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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

OR

☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from       to

Commission file number 1-5467

 VALHI, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware

 

87-0110150

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

 

 

5430 LBJ Freeway, Suite 1700

Dallas, Texas 75240-2620

(Address of principal executive office)

Registrant’s telephone number, including area code: (972) 233-1700

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common stock

 

VHI

 

NYSE

 

Indicate by check mark:

Whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  

Whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer”, “accelerated filer,” smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Act.

Large accelerated filer

 

 

  

Accelerated filer

 

Non-accelerated filer

 

 

  

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes     No  .

Number of shares of the registrant’s common stock, $.01 par value per share, outstanding on October 29, 2021: 28,277,093  

 

 

 


 

 

VALHI, INC. AND SUBSIDIARIES

INDEX

 

 

 

 

 

 

 

Page
number

 

 

 

 

 

 

 

 

Part I.

 

FINANCIAL INFORMATION

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Item 1.

  

Financial Statements

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Condensed Consolidated Balance Sheets – December 31, 2020 and September 30, 2021 (unaudited)

  

 

3

  

 

 

 

 

 

 

 

 

 

 

 

 

  

Condensed Consolidated Statements of Income (unaudited) – Three and nine months ended September 30, 2020 and 2021

  

 

5

  

 

 

 

 

 

 

 

 

 

 

 

 

  

Condensed Consolidated Statements of Comprehensive Income (unaudited) – Three and nine months ended September 30, 2020 and 2021

  

 

6

  

 

 

 

 

 

 

 

 

 

 

 

 

  

Condensed Consolidated Statements of Stockholders’ Equity (unaudited) – Three and nine months ended September 30, 2020 and 2021

  

 

7

  

 

 

 

 

 

 

 

 

 

 

 

 

  

Condensed Consolidated Statements of Cash Flows (unaudited) – Nine months ended September 30, 2020 and 2021

  

 

8

  

 

 

 

 

 

 

 

 

 

 

 

 

  

Notes to Condensed Consolidated Financial Statements (unaudited)

  

 

9

  

 

 

 

 

 

 

 

 

 

 

 

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

 

22

 

 

 

 

 

 

 

 

 

 

 

 

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

 

39

 

 

 

 

 

 

 

 

 

 

 

 

Item 4.

  

Controls and Procedures

  

 

39

 

 

 

 

 

 

 

 

 

 

Part II.

 

OTHER INFORMATION

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Item 1.

  

Legal Proceedings

  

 

40

 

 

 

 

 

 

 

 

 

 

 

 

Item 1A.

  

Risk Factors

  

 

40

 

 

 

 

 

 

 

 

 

 

 

 

Item 5.

 

Other Information

 

 

40

 

 

 

 

 

 

 

 

 

 

 

 

Item 6.

  

Exhibits

  

 

40

 

Items 2, 3 and 4 of Part II are omitted because there is no information to report.

 

 

 


 

VALHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

 

 

December 31,

 

 

September 30,

 

 

2020

 

 

2021

 

 

 

 

 

 

(unaudited)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

518.6

 

 

$

554.7

 

Restricted cash equivalents

 

13.9

 

 

 

22.9

 

Marketable securities

 

4.4

 

 

 

2.5

 

Accounts and other receivables, net

 

342.3

 

 

 

412.4

 

Inventories, net

 

538.2

 

 

 

448.0

 

Other current assets

 

36.0

 

 

 

76.2

 

Total current assets

 

1,453.4

 

 

 

1,516.7

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

Investment in TiO2 manufacturing joint venture

 

103.3

 

 

 

105.5

 

Goodwill

 

379.7

 

 

 

379.7

 

Deferred income taxes

 

120.2

 

 

 

105.1

 

Other assets

 

242.3

 

 

 

207.7

 

Total other assets

 

845.5

 

 

 

798.0

 

 

 

 

 

 

 

 

 

Property and equipment:

 

 

 

 

 

 

 

Land

 

49.6

 

 

 

50.3

 

Buildings

 

268.7

 

 

 

255.9

 

Equipment

 

1,234.8

 

 

 

1,204.1

 

Mining properties

 

30.2

 

 

 

21.9

 

Construction in progress

 

64.5

 

 

 

81.1

 

 

 

1,647.8

 

 

 

1,613.3

 

Less accumulated depreciation and amortization

 

1,057.4

 

 

 

1,049.7

 

Net property and equipment

 

590.4

 

 

 

563.6

 

Total assets

$

2,889.3

 

 

$

2,878.3

 

 

 

- 3 -


 

VALHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In millions)

 

 

December 31,

 

 

September 30,

 

 

2020

 

 

2021

 

 

 

 

 

 

(unaudited)

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current maturities of long-term debt

$

2.4

 

 

$

2.5

 

Accounts payable and accrued liabilities

 

300.0

 

 

 

321.7

 

Income taxes

 

15.7

 

 

 

12.4

 

Total current liabilities

 

318.1

 

 

 

336.6

 

 

 

 

 

 

 

 

 

Noncurrent liabilities:

 

 

 

 

 

 

 

Long-term debt

 

786.2

 

 

 

693.0

 

Deferred income taxes

 

29.6

 

 

 

28.3

 

Payable to affiliate - income taxes

 

50.4

 

 

 

44.5

 

Accrued pension costs

 

379.0

 

 

 

354.1

 

Accrued environmental remediation and related costs

 

95.2

 

 

 

94.2

 

Other liabilities

 

223.9

 

 

 

257.9

 

Total noncurrent liabilities

 

1,564.3

 

 

 

1,472.0

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

Valhi stockholders' equity:

 

 

 

 

 

 

 

Common stock

 

.3

 

 

 

.3

 

Additional paid-in capital

 

668.3

 

 

 

669.5

 

Retained earnings

 

282.9

 

 

 

351.3

 

Accumulated other comprehensive loss

 

(219.4

)

 

 

(215.0

)

Treasury stock, at cost

 

(49.6

)

 

 

(49.6

)

Total Valhi stockholders' equity

 

682.5

 

 

 

756.5

 

Noncontrolling interest in subsidiaries

 

324.4

 

 

 

313.2

 

Total equity

 

1,006.9

 

 

 

1,069.7

 

Total liabilities and equity

$

2,889.3

 

 

$

2,878.3

 

 

 

 

Commitments and contingencies (Notes 6, 12 and 15)

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

- 4 -


 

VALHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per share data)

 

 

 

Three months ended

 

 

Nine months ended

 

 

September 30,

 

 

September 30,

 

 

2020

 

 

2021

 

 

2020

 

 

2021

 

 

(unaudited)

 

Revenues and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

458.6

 

 

$

578.9

 

 

$

1,332.9

 

 

$

1,613.2

 

Other, net

 

2.6

 

 

 

13.1

 

 

 

33.9

 

 

 

27.9

 

Total revenues and other income

 

461.2

 

 

 

592.0

 

 

 

1,366.8

 

 

 

1,641.1

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

368.9

 

 

 

426.2

 

 

 

1,039.5

 

 

 

1,226.6

 

Selling, general and administrative

 

70.2

 

 

 

82.2

 

 

 

210.7

 

 

 

231.6

 

Other components of net periodic pension and OPEB expense

 

5.2

 

 

 

4.3

 

 

 

14.9

 

 

 

13.2

 

Interest

 

8.9

 

 

 

7.9

 

 

 

27.4

 

 

 

25.2

 

Total costs and expenses

 

453.2

 

 

 

520.6

 

 

 

1,292.5

 

 

 

1,496.6

 

Income before income taxes

 

8.0

 

 

 

71.4

 

 

 

74.3

 

 

 

144.5

 

Income tax expense (benefit)

 

(11.4

)

 

 

16.9

 

 

 

21.2

 

 

 

35.2

 

Net income

 

19.4

 

 

 

54.5

 

 

 

53.1

 

 

 

109.3

 

Noncontrolling interest in net income of subsidiaries

 

4.0

 

 

 

15.5

 

 

 

22.4

 

 

 

34.1

 

Net income attributable to Valhi stockholders

$

15.4

 

 

$

39.0

 

 

$

30.7

 

 

$

75.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts attributable to Valhi stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net income per share

$

.54

 

 

$

1.36

 

 

$

1.08

 

 

$

2.64

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average shares outstanding

 

28.5

 

 

 

28.5

 

 

 

28.5

 

 

 

28.5

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

- 5 -


 

 

VALHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

 

 

Three months ended

 

 

Nine months ended

 

 

September 30,

 

 

September 30,

 

 

2020

 

 

2021

 

 

2020

 

 

2021

 

 

(unaudited)

 

Net income

$

19.4

 

 

$

54.5

 

 

$

53.1

 

 

$

109.3

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation

 

9.2

 

 

 

(7.1

)

 

 

(12.2

)

 

 

(3.8

)

Defined benefit pension plans

 

3.1

 

 

 

3.4

 

 

 

9.1

 

 

 

10.2

 

Other

 

-

 

 

 

(.2

)

 

 

(.2

)

 

 

(.5

)

Total other comprehensive income (loss), net

 

12.3

 

 

 

(3.9

)

 

 

(3.3

)

 

 

5.9

 

Comprehensive income

 

31.7

 

 

 

50.6

 

 

 

49.8

 

 

 

115.2

 

Comprehensive income attributable to noncontrolling interest

 

7.1

 

 

 

14.5

 

 

 

21.2

 

 

 

35.6

 

Comprehensive income attributable to Valhi stockholders

$

24.6

 

 

$

36.1

 

 

$

28.6

 

 

$

79.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

- 6 -


 

 

VALHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In millions)

 

 

Three months ended September 30, 2020 and 2021  (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

other

 

 

 

 

 

 

Non-

 

 

 

 

 

 

Preferred

 

 

Common

 

 

paid-in

 

 

Retained

 

 

comprehensive

 

 

Treasury

 

 

controlling

 

 

 

 

 

 

stock

 

 

stock

 

 

capital

 

 

earnings

 

 

loss

 

 

stock

 

 

interest

 

 

Total

 

 

 

 

 

 

 

 

Balance at June 30, 2020

$

667.3

 

 

$

.3

 

 

$

1.5

 

 

$

247.1

 

 

$

(232.0

)

 

$

(49.6

)

 

$

340.9

 

 

$

975.5

 

Net income

 

-

 

 

 

-

 

 

 

-

 

 

 

15.4

 

 

 

-

 

 

 

-

 

 

 

4.0

 

 

 

19.4

 

Other comprehensive income, net

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9.1

 

 

 

-

 

 

 

3.2

 

 

 

12.3

 

Dividends paid to noncontrolling interest

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(7.9

)

 

 

(7.9

)

Cash dividends - $.08 per share

 

-

 

 

 

-

 

 

 

-

 

 

 

(2.3

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2.3

)

Contribution of preferred stock

 

(667.3

)

 

 

-

 

 

 

667.3

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Equity transaction with noncontrolling

interest, net and other

 

-

 

 

 

-

 

 

 

(.5

)

 

 

.5

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2020

$

-

 

 

$

.3

 

 

$

668.3

 

 

$

260.7

 

 

$

(222.9

)

 

$

(49.6

)

 

$

340.2

 

 

$

997.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2021

$

-

 

 

$

.3

 

 

$

669.5

 

 

$

314.6

 

 

$

(212.1

)

 

$

(49.6

)

 

$

322.7

 

 

$

1,045.4

 

Net income

 

-

 

 

 

-

 

 

 

-

 

 

 

39.0

 

 

 

-

 

 

 

-

 

 

 

15.5

 

 

 

54.5

 

Other comprehensive loss, net

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2.9

)

 

 

-

 

 

 

(1.0

)

 

 

(3.9

)

Dividends paid to noncontrolling interest

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(24.0

)

 

 

(24.0

)

Cash dividends - $.08 per share

 

-

 

 

 

-

 

 

 

-

 

 

 

(2.3

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2.3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2021

$

-

 

 

$

.3

 

 

$

669.5

 

 

$

351.3

 

 

$

(215.0

)

 

$

(49.6

)

 

$

313.2

 

 

$

1,069.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2020 and 2021 (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

other

 

 

 

 

 

 

Non-

 

 

 

 

 

 

Preferred

 

 

Common

 

 

paid-in

 

 

Retained

 

 

comprehensive

 

 

Treasury

 

 

controlling

 

 

 

 

 

 

stock

 

 

stock

 

 

capital

 

 

earnings

 

 

loss

 

 

stock

 

 

interest

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

$

667.3

 

 

$

.3

 

 

$

3.3

 

 

$

239.4

 

 

$

(220.7

)

 

$

(49.6

)

 

$

340.1

 

 

$

980.1

 

Net income

 

-

 

 

 

-

 

 

 

-

 

 

 

30.7

 

 

 

-

 

 

 

-

 

 

 

22.4

 

 

 

53.1

 

Other comprehensive loss, net

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2.2

)

 

 

-

 

 

 

(1.1

)

 

 

(3.3

)

Dividends paid to noncontrolling interest

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(21.1

)

 

 

(21.1

)

Cash dividends - $.40 per share

 

-

 

 

 

-

 

 

 

(2.2

)

 

 

(9.1

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(11.3

)

Contribution of preferred stock

 

(667.3

)

 

 

-

 

 

 

667.3

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Equity transaction with noncontrolling

interest, net and other

 

-

 

 

 

-

 

 

 

(.1

)

 

 

(.3

)

 

 

-

 

 

 

-

 

 

 

(.1

)

 

 

(.5

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2020

$

-

 

 

$

.3

 

 

$

668.3

 

 

$

260.7

 

 

$

(222.9

)

 

$

(49.6

)

 

$

340.2

 

 

$

997.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2020

$

-

 

 

$

.3

 

 

$

668.3

 

 

$

282.9

 

 

$

(219.4

)

 

$

(49.6

)

 

$

324.4

 

 

$

1,006.9

 

Net income

 

-

 

 

 

-

 

 

 

-

 

 

 

75.2

 

 

 

-

 

 

 

-

 

 

 

34.1

 

 

 

109.3

 

Other comprehensive income, net

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4.4

 

 

 

-

 

 

 

1.5

 

 

 

5.9

 

Dividends paid to noncontrolling interest

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(45.3

)

 

 

(45.3

)

Cash dividends - $.24 per share

 

-

 

 

 

-

 

 

 

-

 

 

 

(6.8

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(6.8

)

Equity transaction with noncontrolling

interest, net and other

 

-

 

 

 

-

 

 

 

1.2

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1.5

)

 

 

(.3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2021

$

-

 

 

$

.3

 

 

$

669.5

 

 

$

351.3

 

 

$

(215.0

)

 

$

(49.6

)

 

$

313.2

 

 

$

1,069.7

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

- 7 -


 

 

VALHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

 

 

Nine months ended

 

 

September 30,

 

 

2020

 

 

2021

 

 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

$

53.1

 

 

$

109.3

 

Depreciation and amortization

 

50.9

 

 

 

44.2

 

Gain from sale of land

 

(.5

)

 

 

(16.0

)

Benefit plan expense greater than cash funding

 

11.8

 

 

 

8.5

 

Deferred income taxes

 

(9.7

)

 

 

2.7

 

Contributions to TiO2 manufacturing joint venture, net

 

(6.5

)

 

 

(2.2

)

Other, net

 

9.0

 

 

 

4.1

 

Change in assets and liabilities:

 

 

 

 

 

 

 

Accounts and other receivables, net

 

(9.3

)

 

 

(67.1

)

Inventories, net

 

6.8

 

 

 

75.6

 

Land held for development, net

 

(4.2

)

 

 

6.3

 

Accounts payable and accrued liabilities

 

(19.9

)

 

 

25.6

 

Accounts with affiliates

 

(19.5

)

 

 

(19.4

)

Income taxes

 

19.1

 

 

 

(4.8

)

Other, net

 

(35.9

)

 

 

22.4

 

Net cash provided by operating activities

 

45.2

 

 

 

189.2

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

(40.3

)

 

 

(39.2

)

Proceeds from land sales

 

1.2

 

 

 

23.4

 

Purchases of marketable securities

 

(.9

)

 

 

(3.1

)

Proceeds from disposal of marketable securities

 

1.9

 

 

 

4.4

 

Other, net

 

1.5

 

 

 

2.1

 

Net cash used in investing activities

 

(36.6

)

 

 

(12.4

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Principal payments on indebtedness

 

(18.2

)

 

 

(69.5

)

Deferred financing fees

 

-

 

 

 

(1.8

)

Valhi cash dividends paid

 

(11.3

)

 

 

(6.8

)

Distributions to noncontrolling interest in subsidiaries

 

(21.1

)

 

 

(45.3

)

Subsidiary treasury stock acquired

 

(1.0

)

 

 

(.8

)

Net cash used in financing activities

 

(51.6

)

 

 

(124.2

)

Cash, cash equivalents and restricted cash and cash equivalents - net change from:

 

 

 

 

 

 

 

Operating, investing and financing activities

 

(43.0

)

 

 

52.6

 

Effect of exchange rates on cash

 

5.9

 

 

 

(7.7

)

Balance at beginning of period

 

583.8

 

 

 

570.3

 

Balance at end of period

$

546.7

 

 

$

615.2

 

Supplemental disclosures:

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

Interest, net of capitalized interest

$

29.1

 

 

$

26.7

 

Income taxes, net

 

15.9

 

 

 

45.9

 

Noncash investing activities:

 

 

 

 

 

 

 

Change in accruals for capital expenditures

 

1.7

 

 

 

4.3

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

- 8 -


 

 

VALHI, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(unaudited)

 

Note 1 – Organization and basis of presentation:

 

Organization We are majority owned by a wholly-owned subsidiary of Contran Corporation (“Contran”), which owns approximately 92% of our outstanding common stock at September 30, 2021.  A majority of Contran's outstanding voting stock is held directly by Lisa K. Simmons and various family trusts established for the benefit of Ms. Simmons, Thomas C. Connelly (the husband of Ms. Simmons’ late sister) and their children and for which Ms. Simmons or Mr. Connelly, as applicable, serve as trustee (collectively, the “Other Trusts”). With respect to the Other Trusts for which Mr. Connelly serves as trustee, he is required to vote the shares of Contran voting stock held in such trusts in the same manner as Ms. Simmons.  Such voting rights of Ms. Simmons last through April 22, 2030 and are personal to Ms. Simmons. The remainder of Contran’s outstanding voting stock is held by another trust (the “Family Trust”), which was established for the benefit of Ms. Simmons and her late sister and their children and for which a third-party financial institution serves as trustee. Consequently, at September 30, 2021, Ms. Simmons and the Family Trust may be deemed to control Contran and us.

