What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-06 compared with 2020-05-07 · 240 added, 159 removed, 345 unchanged (54% of the section changed)

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Operations Overview

Quarter Ended March 31, 2020 Compared to the Quarter Ended March 31, 2019 —

We reported net income attributable to Valhi stockholders of $24.4 million or $.07 per diluted share in the first quarter of 2020 compared to $18.2 million or $.05 per diluted share in the first quarter of 2019.

As discussed more fully below, our net income attributable to Valhi stockholders increased from 2019 to 2020 primarily due to the net effects of:

lower operating income from our Chemicals Segment in 2020 compared to 2019;

income from tax increment infrastructure reimbursement of $19.1 million in 2020 compared to $1.1 million in 2019.

Our diluted net income per share in the first quarter of 2020 includes income of $.03 per share related to the tax increment infrastructure reimbursement.

Quarter Ended June 30, 2020 Compared to the Quarter Ended June 30, 2019 —

We reported a net loss attributable to Valhi stockholders of $9.1 million or $.32 per diluted share in the second quarter of 2020 compared to net income of $7.1 million or $.25 per diluted share in the second quarter of 2019.

As discussed more fully below, our net income attributable to Valhi stockholders decreased from 2019 to 2020 primarily due to the net effects of:

lower operating income from all of our segments in 2020 compared to 2019;

a pre-tax litigation settlement expense of $19.6 million recognized in the second quarter of 2019;

insurance recoveries related to a single insurance recovery settlement of $4.7 million in the second quarter of 2019;

income from tax increment infrastructure reimbursement of $7.7 million in the second quarter of 2019.

Our diluted net income per share in the second quarter of 2019 includes:

a charge of $.45 per share related to a litigation settlement expense recognized;

income of $.14 per share related to the infrastructure reimbursement recognized;

a gain of $.10 per share related to the insurance recoveries recognized.

Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019 —

We reported net income attributable to Valhi stockholders of $ 15.3 million or $.54 per diluted share in the first six months of 2020 compared to $25.3 million or $.89 per diluted share in the first six months of 2019.

As discussed more fully below, our net income attributable to Valhi stockholders decreased from 2019 to 2020 primarily due to the net effects of:

lower operating income from our Chemicals and Component Products segments in 2020 compared to 2019;

a pre-tax litigation settlement expense of $19.6 million recognized in the second quarter of 2019;

income from infrastructure reimbursement of $19.1 million in 2020 compared to $8.8 million in 2019;

insurance recoveries related to a single insurance recovery settlement of $4.7 million in the second quarter of 2019.

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

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

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

Our diluted net income per share in the first six months of 2019 includes:

a charge of $.45 per share related to the litigation settlement expense recognized in the second quarter;

income of $.16 per share related to the infrastructure reimbursement primarily recognized in the second quarter;

a gain of $.10 per share related to the insurance recovery recognized in the second quarter.

Current Forecast for 2020 —

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lower operating income from our Chemicals Segment and our Component Products Segment in 2020 due to the unfavorable impact of the COVID -19 pandemic on sales and earnings as further discussed below;

higher operating income from our Real Estate Management and Development Segment in 2020 as the recognition of tax increment infrastructure reimbursement will more than offset lower expected land sales due to the impact of the COVID-19 pandemic.

The advance of the COVID-19 pandemic and the global efforts to mitigate its spread have already resulted in sharp contractions of vast areas of the global economy and are expected to continue to challenge workers, businesses and governments for the foreseeable future.

Government actions in various regions to gradually permit the resumption of limited commercial activities following various regional shutdowns are currently in progress, but it is believed that the success and timing of these actions will depend in part on deployment of effective tools to fight COVID-19, including increased testing, enhanced monitoring, data analysis and effective treatments, before economic growth returns to pre-pandemic levels, particularly in service related sectors of the economy.

Even as these measures are implemented and become effective, they will not directly address the business and employment losses already experienced.

higher operating income from our Real Estate Management and Development Segment in 2020 as the recognition of tax increment infrastructure reimbursement will more than offset lower anticipated land sales due to the impact of the COVID-19 pandemic.

The advance of the COVID-19 pandemic and the global efforts to mitigate its spread have resulted in sharp contractions of vast areas of the global economy and are expected to continue to challenge workers, businesses and governments for the foreseeable future.

Government actions in various regions have generally permitted the resumption of commercial activities following various regional shutdowns, but it is believed that the success and timing of these actions will depend in part on deployment of effective tools to fight COVID-19 before economic growth is likely to return to pre-pandemic levels.

As a result, we expect U.S.

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Consequently, we expect to report lower sales and earnings than would otherwise have been expected for the remainder of 2020.

The extent of the impact will depend on numerous factors, including future developments, and therefore is uncertain and cannot be predicted.

See additional discussion on the impact of the COVID-19 pandemic on each of our operating segments below.

Segment Operating Results—2020 Compared to 2019 –

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TiO 2 selling prices generally follow industry trends and prices will increase or decrease generally as a result of competitive market pressures.

Three months ended March 31,

Three months ended June 30,

Six months ended June 30,

(Dollars in millions)

Cost of sales

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Thousands of metric tons

Current Industry Conditions — Our Chemicals Segment started 2020 with average TiO 2 selling prices 1% lower than at the beginning of 2019, and average TiO 2 selling prices at the end of the first quarter of 2020 were 2% lower than at the end of 2019.

Our Chemicals Segment experienced lower sales volumes in the North American, Latin American and export markets partially offset by higher sales volumes in the European market in the first three months of 2020 as compared to the same period of 2019.

Our Chemicals Segment operated our production facilities at overall average capacity utilization rates of 95% in the first quarter of 2020 compared to 97% in the first quarter of 2019.

Primarily due to a moderate rise in the cost of third-party feedstock we procured in 2019, our Chemicals Segment’s cost of sales per metric ton of TiO 2 sold in the first three months of 2020 was higher as compared to the first three months of 2019 (excluding the effect of changes in currency exchange rates).

Net Sales — Our Chemicals Segment’s net sales in the first quarter of 2020 decreased 4%, or $15.5 million, compared to the first quarter of 2019 primarily due to a 5% decrease in sales volumes (which decreased net sales by approximately $22 million).

Our Chemicals Segment’s average TiO 2 selling prices in the first quarter of 2020 were comparable to our average TiO 2 selling prices in the first quarter of 2019.

Current Industry Conditions — Our Chemicals Segment started 2020 with average TiO 2 selling prices 1% lower than at the beginning of 2019 and 3% higher than at the end of the second quarter of 2020.

Average TiO 2 selling prices at the end of the second quarter of 2020 were comparable to average TiO 2 selling prices at the end of the first quarter of 2020.

Our Chemicals Segment experienced lower sales volumes in all major markets in the first six months of 2020 as compared to the same period of 2019.

