VALHI, INC. 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 theLandWell Company ("LandWell"). Kronos (NYSE: KRO), NL (NYSE:NL ) and CompX (NYSE American: CIX) each file periodic reports with theSEC . OnJanuary 26, 2018 we completed the sale of our Waste Management Segment toJFL-WCS Partners, LLC ("JFL Partners "), an entity sponsored by certain investment affiliates ofJ.F. Lehman & Company , for consideration consisting of the assumption of all of WCS' third-party indebtedness and other liabilities. Accordingly, the results of operations of our Waste Management Segment is reflected as discontinued operations in our Consolidated Statement of Income for the year endedDecember 31, 2018 . We recognized a pre-tax gain of approximately$58 million on the transaction in the first quarter of 2018. We recognized an additional pre-tax gain of approximately$4.9 million in the fourth quarter of 2020 related to proceeds received fromJFL Partners in final settlement of an earn-out provision in the sale agreement. Amounts associated with the sale of our former Waste Management Segment are classified as part of discontinued operations. Our Waste Management Segment, which operated in the low-level radioactive, hazardous, toxic and other waste disposal industry historically struggled to generate sufficient recurring disposal volumes to generate positive operating results or cash flows. The sale enabled us to focus more effort on continuing to develop our remaining segments which we believe have greater opportunity for higher returns. See Note 3 to our Consolidated Financial Statements.
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 andmarketer of
value-added TiO2. TiO2 is used to impart whiteness, brightness, opacity
and durability to a wide variety of products, including paints,
plastics, paper, fibers and ceramics. Additionally, TiO2 is a critical
component of everyday applications, such as coatings, plastics and
paper, as well as many specialty products such as inks, foods and
cosmetics.
? Component Products-We operate in the component products industry
through our majority control of CompX. CompX is a leadingmanufacturer
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 manufacturesstainless
steel exhaust systems, gauges, throttle controls, wake enhancements
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 .
Income from Continuing Operations Overview
Year Ended
We reported net income from continuing operations attributable to
Our net income from continuing operations attributable to
? lower operating income from our Chemicals and Component Products
segments in 2020 compared to 2019;
? higher operating income from our
Segment in 2020 compared to 2019 including higher income from tax
increment infrastructure reimbursement and a gain recognized on a prior
land sale;
? a pre-tax litigation settlement expense of $19.3 million mostly
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
? a gain of
risk management business.
- 33 -
--------------------------------------------------------------------------------
Our diluted income from continuing operations per share in 2020 includes:
• income of
reimbursement recognized in the first quarter;
• a gain of
related to a prior land sale; and
• a gain of
damage claim at our Chemicals Segment.
Our diluted income from continuing operations per share in 2019 includes:
• a charge of
recognized in the second quarter;
• income of
primarily recognized in the second quarter;
• a gain of
the second quarter;
• a gain of $.10 per share related to the sale of land in the third
quarter; and
• a gain of
and risk management business.
Year Ended
We reported net income from continuing operations attributable to
Our net income from continuing operations attributable to
? the recognition of an aggregate non-cash deferred income tax benefit of
$112 million in 2018 related to a change in the deferred income
tax
liability related to our investment in Kronos, net of therevaluation
of such change resulting from the reduction in the U.S. federal
corporate income tax rate as a result of the 2017 Tax Act;
? lower operating income from our Chemicals Segment in 2019 compared to 2018;
? a pre-tax litigation settlement expense of
2019 compared to $62.0 million recognized in 2018;
? a securities transaction gain of $12.5 million recognized in 2018
related to the sale of our interest in Amalgamated Sugar Company LLC
("Amalgamated");
? the recognition of a gain on sale of land of $4.4 million in 2019
compared to $12.5 million recognized in 2018;
? income from tax increment infrastructure reimbursement of
in 2019 compared to $3.1 million in 2018;
? insurance recoveries of
in 2018;
? a gain of
risk management business;
? lower interest expense in 2019 as a result of the deemed repayment of
the Snake River debt in August 2018 ;
? lower dividend and interest income in 2019 as a result of the deemed
redemption of our investment in the Amalgamated Sugar Company in August
2018 ; and
? lower litigation fees and related costs in 2019.
Our net diluted income from continuing operations per share in 2019 includes:
? a charge of
expense recognized;
? a gain of $.16 per diluted share related to tax increment
infrastructure reimbursement;
? a gain of $.11 per diluted share related to insurance recoveries;
? a gain of $.10 per diluted share related to the sale of land not used
in our operations; and
? a gain of
and risk management business.
- 34 -
--------------------------------------------------------------------------------
Our net diluted income from continuing operations per share in 2018 includes:
? a non-cash deferred income tax benefit of $3.95 per diluted share
related to a change in the deferred income tax liability related to our
investment in Kronos as a result of the 2017 Tax Act;
? a gain of
gain related to the sale of our interest in Amalgamated;
? a gain of $.33 per diluted share related to the sale of land not used
in our operations;
? a charge of $1.43 per diluted share related to the litigation
settlement expense recognized; and
? a charge of
recognized related to GILTI.
We discuss these amounts more fully below.
Current Forecast for 2021-
We currently expect to report higher consolidated operating income for 2021 as compared to 2020 primarily due to the net effects of:
? higher operating income from our Chemicals Segment in 2021 due to the
favorable impact of higher expected sales volumes and higher average
TiO2 selling prices; and
? lower operating income from our
Segment in 2021 due to lower land sales revenues.
Our expectations for our future operating results are based upon a number of
factors beyond our control, including worldwide growth of gross domestic
product, competition in the marketplace, continued operation of competitors,
technological advances, worldwide production capacity and the consequences
arising directly or indirectly out of the recent coronavirus outbreak. The
extent of the impact of the coronavirus outbreak on our operational and
financial performance will depend on future developments, including the
severity, duration and spread of the outbreak and its impact on, among other
things, overall demand for our products and our customers' products, supply
chains, our operations and the operations of our competitors, all of which are
uncertain and cannot be predicted. If actual developments differ from our
expectations, our results of operations could be unfavorably affected.
Segment Operating Results-2020 Compared to 2019 and 2019 Compared to 2018
Chemicals-
We consider TiO2 to be a "quality of life" product, with demand affected by gross domestic product, or GDP, and overall economic conditions in our markets located in various regions of the world. Over the long-term, we expect demand for TiO2 will grow by 2% to 3% per year, consistent with our expectations for the long-term growth in GDP. However, even if our Chemicals Segment and its competitors maintain consistent shares of the worldwide market, demand for TiO2 in any interim or annual period may not change in the same proportion as the change in GDP, in part due to relative changes in the TiO2 inventory levels of our Chemicals Segment's customers. We believe that our Chemicals Segments' customers' inventory levels are influenced in part by their expectation for future changes in TiO2 selling prices as well as their expectation for future availability of product. Although certain of our Chemicals Segment's TiO2 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 services.
The factors having the most impact on our Chemicals Segment's reported operating results are:
? TiO2 selling prices, ? Our Chemicals Segment's TiO2 sales and production volumes,
? Manufacturing costs, particularly raw materials such as third-party
feedstock ore, 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).
Our Chemicals Segment's key performance indicators are its TiO2 average selling
prices, its level of TiO2 sales and production volumes and the cost of its
third-party feedstock ore. TiO2 selling prices generally follow industry trends
and selling prices will increase or decrease generally as a result of
competitive market pressures.
- 35 -
--------------------------------------------------------------------------------
Years ended December 31, % Change
2018 2019 2020 2018-19 2019-20
(Dollars in millions)
Net sales $ 1,661.9 $ 1,731.2 $ 1,638.8 4 % (5) %
Cost of sales 1,101.7 1,346.8 1,291.0 22 % (4) %
Gross margin $ 560.2 $ 384.4 $ 347.8 (31) % (10) %
Operating income $ 342.9 $ 160.1 $ 126.5 (53) % (21) %
Percent of net sales:
Cost of sales 66 % 78 % 79 %
Gross margin 34 % 22 % 21 %
Operating income 21 % 9 % 8 %
TiO2 operating statistics:
Sales volumes* 491 566 531 15 % (6) %
Production volumes* 536 546 517 2 % (5) %
Production rate as percent of capacity 95 % 98 % 92 %
Percent change in TiO2 net sales:
TiO2 product pricing (6) % (2) %
TiO2 sales volumes 15 (6)
TiO2 product mix/other (2) 2
Changes in currency exchange rates (3) 1
Total 4 % (5) %
* Thousands of metric tons
Industry Conditions and 2020 Overview - Our Chemicals Segment started 2020 with
average TiO2 selling prices 1% lower than at the beginning of 2019. At the end
of 2020, average TiO2 selling prices were comparable to the end of the third
quarter of 2020 and 3% lower than at the beginning of the year. Our Chemicals
Segment experienced lower sales volumes in all major markets in 2020 as compared
to sales volumes in 2019, primarily due to demand contraction related to the
COVID-19 pandemic, which mainly impacted the second and third quarters.
The following table shows our Chemicals Segment's capacity utilization rates
during 2019 and 2020. Our Chemicals Segment's production rates in 2020 were
impacted by the COVID-19 pandemic as it decreased production levels early in the
third quarter to correspond with a temporary decline in market demand, then
increased production levels later in the third quarter and into the fourth
quarter to align with improved demand and market expectations for the near term.
2019 2020
First Quarter 97 % 95 %
Second Quarter 97 % 96 %
Third Quarter 97 % 86 %
Fourth Quarter 100 % 92 %
Overall 98 % 92 %
Net sales - Our Chemicals Segment's net sales decreased $92.3 million , or 5%, in
2020 compared to 2019, primarily due to a 6% decrease in sales volumes (which
decreased net sales by approximately $104 million ) and a 2% decrease in average
TiO2 selling prices (which decreased net sales by approximately $35 million ). 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)
increased our Chemicals Segment's net sales by approximately $9 million , or 1%,
as compared to 2019. TiO2 selling prices will increase or decrease generally as
a result of competitive market pressures, changes in the relative level of
supply and demand as well as changes in raw material and other manufacturing
costs.