Basis of Presentation – Consolidated in this Quarterly Report are the results of our wholly-owned and majority-owned subsidiaries, including NL Industries, Inc., Kronos Worldwide, Inc., CompX International Inc., Tremont LLC, Basic Management, Inc. (“BMI”) and The LandWell Company (“LandWell”).  Kronos (NYSE: KRO), NL (NYSE: NL) and CompX (NYSE American: CIX) each file periodic reports with the Securities and Exchange Commission (“SEC”).  

The unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report have been prepared on the same basis as the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2020 that we filed with the SEC on March 11, 2021 (the “2020 Annual Report”). In our opinion, we have made all necessary adjustments (which include only normal recurring adjustments), in order to state fairly, in all material respects, our consolidated financial position, results of operations and cash flows as of the dates and for the periods presented. We have condensed the Consolidated Balance Sheet at December 31, 2020 contained in this Quarterly Report as compared to our audited Consolidated Financial Statements at that date, and we have omitted certain information and footnote disclosures (including those related to the Consolidated Balance Sheet at December 31, 2020) normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Our results of operations for the interim periods ended September 30, 2021 may not be indicative of our operating results for the full year.  The Condensed Consolidated Financial Statements contained in this Quarterly Report should be read in conjunction with our 2020 Consolidated Financial Statements contained in our 2020 Annual Report.

Unless otherwise indicated, references in this report to “we,” “us” or “our” refer to Valhi, Inc. and its subsidiaries (NYSE: VHI), taken as a whole.

 

Note 2 – Business segment information:

 

Business segment

  

Entity

  

% controlled at
September 30, 2021

 

Chemicals

  

Kronos

  

80

Component products

  

CompX

  

87

Real estate management and development

 

BMI and LandWell

 

63% - 77

%

- 9 -


 

 

Our control of Kronos includes approximately 50% we hold directly and approximately 30% held directly by NL. We own approximately 83% of NL. Our control of CompX is through NL. We own approximately 63% of BMI.  Our control of LandWell includes the approximately 27% we hold directly and 50% held by BMI.  

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2020

 

 

2021

 

 

2020

 

 

2021

 

 

 

(In millions)

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chemicals

 

$

416.9

 

 

$

499.8

 

 

$

1,223.9

 

 

$

1,443.4

 

Component products

 

 

28.4

 

 

 

34.5

 

 

 

84.5

 

 

 

106.7

 

Real estate management and development

 

 

13.3

 

 

 

44.6

 

 

 

24.5

 

 

 

63.1

 

Total net sales

 

$

458.6

 

 

$

578.9

 

 

$

1,332.9

 

 

$

1,613.2

 

Cost of sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chemicals

 

$

337.3

 

 

$

377.1

 

 

$

961.8

 

 

$

1,116.7

 

Component products

 

 

21.1

 

 

 

23.6

 

 

 

59.4

 

 

 

73.4

 

Real estate management and development

 

 

10.5

 

 

 

25.5

 

 

 

18.3

 

 

 

36.5

 

Total cost of sales

 

$

368.9

 

 

$

426.2

 

 

$

1,039.5

 

 

$

1,226.6

 

Gross margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chemicals

 

$

79.6

 

 

$

122.7

 

 

$

262.1

 

 

$

326.7

 

Component products

 

 

7.3

 

 

 

10.9

 

 

 

25.1

 

 

 

33.3

 

Real estate management and development

 

 

2.8

 

 

 

19.1

 

 

 

6.2

 

 

 

26.6

 

Total gross margin

 

$

89.7

 

 

$

152.7

 

 

$

293.4

 

 

$

386.6

 

Operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chemicals

 

$

21.6

 

 

$

60.3

 

 

$

104.3

 

 

$

145.4

 

Component products

 

 

2.1

 

 

 

5.1

 

 

 

9.5

 

 

 

16.7

 

Real estate management and development

 

 

5.2

 

 

 

15.8

 

 

 

25.4

 

 

 

26.0

 

Total operating income

 

 

28.9

 

 

 

81.2

 

 

 

139.2

 

 

 

188.1

 

General corporate items:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities earnings

 

 

.9

 

 

 

.9

 

 

 

3.5

 

 

 

2.9

 

Insurance recoveries

 

 

-

 

 

 

-

 

 

 

1.6

 

 

 

-

 

Gain on land and related sales

 

 

-

 

 

 

10.4

 

 

 

.5

 

 

 

16.0

 

Changes in market value of Valhi common stock held by subsidiaries

 

 

.7

 

 

 

(.2

)

 

 

(2.2

)

 

 

2.0

 

Other components of net periodic pension and OPEB expense

 

 

(5.2

)

 

 

(4.3

)

 

 

(14.9

)

 

 

(13.2

)

General expenses, net

 

 

(8.4

)

 

 

(8.7

)

 

 

(26.0

)

 

 

(26.1

)

Interest expense

 

 

(8.9

)

 

 

(7.9

)

 

 

(27.4

)

 

 

(25.2

)

Income before income taxes

 

$

8.0

 

 

$

71.4

 

 

$

74.3

 

 

$

144.5

 

 

Segment results we report may differ from amounts separately reported by our various subsidiaries due to purchase accounting adjustments and related amortization or differences in the way we define operating income.  Intersegment sales are not material. Infrastructure reimbursement is included in the determination of Real Estate Management and Development operating income. See Note 11.

 

 

- 10 -


 

 

Note 3 – Accounts and other receivables, net:

 

 

December 31,

 

 

September 30,

 

 

2020

 

 

2021

 

 

(In millions)

 

Trade accounts receivable:

 

 

 

 

 

 

 

Kronos

$

294.8

 

 

$

346.6

 

CompX

 

10.8

 

 

 

15.2

 

BMI and LandWell

 

1.2

 

 

 

2.1

 

VAT and other receivables

 

27.2

 

 

 

26.7

 

Refundable income taxes

 

5.7

 

 

 

7.8

 

Receivable from affiliates:

 

 

 

 

 

 

 

Contran - trade items

 

1.7

 

 

 

.4

 

Louisiana Pigment Company, L.P. ("LPC")

 

-

 

 

 

13.4

 

Other - trade items

 

2.8

 

 

 

2.3

 

Allowance for doubtful accounts

 

(1.9

)

 

 

(2.1

)

Total

$

342.3

 

 

$

412.4

 

 

Note 4 – Inventories, net:

 

 

December 31,

 

 

September 30,

 

 

2020

 

 

2021

 

 

(In millions)

 

Raw materials:

 

 

 

 

 

 

 

Chemicals

$

133.2

 

 

$

100.7

 

Component products

 

3.2

 

 

 

5.0

 

Total raw materials

 

136.4

 

 

 

105.7

 

Work in process:

 

 

 

 

 

 

 

Chemicals

 

36.8

 

 

 

29.8

 

Component products

 

11.7

 

 

 

15.1

 

Total in-process products

 

48.5

 

 

 

44.9

 

Finished products:

 

 

 

 

 

 

 

Chemicals

 

270.0

 

 

 

214.7

 

Component products

 

3.5

 

 

 

3.5

 

Total finished products

 

273.5

 

 

 

218.2

 

Supplies (chemicals)

 

79.8

 

 

 

79.2

 

Total

$

538.2

 

 

$

448.0

 

 

Note 5 – Other assets:

 

 

December 31,

 

 

September 30,

 

 

2020

 

 

2021

 

 

(In millions)

 

Other noncurrent assets:

 

 

 

 

 

 

 

Land held for development

$

96.0

 

 

$

59.7

 

Operating lease right-of-use assets

 

26.1

 

 

 

21.8

 

Restricted cash and cash equivalents

 

37.8

 

 

 

37.6

 

IBNR receivables

 

37.1

 

 

 

32.6

 

Marketable securities

 

2.9

 

 

 

3.5

 

Pension asset

 

8.4

 

 

 

10.0

 

Note receivables - OPA

 

25.3

 

 

 

29.0

 

Other

 

8.7

 

 

 

13.5

 

Total

$

242.3

 

 

$

207.7

 

 

- 11 -


 

 

Note 6 – Long-term debt:

 

 

December 31,

 

 

September 30,

 

 

2020

 

 

2021

 

 

(In millions)

 

Valhi:

 

 

 

 

 

 

 

Contran credit facility

$

270.7

 

 

$

204.5

 

Subsidiary debt:

 

 

 

 

 

 

 

Kronos:

 

 

 

 

 

 

 

Senior Notes

 

485.7

 

 

 

460.4

 

BMI:

 

 

 

 

 

 

 

Bank loan - Western Alliance Bank

 

16.3

 

 

 

15.3

 

LandWell:

 

 

 

 

 

 

 

Note payable to Western Alliance Business Trust

 

14.2

 

 

 

13.9

 

Other

 

1.7

 

 

 

1.4

 

Total subsidiary debt

 

517.9

 

 

 

491.0

 

Total debt

 

788.6

 

 

 

695.5

 

Less current maturities

 

(2.4

)

 

 

(2.5

)

Total long-term debt

$

786.2

 

 

$

693.0

 

 

Valhi Contran credit facility During the first nine months of 2021, we had no borrowings and repaid $66.2 million under this facility.  The average interest rate on the existing balance for the nine months ended September 30, 2021 was 4.25%. At September 30, 2021, the interest rate was 4.25% and $115.5 million was available for borrowing under this facility.

Kronos – Senior Notes – At September 30, 2021, the carrying value of Kronos’ 3.75% Senior Secured Notes due September 15, 2025 (€400 million aggregate principal amount outstanding) is stated net of unamortized debt issuance costs of $3.8 million.

Revolving credit facilities – On April 20, 2021, Kronos entered into a new global $225 million revolving credit facility (“Global Revolver”) which matures in April 2026.  The Global Revolver replaces Kronos’ previously existing North American and European revolving credit facilities and there were no borrowings on either facility in 2021 through their termination concurrent with entering into the Global Revolver.  Since inception, Kronos had no borrowings or repayments under the Global Revolver and at September 30, 2021, the full $225 million was available for borrowing.  Borrowings under the Global Revolver are available for Kronos’ general corporate purposes. Available borrowings are based on formula-determined amounts of eligible trade receivables and inventories, as defined in the agreement, less any outstanding letters of credit issued under the Global Revolver.   Borrowings by Kronos’ Canadian, Belgian and German subsidiaries are limited to $25 million, €30 million and €60 million, respectively.  Any amounts outstanding under the Global Revolver bear interest, at Kronos’ option, at the applicable non-base rate (LIBOR, CDOR or EURIBOR, dependent on the currency of the borrowing) plus a margin ranging from 1.5% to 2.0%, or at the applicable base rate, as defined in the agreement, plus a margin ranging from .5% to 2.0%.  The Global Revolver is collateralized by, among other things, a first priority lien on the borrowers’ trade receivables and inventories. The facility contains a number of covenants and restrictions customary in lending transactions of this type which, among other things, restrict the borrowers’ ability to incur additional debt, incur liens, pay additional dividends or merge or consolidate with, or sell or transfer all or substantially all of their assets to another entity and, under certain conditions, requires the maintenance of a fixed charge coverage ratio, as defined in the agreement, of at least 1.0 to 1.0.        

Other We are in compliance with all of our debt covenants at September 30, 2021.

 

- 12 -


 

 

Note 7 – Accounts payable and accrued liabilities:

 

 

December 31,

 

 

September 30,

 

 

2020

 

 

2021

 

 

(In millions)

 

Accounts payable:

 

 

 

 

 

 

 

Kronos

$

111.0

 

 

$

123.4

 

CompX

 

2.6

 

 

 

4.5

 

BMI and LandWell

 

3.6

 

 

 

5.8

 

Other

 

.4

 

 

 

.3

 

Payable to affiliates:

 

 

 

 

 

 

 

Contran - income taxes

 

8.3

 

 

 

5.1

 

LPC

 

19.3

 

 

 

17.6

 

Accrued litigation settlement

 

11.8

 

 

 

11.8

 

Employee benefits

 

37.5

 

 

 

40.0

 

Operating lease liabilities

 

6.7

 

 

 

4.6

 

Accrued sales discounts and rebates

 

30.2

 

 

 

24.0

 

Deferred income

 

20.1

 

 

 

35.3

 

Environmental remediation and related costs

 

3.4

 

 

 

3.6

 

Interest

 

5.7

 

 

 

1.5

 

Other

 

39.4

 

 

 

44.2

 

Total

$

300.0

 

 

$

321.7

 

 

The accrued litigation settlement is discussed in Note 15.

 

Note 8 – Other noncurrent liabilities:

 

 

 

December 31,

 

 

September 30,

 

 

2020

 

 

2021

 

 

(In millions)

 

Operating lease liabilities

$

18.8

 

 

$

16.6

 

Reserve for uncertain tax positions

 

6.8

 

 

 

7.2

 

Accrued litigation settlement

 

49.4

 

 

 

38.3

 

Deferred income

 

58.9

 

 

 

107.9

 

Other postretirement benefits

 

10.8

 

 

 

10.7

 

Employee benefits

 

6.2

 

 

 

5.4

 

Insurance claims and expenses

 

39.3

 

 

 

34.8

 

Deferred payment obligation

 

1.3

 

 

 

-

 

Accrued development costs

 

24.6

 

 

 

27.0

 

Other

 

7.8

 

 

 

10.0

 

Total

$

223.9

 

 

$

257.9

 

 

The accrued litigation settlement is discussed in Note 15.

Deferred payment obligation –  As disclosed in Note 10 to our Annual Report, we were required to make mandatory repayments to Nevada Environmental Response Trust (“NERT”) on our deferred payment obligation whenever we received distributions from BMI or LandWell and we could make voluntary repayments at any time without penalty.  In the first quarter of 2021, we voluntarily fully repaid the remaining $1.5 million face value outstanding under the obligation and recognized an accretion loss of $.2 million on the early repayment.  

