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 .
We have three consolidated reportable operating segments:
? Chemicals - Our Chemicals Segment is operated through our majority
control of Kronos. Kronos is a leading global producer and marketer of
value-added titanium dioxide pigments ("TiO2"). TiO2 is used to impart
whiteness, brightness, opacity and durability to a wide variety of
products, including paints, plastics, paper, fibers and ceramics.Additionally, TiO2 is a critical component of everyday applications, such
as coatings, plastics and paper, as well as many specialty products such
as inks, foods and cosmetics.
? Component Products - We operate in the component products industrythrough our majority control of CompX. CompX is a leading manufacturer of
security products used in the recreational transportation, postal, office
and institutional furniture, cabinetry, tool storage and healthcare
applications. CompX also manufactures stainless steel exhaust systems,
gauges, throttle controls, wake enhancement systems, trim tabs and
related hardware and accessories for the recreational marine and other
industries.
? Real Estate Management and Development - We operate in real estate
management and development through our majority control of BMI and
LandWell. BMI provides utility services to certain industrial and
municipal customers and owns real property in
is engaged in efforts to develop certain land holdings for commercial,
industrial and residential purposes in Henderson, Nevada .
General
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, as amended.
Statements in this Quarterly Report that are not historical facts are
forward-looking in nature and represent management's beliefs and assumptions
based on currently available information. In some cases, you can identify
forward-looking statements by the use of words such as "believes," "intends,"
"may," "should," "could," "anticipates," "expects" or comparable terminology, or
by discussions of strategies or trends. Although we believe that the
expectations reflected in such forward-looking statements are reasonable, we do
not know if these expectations will be correct. Such statements by their nature
involve substantial risks and uncertainties that could significantly impact
expected results. Actual future results could differ materially from those
predicted. The factors that could cause actual future results to differ
materially from those described herein are the risks and uncertainties discussed
in this Quarterly Report and those described from time to time in our other
filings with the SEC and include, but are not limited to, the following:
• Future supply and demand for our products;
• The extent of the dependence of certain of our businesses on certain
market sectors;
• The cyclicality of certain of our businesses (such as Kronos' TiO2
operations);
• Customer and producer inventory levels;
• Unexpected or earlier-than-expected industry capacity expansion (such as
the TiO2 industry);
• Changes in raw material and other operating costs (such as ore, zinc,
brass, aluminum, steel and energy costs);
• Changes in the availability of raw materials (such as ore);
• General global economic and political conditions that harm the worldwide
economy, disrupt our supply chain, increase material costs, reduce demand
or perceived demand for TiO2, component products and land held for
development or impair our ability to operate our facilities (including
changes in the level of gross domestic product in various regions of the
world, natural disasters, terrorist acts, global conflicts and public
health crises such as COVID-19);
• Competitive products and substitute products;
• Customer and competitor strategies;
• Potential difficulties in integrating future acquisitions;
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• Potential difficulties in upgrading or implementing accounting and
manufacturing software systems;
• Potential consolidation of our competitors;
• Potential consolidation of our customers;
• The impact of pricing and production decisions;
• Competitive technology positions;
• Our ability to protect or defend intellectual property rights;
• The introduction of trade barriers or trade disputes;
• The ability of our subsidiaries to pay us dividends;
• The impact of current or future government regulations (including
employee healthcare benefit related regulations);
• Uncertainties associated with new product development and the development
of new product features;
• Fluctuations in currency exchange rates (such as changes in the exchange
rate between the
and the Canadian dollar and between the euro and the Norwegian krone) or
possible disruptions to our business resulting from uncertainties
associated with the euro or other currencies;
• Operating interruptions (including, but not limited to, labor disputes,
leaks, natural disasters, fires, explosions, unscheduled or unplanned
downtime, transportation interruptions, cyber-attacks and public health
crises such as COVID-19);
• Decisions to sell operating assets other than in the ordinary course of
business;
• The timing and amounts of insurance recoveries;
• Our ability to renew, amend, refinance or establish credit facilities;
• Our ability to maintain sufficient liquidity;
• The ultimate outcome of income tax audits, tax settlement initiatives or
other tax matters, including future tax reform;
• Our ability to utilize income tax attributes, the benefits of which may
or may not have been recognized under the more-likely-than-not
recognition criteria;
• Environmental matters (such as those requiring compliance with emission
and discharge standards for existing and new facilities, or new
developments regarding environmental remediation at sites related to our
former operations);
• Government laws and regulations and possible changes therein (such as
changes in government regulations which might impose various obligations
on former manufacturers of lead pigment and lead-based paint, including
such products) including new environmental health and safety regulations
such as those seeking to limit or classify TiO2 or its use;
• The ultimate resolution of pending litigation (such as
and environmental matters);
• Our ability to comply with covenants contained in our revolving bank
credit facilities;
• Our ability to complete and comply with the conditions of our licenses
and permits;
• Changes in real estate values and construction costs in
• Water levels inLake Mead ; and • Possible future litigation.
Should one or more of these risks materialize (or the consequences of such development worsen), or should the underlying assumptions prove incorrect, actual results could differ materially from those currently forecasted or expected. We disclaim any intention or obligation to update or revise any forward-looking statement whether as a result of changes in information, future events or otherwise.
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--------------------------------------------------------------------------------Operations Overview
Quarter Ended
We reported net income attributable toValhi stockholders of$21.4 million or$.75 per diluted share in the second quarter of 2021 compared to a net loss of$9.1 million or$.32 per diluted share in the second quarter of 2020. As discussed more fully below, our net income attributable toValhi stockholders increased from 2020 to 2021 primarily due to:
? higher operating income from all of our segments in 2021 compared to 2020;
? decrease in income tax expense of$10.9 million in 2021; and
? the recognition of a gain on the sale of land not used in our operations
of
Our diluted net income per share in the second quarter of 2021 includes a gain
of
Six Months Ended
We reported net income attributable toValhi stockholders of$36.2 million or$1.27 per diluted share in the first six months of 2021 compared to$15.3 million or$.54 per diluted share in the first six months of 2020. As discussed more fully below, our net income attributable toValhi stockholders increased from 2020 to 2021 primarily due to the net effects of: ? higher operating income from our Chemicals and Component Products segments in 2021 compared to 2020;
? lower operating income from our
segment including income from tax increment infrastructure reimbursement
of $6.2 million in 2021 compared to $19.1 million in 2020;
? decrease in income tax expense of $14.3 million in 2021; and
? the recognition of a gain on the sale of land not used in our operations
of
Our diluted net income per share in the first six months of 2021 includes:
? income of
reimbursement; and
? a gain of $.15 per share related to the sale of land.
Our diluted net income per share in the first six months of 2020 includes:
? income of
reimbursement; and
? a gain of
damage claim at our Chemicals Segment.
Current Forecast for 2021 -
We currently expect to report higher consolidated operating income for 2021 as compared to 2020 primarily due to higher operating income from our Chemicals Segment and our Component Products Segment. Beginning in the second half of 2020 and continuing through the first six months of 2021, sales at each of our operating segments have improved from reduced levels experienced in the first half of 2020 resulting from the COVID-19 pandemic. We expect the improved demand experienced since late 2020 to continue for the remainder of 2021 and we expect our operating results to reflect the elevated demand. See additional discussion on expectations for each of our operating segments below.