Our Chemicals Segment operated its production facilities at overall average capacity utilization rates of 95% for the year-to-date period ended June 30, 2020 compared to 97% for the comparable period of 2019.

Our Chemicals Segment has adjusted planned production levels as a result of softening demand and market expectations for the near term as a result of the COVID-19 pandemic.

Production Capacity Utilization Rates

First quarter

Second quarter

Primarily due to a moderate rise in the cost of third-party feedstock procured in 2019 and the first half of 2020, our Chemicals Segment’s cost of sales per metric ton of TiO 2 sold in the first six months of 2020 was higher as compared to the first six months of 2019 (excluding the effect of changes in currency exchange rates).

Net Sales — Our Chemicals Segment’s net sales in the second quarter of 2020 decreased 20%, or $98.5 million, compared to the second quarter of 2019 primarily due to a 22% decrease in sales volumes (which decreased net sales by approximately $107 million) and a 1% decrease in average TiO 2 selling prices (which decreased net sales by approximately $5 million).

TiO 2 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 decreased 5% in the first quarter of 2020 as compared to the first quarter of 2019 primarily due to lower sales volumes in the North American, Latin American and export markets partially offset by higher sales volumes in the European market.

In addition to the impact of lower sales volumes, we estimate that changes in currency exchange rates (primarily the euro) decreased our Chemicals Segment’s net sales by approximately $7 million in the first quarter of 2020 as compared to the first quarter of 2019.

Cost of Sales and Gross Margin — Our Chemicals Segment’s cost of sales increased 2 % in the first quarter of 2020 compared to the first quarter of 2019 due to the net effect of higher raw materials and other production costs of approximately $23 million (including higher cost for third-party feedstock, energy and other raw materials), favorable effects from currency fluctuations (primarily the euro) and a 5% decrease in sales volumes.

Our cost of sales as a percentage of net sales increased to 79 % in the first quarter of 2020 compared to 75% in the same period of 2019 primarily due to the unfavorable effects of higher raw materials and other production co sts, as discussed above.

Our Chemicals Segment’s gross margin as a percentage of net sales decreased to 21% in the first quarter of 2020 compared to 25% in the first quarter of 2019.

As discussed and quantified above, our Chemicals Segment’s gross margin decreased primarily due to the effects of lower sales volumes and higher raw materials and other production costs.

Operating Income — Our Chemicals Segment’s operating income decreased 11% in the first quarter of 2020 compared to the first quarter of 2019, and operating income as a percentage of net sales decreased to 11% in 2020 from 12% in 2019.

This decrease was driven by the lower gross margin discussed above.

We estimate that changes in currency exchange rates increased our Chemicals Segment’s operating income by approximately $11 million in the first quarter of 2020 as compared to the same period in 2019, as discussed below.

Our Chemicals Segment’s sales volumes decreased 22% in the second quarter of 2020 as compared to the second quarter of 2019 primarily due to lower demand resulting from the COVID-19 pandemic which impacted all major markets, particularly its European and export markets.

In addition to the impact of lower sales volumes and lower average selling prices, we estimate that changes in currency exchange rates (primarily the euro) decreased our Chemicals Segment’s net sales by approximately $4 million in the second quarter of 2020 as compared to the second quarter of 2019.

Our Chemicals Segment’s net sales in the first six months of 2020 de creased 12%, or $114.0 million, compared to the first six months of 2019 primarily due to a 14% decrease in sales volumes (which decreased net sales by approximately $129 million) and a 1% decrease in average TiO 2 selling prices (which decreased net sales by approximately $9 million).

Our Chemicals Segment’s sales volumes decreased 14% in the first six months of 2020 as compared to the first six months of 2019 primarily due to lower sales volumes (primarily in the second quarter) in all major markets, with a significant portion of the decrease occurring in the second quarter as discussed above.

In addition to the impact of changes in average TiO 2 selling prices and sales volumes, we estimate that changes in currency exchange rates (primarily the euro) decreased our Chemicals Segment’s net sales by approximately $11 million as compared to the first six months of 2019.

Cost of Sales and Gross Margin — Our Chemicals Segment’s cost of sales decreased 22% in the second quarter of 2020 compared to the second quarter of 2019 due to the net effect of a 22% decrease in sales volumes and higher raw materials and other production costs of approximately $6 million (including higher cost for third-party feedstock and other raw materials).

Our Chemicals Segment’s cost of sales as a percentage of net sales decreased to 75% in the second quarter of 2020 compared to 77% in the same period of 2019 as favorable product mix and improved sales and production volumes from our Chemicals Segment’s ilmenite mine operations offset the effects of lower average TiO 2 selling prices and higher raw materials and other production costs.

Our Chemicals Segment’s gross margin as a percentage of net sales increased to 25% in the second quarter of 2020 compared to 23% in the second quarter of 2019.

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 improved product mix and ilmenite mine operations offset by lower sales volumes, lower average TiO 2 selling prices and higher raw materials and other production costs.

Our Chemicals Segment’s cost of sales decreased 11% in the first six months of 2020 compared to the same period in 2019 due to the net effect of a 14% decrease in sales volumes, higher raw materials and other production costs of approximately $29 million (including higher cost for third-party feedstock and other raw materials) and currency fluctuations (primarily the euro).

Our Chemicals Segment’s cost of sales as a percentage of net sales increased to 77% in the first six months of 2020 compared to 76% in the same period of 2019 primarily due to the unfavorable effects of lower average selling prices and higher raw materials and other production costs, as discussed above.

Our Chemicals Segment’s gross margin as a percentage of net sales decreased to 23% in the first six months of 2020 compared to 24% in the first six months of 2019.

As discussed and quantified above, our Chemicals Segment’s gross margin as a percentage of net sales decreased primarily due to the net effect of lower average selling prices, lower sales volumes and higher raw materials and other production costs.

Operating Income — Our Chemicals Segment’s operating income decreased 29% in the second quarter of 2020 compared to the second quarter of 2019, and operating income as a percentage of net sales decreased to 9% in 2020 from 10% in 2019.

The decrease was driven by higher selling, general and administrative expenses relative to net sales partially offset by the higher gross margin discussed above.

We estimate that changes in currency exchange rates had a nominal effect on income from operations in the second quarter of 2020 as compared to the same period in 2019, as discussed in the Effects of Currency Exchange Rates section below.

Our Chemicals Segment’s operating income decreased 20% in the first six months of 2020 compared to the first six months of 2019, and operating income as a percentage of net sales decreased to 10% in 2020 from 11% in 2019.

The decrease was driven by the lower gross margin discussed above.

We estimate that changes in currency exchange rates increased our Chemicals Segment’s operating income by approximately $11 million in the first six months of 2020 as compared to the same period in 2019.

