Item 2. Management’s Discussion and Analysis
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, trim tabs and related hardware and accessories for the recreational marine and other industries.
●
Real Estate Management and Development —We operate in real estate management and development through our majority control of BMI and LandWell. BMI provides utility services to certain industrial and municipal customers and owns real property in Henderson, Nevada. LandWell is engaged in efforts to develop certain land holdings for commercial, industrial and residential purposes in Henderson, Nevada.
General
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Statements in this Quarterly Report that are not historical facts are forward-looking in nature and represent management’s beliefs and assumptions based on currently available information. In some cases, you can identify forward-looking statements by the use of words such as “believes,” “intends,” “may,” “should,” “could,” “anticipates,” “expects” or comparable terminology, or by discussions of strategies or trends. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we do not know if these expectations will be correct. Such statements by their nature involve substantial risks and uncertainties that could significantly impact expected results. Actual future results could differ materially from those predicted. The factors that could cause actual future results to differ materially from those described herein are the risks and uncertainties discussed in this Quarterly Report and those described from time to time in our other filings with the SEC and include, but are not limited to, the following:
•
Future supply and demand for our products;
•
The extent of the dependence of certain of our businesses on certain market sectors;
•
The cyclicality of certain of our businesses (such as Kronos’ 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;
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•
Potential difficulties in upgrading or implementing accounting and manufacturing software systems;
•
Potential consolidation of our competitors;
•
Potential consolidation of our customers;
•
The impact of pricing and production decisions;
•
Competitive technology positions;
•
Our ability to protect or defend intellectual property rights;
•
The introduction of trade barriers or trade disputes;
•
The ability of our subsidiaries to pay us dividends;
•
The impact of current or future government regulations (including employee healthcare benefit related regulations);
•
Uncertainties associated with new product development and the development of new product features;
•
Fluctuations in currency exchange rates (such as changes in the exchange rate between the U.S. dollar and each of the euro, the Norwegian krone and the Canadian dollar and between the euro and the Norwegian krone) or possible disruptions to our business resulting from uncertainties associated with the euro or other currencies;
•
Operating interruptions (including, but not limited to, labor disputes, leaks, natural disasters, fires, explosions, unscheduled or unplanned downtime, transportation interruptions, cyber-attacks and public health crises such as COVID-19);
•
Decisions to sell operating assets other than in the ordinary course of business;
•
The timing and amounts of insurance recoveries;
•
Our ability to renew, amend, refinance or establish credit facilities;
•
Our ability to maintain sufficient liquidity;
•
The ultimate outcome of income tax audits, tax settlement initiatives or other tax matters, including future tax reform;
•
Our ability to utilize income tax attributes, the benefits of which may or may not have been recognized under the more-likely-than-not recognition criteria;
•
Environmental matters (such as those requiring compliance with emission and discharge standards for existing and new facilities, or new developments regarding environmental remediation at sites related to our former operations);
•
Government laws and regulations and possible changes therein (such as changes in government regulations which might impose various obligations on former manufacturers of lead pigment and lead-based paint, including NL, with respect to asserted health concerns associated with the use of such products) including new environmental health and safety regulations such as those seeking to limit or classify 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.
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Operations Overview
Quarter Ended March 31, 2021 Compared to the Quarter Ended March 31, 2020 —
We reported net income attributable to Valhi stockholders of $14.8 million or $.52 per diluted share in the first quarter of 2021 compared to net income of $24.4 million or $.86 per diluted share in the first quarter of 2020. As discussed more fully below, our net income attributable to Valhi stockholders decreased from 2020 to 2021 primarily due to:
●
lower operating income from our Chemicals Segment in 2021 compared to 2020, slightly offset by higher operating income from our Component Products Segment; and
●
lower operating income from our Real Estate Management and Development segment including income from tax increment infrastructure reimbursement of $6.2 million in 2021 compared to $19.1 million in 2020.
Our diluted net income per share in the first quarter of 2021 includes income of $.11 per share related to the tax infrastructure reimbursement.
Our diluted net income per share in the first quarter 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.
Current Forecast for 2021 —
We currently expect to report higher consolidated operating income for 2021 as compared to 2020 primarily due to higher operating income from our Chemicals Segment and our Component Products Segment. Beginning in the second half of 2020 and continuing through the first quarter of 2021, sales at each of our operating segments have improved from reduced levels experienced in the first half of 2020 resulting from the COVID-19 pandemic. We expect the improved demand experienced since late 2020 to continue for the remainder of 2021 and we expect our operating results to reflect the elevated demand. See additional discussion on expectations for each of our operating segments below.
Segment Operating Results—2021 Compared to 2020 –
Chemicals –
We consider 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 our Chemicals Segment and its 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 Chemicals Segment’s customers. We believe that our Chemicals Segment’s customers’ inventory levels are influenced in part by their expectations for future changes in market TiO 2 selling prices as well as their expectations for future availability of product. Although certain of our Chemicals Segment’s TiO 2 grades are considered specialty pigments, the majority of its grades and substantially all of its production are considered commodity pigment products with price and availability being the most significant competitive factors along with product quality and customer and technical support service.
The factors having the most impact on our Chemicals Segment’s reported operating results are:
•
TiO 2 selling prices,
•
our Chemicals Segment’s 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 and the euro relative to the Norwegian krone).
Key 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.
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Three months ended March 31,
2020
2021
% Change
(Dollars in millions)
Net sales
$
421.0
$
465.0
10
%
Cost of sales
333.3
369.7
11
Gross margin
$
87.7
$
95.3
9
Operating income
$
46.8
$
37.7
(19
)
Percent of net sales:
Cost of sales
79
%
79
%
Gross margin
21
21
Operating income
11
8
Ti0 2 operating statistics:
Sales volumes*
136
141
3
%
Production volumes*
132
130
(1
)
Percent change in net sales:
Ti0 2 sales volumes
3
%
Ti0 2 product pricing
(1
)
Ti0 2 product mix/other
3
Changes in currency exchange rates
5
Total
10
%
*
Thousands of metric tons
Current Industry Conditions — Our Chemicals Segment started 2021 with average TiO 2 selling prices 3% lower than at the beginning of 2020 and our Chemicals Segment’s average TiO 2 selling prices at the end of the first quarter of 2021 were 1% higher than the end of 2020. Our Chemicals Segment experienced higher sales volumes in its North American and Latin American markets, partially offset by lower sales volumes in its European market in the first three months of 2021 as compared to the same period of 2020.