Segment Operating Results - 2021 Compared to 2020 -
Chemicals -
We consider TiO2 to be a "quality of life" product, with demand affected by
gross domestic product, or GDP, and overall economic conditions in our markets
located in various regions of the world. Over the long-term, we expect demand
for TiO2 to be consistent with our expectations for the long-term growth in GDP.
However, even if our Chemicals Segment and its competitors maintain consistent
shares of the worldwide market, demand for TiO2 in any interim or annual period
may not change in the same proportion as the change in GDP, in part due to
relative changes in the TiO2 inventory levels of our Chemicals Segment's
customers. We believe that our Chemicals Segment's customers' inventory levels
are influenced in part by their expectations for future changes in market TiO2
selling prices as well as their expectations for future availability of product.
Although certain of our Chemicals Segment's TiO2 grades 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.
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The factors having the most impact on our Chemicals Segment's reported operating results are:
• TiO2 selling prices, • our Chemicals Segment's TiO2 sales and production volumes,
• manufacturing costs, particularly raw materials such as third-party
feedstock, maintenance and energy-related expenses, and
• currency exchange rates (particularly the exchange rates for the U.S.
dollar relative to the euro, the Norwegian krone and the Canadian dollar
and the euro relative to the Norwegian krone).
Key performance indicators are our Chemicals Segment's TiO2 average selling
prices, the level of TiO2 sales and production volumes, and the cost of our
Chemicals Segment's third-party feedstock. TiO2 selling prices generally follow
industry trends and prices will increase or decrease generally as a result of
competitive market pressures.
Three months ended June 30, Six months ended June 30,
2020 2021 % Change 2020 2021 % Change
(Dollars in millions) (Dollars in millions)Net sales$ 386.0 $ 478.6 24 %$ 807.0 $ 943.6 17 % Cost of sales 291.1 369.9 27 624.5 739.6 18 Gross margin$ 94.9 $ 108.7 15$ 182.5 $ 204.0 12 Operating income$ 35.9 $ 47.4 32$ 82.7 $ 85.1 3 Percent of net sales: Cost of sales 75 % 77 % 77 % 78 % Gross margin 25 23 23 22 Operating income 9 10 10 9 TiO2 operating statistics: Sales volumes* 124 144 16 % 260 285 9 % Production volumes* 133 137 2 % 265 267 1 %
Percent change in net sales: TiO2 sales volumes 16 % 9 % TiO2 product pricing 3 1 TiO2 product mix/other (1 ) 2 Changes in currency exchange rates 6 5 Total 24 % 17 %
* Thousands of metric tons
Current Industry Conditions - Our Chemicals Segment started 2021 with average
TiO2 selling prices 3% lower than at the beginning of 2020. Average TiO2 selling
prices were 3% higher in the second quarter of 2021 as compared to the second
quarter of 2020 and 1% higher in the first six months of 2021 as compared to the
first six months of 2020. Average TiO2 selling prices at the end of the second
quarter of 2021 were 4% higher than the end of 2020. Our Chemicals Segment
experienced higher sales volumes in all major markets in the first six months of
2021 as compared to the same period of 2020 primarily due to the COVID-19
related demand contraction in 2020 which was most acute in the second quarter of
2020.
Our Chemicals Segment operated its production facilities at overall average
capacity utilization rates of 99% in the first six months of 2021 compared to
95% in the first six months of 2020. Our Chemicals Segment's TiO2 production
volumes were higher in the first six months of 2021 as compared to the first six
months of 2020 due to higher anticipated demand and corresponding adjustments to
planned production levels in 2020 as a result of the COVID-19 pandemic.
Production Capacity Utilization Rates
2020 2021
First quarter 95% 97%
Second quarter 96% 100%
Net Sales - Our Chemicals Segment's net sales in the second quarter of 2021
increased 24%, or $92.6 million , compared to the second quarter of 2020
primarily due to a 16% increase in sales volumes (which increased net sales by
approximately $62 million ), and a 3% increase in average TiO2 selling prices
(which increased net sales by approximately $12 million ). In addition to the
impact of
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-------------------------------------------------------------------------------- higher sales volumes and higher average selling prices, we estimate that changes in currency exchange rates (primarily the euro) increased our Chemicals Segment's net sales by approximately$22 million in the second quarter of 2021 as compared to the second quarter of 2020. TiO2 selling prices will increase or decrease generally as a result of competitive market pressures, changes in the relative level of supply and demand as well as changes in raw material and other manufacturing costs. Our Chemicals Segment's sales volumes increased 16% in the second quarter of 2021 as compared to the second quarter of 2020 due to higher demand in all its major markets resulting from overall improvements in global economic activity in 2021 compared to the same period in 2020 when negative economic effects from the COVID-19 pandemic had the most significant impact. Our Chemicals Segment's net sales in the first six months of 2021 increased 17%, or$136.6 million , compared to the first six months of 2020 primarily due to a 9% increase in sales volumes (which increased net sales by approximately$73 million ) and a 1% increase in average TiO2 selling prices (which increased net sales by approximately$8 million ). In addition to the impact of higher sales volumes and higher average selling prices, we estimate that changes in currency exchange rates (primarily the euro) increased our Chemicals Segment's net sales by approximately$42 million in the first six months of 2021 as compared to the first six months of 2020. Our Chemicals Segment's sales volumes increased 9% in the first six months of 2021 as compared to the first six months of 2020 primarily due to higher sales volumes in all major markets, with a significant portion of the increase occurring in the second quarter as a result of the impact of COVID-19 on the comparable period in 2020, as discussed above. Cost of Sales and Gross Margin - Our Chemicals Segment's cost of sales increased 27% in the second quarter of 2021 compared to the second quarter of 2020 due to a 16% increase in sales volumes and higher production costs of approximately$15 million (including higher costs for raw materials and energy). Our Chemicals Segment's cost of sales as a percentage of net sales increased to 77% in the second quarter of 2021 compared to 75% in the same period of 2020 primarily due to the unfavorable effects of higher raw materials and other production costs, as discussed above. Our Chemicals Segment's gross margin as a percentage of net sales decreased to 23% in the second quarter of 2021 compared to 25% in the second quarter of 2020. As discussed and quantified above, our Chemicals Segment's gross margin as a percentage of net sales decreased primarily due to the net effects of higher raw materials and other production costs partially offset by higher sales volumes and higher average TiO2 selling prices. Our Chemicals Segment's cost of sales increased 18% in the first six months of 2021 compared to the first six months of 2020 due to a 9% increase in sales volumes and higher production costs (including higher costs for raw materials and energy) and the effects of currency fluctuations (primarily the euro). Our Chemicals Segment's cost of sales as a percentage of net sales increased to 78% in the first six months of 2021 compared to 77% in the same period of 2020 primarily due to the unfavorable effects of currency fluctuations, as discussed below. Our Chemicals Segment's gross margin as a percentage of net sales decreased to 22% in the first six months of 2021 compared to 23% in the first six months of 2020. As discussed and quantified above, our Chemicals Segment's gross margin as a percentage of net sales decreased primarily due to the net effects of higher sales volumes, higher raw materials and other production costs and fluctuations in currency exchange rates. Operating Income - Our Chemicals Segment's operating income increased by$11.5 million , or 32%, in the second quarter of 2021 compared to the second quarter of 2020. Operating income as a percentage of net sales increased to 10% in the second quarter of 2021 from 9% in the same period of 2020. Changes in currency exchange rates had a nominal effect on operating income in the second quarter of 2021 as compared to the same period in 2020, as discussed in the Currency Exchange Rates section below. Our Chemicals Segment's operating income increased by$2.4 million , or 3% in the first six months of 2021 compared to the first six months of 2020. Operating income as a percentage of net sales decreased to 9% in the first six months of 2021 from 10% in the same period of 2020. This decrease was driven by the lower gross margin discussed above. We estimate that changes in currency exchange rates decreased our Chemicals Segment's operating income by approximately$17 million in the first six months of 2021 as compared to the same period in 2020. Our Chemicals Segment's operating income is net of amortization of purchase accounting adjustments made in conjunction with our acquisitions of interests inNL and Kronos. As a result, we recognize additional depreciation expense above the amounts Kronos reports separately, substantially all of which is included within cost of sales. We recognized additional depreciation expense of$.7 million in the first six months of 2021 and$1.5 million in the same period of 2020, which reduced our reported Chemicals Segment's operating income as compared to amounts reported by Kronos. Currency Exchange Rates - Our Chemicals Segment has substantial operations and assets located outsidethe United States (primarily inGermany ,Belgium ,Norway andCanada ). The majority of our Chemicals Segment's sales from non-U.S. operations are - 26 - -------------------------------------------------------------------------------- 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 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 and administrative costs are incurred 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 Chemicals Segment's non-U.S. operations also generate currency transaction gains and losses which primarily relate to (i) the difference between the currency exchange rates in effect when non-local currency sales or operating costs (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 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 the reported amounts of our Chemicals Segment's sales and operating income for the periods indicated.