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 $.5 million in the first three months of 2020 and $.6 million in the same period of 2019, which reduced our reported Chemicals Segment’s operating income as compared to amounts reported by Kronos.

We recognized additional depreciation expense of $1.5 million in the first six months of 2020 and $1.1 million in the same period of 2019, 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).

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In addition to the impact of the translation of sales and expenses over time, our 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.

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, (ii) changes in currency exchange rates during time periods when our non-U.S.

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dollars), and (iii) relative changes in the aggregate fair value of currency forward contracts held from time to time.

Our Chemicals Segment periodically uses currency forward contracts to manage a portion of our currency exchange risk, and relative changes in the aggregate fair value of any currency forward contracts we hold from time to time serve in part to mitigate the currency transaction gains or losses we would otherwise recognize from the first two items described above.

Our Chemicals Segment periodically use s currency forward contracts to manage a portion of our currency exchange risk, and relative changes in the aggregate fair value of any currency forward contracts we hold from time to time serve in part to mitigate the currency transaction gains or losses we would otherwise recognize from the first two items described above.

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 March 31, 2020 vs March 31, 2019

Transaction gains recognized

Three months ended June 30, 2020 vs June 30, 2019

gains (losses) -

Transaction losses recognized

(In millions)

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dollar relative to the Canadian dollar and the Norwegian krone in 2020 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 are denominated in the U.S.

The $11 million increase in our Chemicals Segment’s operating income from net currency transaction gains was caused primarily 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 cause increases or decreases, as applicable, in U.S.

The currency effect on our Chemicals Segment’s operating income was comprised of the following:

The $5 million decrease in operating income from net currency transaction losses was caused primarily 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.

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operations and in Norwegian krone denominated receivables and payables held by our non-U.S.

Outlook— To-date, the COVID-19 pandemic, including the measures employed to mitigate its spread, has had limited impact on our Chemicals Segment’s operations and financial performance.

Our manufacturing facilities have remained open, operating at near planned capacities, and the availability of raw materials has not been materially impacted.

Our Chemicals Segment’s first quarter financial results, including sales and production volumes, have been within our expectations.

At the end of the first quarter, our Chemicals Segment had over $341 million in cash and cash equivalents, and over $200 million available for borrowing under our existing revolving credit facilities.

Our Chemicals Segment’s products are vital to the production of numerous critically needed end-user products, and therefore our facilities have been designated as essential businesses in each of the regions in which we operate.

Our manufacturing and administrative facilities are generally located in densely populated regions of Europe and North America which have experienced substantial outbreaks of COVID-19.

Some of our manufacturing and distribution processes are labor-intensive, and we recognize the elevated health risk that COVID-19 represents for our employees, contractors and partners.

We are using a variety of methods to protect the health and well-being of our workforce and our customers, including the implementation of social distancing, contact tracing, deep cleaning of facilities, work-from-home strategies and staggered shift deployment, among other health and safety protocols.

To-date, we have had limited cases of COVID-19 among our workforce and all of our facilities have remained in operation.

Even as these measures are implemented and become effective, they will not directly address the business and employment losses already experienced.

operations, and

Approximately $5 million from net currency translation gains primarily caused by the strengthening of the U.S.

dollar relative to the Canadian dollar and Norwegian krone, as its local currency-denominated operating costs were translated into fewer U.S.

dollars in 2020 as compared to 2019, and such translation, as it related to the U.S.

dollar relative to the euro, had a nominal effect on our Chemicals Segment’s operating income in 2020 as compared to 2019.

Impact of changes in currency exchange rates

Six months ended June 30, 2020 vs June 30 2019

gains (losses) -

Transaction gains recognized

(In millions)

Operating income

The $11 million decrease in net sales (translation loss) was caused primarily by a strengthening of the U.S.

dollar relative to the euro, as our Chemicals Segment’s euro-denominated sales were translated into less U.S.

dollars in 2020 as compared to 2019.

The strengthening of the U.S.

dollar relative to the Canadian dollar and the Norwegian krone in 2020 did not have a significant effect on the reported amount of our net sales, as a substantial portion of the sales generated by our Chemicals Segment’s Canadian and Norwegian operations are denominated in the U.S.

The $11 million increase in our Chemicals Segment’s operating income was comprised of the following:

Approximately $6 million from net currency transaction gains 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,

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

Approximately $5 million from net currency translation gains primarily caused by the strengthening of the U.S.

dollar relative to the Canadian dollar and Norwegian krone, as its local currency-denominated operating costs were translated into fewer U.S.

dollars in 2020 as compared to 2019, partially offset by such translation, as it related to the U.S.

dollar relative to the euro, which had a negative effect on our Chemicals Segment’s operating income in 2020 as compared to 2019, as the negative impact of the stronger U.S.

dollar on euro-denominated sales more than offset the favorable effect of euro-denominated operating costs being translated into fewer U.S.

dollars in 2020 as compared to 2019.

Outlook— The COVID-19 pandemic, including the measures employed to mitigate its spread, has primarily impacted our Chemicals Segment’s operations through reduced demand for its products, resulting in lower sales and earnings than otherwise would have been expected, particularly during the second quarter of 2020.

Our Chemicals Segment’s manufacturing facilities have operated at near planned production rates throughout the pandemic and the availability of raw materials has not been adversely impacted.

Our Chemicals Segment’s manufacturing and administrative facilities are generally located in densely populated regions of Europe and North America which have experienced substantial outbreaks of COVID-19 and are in varying stages of outbreak and recovery.

Our Chemicals Segment continues to employ a variety of methods to protect the health and well-being of its workforce and its customers, including the implementation of contact tracing, deep cleaning and disinfecting of facilities, work-from-home strategies and staggered shift deployment, among other health and safety protocols.

To-date, our Chemicals Segment has had limited cases of COVID-19 among its workforce and all of its facilities have remained open and operational.

Government actions in various regions have generally permitted the resumption of commercial activities following various regional shutdowns, but further government action restricting economic activity is possible in an effort to mitigate increases in COVID-19 in certain regions.

As a result, we expect U.S.

and worldwide gross domestic product to be significantly impacted for an indeterminate period.

While we believe that demand for our Chemicals Segment’s products and the products of our customers will be negatively impacted in the coming months, many of our Chemicals Segment’s products are used by our customers in end-products that to date remain in demand across the world economy.

The breadth and depth of the negative impact COVID-19 will have on our business remains unknown.

Given the impact of COVID-19 on the global economy, we expect our Chemicals Segment’s sales and earnings will be lower than originally planned for 2020.

The extent of the impact will depend on numerous factors, including future developments, and therefore is uncertain and cannot be predicted.

If significant declines in global demand occur, we would expect a reduction in our Chemicals Segment’s sales volumes and potentially, average sales prices, which in turn would cause us to reduce our production volumes, resulting in an increase to our per unit costs of production.