Our Chemicals Segment's sales volumes decreased 6% in 2020 as compared to the
sales volumes of 2019 due to lower sales volumes in all major markets, with the
European and export markets experiencing the most significant reductions. A
significant portion of the sales volume decrease occurred in the second and
third quarters as a result of the demand contraction related to the COVID-19
pandemic.
Our Chemicals Segment's net sales increased 4% or $69.2 million in 2019 compared
to 2018, primarily due to the net effect of a 6% decrease in average TiO2
selling prices (which decreased net sales by approximately $100 million ), a 15%
increase in sales volumes (which increased net sales by approximately $249
million ) and changes in currency exchange rates. TiO2 selling prices will
increase or decrease generally as a result of competitive market pressures,
changes in the relative level of supply and demand as well as changes in raw
material and other manufacturing costs. Our Chemicals Segment's sales volumes
increased 15% in 2019 as compared to the sales
- 36 -
--------------------------------------------------------------------------------
volumes of 2018 primarily due to strength in the European, North American and
export markets in 2019 as compared to 2018. In addition to the impact of changes
in average TiO2 selling prices and sales volumes, we estimate that changes in
currency exchange rates decreased our Chemicals Segment's net sales by
approximately $49 million , or 3%, as compared to 2018.
Cost of Sales and Gross Margin- Cost of sales decreased $55.8 million , or 4%, in
2020 compared to 2019 due to the net effect of a 6% decrease in sales volumes,
higher raw materials and other production costs of approximately $6 million
(including higher cost for third-party feedstock and other raw materials) and
currency exchange rate fluctuations. Our Chemicals Segment's cost of sales per
metric ton of TiO2 sold in 2020 was higher as compared to 2019 (excluding the
effect of changes in currency exchange rates) 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 as a percentage of net sales
increased to 79% in 2020 compared to 78% in 2019 primarily due to the
unfavorable effects of lower average TiO2 selling prices and higher raw
materials and other production costs, as discussed above, partially offset by
improved sales and production volumes from our Chemicals Segment's ilmenite mine
operations.
Gross margin as a percentage of net sales decreased to 21% in 2020 compared to
22% in 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 sales volumes, lower average TiO2 selling prices, higher raw materials and
other production costs and higher sales from our Chemicals Segment's ilmenite
mine operations.
Our Chemicals Segment's cost of sales increased $245.2 million or 22% in 2019
compared to 2018 primarily due to the net impact of a 15% increase in sales
volumes, higher raw materials and other production costs of approximately $122
million (including higher cost for third-party feedstock, energy and other raw
materials) and currency fluctuations (primarily the euro relative to the U.S.
dollar). Our Chemicals Segment's cost of sales as a percentage of net sales
increased to 78% in 2019 compared to 66% in 2018 primarily due to the
unfavorable effects of lower average selling prices and higher raw materials and
other production costs, as discussed above.
Gross margin as a percentage of net sales decreased to 22% in 2019 compared to
34% in 2018. As discussed and quantified above, our Chemicals Segment's gross
margin decreased primarily due to the net effect of lower average selling
prices, higher sales volumes and higher raw materials and other production
costs.
Operating Income- Our Chemicals Segment's operating income decreased by $33.6
million , from $160.1 million in 2019 to $126.5 million in 2020. Income from
operations as a percentage of net sales was 8% in 2020 compared to 9% in
2019. This decrease was driven by the lower gross margin discussed above for the
comparable periods. We estimate that changes in currency exchange rates
increased our Chemicals Segment's income from operations by approximately $6
million in 2020 as compared to 2019 as discussed in the Currency Exchange Rates
section below.
Our Chemicals Segment's operating income was also minimally impacted by the
effects of Hurricane Laura which temporarily halted production at LPC on August
24, 2020 . Although storm damage to core manufacturing facilities was not severe,
a variety of factors, including loss of utilities, limited availability of
employees to return to work and restrictions on the facility's access to raw
materials, prevented the resumption of operations until September 25, 2020 . LPC
believes insurance (subject to applicable deductibles) will cover a majority of
its losses, including those related to property damage and the disruption of its
operations. The Kronos warehouse and slurry facilities located near LPC's
facility were also temporarily closed due to the hurricane, but property damage
to these facilities was not significant. Our Chemicals Segment's 2020 operating
income includes immaterial costs related to Hurricane Laura, primarily costs to
relocate inventory and modify shipping schedules in order to maintain service
levels to customers following the hurricane. We believe insurance (subject to
applicable deductibles) will cover a majority of our Chemicals Segment's losses
from the hurricane, including property damage, business interruption losses
related to our Chemicals Segment's share of LPC's lost production and other
costs resulting from the disruption of operations, but no insurance recoveries
have yet been recognized as the allowable damage claim amounts are not presently
determinable. On October 9, 2020 Hurricane Delta caused an additional temporary
halt to production at the LPC facility. Damages resulting from Hurricane Delta
were not as severe and production activities were resumed within five days from
the time of initial shutdown prior to landfall of the hurricane. Similar to
Hurricane Laura, losses determined to be incurred by LPC and us as a result of
Hurricane Delta are expected to be recoverable from insurance (subject to
applicable deductibles).
Our Chemicals Segment's operating income decreased 53% in 2019 compared to 2018
and operating income as a percentage of net sales decreased to 9% in 2019 from
21% in 2018. This decrease was driven by the decrease in gross margin discussed
above for the comparable periods. We estimate that changes in currency exchange
rates decreased operating income by approximately $3 million in 2019 as compared
to 2018.
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 $2.3
million in 2018, $2.2 million in 2019 and $3.8 million in 2020, which reduced
our reported Chemicals Segment's operating income as compared to amounts
reported by Kronos.
- 37 -
-------------------------------------------------------------------------------- Currency Exchange Rates-- Our Chemicals Segment has substantial operations and assets located outsidethe United States (primarily inGermany ,Belgium ,Norway andCanada ). The majority of our Chemicals Segment's sales from non-U.S. operations are denominated in currencies other than theU.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 theU.S. dollar (and consequently our Chemicals Segment's non-U.S. operations will generally holdU.S. dollars from time to time). Certain raw materials used in all our Chemicals Segment's production facilities, primarily titanium-containing feedstocks, are purchased primarily inU.S. dollars, while labor and other production costs are purchased primarily in local currencies. Consequently, the translatedU.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 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 (primarilyU.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 (primarilyU.S. dollars). Overall, we estimate that fluctuations in currency exchange rates had the following effects on our Chemicals Segment's sales and income from operations for the periods indicated. Impact of changes in currency exchange rates - 2020 vs. 2019 Translation gains Total currency Transaction gains/(losses) recognized impact of impact 2019 2020 Change rate changes 2020 vs. 2019 (In millions) Impact on: Net sales $ - $ - $ - $ 9 $ 9 Operating income 2 (4) (6) 12 6 The$9 million increase in net sales (translation gain) was caused primarily by a weakening of theU.S. dollar relative to the euro, as euro-denominated sales were translated into moreU.S. dollars in 2020 as compared to 2019. The strengthening of theU.S. dollar relative to the Canadian dollar and the Norwegian krone in 2020 did not have a significant effect on the reported amount of net sales, as a substantial portion of the sales generated by our Chemicals Segment's Canadian and Norwegian operations are denominated in theU.S. dollar.
The
• Lower net currency transaction gains of approximately
primarily caused by relative changes in currency exchange rates at each
applicable balance sheet date between the U.S. dollar and the euro,
Canadian dollar and the Norwegian krone, and between the euro and theNorwegian krone, which causes increases or decreases, as applicable, in
held by our Chemicals Segment's non-
krone denominated receivables and payables held by our Chemicals
Segment's non-U.S. operations, and
• Approximately
caused by a strengthening of the
dollar and Norwegian krone, as local currency-denominated operating costs
were translated into fewer
such translation, as it related to the U.S. dollar relative to the euro,
had a nominal effect on operating income in 2020 as compared to 2019.
Impact of changes in currency exchange rates - 2019 vs. 2018
Translation
gains/(losses) Total currency
Transaction gains/(losses) recognized impact of impact
2018 2019 Change rate changes 2019 vs. 2018
(In millions)
Impact on:
Net sales $ - $ - $ - $ (49 ) $ (49 )
Operating income 10 2 (8) 5 3
The $49 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 fewer U.S. dollars in 2019
as compared to 2018. The
- 38 -
-------------------------------------------------------------------------------- strengthening of theU.S. dollar relative to the Canadian dollar and the Norwegian krone in 2019 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 theU.S. dollar.