Impact of changes in currency exchange rates
Three months ended June 30, 2021 vs June 30, 2020
Translation Total
gains (losses)- currency
Transaction gains (losses) recognized impact of impact
2020 2021 Change rate changes 2021 vs 2020
(In millions)
Impact on:
Net sales $ - $ - $ - $ 22 $ 22
Operating income (6 ) 1 7 (8 ) (1 )
The $22 million increase in our Chemicals Segment's net sales (translation gain)
was caused primarily by a weakening of the U.S. dollar relative to the euro, as
our euro-denominated sales were translated into more U.S. dollars in 2021 as
compared to 2020. The weakening of the U.S. dollar relative to the Canadian
dollar and the Norwegian krone in 2021 did not have a significant effect on the
reported amount of our Chemicals Segment's net sales, as a substantial portion
of the sales generated by our Chemicals Segment's Canadian and Norwegian
operations is denominated in the U.S. dollar.
The
• Lower net currency transaction losses of approximately $7 million
primarily caused by relative changes in currency exchange rates at each
applicable balance sheet date between the U.S. dollar and the euro,
Canadian dollar and the Norwegian krone, and between the euro and 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 non-U.S.
operations, and
• Approximately
caused by a weakening of the U.S. dollar relative to the Canadian dollar
and the Norwegian krone, as local currency-denominated operating costs
were translated into more U.S. dollars in 2021 as compared to 2020,partially offset by net currency translation gains primarily caused by a
weakening of the
of the weaker
unfavorable effects of euro-denominated operating costs being translated
into more U.S. dollars in 2021 as compared to 2020.
Impact of changes in currency exchange rates
Six months ended June 30, 2021 vs June 30, 2020
Translation Total
gains (losses) - currency
Transaction gains recognized impact of impact
2020 2021 Change rate changes 2021 vs 2020
(In millions)
Impact on:
Net sales $ - $ - $ - $ 42 $ 42
Operating income 6 - (6 ) (11 ) (17 )
The $42 million increase in our Chemicals Segment's net sales (translation gain)
was caused primarily by a weakening of the U.S. dollar relative to the euro, as
our euro-denominated sales were translated into more U.S. dollars in 2021 as
compared to 2020. The weakening of the U.S. dollar relative to the Canadian
dollar and the Norwegian krone in 2021 did not have a significant effect on the
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reported amount of our Chemicals Segment's net sales, as a substantial portion
of the sales generated by our Chemicals Segment's Canadian and Norwegian
operations are denominated in the
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 non-U.S.
operations, and
• Approximately
caused by the weakening of the
dollar and Norwegian krone, as local currency-denominated operating costs
were translated into more
partially offset by net currency translation gains primarily caused by a
weakening of the
of the weaker
sales more than offset the unfavorable effects of euro-denominated
operating costs being translated into more U.S. dollars in 2021 as
compared to 2020.
Outlook - Beginning in the second half of 2020 and continuing through the first
six months of 2021, our Chemicals Segment's sales volumes have increased from
reduced levels experienced in the first half of 2020 resulting from the COVID-19
pandemic. Our Chemicals Segment increased production volumes in late 2020 to
correspond to increasing demand and has continued to maintain these increased
production volumes through the first six months of 2021. At the beginning of
2021, our Chemicals Segment's average TiO2 selling prices were 3% lower than at
the beginning of 2020 but average selling prices increased 4% during the first
six months of 2021.
Based on current market conditions, we expect global demand for consumer
products, including those of our Chemicals Segment's customers, to remain strong
throughout the remainder of 2021 and we expect that our Chemicals Segment's
sales and production volumes will reflect the elevated demand. As global
economic activity continues to recover, our Chemicals Segment has experienced
certain disruptions in global supply chains including availability of
third-party feedstock and other raw materials along with transportation and
logistics delays. Thus far the Chemicals Segment's operations team has been able
to manage through these disruptions with minimal impact on its operations;
however, our Chemicals Segment expects these challenges to continue for the
foreseeable future. In addition, our Chemicals Segment is experiencing
increasing production costs, including higher raw material costs and related
shipping costs and higher energy costs which are likely to continue through the
end of the year. Driven by increased customer demand and rising costs, we expect
sales prices for TiO2 will continue to rise throughout 2021, mitigating
increases in distribution, raw materials and other production costs. As such, we
expect our Chemical Segment's 2021 sales and income from operations will be
higher than in 2020, principally due to higher TiO2 sales prices and higher
sales volumes; however, our Chemicals Segment expects increasing costs to
continue to challenge margins. Our Chemicals Segment continues to monitor
current and anticipated near-term customer demand levels and will align its
production and inventories accordingly.
Our expectations for the TiO2 industry and our Chemicals Segment's operations
are based on a number of factors outside our control, including the ongoing
economic effects of the COVID-19 pandemic. As noted above, our Chemicals Segment
has experienced global supply chain disruptions, including disruptions related
to COVID-19, and future impacts of COVID-19 on its operations will depend on,
among other things, any future disruption in its operations or its suppliers'
operations and the timing and effectiveness of the global measures deployed to
fight COVID-19 and its variants, all of which remain uncertain and cannot be
predicted. Our Chemicals Segment's manufacturing and administrative facilities
are generally located in densely populated regions of Europe and North America
which have experienced substantial outbreaks of COVID-19 and some of which are
in varying stages of recovery while others are experiencing a resurgence of
outbreaks related to COVID-19 variants. Our Chemicals Segment continues to
employ a variety of methods to protect the health and well-being of its
workforce and its customers and has encouraged its employees to be vaccinated.