Our Chemicals Segment operated its production facilities at overall average capacity utilization rates of 97% in the first quarter of 2021 compared to 95% in the first quarter of 2020. Due to the phase-out of sulfate production at one of its facilities in the fourth quarter of 2020, our Chemicals Segment’s production volumes were 1% lower in the first quarter of 2021 as compared to the first quarter of 2020.
Net Sales — Our Chemicals Segment’s net sales in the first quarter of 2021 increased 10%, or $44.0 million, compared to the first quarter of 2020 primarily due to a 3% increase in sales volumes (which increased net sales by approximately $13 million), partially offset by a 1% decrease in average TiO 2 selling prices (which decreased net sales by approximately $4 million). In addition to the net impact of higher sales volumes and lower average selling prices, we estimate that changes in currency exchange rates (primarily the euro) increased our Chemicals Segment’s net sales by approximately $20 million in the first quarter of 2021 as compared to the first quarter of 2020. 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 increased 3% in the first quarter of 2021 as compared to the first quarter of 2020 primarily due to higher demand in its North American and Latin American markets, partially offset by lower demand in its European market.
Cost of Sales and Gross Margin — Our Chemicals Segment’s cost of sales increased $36.4 million, or 11%, in the first quarter of 2021 compared to the first quarter of 2020 due to a 3% increase in sales volumes partially offset by lower production costs of approximately $13 million. Our Chemicals Segment’s cost of sales as a percentage of net sales in the first quarter of 2021 was comparable to its cost of sales as a percentage of net sales in the first quarter of 2020.
Our Chemicals Segment’s gross margin as a percentage of net sales was 21% in each of the first quarters of 2021 and 2020. Gross margin as a percentage of net sales increases or decreases primarily due to the net effect of fluctuations in sales volumes, average TiO 2 selling prices and raw materials and other production costs.
Operating Income — Our Chemicals Segment’s operating income decreased by $9.1 million, or 19%, in the first quarter of 2021 compared to the first quarter of 2020. Operating income as a percentage of net sales decreased to 8% in the first quarter of 2021 from 11% in the same period of 2020. We estimate that changes in currency exchange rates decreased income from operations by approximately $16 million in the first quarter of 2021 as compared to the same period in 2020, as discussed below.
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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 additio nal depreciation expense of $ . 4 million in the first three months of 202 1 and $ . 5 million in the same period of 20 20 , which reduced our reported Chemicals Segment’s operating income as compared to amounts reported by Kronos.
Currency Exchange Rates — – Our Chemicals Segment has substantial operations and assets located outside the United States (primarily in Germany, Belgium, Norway and Canada). The majority of our Chemicals Segment’s sales from non-U.S. operations are denominated in currencies other than the U.S. dollar, principally the euro, other major European currencies and the Canadian dollar. A portion of our Chemicals Segment’s sales generated from its non-U.S. operations is denominated in the U.S. dollar (and consequently our Chemicals Segment’s 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 Chemicals Segment’s non-U.S. sales and operating results are subject to currency exchange rate fluctuations which may favorably or unfavorably impact reported earnings and may affect the comparability of period-to-period operating results. In addition to the impact of the translation of sales and expenses over time, our Chemicals Segment’s non-U.S. operations also generate currency transaction gains and losses which primarily relate to (i) the difference between the currency exchange rates in effect when non-local currency sales or operating costs (primarily U.S. dollar denominated) are initially accrued and when such amounts are settled with the non-local currency, and (ii) changes in currency exchange rates during time periods when our Chemicals Segment’s non-U.S. operations are holding non-local currency (primarily U.S. dollars).
Overall, we estimate that fluctuations in currency exchange rates had the following effects on the reported amounts of our Chemicals Segment’s sales and operating income for the periods indicated.
Impact of changes in currency exchange rates
Three months ended March 31, 2021 vs March 31, 2020
Translation
gains (losses)-
impact of
rate changes
Total
currency
impact
2021 vs 2020
Transaction gains (losses) recognized
2020
2021
Change
(In millions)
Impact on:
Net sales
$
-
$
-
$
-
$
20
$
20
Operating income
12
(1
)
(13
)
(3
)
(16
)
The $20 million increase in our Chemicals Segment’s net sales (translation gain) was caused primarily by a weakening of the U.S. dollar relative to the euro, as our Chemicals Segment’s euro-denominated sales were translated into more U.S. dollars in 2021 as compared to 2020. The weakening of the U.S. dollar relative to the Canadian dollar and the Norwegian krone in 2021 did not have a significant effect on the reported amount of our Chemicals Segment’s net sales, as a substantial portion of the sales generated by our Chemicals Segment’s Canadian and Norwegian operations are denominated in the U.S. dollar.
The $16 million decrease in our Chemicals Segment’s operating income was comprised of the following:
•
Lower net currency transaction gains of approximately $13 million 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 in Norwegian krone denominated receivables and payables held by our non-U.S. operations, and
•
Approximately $3 million from net currency translation losses primarily caused by the weakening of the U.S. dollar relative to the Canadian dollar, as its local currency-denominated operating costs were translated into more U.S. dollars in 2021 as compared to 2020. Such translations, as it related to the U.S. dollar relative to the euro and Norwegian krone, had a nominal effect on our Chemicals Segment’s operating income in 2021 as compared to 2020.