If this occurs, spending for raw materials and other production costs would be reduced, but not enough to offset the negative impacts of reduced sales.

Depending on the length and severity of the impact of COVID-19 on the global economy, we may decide to curtail production or temporarily close manufacturing facilities, or we may be required to temporarily close certain facilities if outbreaks escalate in a particular region.

We will continue to monitor current and anticipated near-term customer demand throughout the year and align our production and inventory levels accordingly.

Though it is not possible to predict the impact of the COVID-19 pandemic on future demand for our Chemicals Segment’s products or those of our customers, we believe that we have sufficient cash on-hand and available borrowing capacity under our revolving credit facilities to meet our obligations, and we are prepared to implement multiple cash-saving strategies if necessary, including reduction of inventories, delays in capital expenditures and other cost saving initiatives.

and worldwide gross domestic product to be significantly impacted for an indeterminate period of time.

While many of our Chemicals Segment’s products are used by its customers in end-products that thus far have remained in demand across the world economy, we believe overall demand for our Chemicals Segment’s products and its customers’ products will continue to be negatively impacted by reduced economic activity.

Given the impact of COVID-19 on the global economy, we expect our Chemicals Segment’s sales volumes and resulting earnings for the remainder of 2020 will continue to be lower than prior periods.

To-date our Chemicals Segment has made modest adjustments to its production levels in response to near-term market expectations, but the full extent of the COVID-19 impact on its operations will depend on numerous factors, including customer demand for its products, any future disruption in its operations or its suppliers’ operations and the timing and effectiveness of measures deployed to fight COVID-19, all of which are uncertain and cannot be predicted.

Our Chemicals Segment will continue to monitor current and anticipated near-term customer demand throughout the year and align its production and inventory levels accordingly.

Though it is not possible to predict the impact of the COVID-19 pandemic on future demand for our Chemicals Segment’s products or those of its customers, we believe that our Chemicals Segment has sufficient liquidity (including cash on-hand of approximately $341 million and borrowing capacity under its revolving credit facilities of approximately $226 million at June 30, 2020) available to meet its obligations, and our Chemicals Segment is prepared to implement multiple cash-saving strategies as necessary, including reduction of inventories, delays in certain capital expenditures and other cost saving initiatives.

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 our 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.

In addition, small variations in period-to-period net sales, cost of sales and gross margin can result from changes in the relative mix of our products sold.

The key performance indicator for our Component Products Segment is operating income and margins .

Three months ended March 31,

Our Component Products Segment experienced normal sales volumes and operations during the first quarter of 2020.

Beginning in late March 2020 as a result of the COVID-19 pandemic, our Component Products Segment began receiving requests from certain customers of both its security products and marine components reporting units to postpone shipments, in some cases because customers’ production facilities were temporarily closed.

Our Component Products Segment operates three facilities, each of which specializes in certain manufacturing processes and is therefore dependent upon the other facilities to some extent to manufacture finished goods.

With the onset of COVID-19, within each facility our Component Products Segment enhanced cleaning and sanitization procedures, mandated social distancing and implemented other health and safety protocols.

In late April, our Component Products Segment closed its Chicago area location for one week due to COVID-19 activity in the area.

The temporary closure of the Illinois facility had a minimal negative impact on its ability to manufacture and ship during the second quarter due to the decline in demand during the same period.

Three months ended June 30,

Six months ended June 30,

(Dollars in millions)

Security products

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Operating income

Net Sales — Our Component Products Segment’s net sales increased $1.1 million in the first quarter of 2020 compared to the same period in 2019 primarily due to higher sales of security products to existing government security customers and to a lesser extent higher sales of marine components to the towboat and center console boat markets.

Net Sales — Our Component Products Segment’s net sales decreased $9.9 million and $8.8 million in the second quarter and for the first six months of 2020, respectively, compared to the same periods in 2019.

The significant decrease in sales is due to lower sales volumes for both security products and marine components in the second quarter of 2020 as many of our Component Products Segment’s customers were temporarily closed or reduced production during the quarter due to government ordered closures or reduced demand resulting from the COVID-19 pandemic.

Relative changes in selling prices did not have a material impact on net sales comparisons.

Costs of Sales and Gross Margin — As a percentage of net sales, our Component Products Segment’s cost of sales decreased 1% in the first quarter of 2020 compared to the same period in 2019 due to the favorable effects of customer and product mix, partially offset by increased medical costs for both security products and marine components.

As a result, gross margin as a percentage of sales increased over the same period.

Gross margin dollars increased due to higher sales for both business segments.

O perating Income — Our Component Products Segment’s operating income as a percentage of net sales for the first quarter of 2020 increased compared to the same period of 2019 and was primarily impacted by the factors impacting cost of sales and gross margin discussed above.

Outlook— Our Component Products Segment experienced minimal disruptions to our supply chain or customer base from COVID-19 during the first quarter of 2020.

First quarter sales reflect continued strong demand for our products, including high-security applications for our existing government customers as well as our marine products.

We have been identified as an essential business in the states where we operate, and we are considered critical in supplying components to many essential and mandatory markets.

Beginning in late March 2020, we began receiving requests from certain customers of both our security products and marine components reporting units to delay or postpone shipments, in some cases because our customers’ production facilities have temporarily closed.

We operate three facilities, each of which specializes in certain manufacturing processes and is therefore dependent upon the other facilities to some extent to manufacture finished goods.

With the onset of COVID-19, within each facility we increased sanitizing, mandated social distancing and implemented other health and safety protocols.

In late April 2020, we temporarily closed our facility that is located outside of Chicago, Illinois, which has been considered a COVID-19 “hotspot,” due to an increase of COVID-19 cases in the community.

During the closure we completed a deep clean and sanitization within the facility, and we successfully reopened the plant and resumed production after a one week pause.

We believe the temporary closure of our Illinois facility will have minimal negative impact on our ability to manufacture and ship during the second quarter, in part due to the anticipated decline in demand during the same period.

Based on current conditions, we expect to report reduced revenue and operating income during the second quarter of 2020 compared to the first quarter of 2020, but the severity of the decline will depend on customer demand for our products, including the timing and extent to which our customers restart their operations, on our customers’ perception as to when consumer demand for their products will return and on any future disruptions in our operations or our suppliers’ operations, all of which are difficult to predict.

Our operations teams meet daily to ensure we are maintaining a safe working environment for all of our employees, minimizing operational disruptions and managing inventory levels.

It is possible we may temporarily close one or more of our facilities again for the health and safety of our employees before the COVID-19 crisis is over.

CompX has significant cash balances of approximately $58.6 million at March 31, 2020, and believes it is well positioned to navigate the uncertainty ahead.

Costs of Sales and Gross Margin — As a percentage of net sales, our Component Products Segment’s cost of sales for the second quarter of 2020 was 1% higher than the same period in 2019.