To-date, our Chemicals Segment has had limited cases of COVID-19 among its
workforce and all of its facilities have remained open and operational.
Component Products -
Our Component Products Segment's product offerings consist of a significantly large number of products that have a wide variation in selling price and manufacturing cost, which results in certain practical limitations on its ability to quantify the impact of changes in individual product sales quantities and selling prices on the segment's net sales, cost of sales and gross margin. The key performance indicator for our Component Products Segment is operating income and margins. In the second quarter of 2021 our Component Products Segment's operating income increased to$5.8 million compared to$2.4 million in the second quarter of 2020. Operating income for the first six months of 2021 was$11.6 million compared to$7.4 million in the first six months of 2020. The increase in our Component Products Segment's operating income in the second quarter and first six months of 2021 compared to the same periods in 2020 primarily resulted from higher sales for both its security products and - 28 - -------------------------------------------------------------------------------- marine components reporting units. Our Component Products Segment sustained the greatest negative operating impact from COVID-19 in the second quarter of 2020 which significantly impacts operating income comparisons across both periods. Beginning in the third quarter of 2020 and continuing through the second quarter of 2021, marine components experienced significant sales growth beyond its pre-pandemic levels. Security products sales generally improved sequentially since the third quarter of 2020, but did not recover to pre-pandemic levels until the second quarter of 2021 when sales improved in markets that had been slower to recover from the COVID-19 pandemic, particularly sales to distributors and the office furniture market. Three months ended June 30, Six months ended June 30, 2020 2021 % Change
2020 2021 % Change
(Dollars in millions) (Dollars in millions)
Net sales:
Security products $ 18.6 $ 27.6 49 % $ 44.0 $ 53.5 21 %
Marine components 5.2 8.7 66 12.1 18.7 55
Total net sales 23.8 36.3 52 56.1 72.2 29
Cost of sales 16.4 24.9 52 38.3 49.8 30
Gross margin $ 7.4 $ 11.4 53 $ 17.8 $ 22.4 26
Operating income $ 2.4 $ 5.8 143 $ 7.4 $ 11.6 57
Percent of net sales:
Cost of sales 69 % 69 % 68 % 69 %
Gross margin 31 31 32 31
Operating income 10 16 13 16
Net Sales - Our Component Products Segment's net sales increased $12.5 million
and $16.1 million in the second quarter and for the first six months of 2021,
respectively, compared to the same periods in 2020. The significant increase in
sales is primarily due to higher sales volumes for both security products and
marine components in the second quarter of 2021 as many of our Component
Products Segment's customers were temporarily closed or reduced production
during the second quarter of 2020 due to government ordered closures or reduced
demand resulting from the COVID-19 pandemic. Relative to prior year, security
products experienced $3.0 million higher sales to the government security
market, $2.5 million higher sales to the transportation market, and $1.7 million
higher sales to distribution customers during the quarter. Marine sales to the
towboat market were $2.4 million higher for the second quarter and $5.1 million
higher for the first six months of 2021 compared to the same periods in
2020. Relative changes in selling prices did not have a material impact on net
sales comparisons.
Costs of Sales and Gross Margin - Our Component Products Segment's cost of sales
and gross margin as a percentage of sales for the second quarter of 2021 were
comparable to the same period in 2020. Cost of sales as a percentage of net
sales for the first six months of 2021 was higher than the same period in 2020.
As a result, gross margin as a percentage of sales decreased over the same
period. The decrease in gross margin percentage in the first six months of 2021
is primarily due to higher production costs including increased labor and
shipping costs which more than offset the favorable impact of increased coverage
of fixed costs from higher production and sales volumes.
Operating Income - As a percentage of net sales, our Component Products
Segment's operating income for the second quarter and first six months of 2021
increased compared to the same periods of 2020 due to increased coverage of
selling, general and administrative expenses on higher sales, partially offset
by the factors impacting cost of sales and gross margin discussed above.
Outlook - Beginning in the second half of 2020, our Component Products Segment's
sales began to recover from the historically low levels it experienced during
the second quarter of 2020, with sales steadily improving for the remainder of
last year. Throughout the first half of 2021, our Component Products Segment has
experienced strong demand, particularly for marine components. During the second
quarter of 2021, its security products reporting unit began to see improved
demand from distributors and the office furniture market that had been slower to
recover. In the first half of 2021, our Component Products Segment's
manufacturing facilities operated at elevated production rates in-line with
improved demand, although labor markets are tight in each of the regions in
which it operates and, as a result, our Component Products Segment is facing
challenges maintaining staffing levels aligned with current and forecasted
demand, particularly at its marine components reporting unit.
Based on current market conditions, our Component Products Segment expects demand levels to remain strong for the remainder of 2021 and it expects to report increased sales and operating income in 2021 compared to 2020. Our Component Products Segment's supply chains remain intact, although the current global and domestic supply chain disruptions have resulted in challenges in sourcing certain raw materials due to increased lead times along with availability shortages and transportation and logistics delays.
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Thus far our Component Products Segment's operations team has been able to
manage through these disruptions with minimal impact on its operations. In
addition, our Component Products Segment is experiencing increased production
costs including higher labor and shipping costs and increasing costs on many of
the raw materials it uses. In response, our Component Products Segment began
implementing price increases in the second quarter of 2021; however, the extent
to which the price increases will mitigate the rising costs is uncertain and it
expects increasing production costs will continue to challenge gross margins for
the remainder of the year. Our Component Products Segment's operations teams
meet frequently to ensure they are taking appropriate actions to maintain a safe
working environment for all its employees, minimize material or supply related
operational disruptions, manage inventory levels and improve operating margins.
Our Component Products Segment's expectations for its operations and the markets
it serves are based on a number of factors outside its control, including the
ongoing economic effects of the COVID-19 pandemic. As noted above, there are
global and domestic supply chain challenges and any future impacts of COVID-19
on our Component Products Segment's operations will depend on, among other
things, any future disruption in its operations or its suppliers' operations,
demand for its products and the timing and effectiveness of the global measures
deployed to fight COVID-19, all of which remain uncertain and cannot be
predicted. The success and timing of these mitigating actions depends in part
on continued deployment of effective tools to fight COVID-19, including
effective treatments and vaccine distribution. In this regard, our Component
Products Segment encouraged its employees to receive a COVID-19 vaccine and
offered paid time off to hourly employees to facilitate participation.
Three months ended Six months ended
June 30, June 30,
2020 2021 2020 2021
(In millions)
Net sales:
Land sales $ 2.7 $ 8.5 $ 6.2 $ 15.1
Water delivery sales 2.1 1.5 4.0 2.5
Utility and other .4 .4 1.0 .9
Total net sales 5.2 10.4 11.2 18.5
Cost of sales 3.5 5.9 7.8 11.0
Gross margin $ 1.7 $ 4.5 $ 3.4 $ 7.5
Operating income $ 1.0 $ 2.4 $ 20.2 $ 10.2
General - Our Real Estate Management and Development Segment consists of BMI and
LandWell. BMI provides utility services, among other things, to an industrial
park located in Henderson, Nevada , and is responsible for the delivery of water
to the City of Henderson and various other users through a water distribution
system owned by BMI. LandWell is actively engaged in efforts to develop certain
real estate in Henderson, Nevada including approximately 2,100 acres zoned for
residential/planned community purposes and approximately 400 acres zoned for
commercial and light industrial use.