The
• Lower net currency transaction gains of approximately
million primarily caused by relative changes in currency exchange rates
at each applicable balance sheet date between the U.S. dollar and theeuro, Canadian dollar and the Norwegian krone, which causes increases or
decreases, as applicable, in U.S. dollar-denominated receivables and
payables and U.S. dollar currency held by our Chemicals Segment's
non-U.S. operations, and
• Approximately
caused by a strengthening of the
dollar and Norwegian krone, as its local currency-denominated operating
costs were translated into fewer
2018, partially offset by the strengthening of the
to the euro as the reduction in net sales caused by such strengthening of
the stronger
favorable effect of euro-denominated operating costs being translated
into fewer
Outlook- In the second half of 2020 our Chemicals Segment's sales volumes increased from the reduced levels experienced during the first half of the year, primarily during the second quarter. However, the COVID-19 pandemic, including the measures employed to mitigate its spread, continued to impact our Chemicals Segment's operations through reduced demand for its products and resulted in lower sales and earnings in 2020 than otherwise would have been expected. Our Chemicals Segment's manufacturing facilities operated at near planned production rates in the first half of 2020, however, early in the third quarter it decreased production levels to align with demand and market expectations for the near term, and late in the third quarter and into the fourth quarter it began increasing production levels as demand improved. 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 expectU.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 impacted by reduced economic activity. Despite negative impacts and continued uncertainty on worldwide gross domestic product from COVID-19, our Chemicals Segment has experienced increasing demand for its products in the second half of 2020 and we expect these demand levels to continue into 2021. As such we expect our 2021 Chemicals Segment's sales and operating income to be higher than in 2020, principally as a result of higher average TiO2 selling prices and higher sales volumes. We also expect our Chemicals Segment's production volumes in 2021 to be slightly higher as compared to 2020 production volumes in line with expected increased demand for its products. The full extent of the impact of the COVID-19 pandemic on our Chemicals Segment's 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 management will continue to monitor current and anticipated near-term customer demand throughout the year and further align its production and inventory levels accordingly. Our Chemicals Segment experienced increases in its feedstock costs in 2019 and during the first half of 2020 before the costs moderated in the second half of 2020. We expect our Chemicals Segment's feedstock costs to remain relatively consistent in 2021 as compared to the average 2020 costs. To-date, the availability of raw materials has not been adversely impacted by the COVID-19 pandemic. At the beginning of 2020, our Chemicals Segment's average TiO2 selling prices were 1% lower than at the beginning of 2019 and average TiO2 selling prices decreased 3% during 2020. Due to increasing customer demand experienced in the second half of 2020, we expect prices to rise slightly in 2021. Our Chemicals Segment's manufacturing and administrative facilities are generally located in densely populated regions ofEurope andNorth America which have experienced substantial outbreaks of COVID-19 and are in varying stages of outbreak and recovery. Our Chemicals Segment's management 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- - 39 -
--------------------------------------------------------------------------------
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.
Component Products-
Our Component Products Segment experienced normal sales volumes and operations during the first quarter of 2020. Beginning in lateMarch 2020 as a result of the COVID-19 pandemic, our Component Products Segment began receiving requests from certain customers of both Component Products Segment business 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 related order cancellations and delays. In the third and fourth quarters, marine components experienced significant recovery in sales while security products sales generally recovered, though not to pre-pandemic levels. Our Component Products Segment's product offerings consist of a 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 our net sales, cost of sales and gross margin. In addition, small variations in period-to-period net sales, cost of sales and gross margin can result from changes in the relative mix of our products sold. The key performance indicator for our Component Products Segment is operating income margins. Years ended December 31, % Change 2018 2019 2020 2018-19 2019-20 (Dollars in millions) Net sales: Security products$ 98.4 $ 99.3 $ 87.9 1 % (12 )% Marine components 19.8 24.9 26.6 26 % 7 % Total net sales 118.2 124.2 114.5 5 % (8 )% Cost of sales 79.9 85.3 81.7 7 % (4 )% Gross margin$ 38.3 $ 38.9 $ 32.8 2 % (16 )% Operating income$ 17.8 $ 17.8 $ 11.8 (1) % (33 )% Percent of net sales: Cost of sales 68 % 69 % 71 % Gross margin 32 % 31 % 29 % Operating income 15 % 14 % 10 % Net Sales-Our Component Products Segment's net sales decreased approximately$9.7 million in 2020 compared to 2019 primarily due to lower security products sales as certain security products market segments were slower to recover from the negative impact of COVID-19, primarily in the second and third quarters, including transportation which had$4.4 million lower sales than the 2019, distribution customers which were$2.5 million lower than 2019, and office furniture which was$1.8 million lower than the same period in 2019. Lower security product sales were slightly offset by higher marine component sales mainly to the towboat market which increased$2.9 million , primarily for wake enhancement systems and surf pipes to an original equipment boat manufacturer, predominantly in the second half of the year. Relative changes in selling prices did not have a material impact on net sales comparisons. Our Component Products Segment's net sales increased approximately$6.0 million in 2019 compared to 2018 primarily due to higher marine component sales to the towboat market. Relative changes in selling prices did not have a material impact on net sales comparisons. Cost of Sales and Gross Margin-Our Component Products Segment's cost of sales decreased in 2020 compared to 2019 primarily due to the net effects of lower sales for the security products and higher cost for security products inventory produced during the second and third quarters and sold in the last half of the year. Security Products inventory produced during the second and third quarters of 2020 had a higher carrying value compared to prior periods due to higher cost per unit of production as a result of lower production volumes during these quarters of 2020. This negatively impacted our Component Products Segment's gross margin and operating income margin as this higher cost inventory was sold during the last half of 2020. Additionally, gross margin and operating income margin were unfavorably impacted by medical costs which increased$2.1 million in 2020 compared to 2019. Our Component Products Segment's cost of sales increased in 2019 compared to 2018 due to the effects of increased sales volumes for both the security products and marine components reporting units and increased labor costs at the security products reporting unit. As a result, gross margin as a percentage of sales decreased over the same period. The decrease in gross margin percentage is the result of the decline in gross margin percentage at the security products reporting unit in 2019 as compared to 2018 Operating Income-Our Component Products Segment operating income decreased in 2020 compared to 2019. Operating margin decreased in 2020 compared to 2019 primarily due to the factors impacting cost of sales and gross margin above. Operating costs and expenses consists primarily of sales and administrative-related personnel costs, sales commissions and advertising expenses - 40 -
-------------------------------------------------------------------------------- directly related to product sales and administrative costs relating to business unit and corporate management activities, as well as gains and losses on disposal of property and equipment. Operating costs and expenses decreased$.3 million in 2020 compared to 2019. Our Component Products Segment operating income decreased in 2019 compared to 2018 primarily due to the decrease in gross margin. Operating costs and expenses increased$.8 million in 2019 compared to 2018. General- Our Component Products Segment's profitability primarily depends on our ability to utilize our production capacity effectively, which is affected by, among other things, the demand for our products and our ability to control our manufacturing costs, primarily comprised of labor costs and materials. The materials used in our Component Products Segment's products consist of purchased components and raw materials, some of which are subject to fluctuations in the commodity markets such as zinc, brass and stainless steel. Total material costs represented approximately 43% of our Component Products Segment's cost of sales in 2020, with commodity-related raw materials accounting for approximately 12% of our cost of sales. During 2019 and 2020, markets for the primary commodity-related raw materials used in the manufacture of our locking mechanisms, primarily zinc and brass, remained relatively stable. Over that same period, the market for stainless steel, the primary raw material used for the manufacture of marine exhaust headers and pipes and wake enhancement systems, also remained relatively stable. While we expect the markets for our Component Products Segment's primary commodity-related raw materials to remain stable during 2021, we recognize that economic conditions could introduce renewed volatility on these and other manufacturing materials. Our Component Products Segment occasionally enters into short-term commodity-related raw material supply arrangements to mitigate the impact of future increases in commodity related raw material costs. See Item 1 - "Business - Component Products Segment - CompX International, Inc. - Raw Materials." Outlook- In the second half of 2020, our Component Products Segment sales began to recover from the historically low levels experienced during the second quarter, with sales steadily improving for the remainder of the year. The COVID-19 pandemic continues to impact our Component Products Segment's operations and demand for its products particularly in the transportation, office furniture and distribution markets served by the security products reporting unit. In the second half of the year, our Component Products Segment's manufacturing operations returned to more normal production rates as demand from its customers began to return, although for the security products reporting unit, below pre-pandemic levels. Our Component Products Segment's global and domestic supply chains remain intact, and it has experienced minimal supply chain disruptions. The markets our Component Products Segment sells to have recovered to varying degrees, and our Component Products Segment continues to work closely with all its customers and monitors their progress as they continue to adjust their operations. Even with the severe downturn during the second quarter, the marine components reporting unit sales outpaced prior year as demand for recreational boats increased as people sought socially distanced, outdoor activities. We expect these trends to continue for at least the first part of 2021. Considerable effort continues at all of our Component Products Segment locations to manage developing COVID-19 conditions including enhanced health and safety protocols and cleaning and disinfecting efforts. Throughout the course of the COVID-19 pandemic, we have focused our efforts on maintaining efficient operations while closely managing our expenses and capital projects. In this regard, we are constantly evaluating our staffing levels and we believe our current staffing levels are aligned with our Component Products Segment's sales and production forecasts for the first part of 2021. 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 continued deployment of effective tools to fight COVID-19, including availability of testing, effective treatments and vaccine distribution, 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 expectU.S. and worldwide gross domestic product to be significantly impacted for an indeterminate period. Based on current conditions, our Component Products Segment expects to report increased revenue and operating income in 2021 compared to 2020 but we do not expect the security products reporting unit to return to pre-pandemic levels experienced in 2019. As noted above, the security products reporting unit production volumes remain below 2019 levels. As a result, we expect to continue to experience the negative impact of higher fixed costs per unit of production during 2021 which will continue to challenge gross margins in the segment. The severity of 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 continue to be impacted, on customers' perception as to when consumer demand for their products will return to pre-pandemic levels and on any future disruptions in our Component Products Segment's operations or its suppliers' operations, all of which are difficult to predict. Our Component Products Segment's operations teams meet frequently to ensure we are taking appropriate actions to maintain a safe working environment for all our employees, minimize operational disruptions, manage inventory levels and improve operating margins. It is possible we may temporarily close one or more of our facilities for the health and safety of our employees before the COVID-19 pandemic is over. - 41 -
--------------------------------------------------------------------------------
Years ended December 31,
2018 2019 2020
(In millions)
Net sales:
Land sales $ 32.3 $ 33.5 $ 87.0
Water delivery sales 5.6 6.8 7.6
Utility and other 2.1 1.8 1.8
Total net sales 40.0 42.1 96.4
Cost of sales 29.3 30.8 64.9
Gross margin $ 10.7 $ 11.3 $ 31.5
Operating income $ 10.0 $ 14.8 $ 47.8
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 end of 2020, LandWell has closed or
entered into escrow on approximately 1,000 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, 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 5 to 10 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 2020 consisted of revenues
from land sales. We recognized $87.0 million in revenues on land sales during
2020 compared to $33.5 million in 2019. As noted above, we generally 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 was under this method of revenue
recognition. The contracts on these sales (both within the planned community and
otherwise) include approximately 965 acres of the residential planned community
and certain other acreage which closed in December 2013 and through the end of
2020. Cost of sales related to land sales revenues was $57.9 million in 2020
compared to $24.5 million in 2019. During the fourth quarter of 2020, our Real
Estate Management and Development Segment closed on a single parcel for proceeds
of approximately $55 million . The contract for this parcel contained no
post-closing obligations therefore we recognized the full $55 million in revenue
in 2020. Excluding the fourth quarter 2020 land sale noted above, land sales
revenues declined slightly in 2020 as compared to 2019 primarily due to lower
land development spending. As noted above, land sales are generally recognized
over time using cost based inputs and in the second quarter of 2020, in an
effort to conserve resources in response to the pandemic, we reduced
infrastructure development spending to only those expenditures necessary to
fulfill our contractual obligations. We returned to more normalized
infrastructure development spending late in the year. Operating income in 2020
also includes $19.1 million of income related to the recognition of tax
increment reimbursement note receivables compared to $8.8 million of such income
in 2019, as discussed in Note 7 to our Consolidated Financial Statements.