As a result, gross margin as a percentage of sales decreased over the same period.

The decrease in gross margin percentage is the result of the decline in both security products and marine components gross margin percentage for the second quarter due to less favorable customer and product mix for security products and reduced overhead coverage from lower production and sales volumes for both security products and marine components.

Cost of sales and gross margin as a percentage of sales for the first six months of 2020 is comparable to the same period in 2019.

O perating Income — Our Component Products Segment’s operating income as a percentage of net sales for the second quarter and first six months of 2020 decreased compared to the same periods of 2019 and was primarily impacted by the factors impacting cost of sales and gross margin discussed above.

Outlook— In the second quarter of 2020, the COVID-19 pandemic created multiple challenges, both in our Component Products Segment’s reporting units and from the reduced demand for its products.

Both global and domestic supply chains remain intact and our Component Products Segment has experienced minimal supply chain disruptions.

Our Component Products Segment’s management continues to work closely with all of its customers and monitor their progress as they continue to adjust their operations.

While some of our Component Products Segment’s customers expect to recover quickly, others expect to take longer, including transportation, office furniture and cabinetry manufacturers.

Considerable effort continues at all of our Component Products Segment’s locations to manage current COVID-19 conditions including enhanced health and safety protocols and additional cleaning and disinfecting efforts.

After the temporary closure in late April 2020 at its manufacturing facility outside of Chicago, Illinois, our Component Products Segment has been able to operate the facility at normal operating rates.

Throughout the course of the COVID-19 pandemic, our Component Products Segment management has focused its efforts on maintaining efficient operations, while closely managing its expenses and capital projects.

In this regard they are constantly evaluating staffing levels and have recently reduced production staffing levels to adjust to anticipated levels of demand for the second half of 2020.

Government actions in various regions have generally permitted the gradual resumption of commercial activities following various regional shutdowns, but further government action restricting economic activity is possible in an effort to mitigate increases in COVID-19 cases in certain regions.

The success and timing of these mitigating actions will depend in part on deployment of effective tools to

fight COVID-19, including increased testing, enhanced monitoring, data analysis, effective treatments and a safe vaccine, before economic growth is likely to return to pre-pandemic levels.

Even as these measures are implemented and become effective, they will not directly address the business and employment losses already experienced.

As a result, we expect U.S.

and worldwide gross domestic product to be significantly impacted for an indeterminate period.

Based on current conditions, we expect our Component Products Segment to report reduced revenue and operating income in 2020 compared to 2019.

We believe the second quarter of 2020 will be the period most impacted by COVID-19 but the severity of the impact on the remainder of the year will depend on customer demand for our Component Products Segment’s products, including the timing and extent to which its customers operations continue to be impacted, on its customers’ perception as to when consumer demand for their products will return to pre-pandemic levels and on any future disruptions in its operations or its suppliers’ operations, all of which are difficult to predict.

Our Component Products Segment’s operations team meets daily to ensure it is taking appropriate actions to maintain a safe working environment for all of its employees, minimize operational disruptions and manage inventory levels.

Our Component Products Segment increased inventory of both security products and marine components during the second quarter of 2020 to keep its workforce productive by focusing on high-demand products and components.

We expect inventory balances will decline over the remainder of the year as our Component Products Segment aligns its production to current demand levels.

It is possible our Component Products Segment may temporarily close one or more of its facilities again for the health and safety of its employees before the COVID-19 crisis is over.

Our Component Products Segment has significant cash balances of approximately $62.5 million at June 30, 2020, and we believe it is well positioned to navigate the uncertainty ahead.

Real Estate Management and Development –

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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, we do not recognize revenue until we have satisfied the criteria for revenue recognition set forth in ASC Topic 606.

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 the development work to continue for 10 to 15 years on the rest of the land held for development, especially the remainder of the residential/planned community.

Net Sales and Operating Income— A substantial portion of the net sales from our Real Estate Management and Development Segment in the first quarter of 2019 and 2020 consisted of revenues from land sales.

Net Sales and Operating Income— A substantial portion of the net sales from our Real Estate Management and Development Segment in the first six months of 2019 and 2020 consisted of revenues from land sales.

As noted above we recognize 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 2019 and 2020 was under this method of revenue recognition.

The contracts on these sales (both within the planned community and otherwise) include approximately 645 acres of the residential planned community and certain other acreage which closed in December 2013 and through the first quarter of 2020.

Land sales revenues were lower in the first quarter of 2020 as compared to the first quarter of 2019 primarily due to a decrease in the amount of acreage sold in 2020 compared to 2019 and due to higher infrastructure development spending in 2019.

Cost of sales related to land sales revenues was $2.7 million in the first quarter of 2020 compared to $6.9 million in the first quarter of 2019.

Operating income also includes $19.1 million in the first quarter of 2020 and $1.1 million in the first quarter of 2019 of income related to the recognition of tax increment reimbursement note receivables, as discussed in Note 11 to our Condensed Consolidated Financial Statements.

Land sales revenues were lower in the second quarter and first six months of 2020 as compared to the same periods in 2019 primarily due to a decrease in the amount of acreage

sold in 20 20 compared to 201 9 and due to higher infrastructure development spending in 2019.

Cost of sales related to land sales revenues was $ 4 .

0 million in the six months of 2020 compared to $ 1 2 .

5 million in the first six months of 2019.

Operating income also includes $ 19 .

1 million in the first six months of 20 20 (all in the first quarter) and $ 8.8 million in the first six months of 201 9 (primarily in the second quarter) of income related to the recognition of tax increment reimbursement note receivables, as discussed in Note 1 1 to our Condensed Consolidated Financial Statements.

The remainder of net sales and cost of sales related to this segment primarily relates to water delivery fees and expenses.

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Outlook— Our Real Estate Management and Development Segment experienced minimal impact on operations and financial performance from COVID-19 during the first quarter of 2020.

BMI continues to provide utility and water delivery services to its customers without interruption and LandWell is continuing to actively develop and sell land it manages, primarily to residential builders, for the approximately 2,100 acres zoned for a residential/planned community in Henderson, Nevada.

In April 2020, LandWell began receiving requests from some residential builders to delay or cancel closing on certain parcels in escrow and, as a result, LandWell began delaying or curtailing infrastructure development activities where possible to align with current land sales levels and residential builder output.

BMI continues to provide utility and water delivery services to its customers without interruption.

Our Real Estate Management and Development management team is focused on protecting the health and safety of our employees and contractors through implementation of social distancing and work-from-home strategies among other health and safety protocols.

In April 2020 LandWell began receiving requests from some residential builders to delay or cancel closing on certain parcels in escrow.

Given the impact of COVID-19 on the overall economy, including the greater Las Vegas area, we expect the level of land sales to be negatively impacted in the near term.