Outlook— Beginning in the second half of 2020 and continuing through the first quarter of 2021, our Chemicals Segment’s sales volumes have increased from reduced levels experienced in the first half of 2020 resulting from the COVID-19 pandemic. Our Chemicals Segment increased production volumes in late 2020 to correspond to increasing demand and has maintained production at those increased levels through the first quarter of 2021. At the beginning of 2021, our Chemicals Segment’s average TiO 2 selling prices were 3% lower than at the beginning of 2020 and average selling prices increased 1% during the first quarter of 2021, although still below corresponding 2020 levels.
Despite continued challenges and uncertainties related to the pandemic in certain regions and industries, we expect global demand for consumer products, including those of our Chemicals Segment’s customers, to remain strong throughout 2021 and we expect that our Chemicals Segment’s sales and production volumes will reflect the elevated demand. As global economic activity has begun to
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recover, our Chemicals Segment ha s experienced certain disruptions in global supply chains along with increasing production costs, including higher third-party feedstock prices and related shipping costs, which are likely to continue for much of 2021. Due to increas ed customer demand, we expect sales prices for TiO 2 to continue to rise throughout 2021, mitigating increases in distribution and production costs. As such, we expect our Chemicals Segment’s 2021 sales and operating income will be higher than in 2020, principally due to higher TiO 2 sales prices and higher sales volumes. Our Chemicals Segment continue s to monitor current and anticipated near-term customer demand levels and will align its production and inventories accordingly.
Our expectations for the TiO 2 industry and our Chemicals Segment’s operations are based on a number of factors outside our control, including the ongoing economic effects of the COVID-19 pandemic. Future impacts of COVID-19 on our Chemicals Segment’s operations will depend on, among other things, demand for its products, any future disruption in its operations or its suppliers’ operations and the timing and effectiveness of the global measures deployed to fight COVID-19, all of which remain uncertain and cannot be predicted. 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 recovery. Our Chemicals Segment continues to employ a variety of methods to protect the health and well-being of its workforce and its customers, and is encouraging its employees to be vaccinated. 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.
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 .
In the first quarter of 2021 our Component Products Segment’s operating income increased to $5.8 million compared to $5.0 million in the first quarter of 2020, before its sales volumes and operations had been significantly affected by the COVID-19 pandemic. The increase in operating income in the first quarter of 2021 compared to 2020 primarily resulted from higher marine components sales to the towboat market. Our Component Products Segment sustained the greatest negative operating impact from COVID-19 in the second quarter of 2020 to both of its reporting units. Beginning in the third quarter of 2020 and continuing through the first quarter of 2021, marine components experienced a significant recovery in sales, while security products sales generally improved sequentially, though not to pre-pandemic levels.
Three months ended March 31,
2020
2021
% Change
(Dollars in millions)
Net sales:
Security products
$
25.5
$
25.9
2
%
Marine components
6.8
10.0
47
Total net sales
32.3
35.9
11
Cost of sales
21.9
24.9
14
Gross margin
$
10.4
$
11.0
6
Operating income
$
5.0
$
5.8
16
Percent of net sales:
Cost of sales
68
%
69
%
Gross margin
32
31
Operating income
15
16
Net Sales — Our Component Products Segment’s net sales increased $3.6 million in the first quarter of 2021 compared to the same period in 2020 primarily due to higher marine components sales and to a lesser extent higher security products sales. Marine components net sales increased 47% in the first quarter of 2021 compared to the same period last year primarily due to increased sales of $2.7 million to the towboat market, primarily wake enhancements systems and surf pipes to original equipment boat manufacturers. Marine components sales continues to benefit from an overall increase in demand in the recreational marine market which began in late spring 2020. Security products net sales increased 2% in the first quarter of 2021 compared to the same period last year primarily due to $.7 million of higher sales to the transportation market and $.5 million of higher sales to the government security market, partially offset by lower sales to markets that continue to be slower to recover from the effects of the COVID-19 pandemic, including $.4 million of lower sales to distribution customers and $.3 million of lower sales to the office furniture market. Relative changes in selling prices did not have a material impact on net sales comparisons.
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Costs of Sales and Gross Margin — Cost of sales as a percentage of sales in creased 1 % in the first quarter of 202 1 compared to the same period in 20 20. As a result, gross margin as a percentage of sales decreased over the same period . Marine components gross margin and operating income as a percentage of sales increased in the first quarter of 2021 compared to the same period last year due to a favorable customer and product mix and increased coverage of fixed costs on higher sales as well as decreased employer paid medical costs. Security products g ross margin and operating income margin for the first quarter of 2021 declined as compared to 2020 primarily due to higher cost inventory produced during the fourth quarter of 2020 and sold in the first quarter of 2021. Security p roducts inventory produced during the fourth quarter of 2020 had a higher carrying value compared to the same period in 20 19 due to higher cost per unit of production as a result of lower production volumes during the fourth quarter of 2020 . This negatively impacted security products’ gross margin and operating income margin as this higher cost inventory was sold during the first quarter of 2021 . Additionally, security products’ gross margin and operating income margin were favorably impacted by lower employer paid medical costs of $ .7 million during the first quarter of 2021 compared to 2020.
O perating Income — Our Component Products Segment’s operating income for the first quarter of 2021 increased compared to the same period of 2020 and was primarily impacted by the factors impacting cost of sales and gross margin discussed above.
Outlook— Our Component Products Segment first began to feel the effects of the COVID-19 pandemic in late March 2020 when it 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. The second quarter of 2020 sustained the greatest impact from COVID-19, but its effects continued to be felt through most of the remainder of the year. In the second half of 2020, our Component Products Segment’s sales began to recover from the historically low levels experienced during the second quarter of 2020, with sales steadily improving for the remainder of the year and through the first quarter of 2021. In the first quarter of 2021, our Component Products Segment’s manufacturing operations maintained normal production rates in-line with improved demand, although security products still has some markets which continue to be slower to recover, particularly distributors and office furniture. Our Component Products Segment’s supply chains remain intact although it has been moderately impacted by recent global and domestic supply chain disruptions. Thus far our Component Products Segment’s operations team has been able to manage through these disruptions with minimal impact on operations. Most of the markets our Component Products Segment serves continue to recover, and it communicates closely with all its customers to monitor order levels. Marine components sales outpaced prior year as demand for recreational boats increased as people sought socially distanced, outdoor activities. Our Component Products Segment expects this trend to continue during the remainder of 2021.