 

Note 9 – Revenue – disaggregation of sales:

The following table disaggregates the net sales of our Chemicals Segment by place of manufacture (point of origin) and to the location of the customer (point of destination), which are the categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

 

- 13 -


 

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2020

 

 

2021

 

 

2020

 

 

2021

 

 

 

(In millions)

 

Net sales - point of origin:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

272.9

 

 

$

297.6

 

 

$

736.5

 

 

$

787.5

 

Germany

 

 

208.1

 

 

 

254.2

 

 

 

620.3

 

 

 

724.2

 

Canada

 

 

93.8

 

 

 

88.6

 

 

 

247.1

 

 

 

288.8

 

Belgium

 

 

64.9

 

 

 

69.6

 

 

 

181.9

 

 

 

212.0

 

Norway

 

 

46.6

 

 

 

63.4

 

 

 

163.5

 

 

 

198.5

 

Eliminations

 

 

(269.4

)

 

 

(273.6

)

 

 

(725.4

)

 

 

(767.6

)

Total

 

$

416.9

 

 

$

499.8

 

 

$

1,223.9

 

 

$

1,443.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales - point of destination:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Europe

 

$

194.3

 

 

$

248.0

 

 

$

578.6

 

 

$

712.1

 

North America

 

 

153.2

 

 

 

174.3

 

 

 

434.4

 

 

 

476.9

 

Other

 

 

69.4

 

 

 

77.5

 

 

 

210.9

 

 

 

254.4

 

Total

 

$

416.9

 

 

$

499.8

 

 

$

1,223.9

 

 

$

1,443.4

 

 

The following table disaggregates the net sales of our Component Products and Real Estate Management and Development Segments by major product line.

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2020

 

 

2021

 

 

2020

 

 

2021

 

 

 

(In millions)

 

Component Products:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Security products

 

$

21.2

 

 

$

25.8

 

 

$

65.2

 

 

$

79.3

 

Marine components

 

 

7.2

 

 

 

8.7

 

 

 

19.3

 

 

 

27.4

 

Total

 

$

28.4

 

 

$

34.5

 

 

$

84.5

 

 

$

106.7

 

Real Estate Management and Development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land sales

 

$

10.6

 

 

$

41.9

 

 

$

16.8

 

 

$

57.0

 

Water delivery

 

 

2.2

 

 

 

2.3

 

 

 

6.2

 

 

 

4.8

 

Utility and other

 

 

.5

 

 

 

.4

 

 

 

1.5

 

 

 

1.3

 

Total

 

$

13.3

 

 

$

44.6

 

 

$

24.5

 

 

$

63.1

 

 

Note 10 – Defined benefit pension plans:

The components of our net periodic defined benefit pension cost are presented in the table below.

 

 

Three months ended

 

 

Nine months ended

 

 

September 30,

 

 

September 30,

 

 

2020

 

 

2021

 

 

2020

 

 

2021

 

 

(In millions)

 

Service cost

$

3.5

 

 

$

3.7

 

 

$

9.9

 

 

$

11.1

 

Interest cost

 

3.1

 

 

 

2.5

 

 

 

9.0

 

 

 

7.3

 

Expected return on plan assets

 

(2.9

)

 

 

(3.3

)

 

 

(8.4

)

 

 

(10.1

)

Amortization of prior service cost

 

.1

 

 

 

-

 

 

 

.2

 

 

 

.1

 

Recognized actuarial losses

 

5.0

 

 

 

5.3

 

 

 

14.4

 

 

 

16.3

 

Total

$

8.8

 

 

$

8.2

 

 

$

25.1

 

 

$

24.7

 

 

We expect to contribute the equivalent of approximately $18 million to all of our defined benefit pension plans during 2021.

 

- 14 -


 

 

Note 11 – Other income, net:

 

 

 

Nine months ended

 

 

 

September 30,

 

 

 

2020

 

 

2021

 

 

 

(In millions)

 

Securities earnings:

 

 

 

 

 

 

 

 

Dividends and interest

 

$

3.8

 

 

$

2.8

 

Securities transactions, net

 

 

(.3

)

 

 

.1

 

Total

 

 

3.5

 

 

 

2.9

 

Currency transactions, net

 

 

3.2

 

 

 

1.2

 

Insurance recoveries

 

 

1.6

 

 

 

-

 

Infrastructure reimbursement

 

 

19.6

 

 

 

6.2

 

Gain on land and related sales

 

 

4.5

 

 

 

16.0

 

Other, net

 

 

1.5

 

 

 

1.6

 

Total

 

$

33.9

 

 

$

27.9

 

 

Insurance recoveries reflect, in part, amounts NL received from certain of its former insurance carriers and relate to the recovery of prior lead pigment and asbestos litigation defense costs incurred by NL.  See Note 15.  In the first quarter of 2020, Kronos recognized a $1.5 million gain related to an insurance settlement for a property damage claim.

 

In the first nine months of 2021 we sold excess property not used in our operations for net proceeds of approximately $23.4 million and recognized a pre-tax gain of $16.0 million.  In the third quarter of 2020, BMI recognized a pre-tax gain of $4.0 million related to proceeds received associated with a prior land sale.

 

Infrastructure reimbursement As disclosed in Note 7 to our 2020 Annual Report, under an Owner Participation Agreement (“OPA”) entered into by LandWell with the Redevelopment Agency of the City of Henderson, Nevada, as LandWell develops certain real property for commercial and residential purposes in its master planned community in Henderson, Nevada, the cost of certain public infrastructure may be reimbursed to LandWell through tax increment.  During the first nine months of 2020 and 2021, LandWell received approval for additional tax increment reimbursement of $19.1 million (all in the first quarter) and $6.2 million (all in the first quarter), respectively, which was recognized as other income and is evidenced by a promissory note issued to LandWell by the City of Henderson.

 

Note 12 – Income taxes:

 

 

Three months ended

 

 

Nine months ended

 

 

September 30,

 

 

September 30,

 

 

2020

 

 

2021

 

 

2020

 

 

2021

 

 

(In millions)

 

Expected tax expense, at U.S. federal statutory

   income tax rate of 21%

$

1.7

 

 

$

14.9

 

 

$

15.6

 

 

$

30.3

 

Incremental net tax benefit on earnings and losses of

   non-U.S., U.S. and non-tax group companies

 

(3.9

)

 

 

(.7

)

 

 

(7.8

)

 

 

(2.6

)

Non-U.S. tax rates

 

(.2

)

 

 

1.3

 

 

 

.8

 

 

 

3.1

 

Valuation allowance

 

(2.1

)

 

 

(.7

)

 

 

4.9

 

 

 

.8

 

Adjustment to the reserve for uncertain tax positions, net

 

(.5

)

 

 

.3

 

 

 

.7

 

 

 

.1

 

Global intangible low-tax income, net

 

(6.8

)

 

 

.9

 

 

 

6.3

 

 

 

1.9

 

Nondeductible expenses

 

(.5

)

 

 

.3

 

 

 

1.3

 

 

 

.7

 

U.S. state income taxes and other, net

 

.9

 

 

 

.6

 

 

 

(.6

)

 

 

.9

 

Income tax expense (benefit)

$

(11.4

)

 

$

16.9

 

 

$

21.2

 

 

$

35.2

 

Comprehensive provision (benefit) for income taxes allocable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

(11.4

)

 

$

16.9

 

 

$

21.2

 

 

$

35.2

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation

 

1.2

 

 

 

(.8

)

 

 

(1.5

)

 

 

(.4

)

Pension plans

 

1.9

 

 

 

2.0

 

 

 

5.5

 

 

 

6.2

 

Other

 

(.1

)

 

 

(.1

)

 

 

(.2

)

 

 

(.2

)

Total

$

(8.4

)

 

$

18.0

 

 

$

25.0

 

 

$

40.8

 

- 15 -


 

 

 

The amount shown in the preceding table of our income tax rate reconciliation for non-U.S. tax rates represents the result determined by multiplying the pre-tax earnings or losses of each of our non-U.S. subsidiaries by the difference between the applicable statutory income tax rate for each non-U.S. jurisdiction and the U.S. federal statutory tax rate.  The amount shown on such table for incremental net tax benefit on earnings and losses of non-U.S., U.S. and non-tax group companies includes, as applicable, (i) deferred income taxes (or deferred income tax benefits) associated with the current-year earnings of all of our Chemicals Segment’s non-U.S. subsidiaries, (ii) current U.S. income taxes (or current income tax benefit) including U.S. personal holding company tax, as applicable, attributable to current-year income (losses) of one of Kronos’ non-U.S. subsidiaries, which subsidiary is treated as a dual resident for U.S. income tax purposes, (iii) deferred income taxes associated with our direct investment in Kronos and (iv) current and deferred income taxes associated with distributions and earnings from our investments in LandWell and BMI.

 

On March 27, 2020, the “Coronavirus Aid, Relief and Economic Security (CARES) Act” was signed into law in response to the COVID-19 pandemic.  The CARES Act, among other things, includes modifications to the limitation of business interest for tax years beginning in 2019 and 2020 increasing the business interest limitation from 30% of adjusted taxable income to 50% of adjusted taxable income which increased our allowable interest expense deduction for 2019 and 2020.  Consequently, in the first quarter of 2020 we recognized a cash tax benefit of $1.0 million related to an adjustment to the valuation allowance recognized in 2019 for the portion of the disallowed interest expense we did not expect to fully utilize at December 31, 2019. 

 

Tax authorities are examining certain of our U.S. and non-U.S. income tax returns and may propose tax deficiencies, including penalties and interest. We believe we have adequate accruals for additional taxes and related interest expense which could ultimately result from tax examinations.  We believe the ultimate disposition of tax examinations should not have a material adverse effect on our consolidated financial position, results of operations or liquidity.  We currently estimate that our unrecognized tax benefits will decrease by approximately $4.0 million during the next twelve months primarily due to the expiration of certain statutes of limitations.

 

Note 13 – Noncontrolling interest in subsidiaries:

 

 

December 31,

 

 

September 30,

 

 

2020

 

 

2021

 

 

(In millions)

 

Noncontrolling interest in net assets:

 

 

 

 

 

 

 

Kronos Worldwide

$

212.3

 

 

$

217.2

 

NL Industries

 

67.1

 

 

 

72.3

 

CompX International

 

23.5

 

 

 

22.5

 

BMI

 

14.7

 

 

 

6.8

 

LandWell

 

6.8

 

 

 

(5.6

)

Total

$

324.4

 

 

$

313.2

 

 

 

 

 

Nine months ended September 30,

 

 

 

2020

 

 

2021

 

 

 

(In millions)

 

Noncontrolling interest in net income of subsidiaries:

 

 

 

 

 

 

 

 

Kronos Worldwide

 

$

10.2

 

 

$

15.8

 

NL Industries

 

 

1.8

 

 

 

6.2

 

CompX International

 

 

1.1

 

 

 

1.8

 

BMI

 

 

4.4

 

 

 

4.0

 

LandWell

 

 

4.9

 

 

 

6.3

 

Total

 

$

22.4

 

 

$

34.1

 

 

- 16 -


 

 

Note 14 – Stockholders’ equity:

Accumulated other comprehensive loss Changes in accumulated other comprehensive income (loss) attributable to Valhi stockholders are presented in the table below.

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2020

 

 

2021

 

 

2020

 

 

2021

 

 

 

(In millions)

 

Accumulated other comprehensive income (loss), net of tax

   and noncontrolling interest:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

1.8

 

 

$

1.7

 

 

$

1.7

 

 

$

1.8

 

Other comprehensive income  - unrealized

gains (losses) arising during the period

 

 

-

 

 

 

-

 

 

 

.1

 

 

 

(.1

)

Balance at end of period

 

$

1.8

 

 

$

1.7

 

 

$

1.8

 

 

$

1.7

 

Currency translation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(92.4

)

 

$

(64.8

)

 

$

(76.8

)

 

$

(67.4

)

Other comprehensive income (loss)

 

 

6.8

 

 

 

(5.3

)

 

 

(8.8

)

 

 

(2.7

)

Balance at end of period

 

$

(85.6

)

 

$

(70.1

)

 

$

(85.6

)

 

$

(70.1

)

Defined benefit pension plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(142.1

)

 

$

(149.1

)

 

$

(146.6

)

 

$

(154.1

)

Other comprehensive income - amortization of

  prior service cost and net losses included in net

  periodic pension cost

 

 

2.3

 

 

 

2.5

 

 

 

6.8

 

 

 

7.5

 

Balance at end of period

 

$

(139.8

)

 

$

(146.6

)

 

$

(139.8

)

 

$

(146.6

)

OPEB plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

.7

 

 

$

.1

 

 

$

1.0

 

 

$

.3

 

Other comprehensive loss - amortization of prior

service credit and net losses included in

net periodic OPEB cost

 

 

-

 

 

 

(.1

)

 

 

(.3

)

 

 

(.3

)

Balance at end of period

 

$

.7

 

 

$

-

 

 

$

.7

 

 

$

-

 

Total accumulated other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(232.0

)

 

$

(212.1

)

 

$

(220.7

)

 

$

(219.4

)

Other comprehensive income (loss)

 

 

9.1

 

 

 

(2.9

)

 

 

(2.2

)

 

 

4.4

 

Balance at end of period

 

$

(222.9

)

 

$

(215.0

)

 

$

(222.9

)

 

$

(215.0

)

 

Preferred stock As disclosed in Note 16 to our 2020 Annual Report, pursuant to a contribution agreement between us, Contran and a wholly owned subsidiary of Contran, on August 10, 2020, the 5,000 shares of 6% Series A Preferred Stock held by Contran were voluntarily contributed to our capital for no consideration and without the issuance of additional securities by us. Our independent directors approved acceptance of such contribution and entering into the contribution agreement.  The contribution had no impact on our consolidated financial position, results of operations or liquidity and the contribution did not have any tax consequences to us.  On August 10, 2020, following the contribution of the 6% Series A Preferred Stock to us, we filed a Certificate of Elimination with the Secretary of State of Delaware and, as a result, the 5,000 shares that were designated as 6% Series A Preferred Stock were returned to the status of authorized but unissued shares of the preferred stock, $.01 par value per share, without designation as to series.

 

Other During the first quarter of 2021, CompX acquired 50,000 shares of its Class A common stock in a market transaction for approximately $.8 million.  At September 30, 2021, approximately .6 million shares were available for repurchase under CompX’s prior repurchase authorizations.  

 

 

- 17 -


 

 

Note 15 – Commitments and contingencies:

Lead pigment litigation – NL

 

NL’s former operations included the manufacture of lead pigments for use in paint and lead-based paint.  NL, other former manufacturers of lead pigments for use in paint and lead-based paint (together, the “former pigment manufacturers”), and the Lead Industries Association (LIA), which discontinued business operations in 2002, have been named as defendants in various legal proceedings seeking damages for personal injury, property damage and governmental expenditures allegedly caused by the use of lead-based paints.  Certain of these actions have been filed by or on behalf of states, counties, cities or their public housing authorities and school districts, and certain others have been asserted as class actions.  These lawsuits seek recovery under a variety of theories, including public and private nuisance, negligent product design, negligent failure to warn, strict liability, breach of warranty, conspiracy/concert of action, aiding and abetting, enterprise liability, market share or risk contribution liability, intentional tort, fraud and misrepresentation, violations of state consumer protection statutes, supplier negligence and similar claims.

The plaintiffs in these actions generally seek to impose on the defendants responsibility for lead paint abatement and health concerns associated with the use of lead-based paints, including damages for personal injury, contribution and/or indemnification for medical expenses, medical monitoring expenses and costs for educational programs.  To the extent the plaintiffs seek compensatory or punitive damages in these actions, such damages are generally unspecified.  In some cases, the damages are unspecified pursuant to the requirements of applicable state law.  A number of cases are inactive or have been dismissed or withdrawn.  Most of the remaining cases are in various pre-trial stages.  Some are on appeal following dismissal or summary judgment rulings or a trial verdict in favor of either the defendants or the plaintiffs.

NL believes that these actions are without merit, and intends to continue to deny all allegations of wrongdoing and liability and to defend against all actions vigorously.  Other than with respect to the Santa Clara, California public nuisance case discussed below, we do not believe it is probable we have incurred any liability with respect to all of the lead pigment litigation cases to which NL is a party, and with respect to all other lead pigment litigation cases to which NL is a party, we believe liability to NL that may result, if any, in this regard cannot be reasonably estimated, because:

 

NL has never settled any of the market share, intentional tort, fraud, nuisance, supplier negligence, breach of warranty, conspiracy, misrepresentation, aiding and abetting, enterprise liability, or statutory cases (other than the Santa Clara case discussed below),

 

no final, non-appealable adverse judgments have ever been entered against NL, and

 

NL has never ultimately been found liable with respect to any such litigation matters, including over 100 cases over a thirty-year period for which NL was previously a party and for which NL has been dismissed without any finding of liability.  