The extent of the impact will depend on numerous factors, including customer demand and future developments, and therefore is uncertain and cannot be predicted.

Given the current liquidity of our Real Estate

Management and Development Segment , including approximately $11.

2 million of cash and cash equivalents at March 31, 2020, we believe we are well positioned to meet our obligations .

Depending on the length and severity of th e impact of COVID-19 on the e conomy and our operations, we may decide to delay or curtail infrastructure development activities in the near term where possible and implement other cash-saving initiatives.

Because we recognize revenue over time using cost b ased inputs for most of our land sales, delays or curtailments in infrastructure development activities will lower the amount of revenue we would recognize on previously closed land sales.

As a result we expect land sales revenue to be lower in the second quarter of 2020 than the first quarter of 2020.

In addition delays or curtailments in infrastructure development activities will also delay our ability to submit completed costs to the City of Henderson for approval of additional tax increment reimbursem ent note receivables and, as a result , we would not expect to recognize significant additional note receivable s during 2020.

As noted above, land held in escrow can generally be cancelled by builders without financial penalty until shortly before scheduled closing.

In addition, several COVID-19 mitigation procedures put into effect by the City of Henderson and utility providers are, in some cases, adding significant time to the typical permitting and mapping process required to be completed before the necessary approvals can be obtained to close a land sale.

Given these factors and the impact of COVID-19 on the overall economy, including the greater Las Vegas area, we expect the level of land sales to be negatively impacted in the near term although the extent and timing of the impact will depend on numerous factors, including customer demand, and therefore is uncertain and cannot be predicted.

LandWell is continuing to actively develop and market land it manages, primarily to residential builders, for the residential/planned community in Henderson and given the current liquidity of our Real Estate Management and Development Segment, including approximately $14.1 million of cash and cash equivalents at June 30, 2020, we believe it is well positioned to meet its obligations and navigate the uncertainties ahead.

Depending on the length and severity of the impact of COVID-19 on the economy and its operations, LandWell may decide to further delay or curtail infrastructure development activities in the near term where possible and implement other cash-saving initiatives.

Because we recognize revenue over time using cost based inputs for most of LandWell’s land sales, delays or curtailments in infrastructure development activities will lower the amount of revenue we would recognize on previously closed land sales.

In addition, delays or curtailments in infrastructure development activities will also delay LandWell’s ability to submit completed costs to the City of Henderson for approval of additional tax increment reimbursement note receivables and, as a result, we would not expect LandWell to recognize significant additional note receivables during 2020.

General Corporate Items, Interest Expense, Income Taxes and Noncontrolling Interest—2020 Compared to 2019

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Accordingly, these insurance recoveries are recognized when the receipt is probable and the amount is determinable.

Substantially all of the $4.7 million insurance recoveries we recognized in the second quarter of 2019 relates to a settlement NL reached with one of its insurance carriers in which they agreed to reimburse NL for a portion of NL’s past and future litigation defense costs.

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.

Other Components of Net Periodic Pension Expense — We recognized other components of net periodic pension expense of $4.7 million in the first quarter of 2020 compared to $4.1 million in the same period of 2019.

Litigation Settlement Expense – We recognized a pre-tax $19.6 million litigation settlement expense in the second quarter of 2019 related to NL’s lead pigment litigation in California.

See Note 15 to our Condensed Consolidated Financial Statements.

Other Components of Net Periodic Pension Expense – We recognized other components of net periodic pension and OPEB expense of $5.0 million and $9.7 million in the second quarter and first six months of 2020 compared to $4.1 million and $8.2 million in the same periods of 2019.

The expense increased in both periods primarily due to pension costs as a result of actuarial amortizations, discount rates and expected returns on plan assets.

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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.

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 stock to the extent of our proportional ownership interest in each subsidiary.

We recognized a loss of $2.4 million in the first quarter of 2020 compared to a gain of $1.1 million in the same period of 2019 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 were 3% higher in the first quarter of 2020 compared to the first quarter of 2019 primarily due to higher environmental remediation and related costs.

We recognized a loss of $ .5 million in the second quarter of 2020 compared to a gain of $ 1.9 million in the same period of 2019 and a loss of $ 2.9 million in the first six months of 2020 compared to a gain of $3.0 million in the same period of 2019 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 were 17% lower in the second quarter and 9% lower in the first six months of 2020 compared to the same periods of 2019 primarily due to lower litigation and related costs.

Included in corporate expense are:

litigation and related costs at NL of $.6 million in the first quarter of 2020 compared to $.8 million in the first quarter of 2019;

environmental remediation and related costs of $.1 million in the first quarter of 2020 compared to a benefit of $.7 million in the first quarter of 2019.

litigation and related costs at NL of $.5 million in the second quarter of 2020 compared to $1.0 million in the second quarter of 2019 and $1.1 million in the first six months of 2020 compared to $1.9 million in the first six months of 2019;

environmental remediation and related costs of nil in each of the second quarter of 2020 and 2019 and nil in the first six months of 2020 compared to a benefit of $.7 million in the first six months of 2019.

Overall, we currently expect that our net general corporate expenses in 2020 will be comparable to 2019.

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See Note 15 to our Condensed Consolidated Financial Statements.

Interest Expense —Interest expense decreased to $ 9 .

7 million in the first quarter of 20 20 from $ 10 .

3 million i n the first quarter of 201 9 primarily due to lower average interest rates on variable-rate indebtedness in 2020 .

Interest Expense —Interest expense decreased to $8.8 million in the second quarter of 2020 from $10.1 million in the second quarter of 2019 and decreased to $18.5 million in the first six months of 2020 from $20.4 million in the first six months of 2019 primarily due to lower average interest rates and lower average balances on variable-rate indebtedness in 2020.

We expect interest expense will continue to be lower in the remainder of 2020 as compared to 2019 due to lower average rates.

Provision for Income Taxes — We recognized income tax expense of $11.4 million in the first quarter of 2020 compared to income tax expense of $14.2 million in the first quarter of 2019.

The decrease is primarily due to lower earnings at Kronos in 2020.

Provision for Income Taxes — We recognized income tax expense of $21.2 million in the second quarter of 2020 compared to income tax expense of $13.0 million in the second quarter of 2019 and $32.6 million in the first six months of 2020 compared to $27.2 million in the first six months of 2019.

The increase is primarily due to higher amounts recognized for global intangible low-tax income (GILTI) in 2020 due to limitations on related deductions and tax credits and an increase in the valuation allowance 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 the effects of GILTI and the increase to the valuation allowance relative to our decreased earnings significantly impacted our 2020 estimated annual effective tax rate.

Our earnings are subject to income tax in various U.S.

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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 quarter of 2020, we recognized a non-cash deferred income tax expense with respect to our direct investment in Kronos of $.2 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 increase related to our equity in Kronos’ net income during such period.