Beginning in December 2013 and through the first six months of 2021, LandWell
has closed or entered into escrow on approximately 1,300 acres of the
residential/planned community and approximately 70 acres zoned for commercial
and light industrial use. Contracts for land sales are negotiated on an
individual basis and sales terms and prices will vary based on such factors as
location (including location within a planned community), expected development
work, and individual buyer needs. Although land may be under contract or in
escrow, in most instances buyers can cancel the escrow agreement with no
financial penalties until shortly before the closing date. Land sales may be
completed but we do not recognize revenue until we have satisfied the criteria
for revenue recognition set forth in ASC Topic 606. In some instances, we will
receive cash proceeds at the time the contract closes and record deferred
revenue for some or all of the cash amount received, with such deferred revenue
being recognized in subsequent periods. We expect our development work on the
residential/planned community to continue for 4 to 7 years although we may have
sold or transferred ownership of all of the land within the community prior to
development work completion.
Net Sales and Operating Income - A substantial portion of the net sales from our
Real Estate Management and Development Segment in the second quarter and first
six months of 2020 and 2021 consisted of revenues from land sales. As noted
above, we recognize revenue in our residential/planned community over time using
cost based input methods (previously known as percentage completion method) and
substantially all of the revenue we recognized in 2020 and 2021 was under this
method of revenue recognition. The contracts on these sales (both within the
planned community and otherwise) include approximately 1,000 acres of the
residential planned community and certain other acreage which closed in December
2013 and through the second quarter of 2021. Land sales revenues were higher in
the second quarter and first six months of 2021 as compared to the same periods
in 2020 primarily due to an increase in the
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amount of acreage sold in 2021 compared to 2020 and increased development
activity in the second quarter of 2021 compared to the same period of
2020. During the second quarter of 2020 we slowed infrastructure spending within
the residential planned community due to the uncertainty associated with the
COVID-19 pandemic. Cost of sales related to land sales revenues was $8.0 million
in the first six months of 2021 compared to $4.0 million in the first six months
of 2020. Operating income includes $6.2 million in the first six months of 2021
(all in the first quarter) and $19.1 million in the first six months of 2020
(all in the first quarter) of income related to the recognition of tax increment
reimbursement note receivables, as discussed in Note 11 to our Condensed
Consolidated Financial Statements.
The remainder of net sales and cost of sales related to this segment primarily relates to water delivery fees and expenses. We deliver water to several customers under long-term contracts.
Outlook - As a result of the COVID-19 pandemic, LandWell experienced a decline in land sales activity during the second quarter of 2020 and, as a result, LandWell reduced development spending where possible to align with expected residential builder output. Beginning in the second half of 2020 and continuing through the first six months of 2021, land sales activities increased, including increases in both the number of acres sold and the selling price per acre sold. In addition, almost 300 acres are under escrow agreements atJune 30, 2021 . In order to support increased sales activity, LandWell returned to more normalized infrastructure development spending in late 2020, and thus far in 2021 infrastructure activity has continued at a heavy pace to support the increase in acreage sold or entering escrow. Throughout the COVID-19 pandemic, LandWell has continued to actively develop and market land it manages, primarily to residential builders, for the residential/planned community inHenderson and 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 its employees and contractors including implementation of enhanced health and safety protocols. Based on current land sales activities, including current land sales in escrow, we expect the level of land sales in the near term to continue to be strong. As noted above, we cannot guarantee land held in escrow will close as currently scheduled because builders can generally cancel without financial penalty until shortly before scheduled closing. In addition, there are still several COVID-19 mitigation procedures in effect from theCity of Henderson and utility providers that, in some cases, add time to the typical permitting and mapping process required to be completed before the necessary approvals can be obtained to close a land sale. Under LandWell's development agreement with theCity of Henderson , the issuance of a specified number of housing permits requires LandWell to complete certain large infrastructure projects. LandWell has been required to begin several of these large projects in 2021 and, as a result, we expect land development costs to increase during 2021 as compared to 2020. Because these costs relate to the entirety of the residential/planned community, these costs are not part of the cost based inputs used to recognize revenue and therefore this spending will not correlate to revenue recognition but it is expected to be eligible for tax increment reimbursement.
General Corporate Items, Interest Expense, Income Taxes and Noncontrolling Interest - 2021 Compared to 2020
Gain on Land Sale - In the second quarter of 2021 we sold excess property not
used in our operations for net proceeds of approximately
Insurance Recoveries -
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 muchNL 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 15 to our Condensed Consolidated Financial Statements.
Kronos recognized
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 the 2020 Annual Report, 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 common stock, which are attributable to the noncontrolling interest of Kronos andNL , are reflected in our Condensed Consolidated Balance Sheet at fair value. Kronos andNL recognize unrealized gains or losses on these shares of our common stock in the determination of each of their respective net income or losses. Under the principles of consolidation we eliminate any gains or losses associated with our common stock to the extent of our proportional ownership interest in each subsidiary. We recognized a gain of$.9 million in the second quarter of 2021 compared to a loss of$.5 million in the same period of 2020 and a gain of$2.2 million in the first six months of 2021 compared to a loss of$2.9 million in the first six months of 2020 in our Condensed Consolidated Statements of Operations which represents the unrealized gain or loss in respect of these shares during such periods attributable to the noncontrolling interest of Kronos andNL .
Other General Corporate Items - Corporate expenses in the second quarter and first six months of 2021 were comparable to
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--------------------------------------------------------------------------------the same periods of 2020. Included in corporate expense are:
• litigation and related costs at NL of $.5 million in each of the second
quarters of 2021 and 2020 and $.8 million in the first six months of 2021
compared to $1.1 million in the first six months of 2020; and
• environmental remediation and related costs of
quarter of 2021 compared to nil in the second quarter of 2020 and
million in the first six months of 2021 compared to nil in the first six
months of 2020.
Overall, we currently expect that our net general corporate expenses in 2021 will be higher than 2020 primarily due to higher expected litigation and related costs and higher environmental remediation and related costs. The level of our litigation and related expenses varies from period to period depending upon, among other things, the number of cases in which we are currently involved, the nature of such cases and the current stage of such cases (e.g. discovery, pre-trial motions, trial or appeal, if applicable). See Note 15 to our Condensed Consolidated Financial Statements. If our current expectations regarding the number of cases in which we expect to be involved during 2021, or the nature of such cases, were to change, our corporate expenses could be higher than we currently estimate. Obligations for environmental remediation and related costs are difficult to assess and estimate, and it is possible that actual costs for environmental remediation and related costs will exceed accrued amounts or that costs will be incurred in the future for sites in which we cannot currently estimate the liability. If these events occur in 2021, our corporate expense could be higher than we currently estimate. In addition, we adjust our accruals for environmental remediation and related costs as further information becomes available to us or as circumstances change. Such further information or changed circumstances could result in an increase or reduction in our accrued environmental remediation and related costs. See Note 15 to our Condensed Consolidated Financial Statements. Interest Expense - Interest expense of$8.7 million in the second quarter of 2021 was comparable to interest expense of$8.8 million in the second quarter of 2020 and decreased to$17.3 million in the first six months of 2021 from$18.5 million in the first six months of 2020 primarily due to lower average interest rates and lower average balances on variable-rate indebtedness in 2021.