We recognized $33.5 million in revenues on land sales during 2019 compared to
$32.3 million in 2018. Cost of sales related to land sales revenues was $24.5
million in 2019 compared to $23.5 million in 2018. Land sales revenues were
slightly higher in 2019 as compared to 2018 due to an increase in the amount of
acreage sold in 2019 as compared to 2018 and due to higher infrastructure
development spending in 2019. Land infrastructure development spending increased
in 2019 as we balanced development requirements with home builder outputs during
the periods along with developing new phases of our master planned community.
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. Water delivery sales were higher in 2020
due to the timing of water delivery to our largest customer.
Outlook- As a result of the COVID-19 pandemic, early in the second quarter of
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 land sales levels and residential builder output. In the second half
of
- 42 -
-------------------------------------------------------------------------------- 2020 and particularly towards the end of the year, land sales activities increased, including increases in both the number of acres closed and entered into escrow. Throughout the COVID-19 pandemic, BMI has continued to provide utility and water delivery services to its customers without interruption. OurReal Estate Management and Development management team remains focused on protecting the health and safety of our employees and contractors including enhanced health and safety protocols. LandWell is continuing to actively develop and market land it manages, primarily to residential builders, for the residential/planned community inHenderson . If current land sales in escrow close as scheduled, we expect the level of land sales in the near term to continue to be strong; however, we expect land sales revenue in 2021 to be lower than 2020 primarily due to a large amount of revenue in 2020 being related to a single land sale transaction and we would not expect a similar large transaction to occur in 2021. 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 theCity 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 theCity of Henderson , the issuance of a specified numbers 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. 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. Any delays or curtailments in infrastructure development activities will lower the amount of revenue we 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 theCity of Henderson for approval of additional tax increment reimbursement note receivables.
General Corporate Items, Interest Expense, Provision for Income Taxes (Benefit), Noncontrolling Interest and Related Party Transactions
Securities Earnings- A significant portion of our interest and dividend income in 2018 relates to the distributions we received fromThe Amalgamated Sugar Company LLC . We recognized dividend income from Amalgamated of$16.9 million in 2018. OnAugust 31, 2018 , we sold our interest in Amalgamated for consideration consisting of$12.5 million in cash and the deemed payment in full of our$250 million in loans we owedSnake River Sugar Company . We recognized a$12.5 million securities gain on this transaction. Securities earnings were significantly lower in 2019 and 2020 as compared to 2018 primarily due to theAugust 2018 sale of our interest in Amalgamated. See Note 6 to our Consolidated Financial Statements.Insurance Recoveries-NL has agreements with certain insurance carriers pursuant to which the carriers reimburseNL for a portion of its past lead pigment and asbestos litigation defense costs. Insurance recoveries include amountsNL received from these insurance carriers.NL received insurance recoveries of$5.1 million in 2019 primarily related to a settlementNL reached with one of its insurance carriers in which they agreed to reimburseNL for a portion ofNL's past and future litigation defense costs. In addition, Kronos recognized$2.6 million and$1.5 million of insurance recoveries in 2019 and 2020, respectively, related to a property damage claim. The agreements with certain ofNL'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 byNL 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 18 to our Consolidated Financial Statements. Gain on Land Sales-In the first quarter of 2018 and the third quarter of 2019 we sold two parcels and one parcel, respectively, of land not used in our operating activities. See Note 13 to our Consolidated Financial Statements.
Gain on Sale of Business-In the fourth quarter of 2019,
Litigation Settlement Expense-We recognized a pre-tax litigation settlement expense of$62.0 million and$19.3 million in the second quarter of 2018 and 2019, respectively, related toNL's lead pigment litigation inCalifornia . See Note 18 to our Consolidated Financial Statements. Other Components of Net Periodic Pension Expense-We recognized other components of net periodic pension expense of$20.1 million in 2020,$16.5 million in 2019 and$14.5 million in 2018. The change in expense is primarily due to pension costs as a result of actuarial amortizations and expected returns on plan assets. See Note 11 to our Consolidated Financial Statements. Changes in the Market Value of Valhi Common Stock held by Subsidiaries- Our subsidiaries Kronos andNL hold shares of our common stock. As discussed in Note 16 to our Consolidated Financial Statements, we account for our proportional interest in these shares of our common stock as treasury stock, at Kronos' andNL's historical cost basis. The remaining portion of these shares of our - 43 - -------------------------------------------------------------------------------- common stock, which are attributable to the noncontrolling interest of Kronos andNL , are reflected in our consolidated balance sheet at fair value. Any unrealized gains or losses on the shares of our common stock attributable to the noncontrolling interest of Kronos andNL are recognized in the determination of each of Kronos andNL's respective net income or loss. 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. The$1.7 million ,$.2 million and$12.2 million loss recognized in our Consolidated Financial Statements in 2020, 2019 and 2018, respectively, represents the unrealized loss in respect of these shares during such periods attributable to the noncontrolling interest of Kronos andNL . Other General Corporate Items- Corporate expenses were 9% lower at$34.3 million in 2020 compared to$37.5 million in 2019 primarily due to lower litigation and related costs partially offset by higher environmental remediation and related costs. Included in corporate expense are:
? litigation and related costs at
$4.0 million in 2019; and ? environmental remediation and related costs of$.7 million in 2020 compared to$.3 million in 2019. Corporate expenses were 12% lower at$37.5 million in 2019 compared to$42.4 million in 2018 primarily due to lower litigation and related costs and lower environmental remediation and related costs. Included in corporate expense are:
? litigation and related costs at
$6.2 million in 2018; and ? environmental remediation and related costs of$.3 million in 2019 compared to$3.1 million 2018. Overall, we currently expect that our net general corporate expenses in 2021 will be higher than 2020 primarily due to higher expected litigation fees 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 18 to our 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 18 to our Consolidated Financial Statements. Interest Expense- Interest expense decreased to$36.2 million in 2020 from$40.8 million in 2019 primarily due to lower 2020 average debt levels and lower average interest rates on variable-rate indebtedness. Interest expense decreased to$40.8 million in 2019 from$55.7 million in 2018 primarily due to the net effects of lower 2019 average debt levels due to the deemed redemption of the Snake River promissory notes inAugust 2018 and higher average interest rates on variable-rate indebtedness.
We expect interest expense will be lower in 2021 as compared to 2020 due to lower average balances of outstanding borrowings and consistent average rates. See Note 19 to our Consolidated Financial Statements.
Provision for Income Taxes (Benefit)-We recognized income tax expense of$15.9 million in 2020 compared to income tax expense of$26.5 million in 2019. The decrease is primarily due to the jurisdictional mix of earnings in 2020. We recognized income tax expense of$26.5 million in 2019 compared to an income tax benefit of$30.7 million in 2018. As discussed in Note 14 to our Consolidated Financial Statements, the difference is primarily due to the third quarter 2018 recognition of a change in the deferred income tax liability related to our investment in Kronos as a result of the 2017 Tax Act and the effect of lower income from operations in 2019. Our income tax expense in 2019 includes an income tax benefit of$3.0 million related to the favorable settlement of a prior year tax matter inGermany , with$1.5 million recognized as a current cash tax benefit and$1.5 million recognized as a non-cash deferred income tax benefit related to an increase to our German net operating loss carryforward. In addition, we recognized a non-cash deferred income tax expense of$4.7 million related to the revaluation of our net deferred income tax asset inGermany resulting from a decrease in the German trade tax rate. - 44 -
--------------------------------------------------------------------------------
Our income tax benefit in 2018 includes the following:
? an aggregate non-cash deferred income tax benefit of
2018 related to a change in the deferred income tax liability related
to our investment in Kronos, net of the revaluation of suchchange
resulting from the reduction in the U.S. federal corporate tax rate as
a result of the 2017 Tax Act;
? a $1.8 million non-cash deferred income tax benefit related to a
decrease in our effective state income tax rate; this decrease is a
direct result of the sale of our interest in Amalgamated which will
reduce the number of state jurisdictions in which we arerequired to
file;
? a net $1.4 million non-cash income tax benefit related to an APA tax
settlement payment between Kronos' German and Canadiansubsidiaries;
and
? a $4.0 million current cash income tax expense related to tax on GILTI.