Considerable effort continues at all of our Component Products Segment’s locations to manage COVID-19 conditions including enhanced health and safety protocols and cleaning and disinfecting efforts. Throughout the course of the COVID-19 pandemic, our Component Products Segment has focused its efforts on maintaining efficient operations while closely managing its expenses. The advance of the COVID-19 pandemic and the global efforts to mitigate its spread are expected to continue to challenge workers, businesses and governments during 2021. The success and timing of mitigating actions depends in part on continued deployment of effective tools to fight COVID-19, including effective treatments and vaccine distribution before economies are likely to return to normal. In this regard, as part of our health and safety protocols, our Component Products Segment is encouraging its employees to receive a COVID-19 vaccine and has offered paid time off to hourly employees to facilitate participation.
Based on current conditions, our Component Products Segment expects to report increased revenue and operating income in 2021 compared to 2020, despite some security products markets that have not fully recovered to pre-pandemic levels. As a result, our Component Products Segment expects to continue to experience higher fixed costs per unit of production during 2021 which will continue to challenge security products gross margins. The impact of COVID-19 on 2021 will depend on customer demand for our Component Products Segment’s products, including the timing and extent to which its customers’ operations may be impacted, on its customers’ perception as to consumer demand for their products and on any future disruptions in our Component Products Segment’s operations or its suppliers’ operations, all of which are difficult to predict. As noted above, there are global supply chain disruptions and certain of our Component Products Segment’s customers have experienced temporary pauses in their operations as a result of these disruptions. Thus far these pauses have not had a material negative effect on our Component Products Segment’s sales. Our Component Products Segment’s operations teams meet frequently to ensure they are taking appropriate actions to maintain a safe working environment for all its employees, minimize material or supply related operational disruptions, manage inventory levels and improve operating margins. Our Component Products Segment is constantly evaluating staffing levels and believes current staffing levels are aligned with its sales and production forecasts.
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Real Estate Management and Development –
Three months ended
March 31,
2020
2021
(In millions)
Net sales:
Land sales
$
3.6
$
6.6
Water delivery sales
1.9
1.0
Utility and other
.5
.5
Total net sales
6.0
8.1
Cost of sales
4.4
5.1
Gross margin
$
1.6
$
3.0
Operating income
$
19.2
$
7.8
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 2021, LandWell has closed or entered into escrow on approximately 1,100 acres of the residential/planned community and approximately 70 acres zoned for commercial and light industrial use. Contracts for land sales are negotiated on an individual basis and sales terms and prices will vary based on such factors as location (including location within a planned community), expected development work, and individual buyer needs. Although land may be under contract or in escrow, in most instances buyers can cancel the escrow agreement with no financial penalties until shortly before the closing date. Land sales may be completed but we do not recognize revenue until we have satisfied the criteria for revenue recognition set forth in ASC Topic 606. In some instances, we will receive cash proceeds at the time the contract closes and record deferred revenue for some or all of the cash amount received, with such deferred revenue being recognized in subsequent periods. We expect our development work on the residential/planned community to continue for 5 to 10 years although we may have sold or transferred ownership of all of the land within the community prior to development work completion.
Net Sales and Operating Income— A substantial portion of the net sales from our Real Estate Management and Development Segment in the first quarter of 2020 and 2021 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 2020 and 2021 was under this method of revenue recognition. The contracts on these sales (both within the planned community and otherwise) include approximately 985 acres of the residential planned community and certain other acreage which closed in December 2013 and through the first quarter of 2021. Land sales revenues were higher in the first quarter of 2021 as compared to the first quarter of 2020 primarily due to an increase in the amount of acreage sold in 2021 compared to 2020. Cost of sales related to land sales revenues was $3.7 million in the first quarter of 2021 compared to $2.7 million in the first quarter of 2020. Operating income includes $6.2 million in the first quarter of 2021 and $19.1 million in the first quarter of 2020 of income related to the recognition of tax increment reimbursement note receivables, as discussed in Note 11 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— As a result of the COVID-19 pandemic, LandWell experienced a decline in land sales activity during the second quarter of 2020 and, as a result, LandWell reduced development spending where possible to align with expected residential builder output. Beginning in the second half of 2020 and continuing through the first quarter of 2021, land sales activities increased, including increases in both the number of acres sold and new escrow agreements. LandWell returned to more normalized infrastructure development spending in late 2020 in line with increased land sales. Throughout the COVID-19 pandemic, LandWell has continued to actively develop and market land it manages, primarily to residential builders, for the residential/planned community in Henderson and BMI has continued to provide utility and water delivery services to its customers without interruption. Our Real Estate Management and Development management team remains focused on protecting the health and safety of our employees and contractors including implementation of enhanced health and safety protocols.
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Based on current land sales activities, including current land sales in escrow, we expect the level of land sales in the near term to continue to be strong. As noted above, we cannot guarantee land held in escrow will close as currently scheduled because builders can generally cancel without financial penalty until shortly before scheduled closing. In addition, several COVID-19 mitigation procedures put into effect by the City of Henderson and utility providers are, in some cases, adding time to the typical permitting and mapping process required to be completed before the necessary approvals can be obtained to close a land sale. In addition, under LandWell’s development agreement with the City of Henderson, the issuance of a specified number of housing permits requires LandWell to complete certain large infrastructure projects. We expect LandWell to be required to begin several of these large projects in 2021 and, as a result, we expect land development costs to increase during 2021 as compared to 2020. Because these costs relate to the entirety of the residential/planned community, these costs are not part of the cost based inputs used to recognize revenue and therefore this spending will not correlate to revenue recognition. This spending is expected to be eligible for tax increment reimbursement.