We expect interest expense will continue to be lower in the remainder of 2021 as compared to 2020 due to lower average balances.
Provision for Income Taxes - We recognized income tax expense of$10.3 million in the second quarter of 2021 compared to income tax expense of$21.2 million in the second quarter of 2020 and$18.3 million in the first six months of 2021 compared to$32.6 million in the first six months of 2020. The decrease in both periods is primarily due to higher amounts recognized for global intangible low-tax income (GILTI) in 2020 due to limitations on related deductions and tax credits and an increase in the valuation allowance in 2020 for the nondeductible amount of business interest expense carryforward not expected to be fully utilized under the more-likely-than-not recognition criteria. For interim financial reporting purposes, we apply an estimated annual effective tax rate in determining our provision for income taxes and in 2020 our estimated annual effective tax rate was significantly impacted due to the effects of GILTI and the increase to the valuation allowance relative to our earnings. Our earnings are subject to income tax in variousU.S. and non-U.S. jurisdictions, and the income tax rates applicable to the pre-tax earnings (losses) of our non-U.S. operations are generally higher than the income tax rates applicable to ourU.S. operations. Excluding the effect of any increase or decrease in our deferred income tax asset valuation allowance or changes in our reserve for uncertain tax positions, we would generally expect our overall effective tax rate to be higher than theU.S. federal statutory tax rate of 21% primarily because of our non-U.S. operations. We recognize deferred income taxes with respect to the excess of the financial reporting carrying amount over the income tax basis of our direct investment in Kronos common stock because the exemption under GAAP to avoid such recognition of deferred income taxes is not available to us. AtDecember 31, 2020 , we had recognized a deferred income tax liability with respect to our direct investment in Kronos of$35.5 million . There is a maximum amount (or cap) of such deferred income taxes we are required to recognize with respect to our direct investment in Kronos. The maximum amount of such deferred income tax liability we would be required to have recognized (the cap) is$155.4 million . During the first six months of 2021, we recognized a non-cash deferred income tax benefit with respect to our direct investment in Kronos of$.1 million for the decrease in the deferred income taxes required to be recognized with respect to the excess of the financial reporting carrying amount over the income tax basis of our direct investment in Kronos common stock, to the extent such reduction related to our equity in Kronos' net income during such period. We recognized a similar deferred income tax expense of$4.4 million in the first six months of 2020. A portion of the net change with respect to the excess of the financial reporting carrying amount over the income tax basis of our direct investment in Kronos common stock during such periods related to our equity in Kronos' other comprehensive income (loss) items, and the amounts allocated to other comprehensive income (loss) items includes amounts related to our equity in Kronos' other comprehensive income (loss) items.
See Note 12 to our Condensed Consolidated Financial Statements for a tabular reconciliation of our statutory income tax provision to our actual tax provision.
Noncontrolling Interest in Net Income of Subsidiaries - Noncontrolling interest
in operations of subsidiaries increased in 2021 compared to 2020 primarily due
to increased operating income at Kronos and CompX. See Note 13 to our Condensed
Consolidated Financial Statements.
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--------------------------------------------------------------------------------LIQUIDITY AND CAPITAL RESOURCES
Consolidated Cash Flows
Operating Activities -
Trends in cash flows from operating activities (excluding the impact of significant asset dispositions and relative changes in assets and liabilities) are generally similar to trends in our operating income. In addition to the impact of the operating, investing and financing cash flows discussed below, changes in the amount of cash, cash equivalents and restricted cash we report from period to period can be impacted by changes in currency exchange rates, since a portion of our cash, cash equivalents and restricted cash is held by our non-U.S. subsidiaries. Cash provided by operating activities was$76.7 million in the first six months of 2021 compared to cash provided by operating activities of$6.0 million in the first six months of 2020. This$70.7 million increase in cash provided was primarily due to the net effect of the following items:
• a
changes in receivables, inventories, payables and accrued liabilities in
the first six months of 2021; and
• higher net cash paid for income taxes in 2021 of
relative timing of payments (to provide COVID-19 related tax relief in
2020, certain tax payment deadlines were extended until the second half
of 2020 in the U.S. and Norway ).
Changes in working capital were affected by accounts receivable and inventory changes as shown below:
• Kronos' average days sales outstanding ("DSO") decreased from
the timing of collections.
• Kronos' average days sales in inventory ("DSI") decreased fromvolumes attributable to higher sales volumes and timing of raw material
shipments in the first six months of 2021 compared to 2020 while
production volumes were comparable.
• CompX's average DSO at June 30, 2021 increased from December 31, 2020 primarily as a result of relative changes in the timing of collections
but is consistent with prior year.
• CompX's average DSI at
to the record high inventory balances at
temporary pandemic related inventory build but is in-line with December
31, 2020.
For comparative purposes, we have also provided comparable prior period numbers
below.
December 31, June 30, December 31, June 30,
2019 2020 2020 2021
Kronos:
Days sales outstanding 71 days 71 days 68 days 64 days
Days sales in inventory 83 days 85 days 74 days 53 days
CompX:
Days sales outstanding 36 days 43 days 33 days 42 days
Days sales in inventory 81 days 121 days 75 days 73 days
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We do not have complete access to the cash flows of our majority-owned
subsidiaries, due in part to limitations contained in certain credit agreements
of our subsidiaries and because we do not own 100% of these subsidiaries. A
detail of our consolidated cash flows from operating activities is presented in
the table below. Intercompany dividends have been eliminated.
Six months ended
June 30,
2020 2021
(In millions)
Cash provided by (used in) operating activities:
Valhi exclusive of its subsidiaries $ 16.6 $ 39.9
Kronos 18.1 78.1
NL exclusive of its subsidiaries 8.9 14.2
CompX 4.4 3.6
BMI 7.2 14.0
LandWell (.9 ) 10.0
Tremont exclusive of its subsidiaries 4.6 11.3
Eliminations and other (52.9 ) (94.4 )
Total $ 6.0 $ 76.7
Investing Activities -
We spent
•$21.2 million in our Chemicals Segment; •$1.6 million in our Component Products Segment; and •$.7 million in ourReal Estate Management and Development Segment.
We had net proceeds from the sale of land not used in our operations of
Financing Activities -
During the six months ended
• repaid
million under Tremont's deferred payment obligation;
• paid aggregate quarterly dividends to Valhi stockholders of $.16 per
share ($4.5 million ); and
• CompX acquired shares of its Class A common stock for a purchase price of
The declaration and payment of future dividends, and the amount thereof, is discretionary and is dependent upon a number of factors including our current and future expected results of operations, financial condition, cash requirements for our businesses, contractual and other requirements and restrictions and other factors deemed relevant by our board of directors. The amount and timing of past dividends is not necessarily indicative of the amount or timing of any future dividends which might be paid. There are currently no contractual restrictions on the amount of dividends which we may pay. Distributions to noncontrolling interest in subsidiaries in the first six months of 2021 are comprised of CompX dividends paid to shareholders other thanNL and Kronos dividends paid to shareholders other than us andNL .