Our earnings are subject to income tax in various U.S. and non-U.S.
jurisdictions. Generally, our consolidated effective income tax rate is higher
than the U.S. federal statutory tax rate of 21% primarily because 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. However, in 2020 our consolidated effective income tax rate is lower
than the U.S. federal statutory rate of 21% due to the effect of lower earnings
and tax benefits associated with losses incurred in certain high tax
jurisdictions.
Our consolidated effective income tax rate in 2021 is expected to be higher than
the U.S. federal statutory rate of 21% because the income tax rates applicable
to the earnings (losses) of our non-U.S. operations will be higher than the
income tax rates applicable to our U.S. operations due to the expected mix of
earnings.
See Note 14 to our Consolidated Financial Statements for more information about
our 2020 income tax items, including a tabular reconciliation of our statutory
tax expense (benefit) to our actual tax expense (benefit).
Discontinued Operations-On January 26, 2018 , we completed the sale of the Waste
Management Segment to JFL-WCS Partners, LLC , an entity sponsored by certain
investment affiliates of J.F. Lehman & Company , for consideration consisting of
the assumption of all of the Waste Management Segment's third-party indebtedness
and other liabilities. We recognized a pre-tax gain of approximately $58 million
on the transaction in the first quarter of 2018. We recognized an additional
pre-tax gain of approximately $4.9 million in the fourth quarter of 2020 related
to proceeds received from JFL Partners to settle an earn-out provision in the
sale agreement. Amounts related to our former Waste Management Segment are
classified as part of discontinued operations. See Note 3 to our Consolidated
Financial Statements for additional information.
Noncontrolling Interest in Net Income (Loss) of Subsidiaries-Noncontrolling interest in operations of subsidiaries increased from 2019 to 2020 primarily due to changes in operating income at LandWell and decreased from 2018 to 2019 primarily due to changes in operating income at Kronos.
Related Party Transactions-We are a party to certain transactions with related parties. See Note 17 to our Consolidated Financial Statements.
Foreign Operations
We have substantial operations located outsidethe United States , principally our Chemicals Segment's operations inEurope andCanada . The functional currency of these operations is the local currency. As a result, the reported amount of our assets and liabilities related to these foreign operations will fluctuate based upon changes in currency exchange rates. AtDecember 31, 2020 , we had substantial net assets denominated in the euro, Canadian dollar and Norwegian krone.
Critical accounting policies and estimates
Our significant accounting policies are more fully described in Note 1 to our Consolidated Financial Statements. Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted inthe United States of America , or GAAP, which requires management to make estimates, judgments and assumptions that we believe are reasonable based on our historical experience, observance of known trends in our Company and industry as a whole and information available from outside sources. Our estimates affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results may differ significantly from those initial estimates. - 45 -
-------------------------------------------------------------------------------- We believe the most critical accounting policies and estimates involving significant judgment primarily relate to goodwill, long-lived assets, revenue recognized over time using cost based inputs, defined benefit pension plans, income taxes and litigation and environmental liabilities. Goodwill-Our net goodwill totaled$379.7 million atDecember 31, 2020 primarily resulting from our various step acquisitions of Kronos andNL (which occurred before the implementation of the current accounting standards related to noncontrolling interest) and to a lesser extent CompX's purchase of various businesses. In accordance with the applicable accounting standards for goodwill, we do not amortize goodwill. We perform a goodwill impairment test annually in the third quarter of each year.Goodwill is also evaluated for impairment at other times whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. An entity may first assess qualitative factors to determine whether it is necessary to complete the two-step quantitative impairment test using a more-likely-than-not criteria. If an entity believes it is more-likely-than-not the fair value of a reporting unit is greater than its carrying value, including goodwill, the two-step quantitative impairment test can be bypassed. Alternatively, an entity has an unconditional option to bypass the qualitative assessment and proceed directly to performing the two-step quantitative impairment test. When performing a qualitative assessment considerable management judgment is necessary to evaluate the qualitative impact of events and circumstances on the fair value of a reporting unit. Events and circumstances considered in our impairment evaluations, such as historical profits and stability of the markets served, are consistent with factors utilized with our internal projections and operating plan. However, future events and circumstances could result in materially different findings which could result in the recognition of a material goodwill impairment. Evaluations of possible impairment utilizing the two-step quantitative impairment test require us to estimate, among other factors: forecasts of future operating results, revenue growth, operating margin, tax rates, capital expenditures, depreciation, working capital, weighted average cost of capital, long-term growth rates, risk premiums, terminal values, and fair values of our reporting units and assets. The goodwill impairment test is subject to uncertainties arising from such events as changes in competitive conditions, the current general economic environment, material changes in growth rate assumptions that could positively or negatively impact anticipated future operating conditions and cash flows, changes in the discount rate, and the impact of strategic decisions. If any of these factors were to materially change such change may require revaluation of our goodwill. Changes in estimates or the application of alternative assumptions could produce significantly different results. A reporting unit can be a segment or an operating division based on the operations of the segment. For example, our Chemicals Segment produces a globally coordinated homogeneous product whereas our Component Products Segment operates as two distinct reporting units. If the fair value of the reporting unit is less than its book value, the goodwill is written down to estimated fair value. For our Chemicals Segment, we use Level 1 inputs of publicly traded market prices to compare the book value to assess impairment. We also consider control premiums when assessing fair value. When we performed our annual goodwill impairment test in the third quarter of 2020 for our Chemicals Segment goodwill we concluded there was no impairment of such goodwill. However, future events and circumstances could change (i.e. a significant decline in quoted market prices) and result in a materially different finding which could result in the recognition of a material impairment with respect to such goodwill. Substantially all of the goodwill for our Component Products Segment relates to its security products reporting unit. In 2020, we used the qualitative assessment for our annual impairment test and determined it was not necessary to perform the quantitative goodwill impairment test, as we concluded it is more-likely-than-not that the fair value of the security products reporting unit exceeded its carrying amount. Long-lived assets-The net book value of our property and equipment totaled$590.4 million atDecember 31, 2020 . We assess property and equipment for impairment only when circumstances indicate an impairment may exist. Our determination is based upon, among other things, our estimates of the amount of future net cash flows to be generated by the long-lived asset (Level 3 inputs) and our estimates of the current fair value of the asset. Significant judgment is required in estimating such cash flows. Adverse changes in such estimates of future net cash flows or estimates of fair value could result in an inability to recover the carrying value of the long-lived asset, thereby possibly requiring an impairment charge to be recognized in the future. We do not assess our property and equipment for impairment unless certain impairment indicators are present. We did not evaluate any long-lived assets for impairment during 2020 because no such impairment indicators were present. Revenue recognized over time using cost based inputs (formerly percentage completion revenue recognition)-Certain real estate land sales by ourReal Estate Management and Development Segment (generally land sales associated with our residential/planned community) require us to complete property development and improvements after title passes to the buyer and we have received all or a substantial portion of the selling price. Generally, all of the land sales associated with the residential/planned community have been recognized over time using cost based inputs of accounting in accordance with ASC 606. Under such method, revenues and profits are recognized in the same proportion of our progress towards completion of our contractual obligations, with our progress measured by costs incurred as a percentage of total costs estimated to be incurred. Such costs incurred and total estimated costs include amounts specifically identifiable with the parcels sold as well as certain development costs for the entire residential/planned community which - 46 - -------------------------------------------------------------------------------- are allocated to the parcels sold under applicable GAAP. Estimates of total costs expected to be incurred require significant management judgment, and the amount of revenue and profits that have been recognized to date are subject to revisions throughout the development period. The impact on the amount of revenue recognized resulting from any future change in the estimate of total costs estimated to be incurred would be accounted for prospectively in accordance with GAAP. Defined benefit pension plans-We maintain various defined benefit pension plans in theU.S. ,Europe andCanada . See Note 11 to our Consolidated Financial Statements. We recognized consolidated defined benefit pension plan expense of$26.9 million in 2018,$29.6 million in 2019 and$33.8 million on 2020. The amount of funding requirements for these defined benefit pension plans is generally based upon applicable regulations (such as ERISA in theU.S. ) and will generally differ from pension expense for financial reporting purposes. We made contributions to all of our defined benefit pension plans of$19.9 million in 2018,$19.4 million in 2019 and$18.4 million in 2020. Under defined benefit pension plan accounting, defined benefit pension plan expense, pension assets and accrued pension costs are each recognized based on certain actuarial assumptions. These assumptions are principally the discount rate, the assumed long-term rate of return on plan assets, the fair value of plan assets and the assumed increase in future compensation levels. We recognize the funded status of our defined benefit pension plans as either an asset (for overfunded plans) or a liability (for underfunded plans) in our Consolidated Balance Sheet. The discount rates we use for determining defined benefit pension expense and the related pension obligations are based on current interest rates earned on long-term bonds that receive one of the two highest ratings given by recognized rating agencies in the applicable country where the defined benefit pension benefits are being paid. In addition, we receive third-party advice about appropriate discount rates and these advisors may in some cases use their own market indices. We adjust these discount rates as of eachDecember 31 valuation date to reflect then-current interest rates on such long-term bonds. We use these discount rates to determine the actuarial present value of the pension obligations as ofDecember 31 of that year. We also use these discount rates to determine the interest component of defined benefit pension expense for the following year. AtDecember 31, 2020 , approximately 70%, 13%, 7% and 6% of the projected benefit obligations related to our plans inGermany ,Canada , theU.S. andNorway , respectively. We use several different discount rate assumptions in determining our consolidated defined benefit pension plan obligation and expense. This is because we maintain defined benefit pension plans in several different countries inEurope andNorth America and the interest rate environment differs from country to country.
