Valhi, Inc. — Q2 2021 Form 10-Q
Business context and reporting period. Valhi is a holding company with operating segments in chemicals (primarily Kronos titanium dioxide), component products (CompX security and marine products), and real estate management and development. This filing covers the quarter and six months ended June 30, 2021; financial statements are unaudited. Amounts below are in U.S. dollars unless noted.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $525.3 million | $415.0 million | $1,034.3 million | $874.3 million |
| Gross profit | $124.6 million | $104.0 million | $233.9 million | $203.7 million |
| Income before tax | $40.6 million | $17.0 million | $73.1 million | $66.3 million |
| Income tax expense | $10.3 million | $21.2 million | $18.3 million | $32.6 million |
| Net income attributable to Valhi stockholders | $21.4 million | $(9.1) million | $36.2 million | $15.3 million |
| Diluted EPS | $0.75 | $(0.32) | $1.27 | $0.54 |
- Margins: Consolidated gross margin was approximately 23.7% in Q2 2021 versus 25.1% a year earlier; for the first six months it was approximately 22.6% versus 23.3%. Higher input and production costs pressured margins.
- Cash flow: Operating activities provided $76.7 million in the first half, compared with $6.0 million in 2020. Investing activities used $12.4 million, including $23.5 million of capital expenditures; financing activities used $59.6 million. Cash, cash equivalents and restricted cash increased to $570.1 million from $534.1 million at the start of the period.
- Debt and liquidity: Total debt was $745.2 million at June 30, including $242.7 million outstanding under Valhi’s Contran facility; long-term debt was $742.7 million. Valhi had $77.3 million available under the Contran facility. Kronos had its full $225 million global revolver available and undrawn. The company reported $576.8 million of restricted and unrestricted cash, cash equivalents and marketable securities. It stated it was in compliance with debt covenants.
- Balance sheet: Total assets were $2.81 billion and total equity was $1.05 billion at June 30, 2021. Current assets were $1.42 billion and current liabilities were $261.4 million.
Material changes versus prior periods
- Q2 net sales rose 27% year over year, while Valhi-attributable earnings improved from a loss to a profit. Management attributed the earnings improvement primarily to higher operating income across all segments, $10.9 million lower income tax expense, and a $5.6 million gain on sale of excess land.
- For the first half, net sales rose 18% and attributable net income increased to $36.2 million. Chemicals and Component Products operating income increased, while Real Estate Management and Development operating income declined to $10.2 million from $20.2 million.
- Chemicals sales increased with higher TiO₂ volumes, modestly higher selling prices and favorable currency translation. Q2 segment operating income rose 32% to $47.4 million; first-half operating income increased 3% to $85.1 million. First-half currency effects reduced Chemicals operating income by an estimated $17 million.
- Component Products Q2 sales increased 52% to $36.3 million and operating income rose to $5.8 million from $2.4 million, reflecting stronger security and marine demand. First-half operating income increased to $11.6 million from $7.4 million.
- Real estate first-half results included $6.2 million of tax-increment infrastructure reimbursement, compared with $19.1 million in the prior-year period. The 2021 quarter also included the $5.6 million land-sale gain at the corporate level.
- Valhi repaid $28.0 million under the Contran facility in the first half. Kronos entered a new $225 million global revolver in April 2021, replacing its prior regional facilities.
Outlook, commentary and risks
- Management expected higher consolidated operating income in 2021 than in 2020, principally from Chemicals and Component Products, and expected demand improvements to continue. This is management’s expectation, not a quantified earnings forecast.
- For Chemicals, management expected strong demand, higher sales and production volumes, and further TiO₂ price increases. Higher raw-material, shipping and energy costs, as well as supply-chain and logistics disruptions, were expected to continue challenging margins.
- For Component Products, management expected strong demand and higher 2021 sales and operating income. Labor constraints, raw-material availability, shipping costs and other input-cost increases posed risks; the effect of implemented price increases was uncertain.
- LandWell reported nearly 300 acres under escrow at quarter-end and expected near-term land sales to remain strong, but buyers may generally cancel before closing. Required infrastructure spending was expected to increase during 2021; timing of permitting and approvals could also affect closings.
- Management expected approximately $93 million of 2021 capital expenditures, including $85 million for Chemicals. It expected sufficient liquidity for short- and long-term obligations, subject to operating results and other developments.
- Legal and environmental contingencies: NL continues to face lead-pigment litigation and environmental matters. The Santa Clara settlement has five annual installments remaining: four of $12.0 million and a final $16.7 million installment. Environmental remediation liabilities totaled $98.4 million; NL had accrued approximately $93 million for about 32 sites, with estimated reasonably possible costs up to approximately $113 million, including the accrual. Costs at certain sites cannot currently be estimated. The company cautioned that adverse developments could materially affect results, financial condition or liquidity.
- Other risks include TiO₂ cyclicality, competition and industry capacity, foreign exchange and interest-rate movements, COVID-19 impacts, dependence on subsidiary distributions, tax examinations, and potential changes in environmental laws or litigation outcomes. Management reported effective disclosure controls as of June 30, 2021.
Important facts for investors to verify
- Whether TiO₂ demand and pricing gains offset the continuing increases in feedstock, energy, shipping and other production costs.
- How much of the reported earnings improvement reflects recurring segment performance versus the $5.6 million land-sale gain and tax-related changes.
- Whether Component Products can sustain demand growth and staffing while managing higher labor, material and freight costs.
- LandWell escrow closings, infrastructure spending requirements and expected timing of tax-increment reimbursements.
- Availability and restrictions on cash held by subsidiaries, and the extent to which subsidiary dividends support Valhi’s parent-level obligations.
- Developments in NL’s litigation and environmental exposures, including the Santa Clara settlement installments and sites for which remediation costs remain unestimable.