Outstanding Debt Obligations
At
•
with Contran which is due no earlier than
• €400 million aggregate outstanding on the KII 3.75% Senior Secured Notes
(
due in
•
unamortized debt issuance costs) due through September 2032 ;
• $13.9 million on LandWell's bank loan due in April 2036 ; and
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--------------------------------------------------------------------------------
• approximately$1.5 million of other indebtedness. OnApril 20, 2021 , Kronos entered into a new$225 million global revolving credit facility ("Global Revolver") which matures inApril 2026 . Kronos has no outstanding borrowings on the new Global Revolver atJune 30, 2021 and the full$225 million was available for borrowings thereunder. Kronos' Senior Secured Notes and its new Global Revolver contain a number of covenants and restrictions which, among other things, restrict its ability to incur or guarantee additional debt, incur liens, pay dividends or make other restricted payments, or merge or consolidate with, or sell or transfer substantially all of its assets to, another entity, and contain other provisions and restrictive covenants customary in lending transactions of these types. Kronos' credit agreements contain provisions which could result in the acceleration of indebtedness prior to their stated maturity for reasons other than defaults for failure to comply with typical financial or payment covenants. For example, the credit agreements allow the lender to accelerate the maturity of the indebtedness upon a change of control (as defined in the agreement) of the borrower. In addition, the credit agreements could result in the acceleration of all or a portion of the indebtedness following a sale of assets outside the ordinary course of business. The terms of all of our debt instruments outstanding atJune 30, 2021 are discussed in Note 9 to our 2020 Annual Report. See Note 6 to our Condensed Consolidated Financial Statements for discussion of the terms of Kronos' new Global Revolver. We were in compliance with all of our debt covenants atJune 30, 2021 . We believe we will be able to maintain compliance with the financial covenants contained in our credit facilities through their maturity.
Future Cash Requirements
Liquidity -
Our primary source of liquidity on an ongoing basis is our cash flows from operating activities and borrowings under various lines of credit and notes. We generally use these amounts to (i) fund capital expenditures, (ii) repay short-term indebtedness incurred primarily for working capital purposes and (iii) provide for the payment of dividends (including dividends paid to us by our subsidiaries) or treasury stock purchases. From time-to-time we will incur indebtedness, generally to (i) fund short-term working capital needs, (ii) refinance existing indebtedness, (iii) make investments in marketable and other securities (including the acquisition of securities issued by our subsidiaries and affiliates) or (iv) fund major capital expenditures or the acquisition of other assets outside the ordinary course of business. Occasionally we sell assets outside the ordinary course of business, and we generally use the proceeds to (i) repay existing indebtedness (including indebtedness which may have been collateralized by the assets sold), (ii) make investments in marketable and other securities, (iii) fund major capital expenditures or the acquisition of other assets outside the ordinary course of business or (iv) pay dividends. We routinely compare our liquidity requirements and alternative uses of capital against the estimated future cash flows we expect to receive from our subsidiaries, and the estimated sales value of those units. As a result of this process, we have in the past sought, and may in the future seek, to raise additional capital, refinance or restructure indebtedness, repurchase indebtedness in the market or otherwise, modify our dividend policies, consider the sale of our interests in our subsidiaries, affiliates, business units, marketable securities or other assets, or take a combination of these and other steps, to increase liquidity, reduce indebtedness and fund future activities. Such activities have in the past and may in the future involve related companies. From time to time, we and our subsidiaries may enter into intercompany loans as a cash management tool. Such notes are structured as revolving demand notes and pay and receive interest on terms we believe are generally more favorable than current debt and investment market rates. The companies that borrow under these notes have sufficient liquidity to repay the notes. All of these notes and related interest expense and income are eliminated in our Condensed Consolidated Financial Statements. We periodically evaluate acquisitions of interests in or combinations with companies (including our affiliates) that may or may not be engaged in businesses related to our current businesses. We intend to consider such acquisition activities in the future and, in connection with this activity, may consider issuing additional equity securities and increasing indebtedness. From time to time, we also evaluate the restructuring of ownership interests among our respective subsidiaries and related companies. We believe we will be able to comply with the financial covenants contained in our credit facilities through their maturities; however, if future operating results differ materially from our expectations we may be unable to maintain compliance. Based upon our expectations of our operating performance, and the anticipated demands on our cash resources, we expect to have sufficient liquidity to meet our short-term (defined as the twelve-month period endingJune 30, 2022 ) and long-term obligations (defined as the five-year period endingJune 30, 2026 ). If actual developments differ from our expectations, our liquidity could be adversely affected. - 35 -
-------------------------------------------------------------------------------- AtJune 30, 2021 , we had$77.3 million available for borrowing under our credit facility with Contran. Amounts available under this facility are at Contran's discretion. Kronos' new$225 million Global Revolver entered into inApril 2021 , which replaced Kronos' North American and European facilities, matures inApril 2026 and currently, the full$225 million is available for borrowing under this facility and Kronos could borrow all available amounts without violating its existing debt covenants. See Note 6 to our Condensed Consolidated Financial Statements. AtJune 30, 2021 , we had an aggregate of$576.8 million of restricted and unrestricted cash, cash equivalents and marketable securities, including$122.2 million held by our non-U.S. subsidiaries. A detail by entity is presented in the table below. Amount held outside Total U.S. (In millions) Kronos$ 370.2 $ 122.2 CompX 70.4 - NL exclusive of its subsidiaries 103.1
-
Tremont exclusive of its subsidiaries 8.8 - LandWell 9.3 - BMI 13.3 - Valhi exclusive of its subsidiaries 1.7
-
Total restricted and unrestricted cash, cash equivalents and marketable securities$ 576.8 $ 122.2
Capital Expenditures and Other -
We currently expect our aggregate capital expenditures for 2021 will be
approximately
•$85 million by our Chemicals Segment; •$4 million by our Component Products Segment; and •$4 million by ourReal Estate Management and Development Segment. Capital spending for 2021 is expected to be funded primarily through cash generated from operations and borrowing under existing credit facilities. Planned capital expenditures in 2021 at Kronos and CompX will primarily be to maintain and improve the cost-effectiveness of our facilities. It is possible we will delay planned capital projects based on market conditions.
Repurchases of Common Stock -
We, Kronos and CompX have programs to repurchase common stock from time to time as market conditions permit. These stock repurchase programs do not include specific price targets or timetables and may be suspended at any time. Depending on market conditions, these programs may be terminated prior to completion. Cash on hand will be used to acquire the shares, and repurchased shares will be added to treasury shares and cancelled.
At
Kronos' board of directors authorized the repurchase of up to 2.0 million shares of its common stock in open market transactions, including block purchases, or in privately-negotiated transactions at unspecified prices and over an unspecified period of time. Kronos may repurchase its common stock from time to time as market conditions permit. AtJune 30, 2021 , approximately 1.6 million shares are available for repurchase. CompX's board of directors authorized the repurchase of its Class A common stock in open market transactions, including block purchases, or in privately-negotiated transactions at unspecified prices and over an unspecified period of time. During the first six months of 2021, CompX acquired 50,000 shares of its Class A common stock in an open market purchase under such repurchase program for$.8 million . AtJune 30, 2021 , approximately .6 million shares were available for purchase under these authorizations.