We used the following discount rates for our defined benefit pension plans:
Discount rates used for:
Obligations Obligations Obligations
at December 31, 2018 at December 31, 2019 at December 31, 2020
and expense in 2019 and expense in 2020 and expense in 2021
Kronos and NL Plans:
Germany 1.8 % 1.0 % .7 %
Canada 3.5 % 3.0 % 2.4 %
Norway 2.5 % 2.3 % 1.7 %
U.S. 4.1 % 3.1 % 2.2 %
The assumed long-term rate of return on plan assets represents the estimated
average rate of earnings expected to be earned on the funds invested or to be
invested in the plans' assets provided to fund the benefit payments inherent in
the projected benefit obligations. Unlike the discount rate, which is adjusted
each year based on changes in current long-term interest rates, the assumed
long-term rate of return on plan assets will not necessarily change based upon
the actual short-term performance of the plan assets in any given year. Defined
benefit pension expense each year is based upon the assumed long-term rate of
return on plan assets for each plan, the actual fair value of the plan assets as
of the beginning of the year and an estimate of the amount of contributions to
and distributions from the plan during the year. Differences between the
expected return on plan assets for a given year and the actual return are
deferred and amortized over future periods based either upon the expected
average remaining service life of the active plan participants (for plans for
which benefits are still being earned by active employees) or the average
remaining life expectancy of the inactive participants (for plans for which
benefits are not still being earned by active employees).
At December 31, 2020 , the fair value of plan assets for all defined benefit
plans comprised $53.3 million related to U.S. plans and $494.8 million related
to non-U.S. plans. Substantially all of plan assets attributable to foreign
plans related to plans maintained by Kronos, and approximately 70% and 30% of
the plan assets attributable to U.S. plans related to plans maintained by NL and
Kronos, respectively. At December 31, 2020 , approximately 53%, 21%, 10% and 10%
of the plan assets related to our plans in Germany , Canada , Norway and the U.S ,
respectively. We use several different long-term rates of return on plan asset
assumptions in determining our
- 47 -
--------------------------------------------------------------------------------
consolidated defined benefit pension plan expense. This is because the plan
assets in different countries are invested in a different mix of investments and
the long-term rates of return for different investments differ from country to
country.
In determining the expected long-term rate of return on plan asset assumptions,
we consider the long-term asset mix (e.g. equity vs. fixed income) for the
assets for each of our plans and the expected long-term rates of return for such
asset components. In addition, we receive third-party advice about appropriate
long-term rates of return. We regularly review our actual asset allocation for
each of our U.S. and non-U.S. plans and will periodically rebalance the
investments in each plan to more accurately reflect the targeted allocation when
considered appropriate.
The assumed long-term rates of return on plan assets used for purposes of determining net period pension cost for 2018, 2019 and 2020 were as follows:
2018 2019 2020
Kronos and NL plans:
Germany 2.0 % 2.3 % 1.0 %
Canada 4.2 % 4.0 % 3.5 %
Norway 4.0 % 4.0 % 4.0 %
U.S. 7.5 % 5.5 % 4.5 %
Our long-term rate of return on plan asset assumptions in 2021 used for purposes
of determining our 2021 defined benefit pension plan expense for
We follow ASC Topic 820, Fair Value Measurements and Disclosures, in determining the fair value of plan assets within our defined benefit pension plans. While we believe the valuation methods used to determine the fair value of plan assets are appropriate, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. To the extent that a plan's particular pension benefit formula calculates the pension benefit in whole or in part based upon future compensation levels, the projected benefit obligations and the pension expense will be based in part upon expected increases in future compensation levels. For all of our plans for which the benefit formula is so calculated, we generally base the assumed expected increase in future compensation levels upon average long-term inflation rates for the applicable country.
In addition to the actuarial assumptions discussed above, the amount of recognized defined benefit pension expense and the amount of net pension asset and net pension liability will vary based upon relative changes in currency exchange rates. See Note 11 to our Consolidated Financial Statements for additional discussion of actuarial assumptions used in determining defined benefit pension assets, liabilities and expenses.
Based on the actuarial assumptions described above and our current expectation for what actual average currency exchange rates will be during 2021, we expect our defined benefit pension expense will approximate$32 million in 2021. In comparison, we expect to be required to contribute approximately$18 million to such plans during 2021. As noted above, defined benefit pension expense and the amounts recognized as accrued pension costs are based upon the actuarial assumptions discussed above. We believe all of the actuarial assumptions used are reasonable and appropriate. However, if we had lowered the assumed discount rate by 25 basis points for all plans as ofDecember 31, 2020 , our aggregate projected benefit obligations would have increased by approximately$42 million at that date and our defined benefit pension expense would be expected to increase by approximately$2 million during 2021. Similarly, if we lowered the assumed long-term rate of return on plan assets by 25 basis points for all of our plans, our defined benefit pension expense would be expected to increase by approximately$1 million during 2021. Income taxes- We operate globally through our Chemicals Segment and the calculation of our provision for income taxes and our deferred tax assets and liabilities involves the interpretation and application of complex tax laws and regulations in a multitude of jurisdictions across our Chemicals Segment's global operations. Our effective tax rate is highly dependent upon the geographic distribution of our earnings or losses and the effects of tax laws and regulations in each tax-paying jurisdiction in which we operate. Significant judgments and estimates are required in determining our consolidated provision for income taxes due to the global nature of our Chemicals Segment's operations. Our provision for income taxes and deferred tax assets and liabilities reflect our best assessment of estimated current and future taxes to be paid, including the recognition and measurement of deferred tax assets and liabilities.
We recognize deferred taxes for future tax effects of temporary differences between financial and income tax reporting. Deferred income tax assets and liabilities for each tax-paying jurisdiction in which we operate are netted and presented as either a noncurrent deferred income tax asset or liability, as applicable. We record a valuation allowance to reduce our deferred income tax
- 48 -
--------------------------------------------------------------------------------
assets to the amount that is believed to be realized under the
more-likely-than-not recognition criteria. While we have considered future
taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for a valuation allowance, it is possible that we may change
our estimate of the amount of the deferred income tax assets that would
more-likely-than-not be realized in the future, resulting in an adjustment to
the deferred income tax asset valuation allowance that would either increase or
decrease, as applicable, reported net income in the period such change in
estimate was made.
For example, at December 31, 2020 our Chemicals Segment has substantial net
operating loss (NOL) carryforwards in Germany (the equivalent of $531 million
for German corporate tax purposes) and in Belgium (the equivalent of $20 million
for Belgian corporate tax purposes). At December 31, 2020 , we have concluded
that no deferred income tax asset valuation allowance is required to be
recognized with respect to such carryforwards, principally because (i) such
carryforwards have an indefinite carryforward period, (ii) we have utilized a
portion of such carryforwards during the most recent three-year period and (iii)
we currently expect to utilize the remainder of such carryforwards over the long
term. However, prior to the complete utilization of such carryforwards, if we
were to generate additional losses in our German or Belgian operations for an
extended period of time, or if applicable law were to change such that the
carryforward period was no longer indefinite, it is possible that we might
conclude the benefit of such carryforwards would no longer meet the
more-likely-than-not recognition criteria, at which point we would be required
to recognize a valuation allowance against some or all of the then-remaining tax
benefit associated with the carryforwards.
Contingencies-We are involved in numerous legal and environmental actions in
part due to NL's former involvement in the manufacture of lead-based products.
We record accruals for these environmental, legal and other contingencies and
commitments when such contingencies become probable, and amounts can be
reasonably estimated. However, new information may become available to us, or
circumstances (such as applicable laws and regulations) may change, thereby
resulting in an increase or decrease in the amount we are required to accrue for
such matters (and therefore a decrease or increase in our reported net income in
the period of such change). At December 31, 2020 we have recorded total accrued
environmental liabilities of $98.6 million .
Obligations for environmental remediation and related costs are difficult to
assess, 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 (and potential range of our liabilities) as further information
becomes available to us or as circumstances change which involves our judgment
regarding current facts and circumstances for each site and is subject to
various assumptions and estimates. Such further information or changed
circumstances could result in an increase in our accrued environmental
remediation and related costs. See Note 18 to our Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated Cash Flows
Operating Activities-
Trends in cash flows as a result of our operating income (excluding the impact of significant asset dispositions and relative changes in assets and liabilities) are generally similar to trends in our earnings. 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 year to year can be impacted by changes in currency exchange rates, since a portion of our cash, cash equivalents and restricted cash is held by our Chemicals Segment's non-U.S. subsidiaries. For example, during 2020, relative changes in currency exchange rates resulted in a$13.8 million increase in the reported amount of our cash, cash equivalents and restricted cash compared to a$2.3 million decrease in 2019 and a$14.4 million decrease in 2018.
Cash flows from operating activities decreased to
? consolidated operating income of
$6.6 million compared to operating income of$192.7 million in 2019;
? changes in receivables, inventories, payables and accrued liabilities
in 2020 used $33.5 million in net cash compared to $7.1 million in net
cash used in 2019, an increase in the amount of cash used of
$26.4 million compared to 2019, primarily due to the relative changes
in our inventories, receivables, prepaids, land held fordevelopment,
payables and accruals; and
? lower net cash paid for income taxes in 2020 of $9.3 million due to the
timing of tax payments.
Cash flows from operating activities increased to
? consolidated operating income of
$178.0 million compared to operating income of$370.7 million in 2018; - 49 -
--------------------------------------------------------------------------------
? lower net cash paid for income taxes in 2019 of
the timing of tax payments as well as the aggregate $11.9 million we
paid in 2018 related to the Transition Tax provisions of the 2017 Tax
Act;
? lower cash paid for interest in 2019 of
the redemption of the Snake River promissory notes in August 2018;
? lower net distributions to our TiO2 manufacturing joint venture in 2019
of $13.3 million , primarily due to the timing of the jointventure's
working capital needs; and
? changes in receivables, inventories, payables and accrued liabilities
in 2019 used $7.1 million in net cash compared to $89.6 million in net
cash used in 2018, a decrease in the amount of cash used of
$82.5 million compared to 2018, primarily due to the relative changes
in our inventories, receivables, prepaids, land held fordevelopment,
payables and accruals.