Accordingly, other than with respect to the Santa Clara case discussed below, we have not accrued any amounts for any of the pending lead pigment and lead-based paint litigation cases filed by or on behalf of states, counties, cities or their public housing authorities and school districts, or those asserted as class actions. In addition, we have determined that liability to NL which may result, if any, cannot be reasonably estimated at this time because there is no prior history of a loss of this nature on which an estimate could be made and there is no substantive information available upon which an estimate could be based.

 

Under the terms of the County of Santa Clara v. Atlantic Richfield Company, et al. (Superior Court of the State of California, County of Santa Clara, Case No. 1-00-CV-788657) global settlement agreement, NL made a $12.0 million payment in September 2021.  NL has four annual installment payments remaining ($12.0 million for the next three installments and $16.7 million for the final installment).  NL’s final installment will be made with funds already on deposit at the court, which are included in noncurrent restricted cash on our Condensed Consolidated Balance Sheets, that are committed to the settlement, including all accrued interest at the date of payment, with any remaining balance to be paid by NL (and any amounts on deposit in excess of the final payment would be returned to NL).  See Note 18 to our 2020 Annual Report.

 

New cases may continue to be filed against NL.  It is possible we will incur liability in the future with respect to any of the pending or possible litigation in view of the inherent uncertainties involved in court and jury rulings.  In the future, if new information regarding such matters becomes available to us (such as a final, non-appealable adverse verdict against NL or otherwise ultimately being found liable with respect to such matters), at that time we would consider such information in evaluating any remaining cases then-pending against NL as to whether it might then become probable we have incurred liability with respect to these matters, and whether such liability, if any, could become reasonably estimable.  The resolution of any of these cases could result in the recognition of a loss contingency accrual that could have a material adverse impact on our net income for the interim or annual period during which such liability is recognized and a material adverse impact on our consolidated financial condition and liquidity.

- 18 -


 

Environmental matters and litigation

Our operations are governed by various environmental laws and regulations. Certain of our businesses are and have been engaged in the handling, manufacture or use of substances or compounds that may be considered toxic or hazardous within the meaning of applicable environmental laws and regulations. As with other companies engaged in similar businesses, certain of our past and current operations and products have the potential to cause environmental or other damage. We have implemented and continue to implement various policies and programs in an effort to minimize these risks. Our policy is to maintain compliance with applicable environmental laws and regulations at all of our plants and to strive to improve environmental performance. From time to time, we may be subject to environmental regulatory enforcement under U.S. and non-U.S. statutes, the resolution of which typically involves the establishment of compliance programs. It is possible that future developments, such as stricter requirements of environmental laws and enforcement policies, could adversely affect our production, handling, use, storage, transportation, sale or disposal of such substances. We believe all of our facilities are in substantial compliance with applicable environmental laws.

Certain properties and facilities used in NL’s former operations, including divested primary and secondary lead smelters and former mining locations, are the subject of civil litigation, administrative proceedings or investigations arising under federal and state environmental laws and common law. Additionally, in connection with past operating practices, we are currently involved as a defendant, potentially responsible party (“PRP”) or both, pursuant to the Comprehensive Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act (“CERCLA”), and similar state laws in various governmental and private actions associated with waste disposal sites, mining locations, and facilities that we or our predecessors, our subsidiaries or their predecessors currently or previously owned, operated or used, certain of which are on the United States Environmental Protection Agency’s (“EPA”) Superfund National Priorities List or similar state lists. These proceedings seek cleanup costs, damages for personal injury or property damage and/or damages for injury to natural resources. Certain of these proceedings involve claims for substantial amounts. Although we may be jointly and severally liable for these costs, in most cases we are only one of a number of PRPs who may also be jointly and severally liable, and among whom costs may be shared or allocated. In addition, we are occasionally named as a party in a number of personal injury lawsuits filed in various jurisdictions alleging claims related to environmental conditions alleged to have resulted from our operations.

Obligations associated with environmental remediation and related matters are difficult to assess and estimate for numerous reasons including the:

 

complexity and differing interpretations of governmental regulations,

 

number of PRPs and their ability or willingness to fund such allocation of costs,

 

financial capabilities of the PRPs and the allocation of costs among them,

 

solvency of other PRPs,

 

multiplicity of possible solutions,

 

number of years of investigatory, remedial and monitoring activity required,

 

uncertainty over the extent, if any, to which our former operations might have contributed to the conditions allegedly giving rise to such personal injury, property damage, natural resource and related claims, and

 

number of years between former operations and notice of claims and lack of information and documents about the former operations.

In addition, the imposition of more stringent standards or requirements under environmental laws or regulations, new developments or changes regarding site cleanup costs or the allocation of costs among PRPs, solvency of other PRPs, the results of future testing and analysis undertaken with respect to certain sites or a determination that we are potentially responsible for the release of hazardous substances at other sites, could cause our expenditures to exceed our current estimates. It is possible actual costs will exceed accrued amounts or the upper end of the range for sites for which estimates have been made, and it is possible costs will be incurred for sites where no estimates presently can be made. Further, additional environmental and related matters may arise in the future. If we were to incur any future liability, this could have a material adverse effect on our consolidated financial statements, results of operations and liquidity.

We record liabilities related to environmental remediation and related matters (including costs associated with damages for personal injury or property damage and/or damages for injury to natural resources) when estimated future expenditures are probable and reasonably estimable. We adjust such accruals as further information becomes available to us or as circumstances change. Unless the amounts and timing of such estimated future expenditures are fixed and reasonably determinable, we generally do not discount estimated future expenditures to their present value due to the uncertainty of the timing of the payout. We recognize recoveries of costs from other parties, if any, as assets when their receipt is deemed probable.

- 19 -


 

We do not know and cannot estimate the exact time frame over which we will make payments for our accrued environmental and related costs. The timing of payments depends upon a number of factors, including but not limited to the timing of the actual remediation process; which in turn depends on factors outside of our control. At each balance sheet date, we estimate the amount of our accrued environmental and related costs which we expect to pay within the next twelve months, and we classify this estimate as a current liability. We classify the remaining accrued environmental costs as a noncurrent liability.

The table below presents a summary of the activity in our accrued environmental costs during the first nine months of 2021.

 

 

 

Amount

 

 

 

(In millions)

 

Balance at the beginning of the year

 

$

98.6

 

Additions charged to expense

 

 

1.3

 

Payments, net

 

 

(2.1

)

Balance at the end of the period

 

$

97.8

 

Amounts recognized in our Condensed Consolidated Balance Sheet at the end of the period:

 

 

 

 

Current liabilities

 

$

3.6

 

Noncurrent liabilities

 

 

94.2

 

Total

 

$

97.8

 

 

NL – On a quarterly basis, NL evaluates the potential range of its liability for environmental remediation and related costs at sites where it has been named as a PRP or defendant. At September 30, 2021, NL had accrued approximately $93 million related to approximately 32 sites associated with remediation and related matters that it believes are at the present time and/or in their current phase reasonably estimable. The upper end of the range of reasonably possible costs to NL for remediation and related matters for which NL believes it is possible to estimate costs is approximately $112 million, including the amount currently accrued.

NL believes that it is not reasonably possible to estimate the range of costs for certain sites. At September 30, 2021, there were approximately five sites for which NL is not currently able to reasonably estimate a range of costs. For these sites, generally the investigation is in the early stages, and NL is unable to determine whether or not it actually had any association with the site, the nature of its responsibility, if any, for the contamination at the site, if any, and the extent of contamination at and cost to remediate the site. The timing and availability of information on these sites is dependent on events outside of NL’s control, such as when the party alleging liability provides information to NL. At certain of these previously inactive sites, NL has received general and special notices of liability from the EPA and/or state agencies alleging that NL, sometimes with other PRPs, is liable for past and future costs of remediating environmental contamination allegedly caused by former operations. These notifications may assert that NL, along with any other alleged PRPs, is liable for past and/or future clean-up costs. As further information becomes available to us for any of these sites which would allow us to estimate a range of costs, we would at that time adjust our accruals. Any such adjustment could result in the recognition of an accrual that would have a material effect on our consolidated financial statements, results of operations and liquidity.

 

OtherWe have also accrued approximately $5 million at September 30, 2021 for other environmental cleanup matters.

Insurance coverage claims – NL

NL is involved in certain legal proceedings with a number of its former insurance carriers regarding the nature and extent of the carriers’ obligations to NL under insurance policies with respect to certain lead pigment and asbestos lawsuits. The issue of whether insurance coverage for defense costs or indemnity or both will be found to exist for NL’s lead pigment and asbestos litigation depends upon a variety of factors, and we cannot assure you that such insurance coverage will be available.

NL has agreements with certain of its former insurance carriers pursuant to which the carriers reimburse it for a portion of its future lead pigment litigation defense costs, and one such carrier reimburses NL for a portion of its future asbestos litigation defense costs. We are not able to determine how much NL will ultimately recover from these carriers for defense costs incurred by NL because of certain issues that arise regarding which defense costs qualify for reimbursement. While NL continues to seek additional insurance recoveries, we do not know if we will be successful in obtaining reimbursement for either defense costs or indemnity. Accordingly, we recognize insurance recoveries in income only when receipt of the recovery is probable and we are able to reasonably estimate the amount of the recovery.  

For additional discussion of certain litigation involving NL and certain of its former insurance carriers, please refer to our 2020 Annual Report.

- 20 -


 

Other litigation

In addition to the litigation described above, we and our affiliates are involved in various other environmental, contractual, product liability, patent (or intellectual property), employment and other claims and disputes incidental to our present and former businesses. In certain cases, we have insurance coverage for these items, although we do not expect any additional material insurance coverage for our environmental claims. We currently believe that the disposition of all of these various other claims and disputes (including asbestos-related claims), individually or in the aggregate, should not have a material adverse effect on our consolidated financial position, results of operations or liquidity beyond the accruals already provided.  

 

Note 16 – Fair value measurements and financial instruments:  

 

The following table presents the financial instruments that are not carried at fair value but which require fair value disclosure:

 

 

 

December 31, 2020

 

 

September 30, 2021

 

 

 

Carrying amount

 

 

Fair

value

 

 

Carrying

amount

 

 

Fair

value

 

 

 

(In millions)

 

Cash, cash equivalents and restricted cash equivalents

 

$

570.3

 

 

$

570.3

 

 

$

615.2

 

 

$

615.2

 

Deferred payment obligation

 

 

1.3

 

 

 

1.3

 

 

 

-

 

 

 

-

 

Long-term debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Kronos Senior Notes

 

 

485.7

 

 

 

499.9

 

 

 

460.4

 

 

 

472.4

 

Valhi credit facility with Contran

 

 

270.7

 

 

 

270.7

 

 

 

204.5

 

 

 

204.5

 

BMI bank note payable

 

 

16.3

 

 

 

16.9

 

 

 

15.3

 

 

 

15.9

 

LandWell bank note payable

 

 

14.2

 

 

 

14.2

 

 

 

13.9

 

 

 

13.9

 

 

At September 30, 2021, the estimated market price of Kronos’ Senior Notes was €1,017  per €1,000 principal amount.  The fair value of Kronos’ Senior Notes was based on quoted market prices; however, these quoted market prices represent Level 2 inputs because the markets in which the term loan trades were not active. The fair value of variable interest rate debt and other fixed-rate debt, which represents Level 2 inputs, is deemed to approximate carrying values.  See Note 6.  Due to their near-term maturities, the carrying amounts of accounts receivable and accounts payable are considered equivalent to fair value. See Notes 3 and 7.

 

 

 

 

- 21 -


 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Business Overview

We are primarily a holding company. We operate through our wholly-owned and majority-owned subsidiaries, including NL Industries, Inc., Kronos Worldwide, Inc., CompX International Inc., Tremont LLC, Basic Management, Inc. (“BMI”) and the LandWell Company (“LandWell”).  Kronos (NYSE: KRO), NL (NYSE: NL) and CompX (NYSE American: CIX) each file periodic reports with the SEC.  

We have three consolidated reportable operating segments:

 

Chemicals – Our Chemicals Segment is operated through our majority control of Kronos. Kronos is a leading global producer and marketer of value-added titanium dioxide pigments (“TiO2”). TiO2 is used to impart whiteness, brightness, opacity and durability to a wide variety of products, including paints, plastics, paper, fibers and ceramics. Additionally, TiO2 is a critical component of everyday applications, such as coatings, plastics and paper, as well as many specialty products such as inks, foods and cosmetics.

 

Component Products – We operate in the component products industry through our majority control of CompX. CompX is a leading manufacturer of security products used in the recreational transportation, postal, office and institutional furniture, cabinetry, tool storage and healthcare applications.  CompX also manufactures stainless steel exhaust systems, gauges, throttle controls, wake enhancement systems, trim tabs and related hardware and accessories for the recreational marine and other industries.   

 

Real Estate Management and Development – We operate in real estate management and development through our majority control of BMI and LandWell. BMI provides utility services to certain industrial and municipal customers and owns real property in Henderson, Nevada. LandWell is engaged in efforts to develop certain land holdings for commercial, industrial and residential purposes in Henderson, Nevada.  

General

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Statements in this Quarterly Report that are not historical facts are forward-looking in nature and represent management’s beliefs and assumptions based on currently available information. In some cases, you can identify forward-looking statements by the use of words such as “believes,” “intends,” “may,” “should,” “could,” “anticipates,” “expects” or comparable terminology, or by discussions of strategies or trends. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we do not know if these expectations will be correct. Such statements by their nature involve substantial risks and uncertainties that could significantly impact expected results. Actual future results could differ materially from those predicted. The factors that could cause actual future results to differ materially from those described herein are the risks and uncertainties discussed in this Quarterly Report and those described from time to time in our other filings with the SEC and include, but are not limited to, the following:

 

Future supply and demand for our products;

 

The extent of the dependence of certain of our businesses on certain market sectors;

 

The cyclicality of certain of our businesses (such as Kronos’ TiO2 operations);

 

Customer and producer inventory levels;

 

Unexpected or earlier-than-expected industry capacity expansion (such as the TiO2 industry);

 

Changes in raw material and other operating costs (such as ore, zinc, brass, aluminum, steel and energy costs);

 

Changes in the availability of raw materials (such as ore);

 

General global economic and political conditions that harm the worldwide economy, disrupt our supply chain, increase material costs, reduce demand or perceived demand for TiO2, component products and land held for development or impair our ability to operate our facilities (including changes in the level of gross domestic product in various regions of the world, natural disasters, terrorist acts, global conflicts and public health crises such as COVID-19);

 

Competitive products and substitute products;  

 

Customer and competitor strategies;

 

Potential difficulties in integrating future acquisitions;

- 22 -


 

 

 

Potential difficulties in upgrading or implementing accounting and manufacturing software systems;

 

Potential consolidation of our competitors;

 

Potential consolidation of our customers;

 

The impact of pricing and production decisions;

 

Competitive technology positions;

 

Our ability to protect or defend intellectual property rights;

 

The introduction of trade barriers or trade disputes;

 

The ability of our subsidiaries to pay us dividends;

 

The impact of current or future government regulations (including employee healthcare benefit related regulations);

 

Uncertainties associated with new product development and the development of new product features;

 

Fluctuations in currency exchange rates (such as changes in the exchange rate between the U.S. dollar and each of the euro, the Norwegian krone and the Canadian dollar and between the euro and the Norwegian krone) or possible disruptions to our business resulting from uncertainties associated with the euro or other currencies;

 

Operating interruptions (including, but not limited to, labor disputes, leaks, natural disasters, fires, explosions, unscheduled or unplanned downtime, transportation interruptions, cyber-attacks and public health crises such as COVID-19);

 

Decisions to sell operating assets other than in the ordinary course of business;

 

The timing and amounts of insurance recoveries;

 

Our ability to renew, amend, refinance or establish credit facilities;

 

Our ability to maintain sufficient liquidity;

 

The ultimate outcome of income tax audits, tax settlement initiatives or other tax matters, including future tax reform;

 

Our ability to utilize income tax attributes, the benefits of which may or may not have been recognized under the more-likely-than-not recognition criteria;

 

Environmental matters (such as those requiring compliance with emission and discharge standards for existing and new facilities, or new developments regarding environmental remediation at sites related to our former operations);

 

Government laws and regulations and possible changes therein (such as changes in government regulations which might impose various obligations on former manufacturers of lead pigment and lead-based paint, including NL, with respect to asserted health concerns associated with the use of such products) including new environmental health and safety regulations such as those seeking to limit or classify TiO2 or its use;

 

The ultimate resolution of pending litigation (such as NL’s lead pigment and environmental matters);

 

Our ability to comply with covenants contained in our revolving bank credit facilities;

 

Our ability to complete and comply with the conditions of our licenses and permits;

 

Changes in real estate values and construction costs in Henderson, Nevada;

 

Water levels in Lake Mead; and

 

Possible future litigation.