We recognized a similar non-cash deferred income tax expense of $1.0 million in the first quarter of 2019.

During the first six months of 2020, we recognized a non-cash deferred income tax expense with respect to our direct investment in Kronos of $4.4 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 increase related to our equity in Kronos’ net income during such period.

We recognized a similar non-cash deferred income tax expense of $3.0 million in the first six months of 2019.

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.

See Note 1 2 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 (Loss) of Subsidiaries —Noncontrolling interest in operations of subsidiaries increased from 2019 to 2020 primarily due to increased earnings at BMI and LandWell.

Noncontrolling Interest in Net Income (Loss) of Subsidiaries —Noncontrolling interest in operations of subsidiaries decreased from 2019 to 2020 primarily due to decreased earnings at Kronos and CompX.

See Note 13 to our Condensed Consolidated Financial Statements.

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subsidiaries.

Cash used for operating activities was $18.2 million in the first three months of 2020 compared to a use of cash of $2.2 million in the first three months of 2019.

This $16.0 million increase in cash used was primarily due to the net effect of the following items:

consolidated operating income of $71.0 million in the first quarter of 2020, an increase of $10.6 million compared to operating income of $60.4 million in the first quarter of 2019;

lower net cash paid for income taxes in 2020 of $7.0 million;

a $20.3 million increase in the amount of net cash used in relative changes in receivables, inventories, payables and accrued liabilities in the first quarter of 2020.

Cash flow from operating activities was $6.0 million in the first six months of 2020 compared to $32.8 million in the first six months of 2019.

This $26.8 million decrease in cash provided was primarily due to the net effect of the following items:

consolidated operating income of $110.3 million in the first six months of 2020, a decrease of $16.0 million compared to operating income of $126.3 million in the first six months of 2019;

lower net cash paid for income taxes in 2020 of $27.4 million due to decreased earnings in 2020 and the timing of tax payments (to provide COVID-19 related tax relief, the U.S.

Internal Revenue Service extended the payment deadline for most U.S.

federal taxes typically due in the first half of the year until July 15, 2020);

a $30.2 million increase in the amount of net cash used in relative changes in receivables, inventories, payables and accrued liabilities in the first six months of 2020.

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, 2019 to March 31, 2020 primarily due to relative changes in the timing of collections.

Kronos’ average days sales in inventory (“DSI”) decreased from December 31, 2019 to March 31, 2020 primarily due to lower inventory volumes attributable in part to sales volumes exceeding production volumes in the first quarter of 2020, which was not the case in the fourth quarter of 2019.

CompX’s average DSO at March 31, 2020 increased from December 31, 2019 primarily due to relative changes in the timing of collections.

CompX’s average DSI at March 31, 2020 is comparable to December 31, 2019.

Kronos’ average days sales outstanding (“DSO”) at June 30, 2020 is comparable to December 31, 2019.

Kronos’ average days sales in inventory (“DSI”) at June 30, 2020 is comparable to December 31, 2019.

CompX’s average DSO at June 30, 2020 increased from December 31, 2019 primarily due to relative changes in the timing of collections.

CompX’s average DSI at June 30, 2020 increased as compared to December 31, 2019 as a result of an intentional inventory build during the second quarter of 2020 to keep trained and tenured employees productive.

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

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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 ca sh flows from operating activities is presented in the table below.

A detail of our consolidated cash flows from operating activities is presented in the table below.

Intercompany dividends have been eliminated.

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Investing Activities—

We spent $16.0 million in capital expenditures during the first quarter of 2020 including:

We spent $26.7 million in capital expenditures during the first six months of 2020 including:

$25.4 million in our Chemicals Segment;

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Financing Activities—

During the three months ended March 31, 2020, we:

repaid $1.5 million under Tremont’s promissory note payable and $1.6 million under LandWell’s note payable to the City of Henderson;

paid quarterly dividends to Valhi stockholders of $.02 per share ($6.8 million) and;

Kronos acquired shares of its common stock for an aggregate purchase of price of $1.0 million.

During the six months ended June 30, 2020, we:

repaid $3.8 million under the Contran credit facility, repaid $2.0 million under Tremont’s promissory note payable, repaid $1.0 million under BMI’s bank loan and repaid $1.6 million under LandWell’s note payable to the City of Henderson;

paid aggregate quarterly dividends to Valhi stockholders of $.32 per share ($9.0 million) and;

Kronos acquired shares of its common stock for an aggregate purchase price of $1.0 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.

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There are currently no contractual restrictions on the amount of dividends which we may pay.

Distributions to noncontrolling interest in subsidiaries in the three months of 2020 are comprised of CompX dividends paid to shareholders other than NL and Kronos dividends paid to shareholders other than us and NL.

Distributions to noncontrolling interest in subsidiaries in the first six months of 2020 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 March 31, 2020, our consolidated indebtedness was comprised of:

At June 30, 2020, our consolidated indebtedness was comprised of:

Valhi’s $309.2 million outstanding on its $360 million credit facility with Contran which is due no earlier than December 31, 2021;

€400 million aggregate outstanding on our KII 3.75% Senior Secured Notes ($443.8 million carrying amount, net of unamortized debt issuance costs) due in September 2025;

Tremont’s promissory note payable ($.5 million outstanding) due in December 2023 which was fully repaid in April 2020;

$16.9 million on BMI’s bank loan ($16.2 million carrying amount, net of unamortized debt issuance costs) due through September 2032;

0 million on LandWell’s bank loan ($14.9 million carrying amoun t, net of unamortized debt issuance costs) du e in April 20 36 ;

$14.5 million on LandWell’s bank loan due in April 2036;

approximately $ 2.7 million of other indebtedness.

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Kronos’ European revolving credit facility also requires the maintenance of certain financial ratios, and one of such requirements is based on the ratio of net debt to the last twelve months EBITDA of the borrowers.

The terms of all of our debt instruments (including revolving lines of credit for which we have no outstanding borrowings at March 31, 2020) are discussed in Note 9 to our 2019 Annual Report.

We are in compliance with all of our debt covenants at March 31, 2020.

The terms of all of our debt instruments (including revolving lines of credit for which we have no outstanding borrowings at June 30, 2020) are discussed in Note 9 to our 2019 Annual Report.

We are in compliance with all of our debt covenants at June 30, 2020.

We believe that we will be able to continue to comply with the financial covenants contained in our credit facilities through their maturity;

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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 March 31, 2021) and long-term obligations (defined as the five-year period ending March 31, 2025).

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 June 30, 2021) and long-term obligations (defined as the five-year period ending June 30, 2025).

If actual developments differ from our expectations, our liquidity could be adversely affected.

At March 3 1 , 20 20 , we had credit available under existing facilities of $2 63 .