Changes in working capital were affected by accounts receivable and inventory changes, as shown below:
? Kronos' average days sales outstanding ("DSO") was lower from December
31, 2019 to December 31, 2020 , primarily due to the relative changes in
the timing of collections.
? Kronos' average days sales in inventory ("DSI") decreased from December
31, 2019 to December 31, 2020 primarily due to lower inventory volumes
attributable to sales volumes exceeding production volumes in the
fourth quarter of 2020; which was not the case in the fourth quarter of
2019.
? CompX's average DSO decreased from December 31, 2019 to December 31,
2020 primarily as a result of the timing of sales andcollections in
the last month of 2020 as compared to 2019.
? CompX's average DSI decreased from December 31, 2019 to December 31,
2020 primarily as a result of rapid sales growth in the fourth quarter
of 2020.
For comparative purposes, we have also provided comparable prior year numbers
below.
December 31, December 31, December 31,
2018 2019 2020
Kronos:
Days sales outstanding 76 days 71 days 68 days
Days sales in inventory 113 days 83 days 74 days
CompX:
Days sales outstanding 40 days 36 days 33 days
Days sales in inventory 80 days 81 days 75 days
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.
Years ended December 31,
2018 2019 2020
(In millions)
Cash provided by (used in) operating activities:
Kronos $ 188.4 $ 160.2 $ 102.5
Valhi exclusive of subsidiaries 37.4 38.3 57.2
CompX 17.7 18.5 14.9
NL exclusive of subsidiaries .3 10.8 7.3
Waste Control Specialists(1) 2.3 - -
Tremont 5.8 27.0 36.7
BMI 2.9 30.2 39.0
LandWell 10.4 38.8 81.9
Eliminations and other (99.7 ) (146.6 ) (187.3 )
Total $ 165.5 $ 177.2 $ 152.2
(1) Discontinued operations
Investing Activities-
We disclose capital expenditures by our business segments in Note 2 to our Consolidated Financial Statements.
- 50 ---------------------------------------------------------------------------------
During 2020 we:
? had proceeds from the settlement of an earn-out provision related to
the 2018 sale of our Waste Management Segment of $4.9 million ; and
? had net proceeds of
During 2019 we:
? had proceeds from the sale of land not used in our operations of $4.6
million in the third quarter;
? had cash proceeds from the sale of
business of $2.9 million in the fourth quarter;
? received $2.6 million from an insurance settlement related to a
property damage claim in the fourth quarter; and
? had net purchases of $.6 million of marketable securities.
During 2018 we:
? had net proceeds (excluding Amalgamated) of
securities;
? had proceeds from the sale of land not used in our operations of $19.5
million in the first quarter; and
? received $12.5 million as part of the sale of our investment in
Amalgamated in the third quarter.
Financing Activities -
During 2020:
? we repaid
? Kronos acquired 122,489 shares of its common stock for an aggregate
purchase price of $1.0 million ; and
? we repaid $11.6 million under Tremont's promissory note payable and
deferred payment obligation.
During 2019:
? we repaid a net
? Kronos acquired 264,992 shares of its common stock for an aggregate
purchase price of $3.1 million ; and
? we repaid $7.4 million under Tremont's promissory note payable.
During 2018, we:
? repaid a net$6.3 million onValhi's credit facility with Contran; and ? repaid$3.7 million under Tremont's promissory note payable. We paid aggregate cash dividends on our common stock of$27.1 million in each of 2018 and 2019 and$13.6 million in 2020. Distributions to noncontrolling interest in 2018, 2019 and 2020 are primarily comprised of: CompX dividends paid to shareholders other thanNL ; Kronos dividends paid to shareholders other than us andNL , and BMI and LandWell dividends paid to shareholders other than us.
Outstanding Debt Obligations
At
?
with Contran which is due no earlier than December 31, 2022 ;
? €400 million aggregate outstanding on Kronos' 3.75% Senior Secured
Notes ($485.7 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
debt issuance costs) due June 2032 ;
? $14.2 million on LandWell's bank loan due April 2036 ; and
? approximately
lease obligations.
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
- 51 -
-------------------------------------------------------------------------------- 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 contains 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 earnings before income tax, interest, depreciation and amortization expense (EBITDA) of the borrowers. The terms of all of our debt instruments (including revolving lines of credit for which we have no outstanding borrowings atDecember 31, 2020 ) are discussed in Note 9 to our Consolidated Financial Statements. We are in compliance with all of our debt covenants atDecember 31, 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 more favorable than current debt and investment market rates. The companies that borrow under these notes have sufficient borrowing capacity to repay the notes at any time upon demand. All of these notes and related interest expense and income are eliminated in our 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 endingDecember 31, 2021 ) and long-term obligations (defined as the five-year period endingDecember 31, 2025 ). In this regard, see the discussion above in "Outstanding Debt Obligations." If actual developments differ from our expectations, our liquidity could be adversely affected.
At
?
?
?$49.3 (2) million underValhi's Contran credit facility. - 52 -
--------------------------------------------------------------------------------
(1) Based on Kronos' EBITDA over the last twelve months ending
the full €90.0 million amount is available for borrowing at
2020.
(2) Amounts available under this facility are at the sole discretion of Contran.
AtDecember 31, 2020 , we had an aggregate of$577.5 million of restricted and unrestricted cash, cash equivalents and marketable securities attributable to continuing operations. A detail by entity is presented in the table below. Total Held outside amount U.S. (In millions) Kronos $ 362.0 $ 162.4 CompX 70.6 - NL exclusive of its subsidiaries 94.6
-
BMI 21.1
-
Tremont exclusive of its subsidiaries 9.1
-
LandWell 20.0
-
Valhi exclusive of its subsidiaries .1
-
Total cash and cash equivalents, restricted cash and marketable securities $ 577.5 $ 162.4 Following the 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.
Capital Expenditures and Other Investments-
We currently expect our aggregate capital expenditures for 2021 will be
approximately
? $85 million by our Chemicals Segment, including approximately $23
million in the area of environmental compliance, protection and
improvement;
? $4 million by our Component Products Segment; and
? $4 million by our Real Estate Management and Development Segment.
In addition, LandWell expects to spend approximately
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 our Common Stock and Common Stock of our Subsidiaries-
We have in the past, and may in the future, make repurchases of our common stock in market or privately-negotiated transactions. AtDecember 31, 2020 , we had approximately .3 million shares available for repurchase of our common stock under the authorizations described in Note 16 to our Consolidated Financial Statements. Prior to 2018, 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. The stock repurchase program does not include specific price targets or timetables and may be suspended at any time. Depending on market conditions, Kronos may terminate the program prior to its completion. Kronos uses cash on hand or other sources of liquidity to acquire the shares. Repurchased shares are added to Kronos' treasury shares and subsequently cancelled upon approval of the Kronos board of directors. Kronos did not make any repurchases under the plan during 2018. In 2019, Kronos acquired 264,992 shares of its common stock in market transactions for an aggregate purchase price of$3.0 million and subsequently cancelled all of such shares. In 2020, Kronos acquired 122,489 shares of its common stock in market transactions for an aggregate purchase price of$1.0 million and subsequently cancelled all of such shares. AtDecember 31, 2020 approximately 1.56 million shares are available for repurchase. - 53 - -------------------------------------------------------------------------------- Prior to 2018, CompX's board of directors authorized various repurchases of its Class A common stock in open market transactions, including block purchases, or in privately-negotiated transactions at unspecified prices and over an unspecified period of time. CompX may repurchase its common stock from time to time as market conditions permit. The stock repurchase program does not include specific price targets or timetables and may be suspended at any time. Depending on market conditions, CompX may terminate the program prior to its completion. CompX will generally use cash on hand to acquire the shares. Repurchased shares will be added to CompX's treasury and cancelled. CompX did not make any repurchases under the plan during 2018, 2019 and 2020, and atDecember 31, 2020 approximately 678,000 shares were available for purchase under these authorizations.
Dividends-
Because our operations are conducted primarily through subsidiaries and affiliates, our long-term ability to meet parent company level corporate obligations is largely dependent on the receipt of dividends or other distributions from our subsidiaries and affiliates. Kronos paid a regular dividend of$.18 per share in each quarter of 2020 for which we received$41.8 million . InFebruary 2021 the Kronos Board of Directors approved a regular quarterly dividend of$.18 per share. If Kronos were to pay its$.18 per share dividend in each quarter of 2021 based on the 58.0 million shares we held of Kronos common stock atDecember 31, 2020 , 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$6.5 million . InMarch 2021 the NL Board of Directors approved a quarterly dividend of$.06 per share. IfNL were to pay its$.06 per share dividend in each quarter of 2021 based on the 40.4 million shares we hold ofNL common stock atDecember 31, 2020 , we would receive annual dividends fromNL 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$5.7 million in 2018,$29.1 million in 2019 and$43.0 million in 2020. We do not know if we will receive distributions from BMI and LandWell during 2021. All of our ownership interest in CompX is held through our ownership inNL , as such we do not receive any dividends from CompX. Instead any dividend paid by CompX is paid toNL .
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.