Should one or more of these risks materialize (or the consequences of such development worsen), or should the underlying assumptions prove incorrect, actual results could differ materially from those currently forecasted or expected. We disclaim any intention or obligation to update or revise any forward-looking statement whether as a result of changes in information, future events or otherwise.

 


- 23 -


 

 

Operations Overview

Quarter Ended September 30, 2021 Compared to the Quarter Ended September 30, 2020

We reported net income attributable to Valhi stockholders of $39.0 million or $1.36 per diluted share in the third quarter of 2021 compared to net income of $15.4 million or $.54 per diluted share in the third quarter of 2020.  As discussed more fully below, our net income attributable to Valhi stockholders increased from 2020 to 2021 primarily due to the net effects of:

 

higher operating income from all of our segments in 2021 compared to 2020;

 

increase in income tax expense of $28.3 million in 2021;

 

recognition of a gain on the sale of land not used in our operations of $10.4 million in 2021; and

 

recognition of a gain of $4.0 million in 2020 from proceeds received related to a prior land sale.

Our diluted net income per share in the third quarter of 2021 includes a gain of $.28 per share related to the sale of land not used in our operations.

Our diluted net income per share in the third quarter of 2020 includes a gain of $.07 per share related to the proceeds received associated with a prior land sale.

Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020

We reported net income attributable to Valhi stockholders of $75.2 million or $2.64 per diluted share in the first nine months of 2021 compared to $30.7 million or $1.08 per diluted share in the first nine months of 2020.  As discussed more fully below, our net income  attributable to Valhi stockholders increased from 2020 to 2021 primarily due to the net effects of:

 

higher operating income from our Chemicals and Component Products segments in 2021 compared to 2020;

 

income from infrastructure reimbursement of $6.2 million in 2021 compared to $19.6 million in 2020;

 

increase in income tax expense of $14.0 million in 2021;

 

recognition of a gain on the sale of land not used in our operations of $16.0 million in the first nine months of 2021; and

 

recognition of a gain of $4.0 million in the third quarter of 2020 from proceeds received related to a prior land sale.

Our diluted net income per share in the first nine months of 2021 includes:

 

income of $.11 per share related to the tax increment infrastructure reimbursement; and

 

a gain of $.43 per share related to the sale of land not used in our operations.

Our diluted net income per share in the first nine months of 2020 includes:

 

income of $.35 per share related to the tax increment infrastructure reimbursement;

 

a gain of $.07 per share from the proceeds received in the third quarter related to a prior land sale; and

 

a gain of $.03 per share related to an insurance recovery for a property damage claim at our Chemicals Segment.

Current Forecast for 2021

We currently expect to report higher consolidated operating income for 2021 as compared to 2020 primarily due to higher operating income from all of our segments. Beginning in the second half of 2020 and continuing through the first nine months of 2021, sales at each of our operating segments have improved from reduced levels experienced in the first half of 2020 resulting from the COVID-19 pandemic. We expect the improved demand experienced since late 2020 to continue for the remainder of 2021 and we expect our operating results to reflect the elevated demand. See additional discussion on expectations for each of our operating segments below.

Segment Operating Results – 2021 Compared to 2020 –

Chemicals –

We consider TiO2 to be a “quality of life” product, with demand affected by gross domestic product, or GDP, and overall economic conditions in our markets located in various regions of the world. Over the long-term, we expect demand for TiO2 to be consistent with our expectations for the long-term growth in GDP. However, even if our Chemicals Segment and its competitors maintain consistent shares of the worldwide market, demand for TiO2 in any interim or annual period may not change in the same proportion as the change in GDP, in part due to relative changes in the TiO2 inventory levels of our Chemicals Segment’s customers. We believe that our Chemicals Segment’s customers’ inventory levels are influenced in part by their expectations for future changes in market TiO2 selling prices as well as their expectations for future availability of product. Although certain of our Chemicals Segment’s TiO2 grades

- 24 -


 

are considered specialty pigments, the majority of its grades and substantially all of its production are considered commodity pigment products with price and availability being the most significant competitive factors along with product quality and customer and technical support services.

 

The factors having the most impact on our Chemicals Segment’s reported operating results are:

 

TiO2 selling prices,

 

our Chemicals Segment’s TiO2 sales and production volumes,

 

manufacturing costs, particularly raw materials such as third-party feedstock, maintenance and energy-related expenses, and

 

currency exchange rates (particularly the exchange rates for the U.S. dollar relative to the euro, the Norwegian krone and the Canadian dollar and the euro relative to the Norwegian krone).

Key performance indicators are our Chemicals Segment’s TiO2 average selling prices, the level of TiO2 sales and production volumes, and the cost of our Chemicals Segment’s third-party feedstock. TiO2 selling prices generally follow industry trends and prices will increase or decrease generally as a result of competitive market pressures.

 

 

Three months ended September 30,

 

 

 

Nine months ended September 30,

 

 

 

2020

 

 

2021

 

 

% Change

 

 

 

2020

 

 

2021

 

 

% Change

 

 

 

(Dollars in millions)

 

 

 

(Dollars in millions)

 

 

Net sales

$

416.9

 

 

$

499.8

 

 

 

20

 

%

 

$

1,223.9

 

 

$

1,443.4

 

 

 

18

 

%

Cost of sales

 

337.3

 

 

 

377.1

 

 

 

12

 

 

 

 

961.8

 

 

 

1,116.7

 

 

 

16

 

 

Gross margin

$

79.6

 

 

$

122.7

 

 

 

54

 

 

 

$

262.1

 

 

$

326.7

 

 

 

25

 

 

Operating income

$

21.6

 

 

$

60.3

 

 

 

179

 

 

 

$

104.3

 

 

$

145.4

 

 

 

39

 

 

Percent of net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

81

 

%

75

 

%

 

 

 

 

 

79

 

%

77

 

%

 

 

 

 

Gross margin

19

 

 

25

 

 

 

 

 

 

 

21

 

 

23

 

 

 

 

 

 

Operating income

5

 

 

12

 

 

 

 

 

 

 

9

 

 

10

 

 

 

 

 

 

TiO2 operating statistics:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales volumes*

136

 

 

142

 

 

6

 

%

 

396

 

 

427

 

 

8

 

%

Production volumes*

122

 

 

137

 

 

13

 

%

 

387

 

 

404

 

 

4

 

%

Percent change in net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TiO2 sales volumes

 

 

 

 

 

 

 

 

 

6

 

%

 

 

 

 

 

 

 

 

 

 

8

 

%

TiO2 product pricing

 

 

 

 

 

 

 

 

 

11

 

 

 

 

 

 

 

 

 

 

 

 

4

 

 

TiO2 product mix/other

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

Changes in currency exchange rates

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

4

 

 

Total

 

 

 

 

 

 

 

 

 

20

 

%

 

 

 

 

 

 

 

 

 

 

18

 

%

 

*

Thousands of metric tons

Current Industry Conditions Our Chemicals Segment started 2021 with average TiO2 selling prices 3% lower than at the beginning of 2020.  Average TiO2 selling prices were 11% higher in the third quarter of 2021 as compared to the third quarter of 2020 and 4% higher in the first nine months of 2021 as compared to the first nine months of 2020.  Average TiO2 selling prices at the end of the third quarter of 2021 were 10% higher than the end of 2020.  Our Chemicals Segment experienced higher sales volumes in all major markets in the first nine months of 2021 as compared to the same period of 2020 primarily due to the COVID-19 related demand contraction in 2020 which impacted the second and third quarters and was most acute in the second quarter of 2020.

Our Chemicals Segment operated its production facilities at overall average capacity utilization rates of 99% in the first nine months of 2021 compared to 92% in the first nine months of 2020. Our Chemicals Segment’s TiO2 production volumes were higher in the first nine months of 2021 as compared to the first nine months of 2020 due to higher customer demand in 2021.  Our Chemicals Segment decreased production levels in 2020 (primarily in the third quarter) to correspond to the temporary decline in demand resulting from the COVID-19 pandemic. The table below lists our Chemicals Segment’s comparative quarterly production capacity utilization rates.


- 25 -


 

 

 

Production Capacity Utilization Rates

 

 

 

2020

 

 

2021

 

 

First quarter

95%

 

 

97%

 

 

Second quarter

96%

 

 

100%

 

 

Third quarter

86%

 

 

100%

 

 

Net Sales Our Chemicals Segment’s net sales in the third quarter of 2021 increased 20%, or $82.9 million, compared to the third quarter of 2020 primarily due to an 11% increase in average TiO2 selling prices (which increased net sales by approximately $46 million) and a 6% increase in sales volumes (which increased net sales by approximately $25 million).  In addition to the impact of higher sales volumes and higher average selling prices, we estimate that changes in currency exchange rates (primarily the euro) increased our Chemicals Segment’s net sales by approximately $5 million in the third quarter of 2021 as compared to the third quarter of 2020.  TiO2 selling prices will increase or decrease generally as a result of competitive market pressures, changes in the relative level of supply and demand as well as changes in raw material and other manufacturing costs.

Our Chemicals Segment’s sales volumes increased 6% in the third quarter of 2021 as compared to the third quarter of 2020 due to higher demand primarily in its European and North American markets from continuing improvements in global economic activity in the third quarter of 2021 compared to the same period in 2020, which was negatively impacted by the COVID-19 pandemic.  

Our Chemicals Segment’s net sales in the first nine months of 2021 increased 18%, or $219.5 million, compared to the first nine months of 2020 primarily due to an 8% increase in sales volumes (which increased net sales by approximately $98 million) and a 4% increase in average TiO2 selling prices (which increased net sales by approximately $49 million). In addition to the impact of higher sales volumes and higher average selling prices, we estimate that changes in currency exchange rates (primarily the euro) increased our Chemicals Segment’s net sales by approximately $47 million in the first nine months of 2021 as compared to the first nine months of 2020.  

Our Chemicals Segment’s sales volumes increased 8% in the first nine months of 2021 as compared to the first nine months of 2020 primarily due to higher sales volumes in all major markets, with a significant portion of the increase occurring in the second and third quarters as a result of the impact of COVID-19 on the comparable periods in 2020, as discussed above.  

Cost of Sales and Gross Margin Our Chemicals Segment’s cost of sales increased 12% in the third quarter of 2021 compared to the third quarter of 2020 due to a 6% increase in sales volumes and higher production costs of approximately $16 million (including higher costs for raw materials and energy).  Our Chemicals Segment’s cost of sales as a percentage of net sales decreased to 75% in the third quarter of 2021 compared to 81% in the same period of 2020 primarily due to the favorable effects of higher average TiO2 selling prices and increased coverage of fixed costs from higher production, partially offset by higher production costs including higher raw material and energy costs, as discussed above.

Our Chemicals Segment’s gross margin as a percentage of net sales increased to 25% in the third quarter of 2021 compared to 19% in the third quarter of 2020.  As discussed and quantified above, our Chemicals Segment’s gross margin as a percentage of net sales increased primarily due to the net effects of higher production and sales volumes and higher average TiO2 selling prices, partially offset by higher production costs including higher raw material and energy costs.  

Our Chemicals Segment’s cost of sales increased 16% in the first nine months of 2021 compared to the first nine months of 2020 due to an 8% increase in sales volumes and higher production costs of approximately $17 million (including higher costs for raw materials and energy) and the effects of currency fluctuations (primarily the Canadian dollar).  Our Chemicals Segment’s cost of sales as a percentage of net sales decreased slightly to 77% in the first nine months of 2021 compared to 79% in the same period of 2020 primarily due to the favorable effects of higher average TiO2 selling prices and increased coverage of fixed costs from higher production, partially offset by higher production costs as well as the effects of fluctuations in currency exchange rates, as discussed below.

Our Chemicals Segment’s gross margin as a percentage of net sales increased to 23% in the first nine months of 2021 compared to 21% in the first nine months of 2020.  As discussed and quantified above, our Chemicals Segment’s gross margin as a percentage of net sales increased primarily due to the net effects of higher average TiO2 selling prices, higher production and sales volumes, higher raw material and other production costs and fluctuations in currency exchange rates.

Operating Income Our Chemicals Segment’s operating income increased by $38.7 million, or 179%, in the third quarter of 2021 compared to the third quarter of 2020.  Operating income as a percentage of net sales increased to 12% in the third quarter of 2021 from 5% in the same period of 2020 as a result of the factors impacting gross margin discussed above.  We estimate changes in currency exchange rates increased our Chemicals Segment’s operating income by approximately $2 million in the third quarter of 2021 as compared to the same period in 2020, as discussed in the Currency Exchange Rates section below.

- 26 -


 

Our Chemicals Segment’s operating income increased by $41.1 million, or 39%, in the first nine months of 2021 compared to the first nine months of 2020.  Operating income as a percentage of net sales increased to 10% in the first nine months of 2021 from 9% in the same period of 2020.  This increase was driven by the higher gross margin discussed above. We estimate that changes in currency exchange rates decreased our Chemicals Segment’s operating income by approximately $15 million in the first nine months of 2021 as compared to the same period in 2020.

Our Chemicals Segment’s operating income is net of amortization of purchase accounting adjustments made in conjunction with our acquisitions of interests in NL and Kronos. As a result, we recognize additional depreciation expense above the amounts Kronos reports separately, substantially all of which is included within cost of sales. We recognized additional depreciation expense of $1.1 million in the first nine months of 2021 and $2.7 million in the same period of 2020, which reduced our reported Chemicals Segment’s operating income as compared to amounts reported by Kronos.

Currency Exchange Rates – Our Chemicals Segment has substantial operations and assets located outside the United States (primarily in Germany, Belgium, Norway and Canada).  The majority of our Chemicals Segment’s sales from non-U.S. operations are denominated in currencies other than the U.S. dollar, principally the euro, other major European currencies and the Canadian dollar.  A portion of our Chemicals Segment’s sales generated from its non-U.S. operations is denominated in the U.S. dollar (and consequently our non-U.S. operations will generally hold U.S. dollars from time to time).  Certain raw materials used in all our Chemicals Segment’s production facilities, primarily titanium-containing feedstocks, are purchased primarily in U.S. dollars, while labor and other production and administrative costs are incurred primarily in local currencies.  Consequently, the translated U.S. dollar value of our Chemicals Segment’s non-U.S. sales and operating results are subject to currency exchange rate fluctuations which may favorably or unfavorably impact reported earnings and may affect the comparability of period-to-period operating results.  In addition to the impact of the translation of sales and expenses over time, our Chemicals Segment’s non-U.S. operations also generate currency transaction gains and losses which primarily relate to (i) the difference between the currency exchange rates in effect when non-local currency sales or operating costs (primarily U.S. dollar denominated) are initially accrued and when such amounts are settled with the non-local currency, and (ii) changes in currency exchange rates during time periods when our non-U.S. operations are holding non-local currency (primarily U.S. dollars).

Overall, we estimate that fluctuations in currency exchange rates had the following effects on the reported amounts of our Chemicals Segment’s sales and operating income for the periods indicated.

Impact of changes in currency exchange rates

Three months ended September 30, 2021 vs September 30, 2020

 

 

 

 

 

 

Translation

gains (losses)-

impact of

rate changes

 

 

Total

currency

impact

2021 vs 2020

 

 

Transaction gains (losses) recognized

 

 

 

 

 

2020

 

 

2021

 

 

Change

 

(In millions)

 

Impact on:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

 

 

$

 

 

$

 

 

$

5

 

 

$

5

 

Operating income

 

(3

)

 

 

1

 

 

 

4

 

 

 

(2

)

 

 

2

 

The $5 million increase in our Chemicals Segment’s net sales (translation gain) was caused primarily by a weakening of the U.S. dollar relative to the euro, as euro-denominated sales were translated into more U.S. dollars in 2021 as compared to 2020.  The weakening of the U.S. dollar relative to the Canadian dollar and the Norwegian krone in 2021 did not have a significant effect on the reported amount of our Chemicals Segment’s net sales, as a substantial portion of the sales generated by our Chemicals Segment’s Canadian and Norwegian operations is denominated in the U.S. dollar.

