, mainly reflecting higher land sales and development activity. Land sales were $41.9 in Q3 and $57.0 year to date.
- Reported earnings included notable items: a $10.4 Q3 and $16.0 nine-month pretax gain on sales of excess property; $6.2 of nine-month infrastructure reimbursement income, versus $19.6 in 2020; and $4.0 of prior-land-sale proceeds recognized as a gain in Q3 2020. These items affect period comparisons.
- Debt declined primarily after $66.2 of repayments under the Contran facility. Interest expense fell to $7.9 in Q3 and $25.2 year to date, from $8.9 and $27.4.
Outlook, risks and contingencies
- Management expected higher consolidated operating income for full-year 2021 than in 2020, citing stronger demand and higher operating income across segments. It expected strong TiO2 demand and further price increases, while warning that raw-material, energy, logistics and other supply-chain pressures would continue.
- Management expected Component Products demand to remain strong, but cited labor shortages, supply-chain disruption and rising costs. LandWell expected near-term land sales to remain strong, but escrow sales may be cancelled and permitting delays may affect closings. Management expected land-development costs to rise in 2021.
- Valhi expected approximately $79 of 2021 capital expenditures and said it anticipated sufficient liquidity for short- and longer-term obligations, subject to actual results and cash needs. It cautioned that subsidiary dividends are not assured and that much of its liquidity resides at subsidiaries.
- Key exposures include cyclical TiO2 demand and pricing, raw-material and energy costs, foreign exchange, COVID-19 effects, supply-chain interruptions, and dependence on subsidiary cash flows. Kronos reported that a dam at its Norwegian mine was reclassified to the highest Norwegian category, bringing increased oversight; operational effects were not known.
- Environmental remediation accruals totaled $97.8, including approximately $93 for about 32 NL sites. NL estimated the upper end of reasonably possible costs for estimable sites at approximately $112, and could not estimate costs for five other sites. NL made a $12.0 payment under the Santa Clara lead-pigment settlement and had four annual installments remaining: three of $12.0 and a final $16.7.
- Valhi said it had not accrued for most pending lead-pigment cases because liability was not considered probable or reasonably estimable. It warned that future adverse developments could result in a material loss. Tax examinations and other environmental, litigation and legal contingencies remain; management believed existing tax accruals were adequate and other claims would not materially affect the company beyond recorded accruals.
Important facts for investors to verify
- How much of earnings and cash flow is recurring, excluding excess-property gains and infrastructure reimbursement, and how land-sale revenue is recognized.
- Whether TiO2 pricing and demand can offset continued increases in raw-material, energy, freight and other costs, and the impact of supply-chain disruptions on production.
- Whether Component Products can meet demand amid labor constraints and whether price increases will offset higher costs and protect margins.
- The timing and availability of subsidiary cash, dividends and credit facilities, including restrictions, and the extent to which restricted cash is available for general obligations.
- Developments in the Santa Clara settlement, lead-pigment litigation, environmental sites and Norwegian dam oversight, including any changes to estimated costs or operating requirements.