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 decision 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. See Note 17 to our Consolidated Financial Statements. 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 may be required to sell our subsidiaries' securities for less than what we believe is the long-term value of such assets. Prior to 2018, we entered into a$50 million revolving credit facility with a subsidiary ofNL secured with approximately 35.2 million shares of the common stock of Kronos Worldwide, Inc. held byNL's subsidiary as collateral. Outstanding borrowings under the credit facility bear interest at the prime rate plus 1.875% per annum, payable quarterly, with all amounts due onDecember 31, 2023 . The maximum principal amount which may be outstanding from time-to-time under the credit facility is limited to 50% of the amount of the most recent closing price of the Kronos stock. The credit facility contains a number of covenants and restrictions which, among other things, restrictNL's subsidiary's ability to incur additional debt, incur liens, and merge or consolidate with, or sell or transfer substantially all ofNL's subsidiary's assets to, another entity, and requireNL's subsidiary to maintain a minimum specified level of consolidated net worth. Upon an event of default (as defined in the credit facility),Valhi will be entitled to terminate its commitment to make further loans toNL's subsidiary, declare the outstanding loans (with interest) immediately due and payable, and exercise its rights with respect to the collateral under the loan documents. Such collateral rights include, upon certain insolvency events with respect toNL's subsidiary orNL , the right to purchase all of the Kronos common stock at a purchase price equal to the aggregate market value, less amounts owing toValhi under the loan documents, and up to 50% of such purchase price may be paid byValhi in the form of an unsecured promissory note bearing interest at the prime rate plus 2.75% per annum, payable quarterly, with all amounts due no later than five years from the date of purchase, with the remainder of such purchase price payable in cash at the date of purchase. We also eliminate any such intercompany borrowings in our Consolidated Financial Statements. There is$.5 million outstanding under this facility atDecember 31, 2020 . We eliminate any such intercompany borrowings in our Consolidated Financial Statements. - 54 - -------------------------------------------------------------------------------- We have an unsecured revolving demand promissory note with Kronos which, as amended, provides for borrowings from Kronos of up to$40 million . We also eliminate any such intercompany borrowings in our Consolidated Financial Statements. The facility, as amended, is due on demand, but in any event no earlier thanDecember 31, 2022 . We had gross borrowings of$2.6 million and gross repayments of$16.2 million with Kronos during 2018 and there was no outstanding balance atDecember 31, 2018 . We had gross borrowings of$16.6 million and gross repayments of$16.6 million with Kronos during 2019 and there was no outstanding balance atDecember 31, 2019 . We had no borrowings with Kronos in 2020 and we could borrow the full$40.0 million under our current intercompany facility with Kronos atDecember 31, 2020 . Kronos' obligation to loan us money under this note is at Kronos' discretion. Prior to 2018 we entered into an unsecured revolving demand promissory note with CompX which, as amended, provides for borrowings from CompX of up to$40 million . We eliminate these intercompany borrowings in our Consolidated Financial Statements. The facility, as amended, is due on demand, but in any event no earlier thanDecember 31, 2022 . We had gross borrowings of$52.8 million and gross repayments of$51.0 million with CompX for a total outstanding balance of$40.0 million atDecember 31, 2018 . We had gross borrowings of$34.6 million and gross repayments of$40.8 million with CompX for a total outstanding balance of$33.8 million atDecember 31, 2019 . We had gross borrowings of$29.1 million and gross repayments of$33.4 million with CompX for a total outstanding balance of$29.5 million atDecember 31, 2020 . We could borrow an additional$10.5 million under our current intercompany facility with CompX atDecember 31, 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 agreements.
Commitments and Contingencies
We are subject to certain commitments and contingencies, as more fully described in the Notes to our Consolidated Financial Statements and in this Management's Discussion and Analysis of Financial Condition and Results of Operations, including:
? certain income contingencies in various
? certain environmental remediation matters involvingNL and BMI; ? certain litigation related toNL'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 those legal proceedings described in Note 18 to our Consolidated Financial Statements, 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 (includingNL ) with respect to asserted health concerns associated with the use of such products and (ii) effectively overturn court decisions in whichNL 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. - 55 - -------------------------------------------------------------------------------- As more fully described in the Notes 7, 9, 18 and 19 to our Consolidated Financial Statements, we are a party to various debt, lease and other agreements which contractually and unconditionally commit us to pay certain amounts in the future. Our obligations related to the long-term supply contracts for the purchase of TiO2 feedstock are more fully described in Note 18 to our Consolidated Financial Statements and above in "Business-Chemicals Segment-Kronos Worldwide, Inc. -Raw Materials." The following table summarizes our contractual commitments as ofDecember 31, 2020 by the type and date of payment. Payment due date 2022/ 2024/ 2026 and Contractual commitment 2021 2023 2025 after Total (In millions) Indebtedness (1): Principal$ 2.3 $ 275.3 $ 494.4 $ 21.9 $ 793.9 Interest payments 31.5 51.1 33.9 5.2 121.7 Operating leases (2) 7.4 6.8 3.1 20.1 37.4 Kronos' long-term supply contracts to purchase TiO2 feedstock (3) 483.5 690.1 - - 1,173.6 Kronos' long-term service and other supply contracts (4) 33.6 36.7 12.5 3.3 86.1 CompX's raw material and other purchase commitments (5) 13.1 - - - 13.1 Fixed asset acquisitions (2) 23.6 - - - 23.6 BMI and LandWell purchase commitments (6) 21.7 3.7 - - 25.4 Deferred payment obligation (7) - - 1.3 - 1.3 Litigation settlement (8) 12.0 24.0 28.7 - 64.7 Estimated tax obligations (9) 23.9 17.1 33.3 - 74.3 Total$ 652.6 $ 1,104.8 $ 607.2 $ 50.5 $ 2,415.1
(1) The amount shown for indebtedness involving revolving credit facilities is
based upon the actual amount outstanding at
shown for interest for any outstanding variable-rate indebtedness is based
upon the
indebtedness remains outstanding until the maturity of the facility. The
timing and amount shown for principal payments on indebtedness is based on
the mandatory contractual principal repayments schedule of such indebtedness,
and assumes no voluntary principal prepayments. See Item 7A- "Quantitative
and Qualitative Disclosures About Market Risk" and Note 9 to our Consolidated
Financial Statements.
(2) The timing and amount shown for our operating leases and fixed asset
acquisitions are based upon the contractual payment amount and the
contractual payment date for such commitments.
(3) Our contracts for the purchase of TiO2 feedstock contain fixed quantities of
ore that we are required to purchase, or specify a range of quantities within
which we are required to purchase based on our feedstock requirements. The
pricing under these agreements is generally negotiated quarterly or
semi-annually. The timing and amount shown for our commitments related to the
supply contracts for TiO2 feedstock are based upon our current estimate of
the quantity of material that will be purchased in each time period shown,
the payment that would be due based upon such estimated purchased quantity
and an estimate of the prices for the various suppliers which is primarily
based on first half 2021 pricing. The actual amount of material purchased and
the actual amount that would be payable by us, may vary from such estimated
amounts. The amounts shown in the table above include the feedstock ore
requirements from contracts we entered into through
(4) The amounts shown for the long-term service and other supply contracts
primarily pertain to agreements we have entered into with various providers
of products or services which help to run our plant facilities (electricity,
natural gas, etc.), utilizing
to our Consolidated Financial Statements.
(5) CompX's purchase obligations consist of all open purchase orders and
contractual obligations (primarily commitments to purchase raw materials) and
are based on the contractual payment amount and the contractual payment date
for those commitments.
(6) BMI and LandWell's purchase obligations consist of contractual obligations
(primarily commitments for land development and improvement costs) and are
based on the contractual payment amount and the contractual payment date for
those commitments.
(7) The deferred payment obligation is described in Note 10 to our Consolidated
Financial Statements.
(8) The litigation settlement is described in Note 18 to our Consolidated
Financial Statements.
(9) The amount shown for estimated tax obligations in 2020 is the consolidated
amount of income taxes payable at
paid during 2021 and includes taxes payable, if any, to Contran as a result
of our being a member of the
Tax assumed to be paid in 2021. The amounts shown for estimated tax
obligations in 2022 and thereafter relate to the Transition Tax which will be
paid in the years indicated above. See Notes 1 and 14 to our Consolidated
Financial Statements.
The table above does not include:
- 56 ---------------------------------------------------------------------------------
? Our obligations under the Louisiana Pigment Company, L.P. joint
venture, as the timing and amount of such purchases are unknown and
dependent on, among other things, the amount of TiO2 produced by the
joint venture in the future, and the joint venture's future cost of
producing such TiO2. However, the table of contractualcommitments does
include amounts related to our share of the joint venture's ore
requirements necessary for it to produce TiO2 for us. See Notes 7 and
18 to our Consolidated Financial Statements and
"Business-Chemicals-Kronos Worldwide, Inc. "
? Amounts we might pay to fund our defined benefit pension plans, as the
timing and amount of any such future fundings are unknown and dependent
on, among other things, the future performance of defined benefit
pension plan assets, interest rate assumptions and actual future
retiree medical costs. Our defined benefit pension plans are discussed
in greater detail in Note 11 to our Consolidated FinancialStatements.
We currently expect we will be required to contribute an aggregate of
approximately $18 million to our defined benefit pension plans during
2021.
? Any amounts that we might pay to settle any of our uncertain tax
positions classified as a noncurrent liability, as the timing and
amount of any such future settlements are unknown and dependent on,
among other things, the timing of tax audits. See Note 14 to our
Consolidated Financial Statements.
We occasionally enter into raw material supply arrangements to mitigate the
short-term impact of future increases in raw material costs. While these
arrangements do not necessarily commit us to a minimum volume of purchase, they
generally provide for stated unit prices based upon achievement of specified
volume purchase levels. This allows us to stabilize raw material purchase prices
to a certain extent, provided the specified minimum monthly purchase quantities
are met.
Recent Accounting Pronouncements
See Note 20 to our Consolidated Financial Statements.
- 57 -
--------------------------------------------------------------------------------
© Edgar Online, source