The $2 million increase in our Chemicals Segment’s operating income was comprised of the following:

 

Higher net currency transaction gains of approximately $4 million primarily caused by relative changes in currency exchange rates at each applicable balance sheet date between the U.S. dollar and the euro, Canadian dollar and the Norwegian krone, and between the euro and the Norwegian krone, which causes increases or decreases, as applicable, in U.S. dollar-denominated receivables and payables and U.S. dollar currency held by our Chemicals Segment’s non-U.S. operations, and in Norwegian krone denominated receivables and payables held by our Chemicals Segment’s non-U.S. operations, and

 

Approximately $2 million from net currency translation losses primarily caused by a weakening of the U.S. dollar relative to the Canadian dollar and the Norwegian krone, as local currency-denominated operating costs were translated into more U.S. dollars in 2021 as compared to 2020, partially offset by net currency translation gains primarily caused by a weakening of the U.S. dollar relative to the euro as the positive effects of the weaker U.S. dollar on euro-denominated sales more than offset the unfavorable effects of euro-denominated operating costs being translated into more U.S. dollars in 2021 as compared to 2020.

- 27 -


 

 

Impact of changes in currency exchange rates

Nine months ended September 30, 2021 vs September 30, 2020

 

 

 

 

 

 

Translation

gains (losses) -

impact of

rate changes

 

 

Total

currency

impact

2021 vs 2020

 

 

Transaction gains recognized

 

 

 

 

 

2020

 

 

2021

 

 

Change

 

(In millions)

 

Impact on:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

 

 

$

 

 

$

 

 

$

47

 

 

$

47

 

Operating income

 

3

 

 

 

1

 

 

 

(2

)

 

 

(13

)

 

 

(15

)

The $47 million increase in our Chemicals Segment’s net sales (translation gain) was caused primarily by a weakening of the U.S. dollar relative to the euro, as euro-denominated sales were translated into more U.S. dollars in 2021 as compared to 2020.  The weakening of the U.S. dollar relative to the Canadian dollar and the Norwegian krone in 2021 did not have a significant effect on the reported amount of our Chemicals Segment’s net sales, as a substantial portion of the sales generated by our Chemicals Segment’s Canadian and Norwegian operations is denominated in the U.S. dollar.

 

The $15 million decrease in our Chemicals Segment’s operating income was comprised of the following:

 

Lower net currency transaction gains of approximately $2 million primarily caused by relative changes in currency exchange rates at each applicable balance sheet date between the U.S. dollar and the euro, Canadian dollar and the Norwegian krone, and between the euro and the Norwegian krone, which causes increases or decreases, as applicable, in U.S. dollar-denominated receivables and payables and U.S. dollar currency held by our Chemicals Segment’s non-U.S. operations, and in Norwegian krone denominated receivables and payables held by our Chemicals Segment’s non-U.S. operations, and

 

Approximately $13 million from net currency translation losses primarily caused by a weakening of the U.S. dollar relative to the Canadian dollar and Norwegian krone, as local currency-denominated operating costs were translated into more U.S. dollars in 2021 as compared to 2020, partially offset by net currency translation gains primarily caused by a weakening of the U.S. dollar relative to the euro as the positive effects of the weaker U.S. dollar on our Chemicals Segment’s euro-denominated sales more than offset the unfavorable effects of euro-denominated operating costs being translated into more U.S. dollars in 2021 as compared to 2020.

Outlook – Based on current market conditions, we expect global demand for consumer products, including those of our Chemicals Segment’s customers, to remain strong throughout the remainder of 2021 and therefore we expect our Chemicals Segment’s sales and production volumes will be higher in 2021 as compared to 2020. As global economic activity continues to recover, our Chemicals Segment is experiencing certain disruptions in global supply chains including availability of third-party feedstock and other raw materials along with transportation and logistics delays.  Thus far the Chemicals Segment’s operations team has been able to manage through these disruptions with minimal impact on its operations; however, our Chemicals Segment expects these challenges to continue for the foreseeable future.  In addition, our Chemicals Segment continues to experience increasing production costs, including higher raw material and related shipping costs and higher energy costs, all of which are likely to continue through the end of the year. As a result of rising costs and continued strong customer demand, we expect selling prices for TiO2 will continue to rise through the remainder of 2021, mitigating increases in distribution, raw material, energy and other production costs. As such, we expect our Chemical Segment’s 2021 sales and operating income will be higher than in 2020; however, our Chemicals Segment expects increasing costs to continue to challenge margins. Our Chemicals Segment continues to monitor current and anticipated near-term customer demand levels and will align its production and inventories accordingly.

Our expectations for the TiO2 industry and our Chemicals Segment’s operations are based on a number of factors outside our control, including the ongoing economic effects of the COVID-19 pandemic. As noted above, our Chemicals Segment has experienced global supply chain disruptions, including disruptions related to COVID-19, and future impacts of COVID-19 on its operations will depend on, among other things, any future disruption in its operations or its suppliers’ operations, or related possible shipping delays, and the timing and effectiveness of the global measures deployed to fight COVID-19 and its variants, all of which remain uncertain and cannot be predicted.

Component Products –

Our Component Products Segment’s product offerings consist of a significantly large number of products that have a wide variation in selling price and manufacturing cost, which results in certain practical limitations on its ability to quantify the impact of changes in individual product sales quantities and selling prices on the segment’s net sales, cost of sales and gross margin. The key performance indicator for our Component Products Segment is operating income and margins.

- 28 -


 

In the third quarter of 2021 our Component Products Segment’s operating income increased to $5.1 million compared to $2.1 million in the third quarter of 2020.  Operating income for the first nine months of 2021 was $16.7 million compared to $9.5 million in the first nine months of 2020. The increase in our Component Products Segment’s operating income in the third quarter and first nine months of 2021 compared to the same periods in 2020 primarily resulted from higher sales volumes at both its security products and marine components reporting units. Our Component Products Segment’s operating income was negatively impacted by the COVID-19 pandemic in the second and third quarters of 2020, which significantly impacts operating income comparisons for the third quarter and nine-month comparative periods. Our Component Products Segment sustained the greatest negative sales impact from COVID-19 in the second quarter of 2020.  Beginning in the third quarter of 2020 and continuing through the third quarter of 2021, marine components sales exceeded pre-pandemic levels.  Security products sales generally improved since the third quarter of 2020, but did not recover to pre-pandemic levels until the second quarter of 2021 when sales improved in markets that had been slower to recover from the COVID-19 pandemic, particularly sales to distributors and the office furniture market.

 

 

Three months ended September 30,

 

 

 

Nine months ended September 30,

 

 

 

2020

 

 

2021

 

 

% Change

 

 

 

2020

 

 

2021

 

 

% Change

 

 

 

(Dollars in millions)

 

 

 

(Dollars in millions)

 

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Security products

$

21.2

 

 

$

25.8

 

 

 

22

 

%

 

$

65.2

 

 

$

79.3

 

 

 

22

 

%

Marine components

 

7.2

 

 

 

8.7

 

 

 

21

 

 

 

 

19.3

 

 

 

27.4

 

 

 

42

 

 

Total net sales

 

28.4

 

 

 

34.5

 

 

 

22

 

 

 

 

84.5

 

 

 

106.7

 

 

 

26

 

 

Cost of sales

 

21.1

 

 

 

23.6

 

 

 

12

 

 

 

 

59.4

 

 

 

73.4

 

 

 

24

 

 

Gross margin

$

7.3

 

 

$

10.9

 

 

 

49

 

 

 

$

25.1

 

 

$

33.3

 

 

 

32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

$

2.1

 

 

$

5.1

 

 

 

146

 

%

 

$

9.5

 

 

$

16.7

 

 

 

76

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent of net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

74

 

%

68

 

%

 

 

 

 

 

70

 

%

69

 

%

 

 

 

 

Gross margin

26

 

 

32

 

 

 

 

 

 

 

30

 

 

31

 

 

 

 

 

 

Operating income

7

 

 

15

 

 

 

 

 

 

 

11

 

 

15

 

 

 

 

 

 

 

Net Sales – Our Component Products Segment’s net sales increased $6.1 million in the third quarter of 2021 compared to the same period in 2020 primarily due to higher security products sales across a variety of markets and to a lesser extent higher marine components sales primarily to the towboat market.  Net sales increased $22.2 million for the first nine months of 2021 compared to the same period in 2020 primarily due to higher sales volumes for both security products and marine components, particularly in the second quarter of 2021, as many of our Component Products Segment’s customers were temporarily closed or reduced production during the second quarter of 2020 due to government ordered closures or reduced demand resulting from the COVID-19 pandemic. Relative to prior year, third quarter security products sales were $2.1 million higher to the government security market, $1.3 million higher to the transportation market, and $.6 million higher to distribution customers, and sales for the first nine months of 2021 were $5.6 million higher to the government security market, $4.5 million higher to the transportation market, and $2.0 million higher to distribution customers. Marine sales to the towboat market were $1.4 million higher for the third quarter and $6.5 million higher for the first nine months of 2021 compared to the same periods in 2020.  

Costs of Sales and Gross Margin – Our Component Products Segment’s cost of sales as a percentage of net sales for the third quarter and for the first nine months of 2021 was lower than the same periods in 2020. As a result, gross margin as a percentage of net sales increased over the same periods. The increase in gross margin percentage in the third quarter and for the first nine months of 2021 is primarily due to the increase in the security products gross margin percentage related to increased coverage of fixed costs from higher production, partially offset by higher production costs including increased raw materials costs across a variety of commodities and component inputs, higher shipping costs, and increased labor costs primarily due to higher overtime costs and increased headcount.

Operating Income – As a percentage of net sales, our Component Products Segment’s operating income for the third quarter and first nine months of 2021 increased compared to the same periods of 2020 due to increased coverage of selling, general and administrative expenses on higher sales and the factors impacting cost of sales and gross margin discussed above.

Outlook Beginning in the second half of 2020, our Component Products Segment’s sales began to recover from the historically low levels it experienced during the second quarter of 2020, with sales steadily improving for the remainder of last year. Throughout the first nine months of 2021, our Component Products Segment experienced strong demand, particularly for marine components. During the second and third quarters of 2021, its security products reporting unit has seen improved demand from distributors and the office furniture market that had been slower to recover. In the first nine months of 2021, our Component Products

- 29 -


 

Segment’s manufacturing facilities operated at elevated production rates in line with improved demand, although labor markets are tight in each of the regions in which it operates and, as a result, our Component Products Segment has experienced and continues to have challenges maintaining staffing levels aligned with current and forecasted demand, particularly at its marine components reporting unit.

Based on current market conditions, our Component Products Segment expects demand levels to remain strong for the remainder of 2021 and it expects to report increased sales and operating income in 2021 compared to 2020. Our Component Products Segment’s supply chains remain intact, although the current global and domestic supply chain disruptions continue to present challenges in sourcing certain raw materials due to increased lead times, availability shortages and transportation and logistics delays. Thus far our Component Products Segment has been able to manage through these disruptions with minimal impact on its operations.  In addition, our Component Products Segment is experiencing increased production costs including higher labor, shipping, and increasing costs of many of the raw materials it uses. In response, our Component Products Segment implemented price increases and surcharges in the second and third quarters of 2021; however, the extent to which the price increases and surcharges will mitigate the rising costs is uncertain and it expects increasing production costs will negatively impact gross margins in the fourth quarter as higher cost inventories are sold. Our Component Products Segment’s operations teams meet frequently to ensure they are taking appropriate actions to maintain a safe working environment for all its employees, minimize material or supply related operational disruptions, manage inventory levels and improve operating margins.

Our Component Products Segment’s expectations for its operations and the markets it serves are based on a number of factors outside its control. As noted above, there are global and domestic supply chain challenges and any future impacts of COVID-19 on our Component Products Segment’s operations will depend on, among other things, any future disruption in its operations or its suppliers’ operations, demand for its products and the timing and effectiveness of the global measures deployed to fight COVID-19, all of which remain uncertain and cannot be predicted.

 

Real Estate Management and Development  –

 

 

Three months ended

 

 

Nine months ended

 

 

September 30,

 

 

September 30,

 

 

2020

 

 

2021

 

 

2020

 

 

2021

 

 

(In millions)

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land sales

$

10.6

 

 

$

41.9

 

 

$

16.8

 

 

$

57.0

 

Water delivery sales

 

2.2

 

 

 

2.3

 

 

 

6.2

 

 

 

4.8

 

Utility and other

 

.5

 

 

 

.4

 

 

 

1.5

 

 

 

1.3

 

Total net sales

 

13.3

 

 

 

44.6

 

 

 

24.5

 

 

 

63.1

 

Cost of sales

 

10.5

 

 

 

25.5

 

 

 

18.3

 

 

 

36.5

 

Gross margin

$

2.8

 

 

$

19.1

 

 

$

6.2

 

 

$

26.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

$

5.2

 

 

$

15.8

 

 

$

25.4

 

 

$

26.0

 

 

General – Our Real Estate Management and Development Segment consists of BMI and LandWell.  BMI provides utility services, among other things, to an industrial park located in Henderson, Nevada and is responsible for the delivery of water to the City of Henderson and various other users through a water distribution system owned by BMI. LandWell is actively engaged in efforts to develop certain real estate in Henderson, Nevada, including approximately 2,100 acres zoned for residential/planned community purposes and approximately 400 acres zoned for commercial and light industrial use.

Beginning in December 2013 and through the first nine months of 2021, LandWell has closed or entered into escrow on approximately 1,300 acres of the residential/planned community and approximately 70 acres zoned for commercial and light industrial use. Contracts for land sales are negotiated on an individual basis and sales terms and prices will vary based on such factors as location (including location within a planned community), expected development work, and individual buyer needs. Although land may be under contract or in escrow, in most instances buyers can cancel the escrow agreement with no financial penalties until shortly before the closing date. Land sales may be completed but we do not recognize revenue until we have satisfied the criteria for revenue recognition set forth in ASC Topic 606. In some instances, we will receive cash proceeds at the time the contract closes and record deferred revenue for some or all of the cash amount received, with such deferred revenue being recognized in subsequent periods. We expect our development work on the residential/planned community to continue for 4 to 7 years although we may have sold or transferred ownership of all of the land within the community prior to development work completion.

Net Sales and Operating Income – A substantial portion of the net sales from our Real Estate Management and Development Segment in the third quarter and first nine months of 2020 and 2021 consisted of revenues from land sales. As noted above, we recognize

- 30 -


 

revenue in our residential/planned community over time using cost based input methods (previously known as percentage completion method) and substantially all of the revenue we recognized in 2020 and 2021 was under this method of revenue recognition.  The contracts on these sales (both within the planned community and otherwise) include approximately 1,200 acres of the residential planned community and certain other acreage which closed in December 2013 and through the third quarter of 2021. Land sales revenues were higher in the third quarter and first nine months of 2021 as compared to the same periods in 2020 primarily due to an increase in the amount of acreage sold in 2021 compared to 2020 and increased development activity in the second and third quarters of 2021 compared to the same periods of 2020.  During the second and third quarters of 2020 we slowed infrastructure spending within the residential planned community due to the uncertainty associated with the COVID-19 pandemic.  Cost of sales related to land sales revenues was $32.0 million in the first nine months of 2021 compared to $12.8 million in the first nine months of 2020. Operating income includes $6.2 million in the first nine months of 2021 (all in the first quarter) and $19.1 million in the first nine months of 2020 (all in the first quarter) of income related to the recognition of tax increment reimbursement note receivables, as discussed in Note 11 to our Condensed Consolidated Financial Statements. In addition during the third quarter of 2020 we recognized a gain of $4.0 million from proceeds from a prior land sale.

The remainder of net sales and cost of sales related to this segment primarily relates to water delivery fees and expenses.  We deliver water to several customers under long-term contracts.  

Outlook – As a result of the COVID-19 pandemic, LandWell experienced a decline in land sales activity during the second quarter of 2020 and, as a result, LandWell reduced development spending where possible to align with expected residential builder output. Beginning in the second half of 2020 and continuing through the first nine months of 2021, land sales activities increased, including increases in both the number of acres sold and the selling price per acre sold.  In addition, approximately 150 acres are under escrow agreements at September 30, 2021.  In order to support increased sales activity, LandWell returned to more normalized infrastructure development spending in late 2020, and thus far in 2021 infrastructure activity has continued at a heavy pace to support the increase in acreage sold or entering escrow.  Throughout the COVID-19 pandemic, LandWell has continued to actively develop and market land it manages, primarily to residential builders, for the residential/planned community in Henderson and BMI has continued to provide utility and water delivery services to its customers without interruption.  Our Real Estate Management and Development management team remains focused on protecting the health and safety of its employees and contractors including implementation of enhanced health and safety protocols.

Based on current land sales activities, including current land sales in escrow, we expect the level of land sales in the near term to continue to be strong.  As noted above, we cannot guarantee land held in escrow will close as currently scheduled because builders can generally cancel without financial penalty until shortly before scheduled closing. In addition, there are still several COVID-19 mitigation procedures in effect from the City of Henderson and utility providers that, in some cases, add time to the typical permitting and mapping process required to be completed before the necessary approvals can be obtained to close a land sale. Under LandWell’s development agreement with the City of Henderson, the issuance of a specified number of housing permits requires LandWell to complete certain large infrastructure projects.  LandWell has been required to begin several of these large projects in 2021 and, as a result, we expect land development costs to increase during 2021 as compared to 2020.  Because these costs relate to the entirety of the residential/planned community, these costs are not part of the cost based inputs used to recognize revenue and therefore this spending will not correlate to revenue recognition but it is expected to be eligible for tax increment reimbursement.

General Corporate Items, Interest Expense, Income Taxes and Noncontrolling Interest – 2021 Compared to 2020

Gain on Land Sales In the first nine months of 2021 we sold excess property not used in our operations for net proceeds of approximately $23.4 million and recognized a pre-tax gain of $16.0 million.

Insurance Recoveries NL has agreements with certain insurance carriers pursuant to which the carriers reimburse NL for a portion of its past lead pigment and asbestos litigation defense costs.  Insurance recoveries include amounts NL received from these insurance carriers.  

The agreements with certain of NL’s insurance carriers also include reimbursement for a portion of its future litigation defense costs.  We are not able to determine how much NL will ultimately recover from these carriers for defense costs incurred by NL because of certain issues that arise regarding which defense costs qualify for reimbursement.  Accordingly, these insurance recoveries are recognized when the receipt is probable and the amount is determinable. See Note 15 to our Condensed Consolidated Financial Statements.

Kronos recognized $1.5 million of insurance recoveries in the first quarter of 2020 related to a property damage claim.

Changes in the Market Value of Valhi Common Stock held by Subsidiaries – Our subsidiaries, Kronos and NL, hold shares of our common stock.  As discussed in the 2020 Annual Report, we account for our proportional interest in these shares of our common stock as treasury stock, at Kronos’ and NL’s historical cost basis.  The remaining portion of these shares of our common stock, which are attributable to the noncontrolling interest of Kronos and NL, are reflected in our Condensed Consolidated Balance Sheet at fair value.  Kronos and NL recognize unrealized gains or losses on these shares of our common stock in the determination of each of their respective net income or losses.  Under the principles of consolidation we eliminate any gains or losses associated with our common

- 31 -


 

stock to the extent of our proportional ownership interest in each subsidiary.  We recognized a loss of $.2 million in the third quarter of 2021 compared to a gain of $.7 million in the same period of 2020 and a gain of $2.0 million in the first nine months of 2021 compared to a loss of $2.2 million in the first nine months of 2020 in our Condensed Consolidated Statements of Income, which represents the unrealized gain or loss in respect of these shares during such periods attributable to the noncontrolling interest of Kronos and NL.

Other General Corporate Items Corporate expenses in the third quarter and first nine months of 2021 were comparable to the same periods of 2020. Included in corporate expense are:

 

litigation and related costs at NL of $.6 million in the third quarter of 2021 compared to $.3 million in the third quarter of 2020 and $1.4 million in each of the first nine months of 2021 and 2020; and

 

environmental remediation and related costs of $.4 million in the third quarter of 2021 compared to $.1 million in the third quarter of 2020 and $1.3 million in the first nine months of 2021 compared to $.5 million in the first nine months of 2020.

Overall, we currently expect that our net general corporate expenses in 2021 will be higher than 2020 primarily due to higher expected litigation and related costs and higher environmental remediation and related costs.

The level of our litigation and related expenses varies from period to period depending upon, among other things, the number of cases in which we are currently involved, the nature of such cases and the current stage of such cases (e.g. discovery, pre-trial motions, trial or appeal, if applicable). See Note 15 to our Condensed Consolidated Financial Statements. If our current expectations regarding the number of cases in which we expect to be involved during 2021, or the nature of such cases, were to change, our corporate expenses could be higher than we currently estimate.

Obligations for environmental remediation and related costs are difficult to assess and estimate, and it is possible that actual costs for environmental remediation and related costs will exceed accrued amounts or that costs will be incurred in the future for sites in which we cannot currently estimate the liability. If these events occur in 2021, our corporate expense could be higher than we currently estimate. In addition, we adjust our accruals for environmental remediation and related costs as further information becomes available to us or as circumstances change. Such further information or changed circumstances could result in an increase or reduction in our accrued environmental remediation and related costs. See Note 15 to our Condensed Consolidated Financial Statements.

Interest Expense – Interest expense of $7.9 million in the third quarter of 2021 and $25.2 million in the first nine months of 2021 decreased $1.0 million and $2.2 million, respectively, compared to the same prior year periods primarily due to lower average interest rates and lower average balances on variable-rate indebtedness in 2021.  

We expect interest expense will continue to be lower in the remainder of 2021 as compared to 2020 due to lower average balances.

Provision for Income Taxes – We recognized income tax expense of $16.9 million in the third quarter of 2021 compared to income tax benefit of $11.4 million in the third quarter of 2020 and income tax expense of $35.2 million in the first nine months of 2021 compared to $21.2 million in the first nine months of 2020. The increase in both periods is primarily due to higher earnings in 2021, the jurisdictional mix of our earnings and, in 2020, a reduction in the expected annual effective income tax rate recognized in the third quarter. Income tax expense for the first nine months of 2021 includes lower amounts recognized for global intangible low-tax income (GILTI) due to limitations in 2020 on related deductions and tax credits and an increase in the valuation allowance in 2020 for the nondeductible amount of business interest expense carryforward not expected to be fully utilized under the more-likely-than-not recognition criteria.  For interim financial reporting purposes, we apply an estimated annual effective tax rate in determining our provision for income taxes and in 2020 our estimated annual effective tax rate was significantly impacted due to the effects of GILTI and the increase to the valuation allowance relative to our earnings. Our earnings are subject to income tax in various U.S. and non-U.S. jurisdictions, and the income tax rates applicable to the pre-tax earnings (losses) of our non-U.S. operations are generally higher than the income tax rates applicable to our U.S. operations.  Excluding the effect of any increase or decrease in our deferred income tax asset valuation allowance or changes in our reserve for uncertain tax positions, we would generally expect our overall effective tax rate to be higher than the U.S. federal statutory tax rate of 21% primarily because of our non-U.S. operations.  

We recognize deferred income taxes with respect to the excess of the financial reporting carrying amount over the income tax basis of our direct investment in Kronos common stock because the exemption under GAAP to avoid such recognition of deferred income taxes is not available to us. At December 31, 2020, we had recognized a deferred income tax liability with respect to our direct investment in Kronos of $35.5 million.  There is a maximum amount (or cap) of such deferred income taxes we are required to recognize with respect to our direct investment in Kronos. The maximum amount of such deferred income tax liability we would be required to have recognized (the cap) is $155.4 million.  During the first nine months of 2021, we recognized a non-cash deferred income tax expense with respect to our direct investment in Kronos of $.7 million for the increase in the deferred income taxes required to be recognized with respect to the excess of the financial reporting carrying amount over the income tax basis of our direct investment in Kronos common stock, to the extent such reduction related to our equity in Kronos’ net income during such period. We recognized a similar deferred income tax benefit of $1.8 million in the first nine months of 2020. A portion of the net change with respect to the excess of the financial reporting carrying amount over the income tax basis of our direct investment in Kronos common stock during such periods related to our equity in Kronos’ other comprehensive income (loss) items, and the amounts allocated to other comprehensive income (loss) items includes amounts related to our equity in Kronos’ other comprehensive income (loss) items.

- 32 -


 

See Note 12 to our Condensed Consolidated Financial Statements for a tabular reconciliation of our statutory income tax provision to our actual tax provision.

Noncontrolling Interest in Net Income of Subsidiaries – Noncontrolling interest in operations of subsidiaries increased in 2021 compared to 2020 primarily due to increased operating income at Kronos and CompX. See Note 13 to our Condensed Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

Consolidated Cash Flows

Operating Activities

Trends in cash flows from operating activities (excluding the impact of significant asset dispositions and relative changes in assets and liabilities) are generally similar to trends in our operating income.  In addition to the impact of the operating, investing and financing cash flows discussed below, changes in the amount of cash, cash equivalents and restricted cash we report from period to period can be impacted by changes in currency exchange rates, since a portion of our cash, cash equivalents and restricted cash is held by our non-U.S. subsidiaries.

Cash provided by operating activities was $189.2 million in the first nine months of 2021 compared to cash provided by operating activities of $45.2 million in the first nine months of 2020. This $144.0 million increase in cash provided was primarily due to the net effect of the following items:

 

a $72.1 million decrease in the amount of net cash used in relative changes in receivables, inventories, payables and accrued liabilities in the first nine months of 2021;

 

consolidated operating income of $188.1 million in the first nine months of 2021, an increase of  $48.9 million compared to operating income of $139.2 million in the first nine months of 2020; and

 

higher net cash paid for income taxes in 2021 of $30.0 million due to increased earnings in 2021 and the timing of tax payments.

Changes in working capital were affected by accounts receivable and inventory changes as shown below:

 

Kronos’ average days sales outstanding (“DSO”) decreased from December 31, 2020 to September 30, 2021 primarily due to relative changes in the timing of collections.

 

Kronos’ average days sales in inventory (“DSI”) decreased from December 31, 2020 to September 30, 2021 primarily due to lower inventory volumes attributable to sales volumes exceeding production volumes in the first nine months of 2021 compared to 2020.

 

CompX’s average DSO at September 30, 2021 increased from December 31, 2020 primarily as a result of relative changes in the timing of collections but is in line with prior year.

 

CompX’s average DSI increased from December 31, 2020 to September 30, 2021 due to increased raw material and production costs as well as increased purchases of certain components and raw materials that have longer lead times or for which CompX has experienced availability issues.

For comparative purposes, we have also provided comparable prior period numbers below.

 

 

December 31,
2019

 

  

September 30,

2020

 

  

December 31,
2020

 

  

September 30,

2021

 

Kronos:

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Days sales outstanding

 

71 days

  

  

 

67 days

  

  

 

68 days

  

  

 

66 days

 

Days sales in inventory

 

83 days

  

  

 

66 days

  

  

 

74 days

  

  

 

51 days

 

CompX:

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Days sales outstanding

 

36 days

  

  

 

39 days

  

  

 

33 days

  

  

 

40 days

 

Days sales in inventory

 

81 days

  

  

 

83 days

  

  

 

75 days

  

  

 

91 days

 

 

- 33 -


 

 

We do not have complete access to the cash flows of our majority-owned subsidiaries, due in part to limitations contained in certain credit agreements of our subsidiaries and because we do not own 100% of these subsidiaries. A detail of our consolidated cash flows from operating activities is presented in the table below.  Intercompany dividends have been eliminated.

 

 

Nine months ended

September 30,

 

 

2020

 

 

2021

 

 

(In millions)

 

Cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Valhi exclusive of its subsidiaries

$

28.1

 

 

$

84.8

 

Kronos

 

56.0

 

 

 

125.9

 

NL exclusive of its subsidiaries

 

2.7

 

 

 

8.3

 

CompX

 

8.7

 

 

 

8.1

 

BMI

 

12.6

 

 

 

35.1

 

LandWell

 

12.6

 

 

 

96.5

 

Tremont exclusive of its subsidiaries

 

7.9

 

 

 

32.2

 

Eliminations and other

 

(83.4

)

 

 

(201.7

)

Total

$

45.2

 

 

$

189.2

 

Investing Activities –

We spent $39.2 million in capital expenditures during the first nine months of 2021 including:

 

$35.9 million in our Chemicals Segment;

 

$2.3 million in our Component Products Segment; and

 

$1.0 million in our Real Estate Management and Development Segment.

We had net proceeds from the sale of land not used in our operations of $23.4 million in the first nine months of 2021.

Financing Activities –

During the nine months ended September 30, 2021, we:

 

repaid $66.2 million under the Contran credit facility and repaid $1.5 million under Tremont’s deferred payment obligation;

 

paid aggregate quarterly dividends to Valhi stockholders of $.24 per share ($6.8 million); and

 

CompX acquired shares of its Class A common stock for a purchase price of $.8 million.

The declaration and payment of future dividends, and the amount thereof, is discretionary and is dependent upon a number of factors including our current and future expected results of operations, financial condition, cash requirements for our businesses, contractual and other requirements and restrictions and other factors deemed relevant by our board of directors.  The amount and timing of past dividends is not necessarily indicative of the amount or timing of any future dividends which might be paid.  There are currently no contractual restrictions on the amount of dividends which we may pay.  Distributions to noncontrolling interest in subsidiaries in the first nine months of 2021 are comprised of CompX dividends paid to shareholders other than NL and Kronos dividends paid to shareholders other than us and NL.

Outstanding Debt Obligations

At September 30, 2021, our consolidated indebtedness was comprised of:

 

Valhi’s $204.5 million outstanding on its $320 million credit facility with Contran which is due no earlier than December 31, 2022;

 

€400 million aggregate outstanding on the KII 3.75% Senior Secured Notes ($460.4 million carrying amount, net of unamortized debt issuance costs) due in September 2025;

 

$15.9 million on BMI’s bank loan ($15.3 million carrying amount, net of unamortized debt issuance costs) due through September 2032;

 

$13.9 million on LandWell’s bank loan due in April 2036; and

 

approximately $1.4 million of other indebtedness.

- 34 -


 

 

On April 20, 2021, Kronos entered into a new $225 million global revolving credit facility (“Global Revolver”) which matures in April 2026.  Kronos has no outstanding borrowings on the new Global Revolver at September 30, 2021 and the full $225 million was available for borrowings thereunder.  Kronos’ Senior Secured Notes and its new Global Revolver contain a number of covenants and restrictions which, among other things, restrict its ability to incur or guarantee additional debt, incur liens, pay dividends or make other restricted payments, or merge or consolidate with, or sell or transfer substantially all of its assets to, another entity, and contain other provisions and restrictive covenants customary in lending transactions of these types.  Kronos’ credit agreements contain provisions which could result in the acceleration of indebtedness prior to their stated maturity for reasons other than defaults for failure to comply with typical financial or payment covenants. For example, the credit agreements allow the lender to accelerate the maturity of the indebtedness upon a change of control (as defined in the agreement) of the borrower.  In addition, the credit agreements could result in the acceleration of all or a portion of the indebtedness following a sale of assets outside the ordinary course of business.  The terms of all of our debt instruments outstanding at September 30, 2021 are discussed in Note 9 to our 2020 Annual Report.  See Note 6 to our Condensed Consolidated Financial Statements for discussion of the terms of Kronos’ new Global Revolver.  We were in compliance with all of our debt covenants at September 30, 2021.  We believe we will be able to maintain compliance with the financial covenants contained in our credit facilities through their maturity.

Future Cash Requirements

Liquidity

Our primary source of liquidity on an ongoing basis is our cash flows from operating activities and borrowings under various lines of credit and notes. We generally use these amounts to (i) fund capital expenditures, (ii) repay short-term indebtedness incurred primarily for working capital purposes and (iii) provide for the payment of dividends (including dividends paid to us by our subsidiaries) or treasury stock purchases. From time-to-time we will incur indebtedness, generally to (i) fund short-term working capital needs, (ii) refinance existing indebtedness, (iii) make investments in marketable and other securities (including the acquisition of securities issued by our subsidiaries and affiliates) or (iv) fund major capital expenditures or the acquisition of other assets outside the ordinary course of business. Occasionally we sell assets outside the ordinary course of business, and we generally use the proceeds to (i) repay existing indebtedness (including indebtedness which may have been collateralized by the assets sold), (ii) make investments in marketable and other securities, (iii) fund major capital expenditures or the acquisition of other assets outside the ordinary course of business or (iv) pay dividends.

