VALHI INC /DE/ 10-Q

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 (“TiO 2 ”). TiO 2 is used to impart whiteness, brightness, opacity and durability to a wide variety of products, including paints, plastics, paper, fibers and ceramics. Additionally, TiO 2 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, healthcare and a variety of other industries. CompX also manufactures stainless steel exhaust systems, gauges, throttle controls, wake enhancement systems and trim tabs 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’ TiO 2 operations); • Customer and producer inventory levels; • Unexpected or earlier-than-expected industry capacity expansion (such as the TiO 2 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 TiO 2 , 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) 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 TiO 2 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 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; and • 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; and • 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; and • insurance recoveries related to a single insurance recovery settlement of $4.7 million in the second quarter of 2019. - 24 - 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; and • 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; and • a gain of $.10 per share related to the insurance recovery recognized in the second quarter. Current Forecast for 2020 — We currently expect to report lower consolidated operating income for 2020 as compared to 2019 primarily due to the net effects of: • 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; and • 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. and worldwide gross domestic product to be significantly impacted for an indeterminate period which in turn would impact demand for our products and those of our customers. Consequently, we expect to report lower sales and earnings than would otherwise have been expected for the remainder of 2020. 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 – Chemicals – We consider TiO 2 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 TiO 2 to be consistent with our expectations for the long-term growth in GDP. However, even if we and our competitors maintain consistent shares of the worldwide market, demand for TiO 2 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 TiO 2 inventory levels of our customers. We believe that our customers’ inventory levels are influenced in part by their expectations for future changes in market TiO 2 selling prices as well as their expectations for future availability of product. Although certain of our TiO 2 grades are considered specialty pigments, the majority of our grades and substantially all of our 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 service. The factors having the most impact on our Chemicals Segment’s reported operating results are: • TiO 2 selling prices, • our TiO 2 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 rate for the U.S. dollar relative to the euro, the Norwegian krone and the Canadian dollar). - 25 - K ey performance indicators are our Chemicals Segment’s TiO 2 average selling prices, the level of TiO 2 sales and production volumes, and the cost of our Chemicals Segment’s third-party feedstock. 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 June 30, Six months ended June 30, 2019 2020 % Change 2019 2020 % Change (Dollars in millions) (Dollars in millions) Net sales $ 484.5 $ 386.0 (20 ) % $ 921.0 $ 807.0 (12 ) % Cost of sales 375.4 291.1 (22 ) 703.1 624.5 (11 ) Gross margin $ 109.1 $ 94.9 (13 ) $ 217.9 $ 182.5 (16 ) Operating income $ 50.5 $ 35.9 (29 ) $ 103.3 $ 82.7 (20 ) Percent of net sales: Cost of sales 77 % 75 % 76 % 77 % Gross margin 23 25 24 23 Operating income 10 9 11 10 Ti0 2 operating statistics: Sales volumes* 158 124 (22 ) % 301 260 (14 ) % Production volumes* 136 133 (2 ) % 270 265 (2 ) % Percent change in net sales: Ti0 2 sales volumes (22 ) % (14 ) % Ti0 2 product pricing (1 ) (1 ) Ti0 2 product mix/other 4 4 Changes in currency exchange rates (1 ) (1 ) Total (20 ) % (12 ) % * 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 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 2019 2020 First quarter 97% 95% Second quarter 97% 96% 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 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. - 26 - 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 $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). 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 sales generated from our 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 worldwide, primarily titanium-containing feedstocks, are purchased primarily in U.S. dollars, while labor and other production costs are purchased primarily in local currencies. Consequently, the translated U.S. dollar value of our 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 non-U.S. operations also generate - 27 - 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. operations are holding non-local currency (primarily U.S. dollars), and (iii) relative changes in the aggregate fair value of currency forward contracts held from time to time. 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 June 30, 2020 vs June 30, 2019 Translation gains (losses) - impact of rate changes Total currency impact 2020 vs 2019 Transaction losses recognized 2019 2020 Change (In millions) Impact on: Net sales $ — $ — $ — $ (4 ) $ (4) Operating income (1 ) (6 ) (5 ) 5 — The $4 million decrease in our Chemicals Segment’s net sales (translation loss) was caused primarily by a strengthening of the U.S. dollar relative to the euro, as our euro-denominated sales were translated into fewer 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 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. dollar. 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. dollar currency held by our non-U.S. operations and in Norwegian krone denominated receivables and payables held by our 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, 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 Translation gains (losses) - impact of rate changes Total currency impact 2020 vs 2019 Transaction gains recognized 2019 2020 Change (In millions) Impact on: Net sales $ — $ — $ — $ (11 ) $ (11 ) Operating income — 6 6 5 11 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. dollar. 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, - 28 - 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. 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 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 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. The key performance indicator for our Component Products Segment is operating income and margins . 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. - 29 - Three months ended June 30, Six months ended June 30, 2019 2020 % Change 2019 2020 % Change (Dollars in millions) (Dollars in millions) Net sales: Security products $ 26.9 $ 18.6 (31 ) % $ 51.6 $ 44.0 (15 ) % Marine components 6.8 5.2 (23 ) 13.3 12.1 (9 ) Total net sales 33.7 23.8 (29 ) 64.9 56.1 (14 ) Cost of sales 22.8 16.4 (28 ) 44.3 38.3 (14 ) Gross margin $ 10.9 $ 7.4 (32 ) $ 20.6 $ 17.8 (13 ) Operating income $ 5.6 $ 2.4 (57 ) $ 10.0 $ 7.4 (26 ) Percent of net sales: Cost of sales 68 % 69 % 68 % 68 % Gross margin 32 31 32 32 Operating income 17 10 15 13 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 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. 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 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 - 30 - 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 – Three months ended Six months ended June 30, June 30, 2019 2020 2019 2020 (In millions) Net sales: Land sales $ 8.4 $ 2.7 $ 17.9 $ 6.2 Water delivery sales 1.6 2.1 3.5 4.0 Utility and other .4 .4 .9 1.0 Total net sales 10.4 5.2 22.3 11.2 Cost of sales 7.2 3.5 15.8 7.8 Gross margin $ 3.2 $ 1.7 $ 6.5 $ 3.4 Operating income $ 9.8 $ 1.0 $ 13.0 $ 20.2 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 quarter of 2020, LandWell has closed or entered into escrow on approximately 930 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 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 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 second quarter of 2020. 