Dividends -
Because our operations are conducted primarily through subsidiaries and affiliates, our long-term ability to meet parent company level corporate obligations is largely dependent on the receipt of dividends or other distributions from our subsidiaries and
- 36 -
--------------------------------------------------------------------------------
affiliates. Kronos paid a regular dividend of $.18 per share in each quarter of
2020. If Kronos were to pay its $.18 per share in each quarter of 2021 based on
the 58.0 million shares we held of Kronos common stock at June 30, 2021 , we
would receive aggregate annual regular dividends from Kronos of $41.8
million . NL paid a regular quarterly dividend of $.04 per share in 2020 for
which we received $6.5 million . In February 2021 the NL board of directors
approved a quarterly dividend of $.06 per share. If NL were to pay its $.06 per
share dividend in each quarter of 2021 based on the 40.4 million shares we hold
of NL common stock at June 30, 2021 , we would receive aggregate annual dividends
from NL of $9.7 million . BMI and LandWell pay cash dividends from time to time,
but the timing and amount of such dividends are uncertain. In this regard, we
received aggregate dividends from BMI and LandWell of $43.0 million in 2020 and
$15.9 million during the first six months of 2021. We do not know if we will
receive additional dividends from BMI and LandWell during 2021. All of our
ownership interest in CompX is held through our ownership in NL ; as such we do
not receive any dividends from CompX. Instead any dividend paid by CompX is paid
to NL .
Our subsidiaries have various credit agreements with unrelated third-party lenders which contain customary limitations on the payment of dividends; however, these restrictions in the past have not significantly impacted their ability to pay dividends.
Investment in our Subsidiaries and Affiliates and Other Acquisitions -
We have in the past, and may in the future, purchase the securities of our subsidiaries and affiliates or third parties in market or privately-negotiated transactions. We base our purchase decisions on a variety of factors, including an analysis of the optimal use of our capital, taking into account the market value of the securities and the relative value of expected returns on alternative investments. In connection with these activities, we may consider issuing additional equity securities or increasing our indebtedness. We may also evaluate the restructuring of ownership interests of our businesses among our subsidiaries and related companies. We generally do not guarantee any indebtedness or other obligations of our subsidiaries or affiliates. Our subsidiaries are not required to pay us dividends. If one or more of our subsidiaries were unable to maintain its current level of dividends, either due to restrictions contained in a credit agreement or to satisfy its liabilities or otherwise, our ability to service our liabilities or to pay dividends on our common stock could be adversely impacted. If this were to occur, we might consider reducing or eliminating our dividends or selling interests in subsidiaries or other assets. If we were required to liquidate assets to generate funds to satisfy our liabilities, we might be required to sell at less than what we believe is the long-term value of such assets. Prior to 2020, we entered into a$50 million revolving credit facility with a subsidiary ofNL secured with approximately 35.2 million shares of the common stock of Kronos held byNL's subsidiary as collateral. Outstanding borrowings under the credit facility bear interest at the prime rate plus 1.875% per annum, payable quarterly, with all amounts due onDecember 31, 2023 . The maximum principal amount which may be outstanding from time-to-time under the credit facility is limited to 50% of the value of the Kronos stock using the most recent closing price. The credit facility contains a number of covenants and restrictions which, among other things, restrictNL's subsidiary's ability to incur additional debt, incur liens, and merge or consolidate with, or sell or transfer substantially all ofNL's subsidiary's assets to, another entity, and requireNL's subsidiary to maintain a minimum specified level of consolidated net worth. Upon an event of default (as defined in the credit facility),Valhi will be entitled to terminate its commitment to make further loans toNL's subsidiary, declare the outstanding loans (with interest) immediately due and payable, and exercise its rights with respect to the collateral under the loan documents. Such collateral rights include, upon certain insolvency events with respect toNL's subsidiary orNL , the right to purchase all of the Kronos common stock at a purchase price equal to the aggregate market value, less amounts owing toValhi under the loan documents, and up to 50% of such purchase price may be paid byValhi in the form of an unsecured promissory note bearing interest at the prime rate plus 2.75% per annum, payable quarterly, with all amounts due no later than five years from the date of purchase, with the remainder of such purchase price payable in cash at the date of purchase. We also eliminate any such intercompany borrowings in our Condensed Consolidated Financial Statements. Prior to 2020NL's subsidiary borrowed$.5 million under this facility, no additional amounts have been borrowed since then, and$.5 million is outstanding under this facility atJune 30, 2021 . We eliminate any such intercompany borrowings in our Condensed Consolidated Financial Statements. We have an unsecured revolving demand promissory note with Kronos which, as amended, provides for borrowings from Kronos of up to$40 million . We eliminate any such intercompany borrowings in our Condensed Consolidated Financial Statements. The facility, as amended, is due on demand, but in any event no earlier thanDecember 31, 2022 . We had no borrowings from Kronos under this facility during the first six months of 2021, and there was no outstanding balance atJune 30, 2021 . We could borrow$40.0 million under our current intercompany facility with Kronos atJune 30, 2021 . Kronos' obligation to loan us money under this note is at Kronos' discretion. We also have an unsecured revolving demand promissory note with CompX which, as amended, provides for borrowings from CompX of up to$40 million . We eliminate any such intercompany borrowings in our Condensed Consolidated Financial Statements. The facility, as amended, is due on demand, but in any event no earlier thanDecember 31, 2022 . We had gross borrowings of$18.7 million and gross repayments of$22.2 million during the first six months of 2021, and$26.0 million was outstanding atJune 30, 2021 . We could borrow$14.0 million under our current intercompany facility with CompX atJune 30, 2021 . CompX's obligation to loan us money under this note is at CompX's discretion. - 37 - --------------------------------------------------------------------------------
Off-balance Sheet Financing
We do not have any off-balance sheet financing arrangements.
Commitments and Contingencies
There have been no material changes in our contractual obligations since we filed our 2020 Annual Report and we refer you to that report for a complete description of these commitments.
We are subject to certain commitments and contingencies, as more fully described in our 2020 Annual Report, or in Notes 12 and 15 to our Condensed Consolidated Financial Statements and in Part II, Item 1 of this Quarterly Report, including:
• certain income tax contingencies in various
• certain environmental remediation matters involvingNL and BMI;
• certain litigation related to
of lead pigment and lead-based paint; and
• certain other litigation to which we are a party.
In addition to such legal proceedings, various legislation and administrative
regulations have, from time to time, been proposed that seek to (i) impose
various obligations on present and former manufacturers of lead pigment and
lead-based paint (including NL ) with respect to asserted health concerns
associated with the use of such products and (ii) effectively overturn court
decisions in which NL and other pigment manufacturers have been successful.
Examples of such proposed legislation include bills which would permit civil
liability for damages on the basis of market share, rather than requiring
plaintiffs to prove that the defendant's product caused the alleged damage, and
bills which would revive actions barred by the statute of limitations. While no
legislation or regulations have been enacted to date that are expected to have a
material adverse effect on our consolidated financial position, results of
operations or liquidity, enactment of such legislation could have such an
effect.
Recent Accounting Pronouncements
Not applicable
Critical Accounting Policies
There have been no changes in the first six months of 2021 with respect to our
critical accounting policies presented in Management's Discussion and Analysis
of Financial Condition and Results of Operation in our 2020 Annual Report.
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