We routinely compare our liquidity requirements and alternative uses of capital against the estimated future cash flows we expect to receive from our subsidiaries, and the estimated sales value of those units. As a result of this process, we have in the past sought, and may in the future seek, to raise additional capital, refinance or restructure indebtedness, repurchase indebtedness in the market or otherwise, modify our dividend policies, consider the sale of our interests in our subsidiaries, affiliates, business units, marketable securities or other assets, or take a combination of these and other steps, to increase liquidity, reduce indebtedness and fund future activities. Such activities have in the past and may in the future involve related companies. From time to time, we and our subsidiaries may enter into intercompany loans as a cash management tool. Such notes are structured as revolving demand notes and pay and receive interest on terms we believe are generally more favorable than current debt and investment market rates. The companies that borrow under these notes have sufficient liquidity to repay the notes. All of these notes and related interest expense and income are eliminated in our Condensed Consolidated Financial Statements.

We periodically evaluate acquisitions of interests in or combinations with companies (including our affiliates) that may or may not be engaged in businesses related to our current businesses. We intend to consider such acquisition activities in the future and, in connection with this activity, may consider issuing additional equity securities and increasing indebtedness. From time to time, we also evaluate the restructuring of ownership interests among our respective subsidiaries and related companies.

We believe we will be able to comply with the financial covenants contained in our credit facilities through their maturities; however, if future operating results differ materially from our expectations we may be unable to maintain compliance. Based upon our expectations of our operating performance, and the anticipated demands on our cash resources, we expect to have sufficient liquidity to meet our short-term (defined as the twelve-month period ending September 30, 2022) and long-term obligations (defined as the five-year period ending September 30, 2026). If actual developments differ from our expectations, our liquidity could be adversely affected.

 

- 35 -


 

 

At September 30, 2021, we had $115.5 million available for borrowing under our credit facility with Contran. Amounts available under this facility are at Contran’s discretion.  Kronos’ new $225 million Global Revolver entered into in April 2021, which replaced Kronos’ North American and European facilities, matures in April 2026 and currently the full $225 million is available for borrowing under this facility and Kronos could borrow all available amounts without violating its existing debt covenants.  See Note 6 to our Condensed Consolidated Financial Statements.

 

At September 30, 2021, we had an aggregate of $621.3 million of restricted and unrestricted cash, cash equivalents and marketable securities, including $111.2 million held by our non-U.S. subsidiaries.  A detail by entity is presented in the table below.

 

 

Total

 

  

Amount
held outside
U.S.

 

 

(In millions)

 

Kronos

$

379.7

  

  

$

111.2

  

CompX

 

76.0

  

  

 

-

  

NL exclusive of its subsidiaries

 

94.4

  

  

 

-

  

Tremont exclusive of its subsidiaries

 

9.9

  

  

 

-

  

LandWell

 

40.0

  

  

 

-

  

BMI

 

19.6

  

  

 

-

  

Valhi exclusive of its subsidiaries

 

1.7

  

  

 

-

  

Total restricted and unrestricted cash, cash equivalents and

   marketable securities

$

621.3

  

  

$

111.2

 

 

Capital Expenditures and Other –

We currently expect our aggregate capital expenditures for 2021 will be approximately $79 million as follows:

 

$70 million by our Chemicals Segment;

 

$5 million by our Component Products Segment; and

 

$4 million by our Real Estate Management and Development Segment.

Capital spending for 2021 is expected to be funded primarily through cash generated from operations and borrowing under existing credit facilities. Planned capital expenditures in 2021 at Kronos and CompX will primarily be to maintain and improve the cost-effectiveness of our facilities. It is possible we will delay planned capital projects based on market conditions.

Repurchases of Common Stock –

We, Kronos and CompX have programs to repurchase common stock from time to time as market conditions permit. These stock repurchase programs do not include specific price targets or timetables and may be suspended at any time. Depending on market conditions, these programs may be terminated prior to completion. Cash on hand will be used to acquire the shares, and repurchased shares will be added to treasury shares and cancelled.  

At September 30, 2021, Valhi had approximately .3 million shares available to repurchase under authorizations made by our board of directors.

 

Kronos’ board of directors authorized the repurchase of up to 2.0 million shares of its common stock in open market transactions, including block purchases, or in privately-negotiated transactions at unspecified prices and over an unspecified period of time. Kronos may repurchase its common stock from time to time as market conditions permit.  At September 30, 2021, approximately 1.6 million shares are available for repurchase.  

 

CompX’s board of directors authorized the repurchase of its Class A common stock in open market transactions, including block purchases, or in privately-negotiated transactions at unspecified prices and over an unspecified period of time. During the first nine months of 2021, CompX acquired 50,000 shares of its Class A common stock in an open market purchase under such repurchase program for $.8 million. At September 30, 2021, approximately .6 million shares were available for purchase under these authorizations.

Dividends –

Because our operations are conducted primarily through subsidiaries and affiliates, our long-term ability to meet parent company level corporate obligations is largely dependent on the receipt of dividends or other distributions from our subsidiaries and

- 36 -


 

affiliates. Kronos paid a regular dividend of $.18 per share in each quarter of 2020. If Kronos were to pay its $.18 per share in each quarter of 2021 based on the 58.0 million shares we held of Kronos common stock at September 30, 2021, we would receive aggregate annual regular dividends from Kronos of $41.8 million.  NL paid a regular quarterly dividend of $.04 per share in 2020 for which we received $6.5 million. In February 2021 the NL board of directors approved a quarterly dividend of $.06 per share. If NL were to pay its $.06 per share dividend in each quarter of 2021 based on the 40.4 million shares we hold of NL common stock at September 30, 2021, we would receive aggregate annual dividends from NL of $9.7 million. BMI and LandWell pay cash dividends from time to time, but the timing and amount of such dividends are uncertain. In this regard, we received aggregate dividends from BMI and LandWell of $43.0 million in 2020 and $41.8 million during the first nine months of 2021.  We do not know if we will receive additional dividends from BMI and LandWell during 2021.  All of our ownership interest in CompX is held through our ownership in NL; as such we do not receive any dividends from CompX. Instead any dividend paid by CompX is paid to NL.

Our subsidiaries have various credit agreements with unrelated third-party lenders which contain customary limitations on the payment of dividends; however, these restrictions in the past have not significantly impacted their ability to pay dividends.

Investment in our Subsidiaries and Affiliates and Other Acquisitions –

 

We have in the past, and may in the future, purchase the securities of our subsidiaries and affiliates or third parties in market or privately-negotiated transactions. We base our purchase decisions on a variety of factors, including an analysis of the optimal use of our capital, taking into account the market value of the securities and the relative value of expected returns on alternative investments. In connection with these activities, we may consider issuing additional equity securities or increasing our indebtedness. We may also evaluate the restructuring of ownership interests of our businesses among our subsidiaries and related companies.

 

We generally do not guarantee any indebtedness or other obligations of our subsidiaries or affiliates. Our subsidiaries are not required to pay us dividends. If one or more of our subsidiaries were unable to maintain its current level of dividends, either due to restrictions contained in a credit agreement or to satisfy its liabilities or otherwise, our ability to service our liabilities or to pay dividends on our common stock could be adversely impacted. If this were to occur, we might consider reducing or eliminating our dividends or selling interests in subsidiaries or other assets. If we were required to liquidate assets to generate funds to satisfy our liabilities, we might be required to sell at less than what we believe is the long-term value of such assets.

 

Prior to 2020, we entered into a $50 million revolving credit facility with a subsidiary of NL secured with approximately 35.2 million shares of the common stock of Kronos held by NL’s subsidiary as collateral.  Outstanding borrowings under the credit facility bear interest at the prime rate plus 1.875% per annum, payable quarterly, with all amounts due on December 31, 2023.  The maximum principal amount which may be outstanding from time-to-time under the credit facility is limited to 50% of the value of the Kronos stock using the most recent closing price.  The credit facility contains a number of covenants and restrictions which, among other things, restrict NL’s subsidiary’s ability to incur additional debt, incur liens, and merge or consolidate with, or sell or transfer substantially all of NL’s subsidiary’s assets to, another entity, and require NL’s subsidiary to maintain a minimum specified level of consolidated net worth.  Upon an event of default (as defined in the credit facility), Valhi will be entitled to terminate its commitment to make further loans to NL’s subsidiary, declare the outstanding loans (with interest) immediately due and payable, and exercise its rights with respect to the collateral under the loan documents.  Such collateral rights include, upon certain insolvency events with respect to NL’s subsidiary or NL, the right to purchase all of the Kronos common stock at a purchase price equal to the aggregate market value, less amounts owing to Valhi under the loan documents, and up to 50% of such purchase price may be paid by Valhi in the form of an unsecured promissory note bearing interest at the prime rate plus 2.75% per annum, payable quarterly, with all amounts due no later than five years from the date of purchase, with the remainder of such purchase price payable in cash at the date of purchase. We also eliminate any such intercompany borrowings in our Condensed Consolidated Financial Statements. Prior to 2020 NL’s subsidiary borrowed $.5 million under this facility, no additional amounts have been borrowed since then, and $.5 million is outstanding under this facility at September 30, 2021. We eliminate any such intercompany borrowings in our Condensed Consolidated Financial Statements.

 

We have an unsecured revolving demand promissory note with Kronos which, as amended, provides for borrowings from Kronos of up to $40 million. We eliminate any such intercompany borrowings in our Condensed Consolidated Financial Statements.  The facility, as amended, is due on demand, but in any event no earlier than December 31, 2022.  We had no borrowings from Kronos under this facility during the first nine months of 2021, and there was no outstanding balance at September 30, 2021.  We could borrow $40.0 million under our current intercompany facility with Kronos at September 30, 2021.  Kronos’ obligation to loan us money under this note is at Kronos’ discretion.

 

We also have an unsecured revolving demand promissory note with CompX which, as amended, provides for borrowings from CompX of up to $40 million. We eliminate any such intercompany borrowings in our Condensed Consolidated Financial Statements.  The facility, as amended, is due on demand, but in any event no earlier than December 31, 2022.  We had gross borrowings of $25.4 million and gross repayments of $33.1 million during the first nine months of 2021, and $21.8 million was outstanding at September 30, 2021.  We could borrow $18.2 million under our current intercompany facility with CompX at September 30, 2021.  CompX’s obligation to loan us money under this note is at CompX’s discretion.

- 37 -


 

Off-balance Sheet Financing

 

We do not have any off-balance sheet financing arrangements.  

Commitments and Contingencies

There have been no material changes in our contractual obligations since we filed our 2020 Annual Report and we refer you to that report for a complete description of these commitments.

We are subject to certain commitments and contingencies, as more fully described in our 2020 Annual Report, or in Notes 12 and 15 to our Condensed Consolidated Financial Statements and in Part II, Item 1 of this Quarterly Report, including:

 

certain income tax contingencies in various U.S. and non-U.S. jurisdictions;

 

certain environmental remediation matters involving NL and BMI;

 

certain litigation related to NL’s former involvement in the manufacture of lead pigment and lead-based paint; and

 

certain other litigation to which we are a party.

In addition to such legal proceedings, various legislation and administrative regulations have, from time to time, been proposed that seek to (i) impose various obligations on present and former manufacturers of lead pigment and lead-based paint (including NL) with respect to asserted health concerns associated with the use of such products and (ii) effectively overturn court decisions in which NL and other pigment manufacturers have been successful. Examples of such proposed legislation include bills which would permit civil liability for damages on the basis of market share, rather than requiring plaintiffs to prove that the defendant’s product caused the alleged damage, and bills which would revive actions barred by the statute of limitations. While no legislation or regulations have been enacted to date that are expected to have a material adverse effect on our consolidated financial position, results of operations or liquidity, enactment of such legislation could have such an effect.

Recent Accounting Pronouncements

Not applicable

Critical Accounting Policies

There have been no changes in the first nine months of 2021 with respect to our critical accounting policies presented in Management’s Discussion and Analysis of Financial Condition and Results of Operation in our 2020 Annual Report.


- 38 -


 

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk, including currency exchange rates, interest rates and security prices, and raw material prices. There have been no material changes in these market risks since we filed our 2020 Annual Report, and refer you to Part I, Item 7A.“Quantitative and Qualitative Disclosure About Market Risk” in our 2020 Annual Report.

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures which, as defined in Exchange Act Rule 13a-15(e), means controls and other procedures that are designed to ensure that information required to be disclosed in the reports we file or submit to the SEC under the Securities Exchange Act of 1934, as amended (the “Act”), is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports we file or submit to the SEC under the Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions to be made regarding required disclosure. Each of Robert D. Graham, our Vice Chairman of the Board, President and Chief Executive Officer, and Amy Allbach Samford, our Senior Vice President and Chief Financial Officer, have evaluated the design and effectiveness of our disclosure controls and procedures as of September 30, 2021. Based upon their evaluation, these executive officers have concluded that our disclosure controls and procedures were effective as of the date of such evaluation.

Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting which, as defined by Exchange Act Rule 13a-15(f) means a process designed by, or under the supervision of, our principal executive and principal financial officers, or persons performing similar functions, and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:

 

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets,

 

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and directors, and

 

Provide reasonable assurance regarding prevention or timely detection of an unauthorized acquisition, use or disposition of assets that could have a material effect on our Consolidated Financial Statements.

Other

As permitted by the SEC, our assessment of internal control over financial reporting excludes (i) internal control over financial reporting of equity method investees and (ii) internal control over the preparation of any financial statement schedules which would be required by Article 12 of Regulation S-X. However, our assessment of internal control over financial reporting with respect to equity method investees did include controls over the recording of amounts related to our investment that are recorded in the consolidated financial statements, including controls over the selection of accounting methods for our investments, the recognition of equity method earnings and losses and the determination, valuation and recording of our investment account balances.

Changes in Internal Control over Financial Reporting

There has been no change to our internal control over financial reporting during the quarter ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.  

 

 

 

- 39 -


 

 

Part II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

In addition to the matter discussed below, refer to Note 15 to our Condensed Consolidated Financial Statements, our March 31, 2021 Quarterly Report on Form 10-Q and our 2020 Annual Report for descriptions of certain legal proceedings.

 

Lewis, et al. v. Lead Industries Association, et al.  In October 2021, the court entered an order decertifying the class and entering judgment for NL and the other defendants.

 

Item 1A. Risk Factors.

For a discussion of the risk factors related to our businesses, please refer to Part I, Item 1A, “Risk Factors,” in our 2020 Annual Report.

 

Item 5. Other Information

In the third quarter 2021, Kronos was notified that the classification of a dam at its mine facilities in Norway was changed to the highest level for Norwegian classification of dam structures.  As a result of this change in classification, Kronos’ operations are subject to a higher degree of oversight and regulation.  The impact of further regulations and any potential to affect Kronos’ operations at the mines, and as a result at its sulfate pigment plants, is not known.

 

Item 6. Exhibits.

 

Item No.

  

Exhibit Index

 

 

 

31.1

  

Certification

 

 

 

31.2

  

Certification

 

 

 

32.1

  

Certification

 

 

 

101.INS

  

Inline XBRL Instance – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

 

 

 

101.SCH

  

Inline XBRL Taxonomy Extension Schema

 

 

 

101.CAL

  

Inline XBRL Taxonomy Extension Calculation Linkbase

 

 

 

101.DEF

  

Inline XBRL Taxonomy Extension Definition Linkbase

 

 

 

101.LAB

  

Inline XBRL Taxonomy Extension Label Linkbase

 

 

 

101.PRE

  

Inline XBRL Taxonomy Extension Presentation Linkbase

 

 

 

104

  

Cover page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

 

 

 

 

 

 

 

 

 

- 40 -


 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

VALHI, INC.

 

 

 

 

(Registrant)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Date:

 

November 4, 2021

 

/s/ Amy Allbach Samford

 

 

 

 

Amy Allbach Samford

(Senior Vice President and Chief Financial Officer)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Date:

 

November 4, 2021

 

/s/ Patty S. Brinda

 

 

 

 

Patty S. Brinda

(Vice President and Controller)

 

 

- 41 -

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