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 - 31 - 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. We deliver water to several customers under long-term contracts. 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. 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. 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 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 we 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. 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. 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. 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 2019 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 - 32 - 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 $ .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 $.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; and • 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. 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 2020, 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 2020, 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 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 $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. 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, 2019, we had recognized a deferred income tax liability with respect to our direct investment in Kronos of $37.8 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 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. - 33 - 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 decreased from 2019 to 2020 primarily due to decreased earnings at Kronos and CompX. See Note 13 to our Condensed Consolidated Financial Statements. - 34 - 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 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); and • 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”) 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. December 31, 2018 June 30, 2019 December 31, 2019 June 30, 2020 Kronos: Days sales outstanding 76 days 72 days 71 days 71 days Days sales in inventory 113 days 62 days 83 days 85 days CompX: Days sales outstanding 40 days 40 days 36 days 43 days Days sales in inventory 80 days 71 days 81 days 121 days - 35 - 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. Six months ended June 30, 2019 2020 (In millions) Cash provided by (used in) operating activities: Valhi exclusive of its subsidiaries $ 13.7 $ 16.6 Kronos 25.9 18.1 NL exclusive of its subsidiaries 14.2 8.9 CompX 5.4 4.4 BMI 12.5 7.2 LandWell 10.9 (.9 ) Tremont exclusive of its subsidiaries 9.1 4.6 Eliminations and other (58.9 ) (52.9 ) Total $ 32.8 $ 6.0 Investing Activities— We spent $26.7 million in capital expenditures during the first six months of 2020 including: • $25.4 million in our Chemicals Segment; • $.9 million in our Component Products Segment; and • $.4 million in our Real Estate Management and Development Segment. Financing Activities— 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. 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 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 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; • $16.9 million on BMI’s bank loan ($16.2 million carrying amount, net of unamortized debt issuance costs) due through September 2032; • $14.5 million on LandWell’s bank loan due in April 2036; and - 36 - • approximately $ 2.7 million of other indebtedness. Certain of our credit facilities require the respective borrowers to maintain a number of covenants and restrictions which, among other things, restrict our ability to incur additional debt, incur liens, pay dividends or merge or consolidate with, or sell or transfer substantially all of our assets to, another entity, and contain other provisions and restrictive covenants customary in lending transactions of this type. Certain of our 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, certain 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, certain 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. Kronos’ North American and European revolvers contain a number of covenants and restrictions which, among other things, restrict its ability to incur additional debt, incur liens, pay dividends 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 this type. 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 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; however, if future operating results differ materially from our expectations we may be unable to maintain compliance. 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 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. - 37 - 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; • $125.0 million under Kronos’ North American revolving credit facility; and • $50.8 (2) million under Valhi’s Contran credit facility. (1) 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. (2) Amounts available under this facility are at the sole discretion of Contran. 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. Following implementation of a territorial tax system under the 2017 Tax Act, repatriation of any cash and cash equivalents held by our non-U.S. subsidiaries would not be expected to result in any material income tax liability as a result of such repatriation. A detail by entity is presented in the table below. Total Amount held outside U.S. (In millions) Kronos $ 343.4 $ 159.7 CompX 62.5 - NL exclusive of its subsidiaries 100.0 - Tremont exclusive of its subsidiaries 8.5 - LandWell 9.5 - BMI 17.4 - Valhi exclusive of its subsidiaries - - Total restricted and unrestricted cash, cash equivalents and marketable securities $ 541.3 $ 159.7 Capital Expenditures and Other – We currently expect our aggregate capital expenditures for 2020 will be approximately $66 million as follows: • $60 million by our Chemicals Segment, • $4 million by our Component Products Segment; and • $2 million by our Real Estate Management and Development Segment. Capital spending for 2020 is expected to be funded primarily through cash generated from operations and borrowing under existing credit facilities. Planned capital expenditures in 2020 at Kronos and CompX will primarily be to maintain and improve the cost-effectiveness of our facilities. 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, curtail or delay planned capital spending and land development activities if economic conditions warrant. 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 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 six months of 2020, Kronos acquired - 38 - 122 , 489 shares of its common stock in open market purchases under such repurchase program for an aggregate purchase price of $ 1 . 0 million . 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 June 30, 2020, approximately .7 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 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 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 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. 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, typically a percentage of net income or cash flow; however, these restrictions in the past have not significantly impacted their ability to pay dividends. 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 – 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 2019, 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 - 39 - 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 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 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 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 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 $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. 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 2019 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 Notes 1, 14 and 18 to our 2019 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 See Note 17 to our Condensed Consolidated Financial Statements. Critical Accounting Policies 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. - 40 -