General Corporate Items, Interest Expense, Income Taxes and Noncontrolling Interest—2021 Compared to 2020
Insurance Recoveries — NL has agreements with certain insurance carriers pursuant to which the carriers reimburse NL for a portion of its past lead pigment and asbestos litigation defense costs. Insurance recoveries include amounts NL received from these insurance carriers.
The agreements with certain of NL’s insurance carriers also include reimbursement for a portion of its future litigation defense costs. We are not able to determine how much NL will ultimately recover from these carriers for defense costs incurred by NL because of certain issues that arise regarding which defense costs qualify for reimbursement. Accordingly, these insurance recoveries are recognized when the receipt is probable and the amount is determinable. See Note 15 to our Condensed Consolidated Financial Statements.
Kronos recognized $1.5 million of insurance recoveries in the first quarter of 2020 related to a property damage claim.
Changes in the Market Value of Valhi Common Stock held by Subsidiaries —Our subsidiaries, Kronos and NL, hold shares of our common stock. As discussed in the 2020 Annual Report, we account for our proportional interest in these shares of our common stock as treasury stock, at Kronos’ and NL’s historical cost basis. The remaining portion of these shares of our common stock, which are attributable to the noncontrolling interest of Kronos and NL, are reflected in our Condensed Consolidated Balance Sheet at fair value. Kronos and NL recognize unrealized gains or losses on these shares of our common stock in the determination of each of their respective net income or losses. Under the principles of consolidation we eliminate any gains or losses associated with our common stock to the extent of our proportional ownership interest in each subsidiary. We recognized a gain of $1.3 million in the first quarter of 2021 compared to a loss of $2.4 million in the same period of 2020 in our Condensed Consolidated Statements of Income which represents the unrealized gain or loss in respect of these shares during such periods attributable to the noncontrolling interest of Kronos and NL.
Other General Corporate Items — Corporate expenses in the first quarter of 2021 were comparable to the same period of 2020. Included in corporate expense are:
•
litigation and related costs at NL of $.3 million in the first quarter of 2021 compared to $.6 million in the first quarter of 2020; and
•
environmental remediation and related costs of nil in the first quarter of 2021 compared to $.1 million in the first quarter of 2020.
Overall, we currently expect that our net general corporate expenses in 2021 will be higher than 2020 primarily due to higher expected litigation and related costs and higher environmental remediation and related costs.
The level of our litigation and related expenses varies from period to period depending upon, among other things, the number of cases in which we are currently involved, the nature of such cases and the current stage of such cases (e.g. discovery, pre-trial motions, trial or appeal, if applicable). See Note 15 to our Condensed Consolidated Financial Statements. If our current expectations regarding the number of cases in which we expect to be involved during 2021, or the nature of such cases, were to change, our corporate expenses could be higher than we currently estimate.
Obligations for environmental remediation and related costs are difficult to assess and estimate, and it is possible that actual costs for environmental remediation and related costs will exceed accrued amounts or that costs will be incurred in the future for sites in which we cannot currently estimate the liability. If these events occur in 2021, our corporate expense could be higher than we currently estimate. In addition, we adjust our accruals for environmental remediation and related costs as further information becomes available to us or as circumstances change. Such further information or changed circumstances could result in an increase or reduction in our accrued environmental remediation and related costs. See Note 15 to our Condensed Consolidated Financial Statements.
Interest Expense —Interest expense decreased to $8.6 million in the first quarter of 2021 from $9.7 million in the first quarter of 2020 primarily due to lower average interest rates and lower average balances on variable-rate indebtedness in 2021.
We expect interest expense will continue to be lower in the remainder of 2021 as compared to 2020 due to lower average rates and average balances.
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Provision for Income Taxes — We recognized an income tax expense of $ 8 . 0 million in the first quarter of 20 2 1 compared to $ 11 . 4 million in the first quarter of 20 20 . The decrease is primarily due to lower income from operations in the first quarter 202 1 . Our earnings are subject to income tax in various U.S. and non-U.S. jurisdictions, and the income tax rates applicable to the pre-tax earnings (losses) of our non-U.S. operations are generally higher than the income tax rates applicable to our U.S. operations. Excluding the effect of any increase or decrease in our deferred income tax asset valuation allowance or changes in our reserve for uncertain tax positions, we would generally expect our overall effective tax rate to be higher than the U.S. federal statutory tax rate of 21% primarily because of our non-U.S. operations.
We recognize deferred income taxes with respect to the excess of the financial reporting carrying amount over the income tax basis of our direct investment in Kronos common stock because the exemption under GAAP to avoid such recognition of deferred income taxes is not available to us. At December 31, 2020, we had recognized a deferred income tax liability with respect to our direct investment in Kronos of $35.5 million. There is a maximum amount (or cap) of such deferred income taxes we are required to recognize with respect to our direct investment in Kronos. The maximum amount of such deferred income tax liability we would be required to have recognized (the cap) is $155.4 million. During the first quarter of 2021, we recognized a non-cash deferred income tax benefit with respect to our direct investment in Kronos of $.1 million for the decrease in the deferred income taxes required to be recognized with respect to the excess of the financial reporting carrying amount over the income tax basis of our direct investment in Kronos common stock, to the extent such reduction related to our equity in Kronos’ net income during such period. We recognized a similar deferred income tax expense of $.2 million in the first quarter of 2020. A portion of the net change with respect to the excess of the financial reporting carrying amount over the income tax basis of our direct investment in Kronos common stock during such periods related to our equity in Kronos’ other comprehensive income (loss) items, and the amounts allocated to other comprehensive income (loss) items includes amounts related to our equity in Kronos’ other comprehensive income (loss) items.
See Note 12 to our Condensed Consolidated Financial Statements for a tabular reconciliation of our statutory income tax provision to our actual tax provision.
Noncontrolling Interest in Net Income (Loss) of Subsidiaries —Noncontrolling interest in operations of subsidiaries decreased in 2021 compared to 2020 primarily due to decreased operating income at Kronos and LandWell.
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LIQUIDITY AND CAPITAL RESOURCES
Consolidated Cash Flows
Operating Activities —
Trends in cash flows from operating activities (excluding the impact of significant asset dispositions and relative changes in assets and liabilities) are generally similar to trends in our operating income. In addition to the impact of the operating, investing and financing cash flows discussed below, changes in the amount of cash, cash equivalents and restricted cash we report from period to period can be impacted by changes in currency exchange rates, since a portion of our cash, cash equivalents and restricted cash is held by our non-U.S. subsidiaries.
Cash provided by operating activities was $56.6 million in the first quarter of 2021 compared to cash used in operating activities of $18.2 million in the first quarter of 2020. This $74.8 million increase in cash provided was primarily due to the net effect of the following items:
•
a $78.6 million decrease in the amount of net cash used in relative changes in receivables, inventories, payables and accrued liabilities in the first quarter of 2021;
•
consolidated operating income of $51.3 million in the first quarter of 2021, a decrease of $19.7 million compared to operating income of $71.0 million in the first quarter of 2020; and
•
higher net cash paid for income taxes in 2021 of $4.6 million.
Changes in working capital were affected by accounts receivable and inventory changes as shown below:
•
Kronos’ average days sales outstanding (“DSO”) decreased from December 31, 2020 to March 31, 2021 primarily due to relative changes in the timing of collections.
•
Kronos’ average days sales in inventory (“DSI”) decreased from December 31, 2020 to March 31, 2021 primarily due to lower inventory volumes attributable to higher sales volumes in the first quarter of 2021 compared to the fourth quarter of 2020 while production volumes were comparable.
•
CompX’s average DSO at March 31, 2021 increased from December 31, 2020 primarily due to relative changes in the timing of collections.
•
CompX’s average DSI at March 31, 2021 decreased as compared to December 31, 2020 primarily due to marine components as a result of rapid sales growth in the first quarter of 2021.
For comparative purposes, we have also provided comparable prior period numbers below.
December 31,
2019
March 31,
2020
December 31,
2020
March 31,
2021
Kronos:
Days sales outstanding
71 days
69 days
68 days
64 days
Days sales in inventory
83 days
66 days
74 days
56 days
CompX:
Days sales outstanding
36 days
43 days
33 days
43 days
Days sales in inventory
81 days
79 days
75 days
66 days
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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 cash flows from operating activities is presented in the table below. Intercompany dividends have been eliminated.
Three months ended
March 31,
2020
2021
(In millions)
Cash provided by (used in) operating activities:
Valhi exclusive of its subsidiaries
$
10.0
$
8.6
Kronos
(9.8
)
56.7
NL exclusive of its subsidiaries
5.4
6.5
CompX
(1.2
)
(2.4
)
BMI
5.6
.3
LandWell
(.2
)
9.1
Tremont exclusive of its subsidiaries
5.3
(.7
)
Eliminations and other
(33.3
)
(21.5
)
Total
$
(18.2
)
$
56.6
Investing Activities—
We spent $11.5 million in capital expenditures during the first three months of 2021 including:
•
$10.8 million in our Chemicals Segment;
•
$.6 million in our Component Products Segment; and
•
$.1 million in our Real Estate Management and Development Segment.
Financing Activities—
During the three months ended March 31, 2021, we:
•
repaid $2.3 million under the Contran credit facility and repaid $1.5 million under Tremont’s deferred payment obligation;
•
paid a quarterly dividend to Valhi stockholders of $.08 per share ($2.2 million); and
•
CompX acquired shares of its Class A common stock for a purchase price of $.8 million.
The declaration and payment of future dividends, and the amount thereof, is discretionary and is dependent upon a number of factors including our current and future expected results of operations, financial condition, cash requirements for our businesses, contractual and other requirements and restrictions and other factors deemed relevant by our board of directors. The amount and timing of past dividends is not necessarily indicative of the amount or timing of any future dividends which might be paid. There are currently no contractual restrictions on the amount of dividends which we may pay. Distributions to noncontrolling interest in subsidiaries in the first three months of 2021 are comprised of CompX dividends paid to shareholders other than NL and Kronos dividends paid to shareholders other than us and NL.
Outstanding Debt Obligations
At March 31, 2021, our consolidated indebtedness was comprised of:
•
Valhi’s $268.4 million outstanding on its $320 million credit facility with Contran which is due no earlier than December 31, 2022;
•
€400 million aggregate outstanding on the KII 3.75% Senior Secured Notes ($465.0 million carrying amount, net of unamortized debt issuance costs) due in September 2025;
•
$16.9 million on BMI’s bank loan ($16.3 million carrying amount, net of unamortized debt issuance costs) due through September 2032;
•
$14.2 million on LandWell’s bank loan due in April 2036; and
•
approximately $1.6 million of other indebtedness.
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On April 20, 2021, Kronos entered into a new $225 million global revolving credit facility (“Global Revolver”) which matures in April 2026. Kronos had no outstanding borrowings on its previously existing North American and European revolving facilities at March 31, 2021 through the date of their termination. Kronos currently has no outstanding borrowings on the new Global Revolver and the full $225 million was available for borrowing thereunder. Kronos’ credit facilities contain a number of covenants and restrictions which, among other things, restrict its ability to incur or guarantee additional debt, incur liens, pay dividends or make other restricted payments, or merge or consolidate with, or sell or transfer substantially all of its assets to, another entity, and contain other provisions and restrictive covenants customary in lending transactions of these types . Kronos’ credit agreements contain provisions which could result in the acceleration of indebtedness prior to their stated maturity for reasons other than defaults for failure to comply with typical financial or payment covenants. For example, the credit agreements allow the lender to accelerate the maturity of the indebtedness upon a change of control (as defined in the agreement) of the borrower. In addition, the credit agreements could result in the acceleration of all or a portion of the indebtedness following a sale of assets outside the ordinary course of business. The terms of all of our debt instruments outstanding at March 31, 2021 are discussed in Note 9 to our 2020 Annual Report. See Note 6 to our Condensed Consolidated Financial Statements for discussion of the terms of Kronos’ new Global Revolver. We were in compliance with all of our debt covenants at March 31 , 2021. We believe we will be able to continue to comply with the financial covenants contained in our credit facilities through their maturity.
Future Cash Requirements
Liquidity –
Our primary source of liquidity on an ongoing basis is our cash flows from operating activities and borrowings under various lines of credit and notes. We generally use these amounts to (i) fund capital expenditures, (ii) repay short-term indebtedness incurred primarily for working capital purposes and (iii) provide for the payment of dividends (including dividends paid to us by our subsidiaries) or treasury stock purchases. From time-to-time we will incur indebtedness, generally to (i) fund short-term working capital needs, (ii) refinance existing indebtedness, (iii) make investments in marketable and other securities (including the acquisition of securities issued by our subsidiaries and affiliates) or (iv) fund major capital expenditures or the acquisition of other assets outside the ordinary course of business. Occasionally we sell assets outside the ordinary course of business, and we generally use the proceeds to (i) repay existing indebtedness (including indebtedness which may have been collateralized by the assets sold), (ii) make investments in marketable and other securities, (iii) fund major capital expenditures or the acquisition of other assets outside the ordinary course of business or (iv) pay dividends.
We routinely compare our liquidity requirements and alternative uses of capital against the estimated future cash flows we expect to receive from our subsidiaries, and the estimated sales value of those units. As a result of this process, we have in the past sought, and may in the future seek, to raise additional capital, refinance or restructure indebtedness, repurchase indebtedness in the market or otherwise, modify our dividend policies, consider the sale of our interests in our subsidiaries, affiliates, business units, marketable securities or other assets, or take a combination of these and other steps, to increase liquidity, reduce indebtedness and fund future activities. Such activities have in the past and may in the future involve related companies. From time to time, we and our subsidiaries may enter into intercompany loans as a cash management tool. Such notes are structured as revolving demand notes and pay and receive interest on terms we believe are generally more favorable than current debt and investment market rates. The companies that borrow under these notes have sufficient liquidity to repay the notes. All of these notes and related interest expense and income are eliminated in our Condensed Consolidated Financial Statements.
We periodically evaluate acquisitions of interests in or combinations with companies (including our affiliates) that may or may not be engaged in businesses related to our current businesses. We intend to consider such acquisition activities in the future and, in connection with this activity, may consider issuing additional equity securities and increasing indebtedness. From time to time, we also evaluate the restructuring of ownership interests among our respective subsidiaries and related companies.
We believe we will be able to comply with the financial covenants contained in our credit facilities through their maturities; however, if future operating results differ materially from our expectations we may be unable to maintain compliance. Based upon our expectations of our operating performance, and the anticipated demands on our cash resources, we expect to have sufficient liquidity to meet our short-term (defined as the twelve-month period ending March 31, 2022) and long-term obligations (defined as the five-year period ending March 31, 2026). If actual developments differ from our expectations, our liquidity could be adversely affected.
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At March 31, 2021, we had $51.6 million available for borrowing under our credit facility with Contran. Amounts available under this facility are at Contran’s discretion. Kronos’ new $225 million Global Revolver entered into in April 2021, which replaced Kronos’ North American and European facilities, matures in April 2026 and at inception, the full $225 million was available for borrowing under this facility and Kronos could borrow all available amounts without violating its existing debt covenants. See Note 6 to our Condensed Consolidated Financial Statements.
At March 31, 2021, we had an aggregate of $606.1 million of restricted and unrestricted cash, cash equivalents and marketable securities, including $204.7 million held by our non-U.S. subsidiaries. A detail by entity is presented in the table below.
Total
Amount
held outside
U.S.
(In millions)
Kronos
$
379.9
$
204.7
CompX
64.7
NL exclusive of its subsidiaries
98.3
Tremont exclusive of its subsidiaries
8.9
LandWell
33.1
BMI
19.4
Valhi exclusive of its subsidiaries
1.8
Total restricted and unrestricted cash, cash equivalents and
marketable securities
$
606.1
$
204.7
Capital Expenditures and Other –
We currently expect our aggregate capital expenditures for 2021 will be approximately $93 million as follows:
•
$85 million by our Chemicals Segment;
•
$4 million by our Component Products Segment; and
•
$4 million by our Real Estate Management and Development Segment.
Capital spending for 2021 is expected to be funded primarily through cash generated from operations and borrowing under existing credit facilities. Planned capital expenditures in 2021 at Kronos and CompX will primarily be to maintain and improve the cost-effectiveness of our facilities. 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.
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 March 31, 2021, Valhi had approximately .3 million shares available to repurchase under authorizations made by our board of directors.
Kronos’ board of directors authorized the repurchase of up to 2.0 million shares of its common stock in open market transactions, including block purchases, or in privately-negotiated transactions at unspecified prices and over an unspecified period of time. Kronos may repurchase its common stock from time to time as market conditions permit. At March 31, 2021, approximately 1.56 million shares are available for repurchase.
CompX’s board of directors authorized the repurchase of its Class A common stock in open market transactions, including block purchases, or in privately-negotiated transactions at unspecified prices and over an unspecified period of time. During the first three months of 2021, CompX acquired 50,000 shares of its Class A common stock in an open market purchase under such repurchase program for $.8 million. At March 31, 2021, approximately .6 million shares were available for purchase under these authorizations.
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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 2020. If Kronos were to pay its $.18 per share in each quarter of 2021 based on the 58.0 million shares we held of Kronos common stock at March 31, 2021, we would receive aggregate annual regular dividends from Kronos of $41.8 million. NL paid a regular quarterly dividend of $.04 per share in 2020 for which we received $6.5 million. In February 2021 the NL board of directors approved a quarterly dividend of $.06 per share. If NL were to pay its $.06 per share dividend in each quarter of 2021 based on the 40.4 million shares we hold of NL common stock at March 31, 2021, we would receive aggregate annual dividends from NL of $9.7 million. BMI and LandWell pay cash dividends from time to time, but the timing and amount of such dividends are uncertain. In this regard, we received aggregate dividends from BMI and LandWell of $43.0 million in 2020, none during the first three months of 2021 and $8.4 million in April 2021. We do not know if we will receive additional dividends from BMI and LandWell during 2021. All of our ownership interest in CompX is held through our ownership in NL; as such we do not receive any dividends from CompX. Instead any dividend paid by CompX is paid to NL.
Our subsidiaries have various credit agreements with unrelated third-party lenders which contain customary limitations on the payment of dividends; however, these restrictions in the past have not significantly impacted their ability to pay dividends.
Investment in our Subsidiaries and Affiliates and Other Acquisitions –
We have in the past, and may in the future, purchase the securities of our subsidiaries and affiliates or third parties in market or privately-negotiated transactions. We base our purchase decisions on a variety of factors, including an analysis of the optimal use of our capital, taking into account the market value of the securities and the relative value of expected returns on alternative investments. In connection with these activities, we may consider issuing additional equity securities or increasing our indebtedness. We may also evaluate the restructuring of ownership interests of our businesses among our subsidiaries and related companies.
We generally do not guarantee any indebtedness or other obligations of our subsidiaries or affiliates. Our subsidiaries are not required to pay us dividends. If one or more of our subsidiaries were unable to maintain its current level of dividends, either due to restrictions contained in a credit agreement or to satisfy its liabilities or otherwise, our ability to service our liabilities or to pay dividends on our common stock could be adversely impacted. If this were to occur, we might consider reducing or eliminating our dividends or selling interests in subsidiaries or other assets. If we were required to liquidate assets to generate funds to satisfy our liabilities, we might be required to sell at less than what we believe is the long-term value of such assets.
Prior to 2020, we entered into a $50 million revolving credit facility with a subsidiary of NL secured with approximately 35.2 million shares of the common stock of Kronos held by NL’s subsidiary as collateral. Outstanding borrowings under the credit facility bear interest at the prime rate plus 1.875% per annum, payable quarterly, with all amounts due on December 31, 2023. The maximum principal amount which may be outstanding from time-to-time under the credit facility is limited to 50% of the value of the Kronos stock using the most recent closing price. The credit facility contains a number of covenants and restrictions which, among other things, restrict NL’s subsidiary’s ability to incur additional debt, incur liens, and merge or consolidate with, or sell or transfer substantially all of NL’s subsidiary’s assets to, another entity, and require NL’s subsidiary to maintain a minimum specified level of consolidated net worth. Upon an event of default (as defined in the credit facility), Valhi will be entitled to terminate its commitment to make further loans to NL’s subsidiary, declare the outstanding loans (with interest) immediately due and payable, and exercise its rights with respect to the collateral under the loan documents. Such collateral rights include, upon certain insolvency events with respect to NL’s subsidiary or NL, the right to purchase all of the Kronos common stock at a purchase price equal to the aggregate market value, less amounts owing to Valhi under the loan documents, and up to 50% of such purchase price may be paid by Valhi in the form of an unsecured promissory note bearing interest at the prime rate plus 2.75% per annum, payable quarterly, with all amounts due no later than five years from the date of purchase, with the remainder of such purchase price payable in cash at the date of purchase. We also eliminate any such intercompany borrowings in our Condensed Consolidated Financial Statements. Prior to 2020 NL’s subsidiary borrowed $.5 million under this facility, no additional amounts have been borrowed since then, and $.5 million is outstanding under this facility at March 31, 2021. We eliminate any such intercompany borrowings in our Condensed Consolidated Financial Statements.
We have an unsecured revolving demand promissory note with Kronos which, as amended, provides for borrowings from Kronos of up to $40 million. We eliminate any such intercompany borrowings in our Condensed Consolidated Financial Statements. The facility, as amended, is due on demand, but in any event no earlier than December 31, 2022. We had no borrowings from Kronos under this facility during the first three months of 2021, and there was no outstanding balance at March 31, 2021. We could borrow $40.0 million under our current intercompany facility with Kronos at March 31, 2021. Kronos’ obligation to loan us money under this note is at Kronos’ discretion.
We also have an unsecured revolving demand promissory note with CompX which, as amended, provides for borrowings from CompX of up to $40 million. We eliminate any such intercompany borrowings in our Condensed Consolidated Financial Statements. The facility, as amended, is due on demand, but in any event no earlier than December 31, 2022. We had gross borrowings of $11.6 million and gross repayments of $11.9 million during the first three months of 2021, and $29.2 million was outstanding at
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March 31, 2021 . We could borrow $ 10 . 8 million under our current intercompany facility with CompX at March 31, 2021 . 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 2020 Annual Report and we refer you to that report for a complete description of these commitments.
We are subject to certain commitments and contingencies, as more fully described in our 2020 Annual Report, or in Notes 12 and 15 to our Condensed Consolidated Financial Statements and in Part II, Item 1 of this Quarterly Report, including:
•
certain income tax contingencies in various U.S. and non-U.S. jurisdictions;
•
certain environmental remediation matters involving NL and BMI;
•
certain litigation related to NL’s former involvement in the manufacture of lead pigment and lead-based paint; and
•
certain other litigation to which we are a party.
In addition to such legal proceedings, various legislation and administrative regulations have, from time to time, been proposed that seek to (i) impose various obligations on present and former manufacturers of lead pigment and lead-based paint (including NL) with respect to asserted health concerns associated with the use of such products and (ii) effectively overturn court decisions in which NL and other pigment manufacturers have been successful. Examples of such proposed legislation include bills which would permit civil liability for damages on the basis of market share, rather than requiring plaintiffs to prove that the defendant’s product caused the alleged damage, and bills which would revive actions barred by the statute of limitations. While no legislation or regulations have been enacted to date that are expected to have a material adverse effect on our consolidated financial position, results of operations or liquidity, enactment of such legislation could have such an effect.
Recent Accounting Pronouncements
Not applicable
Critical Accounting Policies
There have been no changes in the first three months of 2021 with respect to our critical accounting policies presented in Management’s Discussion and Analysis of Financial Condition and Results of Operation in our 2020 Annual Report.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.