2 million, which was comprised of:

At June 30 , 20 20 , we had credit available under existing facilities of $ 276.7 million, which was comprised of:

$100.9 (1) million under Kronos’ European revolving credit facility;

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$50.8 (2) million under Valhi’s Contran credit facility.

Based on Kronos’ EBITDA over the last twelve months ending March 31, 2020, the full €90.0 million amount is available for borrowing at such date.

Based on Kronos’ EBITDA over the last twelve months ending June 30, 2020, the full €90.0 million amount is available for borrowing at such date.

Amounts available under this facility are at the sole discretion of Contran.

At March 31, 2020, we had an aggregate of $536.6 million of restricted and unrestricted cash, cash equivalents and marketable securities, including $109.5 million held by our non-U.S.

At June 30, 2020, we had an aggregate of $541.3 million of restricted and unrestricted cash, cash equivalents and marketable securities, including $159.7 million held by our non-U.S.

subsidiaries.

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In addition, Kronos’ capital expenditures in the area of environmental compliance, protection and improvement include expenditures which are primarily focused on increased operating efficiency but also result in improved environmental protection, such as lower emissions from our manufacturing plants.

We may further reduce planned capital spending and land development activities if economic conditions warrant.

We may further reduce, curtail or delay planned capital spending and land development activities if economic conditions warrant.

Repurchases of Common Stock –

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Cash on hand will be used to acquire the shares and repurchased shares will be added to treasury shares and cancelled.

At March 31, 2020 Valhi had approximately 4.0 million shares of our common stock available to repurchase under the authorizations made by our board of directors.

At June 30, 2020, as adjusted for the 1-for-12 reverse stock split of our common stock effected on June 1, 2020, 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.

During the first three months of 2020,

Kronos acquired 122 , 489 shares of its common stock in open market purchases under such repurchase pro gram for an aggregate purchase price of $ 1 .

At March 3 1 , 20 20 , approximately 1 .

During the first six months of 2020, Kronos acquired

122 , 489 shares of its common stock in open market purchases under such repurchase program for an aggregate purchase price of $ 1 .

At June 30 , 20 20 , 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.

At March 31, 2020, approximately .7 million shares were available for purchase under these authorizations.

At June 30, 2020, approximately .7 million shares were available for purchase under these authorizations.

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 affiliates.

Kronos paid a regular dividend of $.18 per share in each quarter of 2019.

If Kronos were to pay its $.18 per share in each quarter of 2020 based on the 58.0 million shares we held of Kronos common stock at March 31, 2020, we would receive aggregate annual regular dividends from Kronos of $41.8 million.

If Kronos were to pay its $.18 per share in each quarter of 2020 based on the 58.0 million shares we held of Kronos common stock at June 30, 2020, we would receive aggregate annual regular dividends from Kronos of $41.8 million.

In February 2020 the NL board of directors approved a quarterly dividend of $.04 per share.

If NL were to pay its $.04 per share dividend in each quarter of 2020 based on the 40.4 million shares we hold of NL common stock at March 31, 2020, we would receive aggregate annual dividends from NL of $6.5 million.

BMI and LandWell do 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 $29.1 million in 2019 and $5.9 million during the first three months of 2020.

If NL were to pay its $.04 per share dividend in each quarter of 2020 based on the 40.4 million shares we hold of NL common stock at June 30, 2020, we would receive aggregate annual dividends from NL of $6.5 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 $29.1 million in 2019 and $5.9 million during the first six months of 2020.

We do not know if we will receive additional dividends from BMI and LandWell during 2020.

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however, these restrictions in the past have not significantly impacted their ability to pay dividends.

As disclosed in our proxy statement filed with the Securities and Exchange Commission on April 7, 2020, our stockholders will vote on a proposal to approve a reverse stock split of our common stock at a reverse stock split ratio of 1-for-8, 1-for-10 or 1-for-12, as determined by our board of directors following stockholder approval, at our annual meeting of stockholders scheduled to be held on May 28, 2020.

Also as disclosed in our proxy statement, our controlling stockholder has indicated its intention to have its shares represented at the meeting and to vote its shares in favor of the reverse stock split proposal, in which case the proposal will be approved.

We expect to effect the reverse stock split promptly following the annual meeting, at the reverse stock split ratio selected by our board of directors immediately following the stockholders meeting.

Once the reverse stock split has been implemented, we will adjust all share and per-share disclosures for all periods presented in our consolidated financial statements to give effect to the split.

Reverse stock split –

On May 28, 2020 following stockholder approval at our annual meeting, our board of directors approved a reverse stock split of our common stock at a ratio of 1-for-12, which was effective June 1, 2020.

All share and per-share disclosures for all periods presented have been adjusted to give effect to the reverse stock split and we have adjusted our stockholders’ equity at December 31, 2018, March 31, 2019, December 31, 2019 and March 31, 2020 to reflect the split by reclassifying $3.3 million from common stock to additional paid-in capital representing $.01 per share par value of each share of common stock eliminated as a result of the reverse stock split.

Investment in our Subsidiaries and Affiliates and Other Acquisitions –

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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.

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.

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 201 9 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 March 31 , 20 20 .

We eliminate any such intercompany borrowings in our Consolidated Financial Statements.

Prior to 201 9 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 June 30 , 20 20 .

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 $60 million.

We also eliminate any such intercompany borrowings in our Condensed Consolidated Financial Statements.

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, 2021.

We had no borrowings from Kronos under this facility during the first quarter of 2020, and there was no outstanding balance at March 31, 2020.

We could borrow $60.0 million under our current intercompany facility with Kronos at March 31, 2020.

We had no borrowings from Kronos under this facility during the first six months of 2020, and there was no outstanding balance at June 30, 2020.

We could borrow $60.0 million under our current intercompany facility with Kronos at June 30, 2020.

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 also eliminate any such intercompany borrowings in our Condensed Consolidated Financial Statements.

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, 2021.

We had gross borrowings of $14.9 million and gross repayments of $18.2 million during the first quarter of 2020, and $30.5 million was outstanding at March 31, 2020.

We could borrow $9.5 million under our current intercompany facility with CompX at March 31, 2020.

We had gross borrowings of $17.3 million and gross repayments of $20.6 million during the first six months of 2020, and $30.5 million was outstanding at June 30, 2020.

We could borrow $9.5 million under our current intercompany facility with CompX at June 30, 2020.

CompX’s obligation to loan us money under this note is at CompX’s discretion.

15 unchanged sentences

Critical Accounting Policies

There have been no changes in the first quarter of 2020 with respect to our critical accounting policies presented in Management’s Discussion and Analysis of Financial Condition and Results of Operation in our 2019 Annual Report.

There have been no changes in the first six months of 2020 with respect to our critical accounting policies presented in Management’s Discussion and Analysis of Financial Condition and Results of Operation in our 2019 Annual Report.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis