Valhi, Inc. — Q2 2022 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2022. Valhi is a holding company whose principal segments are chemicals (Kronos), component products (CompX), and real estate management and development (BMI and LandWell). Figures below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $634.6 | $525.3 | $1,263.6 | $1,034.3 |
| Operating income | $71.9 | $55.6 | $172.6 | $106.9 |
| Income before taxes | $56.4 | $40.6 | $139.7 | $73.1 |
| Net income attributable to Valhi stockholders | $28.0 | $21.4 | $73.4 | $36.2 |
| Diluted EPS | $0.98 | $0.75 | $2.57 | $1.27 |
| Operating cash flow | Not separately provided | Not separately provided | $27.8 | $76.7 |
Second-quarter sales rose 21% year over year; first-half sales rose 22%. First-half cost of sales was $946.2 million, leaving gross profit of $317.4 million (about 25% of sales). Net income for the first half was $105.8 million, including noncontrolling interests of $32.4 million. Q2 included a $16.0 million impairment charge; Q2 2021 included a $5.6 million gain on land sale.
Segments and material changes
- Chemicals: Q2 sales were $565.3 million and operating income $69.2 million, versus $478.6 million and $47.4 million a year earlier. First-half operating income increased to $155.6 million from $85.1 million. Higher TiO₂ selling prices were the main sales and profit driver; first-half average prices increased 25%, while sales volumes were comparable. Higher feedstock and energy costs pressured Q2 margins, and currency translation reduced first-half sales by an estimated $51 million.
- Component products: Q2 sales increased to $41.6 million from $36.3 million and operating income to $7.7 million from $5.8 million. First-half operating income was $14.0 million versus $11.6 million, reflecting stronger security-products and marine-component sales.
- Real estate: First-half sales increased to $51.7 million from $18.5 million, principally on higher land-sale activity. Segment operating income fell to $3.0 million from $10.2 million. Q2 included a $16.0 million impairment of BWC’s Lake Mead water-system assets, more than offsetting higher land-sale activity for the quarter.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $644.4 million; restricted cash was $88.8 million, and marketable securities totaled $5.8 million. The filing reports aggregate restricted and unrestricted cash, cash equivalents and marketable securities of $739.0 million, including $104.2 million held outside the U.S.
- Six-month operating cash flow was $27.8 million, down $48.9 million year over year, largely due to working-capital movements. Investing cash outflow was $33.4 million, including $33.2 million of capital expenditures; financing cash outflow was $45.4 million. Cash, cash equivalents and restricted cash decreased by $59.7 million, including the effect of exchange rates.
- Total debt was $598.1 million, including $16.4 million current maturities. Debt declined from $653.0 million at year-end 2021. Valhi had $153.4 million drawn on its Contran facility, with $71.6 million available at a 5.75% rate at quarter-end; availability is at Contran’s discretion. Kronos had the full $225 million revolver available.
- BWC’s $14.3 million carrying-value bank loan was reclassified as current and is in default after impairment reduced collateral value. The loan is secured in part by the water system and water-contract revenue. Other debt covenants were reported in compliance.
- Management stated it expects sufficient liquidity for near-term and five-year obligations. Expected 2022 capital expenditures are approximately $87 million; expected pension-plan contributions are approximately $20 million.
Outlook, risks and unusual items
- Management described the long-term TiO₂ outlook as positive, while warning that demand could soften in the second half of 2022 amid economic and geopolitical uncertainty. Maintenance delays, raw-material availability, supply-chain and logistics constraints, and higher energy and feedstock costs affected operations; natural-gas availability in Germany was a concern.
- CompX expected full-year 2022 sales and operating income to increase versus 2021, but warned that elevated input, labor and shipping costs could continue to pressure margins and supply disruptions could persist.
- LandWell expected substantially all residential-community land to be sold by year-end 2022 if contracts close as scheduled. Buyers can generally cancel escrow agreements before closing. Previously closed land sales had $165.5 million of deferred revenue; recognition depends on development activity, expected to take three to five years.
- BWC ceased pumping from its Lake Mead intake on June 30 because historically low water levels created a risk of damage. Management said it could not determine when pumping might resume and was negotiating with customers, the City, the regional water authority and its lender; no long-term resolution was assured.
- Environmental remediation liabilities totaled $98.1 million. NL had accrued approximately $93 million for about 33 sites; the estimated upper end of reasonably possible costs for estimable sites was approximately $118 million, including accrued amounts. Costs at approximately five sites could not be reasonably estimated.
- NL reported no accrual for pending lead-pigment litigation because it did not consider a loss probable and could not reasonably estimate potential liability. The filing warns that future litigation outcomes could materially affect results, financial condition or liquidity. Four annual installments remained under the Santa Clara settlement: $12.0 million for each of the next three installments and $16.7 million for the final installment.
Most important facts for investors to verify
- Whether TiO₂ demand, pricing and production recover or weaken in the second half, and whether input-cost increases continue to outpace price realization.
- Whether BWC secures a viable water-delivery solution, the status and potential consequences of its loan default, and any further impairment or costs.
- Whether land-sale escrows close as planned and whether infrastructure work supports revenue recognition and reimbursements.
- Future working-capital requirements and cash generation, including the effect of restricted cash and subsidiary-level limits on cash availability.
- Developments in environmental matters, lead-pigment litigation and insurance recoveries that could change the currently unestimable or accrued exposures.