Valhi, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. Valhi is a holding company with three reportable segments: Chemicals (Kronos Worldwide), Component Products (CompX), and Real Estate Management and Development (BMI and LandWell). The former Waste Management segment was sold in 2018 and is reported as discontinued operations.
Financial performance
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $1,849.7 million | $1,897.5 million | Down 2.5% |
| Operating income | $186.1 million | $192.7 million | Down 3.4% |
| Income from continuing operations attributable to Valhi stockholders | $50.9 million; $1.79 per diluted share | $49.2 million; $1.73 per diluted share | Up 3.5% |
| Net income attributable to Valhi stockholders, including discontinued operations | $55.2 million; $1.94 per diluted share | $49.2 million; $1.73 per diluted share | Up |
| Cash from operating activities | $152.2 million | $177.2 million | Down $25.0 million |
| Capital expenditures | $65.5 million | $59.9 million | Up $5.6 million |
Consolidated gross margin was $412.1 million, or approximately 22.3% of sales, versus $434.6 million, or approximately 22.9%, in 2019. Operating margin was approximately 10.1%, compared with 10.2%.
- Chemicals: Sales of $1,638.8 million, down 5%; operating income of $126.5 million, down 21%. TiO2 sales volumes fell 6%, average prices fell 2%, and production declined 5% to 517,000 metric tons. Segment gross margin declined to 21% from 22%.
- Component Products: Sales of $114.5 million, down 8%; operating income of $11.8 million, down 33%. Security products sales weakened, partly offset by growth in marine components. Segment operating margin fell to 10% from 14%.
- Real Estate Management and Development: Sales of $96.4 million versus $42.1 million; operating income of $47.8 million versus $14.8 million. The increase included a $55 million land parcel sale and $19.1 million of tax-increment reimbursement income. One land buyer, D.R. Horton, accounted for 58% of segment sales.
Balance sheet, liquidity and cash flow
- At year-end, total assets were $2,889.3 million, current assets $1,453.4 million, and current liabilities $318.1 million. Cash and cash equivalents were $518.6 million; restricted cash was $51.7 million across current and noncurrent assets. The company reported $577.5 million in aggregate cash, restricted cash and marketable securities attributable to continuing operations.
- Total debt was $788.6 million, including $270.7 million borrowed under Valhi’s Contran facility and Kronos’s €400 million senior notes, with a $485.7 million carrying value. Long-term debt was $786.2 million. Debt declined modestly from $794.3 million in 2019. Valhi reported compliance with debt covenants.
- Available borrowing capacity under existing facilities was $267.2 million, although $49.3 million under Valhi’s Contran facility was at Contran’s discretion. Management expected liquidity to cover short- and long-term obligations, subject to operating results and other risks.
- Operating cash flow fell to $152.2 million, principally as working-capital changes used $33.5 million of cash, compared with $7.1 million in 2019. Financing activities used $122.5 million, including $58.5 million of debt principal payments, $13.6 million of Valhi dividends and $49.4 million of distributions to noncontrolling interests.
- Valhi’s annual common dividend was reduced to $0.48 per share in 2020 from $0.96 in 2019. Aggregate 2020 cash dividends were $13.6 million.
Material changes, outlook and notable items
- Management forecast higher consolidated operating income in 2021, primarily from higher TiO2 volumes and prices, partly offset by lower real estate segment income as 2020 included a large, nonrecurring land transaction. It expected Component Products revenue and operating income to increase, but security products sales to remain below 2019 levels.
- Management expected 2021 capital expenditures of approximately $93 million, including $85 million for Chemicals, and LandWell development spending of approximately $34 million. Chemicals feedstock costs were expected to remain near 2020 averages; Kronos expected plants to operate near practical capacity.
- COVID-19 reduced demand, particularly in the second and third quarters of 2020, and affected production, customer orders, and land-development schedules. Recovery and further effects remained uncertain.
- Unusual items materially affected comparability: $19.3 million of lead-pigment litigation settlement expense in 2019 versus none in 2020; $19.1 million of tax-increment reimbursement income in 2020 versus $8.8 million in 2019; a $4.0 million gain on a prior land sale in 2020; and a $4.9 million discontinued-operations earn-out gain from the 2018 WCS sale.
- NL’s Santa Clara lead-pigment settlement requires $101.7 million from NL, payable in installments; NL paid $12.0 million in 2020. Separately, Valhi reported $98.6 million in total accrued environmental liabilities; NL’s approximately $93 million accrual covered about 32 sites, with an estimated upper range of $114 million, and costs at approximately five additional sites could not be reasonably estimated.
- The EU classification of TiO2 powder as a suspected carcinogen by inhalation was scheduled to take effect October 1, 2021, potentially requiring hazard labels and affecting compliance costs, customer perception or demand.
- Valhi’s majority owner, a Contran subsidiary, held approximately 92% of its common stock. Valhi reported $41.3 million in 2020 intercorporate services fees charged by Contran and $14.2 million in interest and unused commitment fees paid to Contran.
- PwC issued an unqualified opinion on the consolidated financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the filing did not include an auditor attestation on internal control.
Important facts for investors to verify
- Whether the expected 2021 TiO2 volume and price recovery materialized, and how COVID-19, competition and feedstock costs affected margins.
- How much of 2020 real estate earnings and cash flow depended on the $55 million parcel sale and tax-increment reimbursements, and the timing and certainty of future land closings and reimbursements.
- Liquidity available to Valhi itself versus cash held at subsidiaries, restricted cash, lender discretion and limits on subsidiary dividends; also the 2021 contractual commitments of $652.6 million.
- Potential changes in environmental remediation estimates, unresolved lead-pigment and other litigation, and the timing and amount of insurance recoveries.
- Exposure to euro-denominated debt: the filing estimates a 10% adverse exchange-rate move would increase the U.S.-dollar equivalent of Kronos’s senior-note debt by approximately $49 million.