VALHI INC DE

Previous wording

We reported net income attributable to Valhi stockholders of $7.8 million or $.27 per diluted share in the first quarter of 2024 compared to a net loss attributable to Valhi stockholders of $4.9 million or $.17 per diluted share in the first quarter of 2023. As discussed more fully below, our net income attributable to Valhi stockholders increased from 2023 to 2024 primarily due to higher operating income from our Chemicals Segment partially offset by lower operating income from our Component Products Segment and our Real Estate Management and Development Segment.

Current wording

We reported net income attributable to Valhi stockholders of $19.9 million or $.70 per diluted share in the second quarter of 2024 compared to a net loss attributable to Valhi stockholders of $3.2 million or $.11 per diluted share in the second quarter of 2023. As discussed more fully below, our net income attributable to Valhi stockholders increased from 2023 to 2024 primarily due to the net effects of:

Previous wording

Our diluted net loss per share in the first quarter of 2023 includes a gain of $.03 per share related to a business interruption insurance claim arising from Hurricane Laura in 2020 at our Chemicals Segment.

Current wording

Our diluted net loss per share in the second quarter of 2023 includes:

Previous wording

Our diluted net income per share in the first quarter of 2024 includes an aggregate charge of $.03 per share related to a write-off of deferred financing costs at our Chemicals Segment.

Current wording

Our diluted net income per share in 2024 includes an aggregate charge of $.03 per share related to a write-off of deferred financing costs at our Chemicals Segment.

Previous wording

Current Industry Conditions– Our Chemicals Segment and the TiO 2 industry experienced an extended period of significantly reduced demand across all major markets which was reflected in its sales volumes in the first quarter of and throughout 2023. Although overall demand remains below average historical levels, demand has improved in the first quarter of 2024 in all major markets. Our Chemicals Segment started 2024 with average TiO 2 selling prices 13% lower than at the beginning of 2023 and its average TiO 2 selling prices declined 2% during the first quarter of 2024. Our Chemicals Segment’s average TiO 2 selling prices in the first three months of 2024 were 11% lower than average prices during the first three months of 2023.

Current wording

Current Industry Conditions– Our Chemicals Segment and the TiO 2 industry experienced an extended period of significantly reduced demand across all major markets which was reflected in its sales volumes throughout 2023. Although overall demand remains below average historical levels, demand has improved in the first six months of 2024 in all major markets. Our Chemicals Segment started 2024 with average TiO 2 selling prices 13% lower than at the beginning of 2023 and its average TiO 2 selling prices have remained stable during the first six months of 2024. Our Chemicals Segment’s average TiO 2 selling prices in the first six months of 2024 were 9% lower than average prices during the first six months of 2023.

Previous wording

Our Chemicals Segment operated its production facilities at 76% of practical capacity utilization in the first three months of 2023 in response to decreased demand and higher production costs. As a result of increased demand experienced in the fourth quarter of 2023 and first quarter of 2024, along with more favorable production costs, our Chemicals Segment began increasing its production rates during the first quarter of 2024 resulting in 87% of practical capacity utilization in the first three months of 2024.

Current wording

Our Chemicals Segment operated its production facilities at 70% of practical capacity utilization in the first six months of 2023 in response to decreased demand and higher production costs. As a result of increased demand experienced in the fourth quarter of 2023 and first half of 2024, along with more favorable production costs, our Chemicals Segment began increasing its production rates during

Previous wording

Excluding the effect of changes in currency exchange rates, our Chemicals Segment’s cost of sales per metric ton of TiO 2 sold in the first three months of 2024 was significantly lower as compared to the comparable period in 2023 primarily due to significant decreases in per metric ton production costs (primarily feedstock and unabsorbed fixed costs due to reduced operating rates in 2023).

Current wording

Excluding the effect of changes in currency exchange rates, our Chemicals Segment’s cost of sales per metric ton of TiO 2 sold in the first six months of 2024 was significantly lower as compared to the comparable period in 2023 primarily due to significant decreases in per metric ton production costs (primarily feedstock, energy and unabsorbed fixed costs resulting from reduced operating rates in 2023).

Previous wording

In response to the extended period of reduced demand in 2023, discussed above, our Chemicals Segment took measures to reduce its operating costs and improve its long-term cost structure such as the implementation of certain voluntary and involuntary workforce reductions during the third quarter of 2023 that primarily impacted its European operations. A substantial portion of our Chemicals Segment’s workforce reductions were accomplished through voluntary programs, for which eligible workforce reduction costs are recognized at the timeboth the employee and employer are irrevocably committed to the terms of the sepa ration. These work force reductions impacted approximately 100 employees. Our Chemicals Segment recognized a total of approximately $6 million in chargesprimarily in the fourth quarter of 2023 related to workforce reductions it implemented during thesecond half of the year with the majo rityof related cash payments expected to be paid in the first half of 2024.

Current wording

In response to the extended period of reduced demand in 2023, discussed above, our Chemicals Segment took measures to reduce its operating costs and improve its long-term cost structure such as the implementation of certain voluntary and involuntary workforce reductions during the third quarter of 2023 that primarily impacted its European operations. A substantial portion of our Chemicals Segment’s workforce reductions were accomplished through voluntary programs, for which eligible workforce reduction costs are recognized at the timeboth the employee and employer are irrevocably committed to the terms of the sepa ration. These work force reductions impacted approximately 100 employees. Our Chemicals Segment recognized a total of approximately $6 million in chargesprimarily in the fourth quarter of 2023 related to workforce reductions it implemented during thesecond half of the year. The majo rityof related cash payments will be paid in 2024.

Previous wording

In April 2024, our Chemicals Segment announced plans to close its sulfate process line at its plant in Varennes, Canada by the third quarter of 2024. Our Chemicals Segment expects to recognize a charge of approximately $2 million primarily to cost of sales in the second quarter of 2024 related to workforce reductions for employees impacted. In addition, approximately $15 million in non-cash charges related to the closure of the line are expected to be reflected in cost of sales in the second and third quarters of 2024.

Current wording

In April 2024, our Chemicals Segment announced plans to close its sulfate process line at its plant in Varennes, Canada by the end of the third quarter of 2024. As a result of the sulfate process line closure, our Chemicals Segment recognized a charge of approximately $2 million to cost of sales in the second quarter of 2024 related to workforce reductions for employees impacted. In addition, approximately $10 million in non-cash charges primarily related to accelerated depreciation are reflected in cost of sales in the second quarter of 2024 with approximately $5 million in additional non-cash charges related to accelerated depreciation expected to be recognized in the third quarter of 2024.

Previous wording

Net Sales– Our Chemicals Segment’s net sales in the first quarter of 2024 increased 12%, or $52.5 million, compared to the first quarter of 2023 primarily due to the net effects of a 28% increase in sales volumes (which increased net sales by approximately $119 million) and an 11% decrease in average TiO 2 selling prices (which decreased net sales by approximately $47 million). In addition to the impact of sales volumes and average TiO 2 selling prices, our Chemicals Segment estimates that changes in currency exchange rates (primarily the euro) increased its net sales by approximately $4 million in the first quarter of 2024 as compared to the first quarter of 2023. TiO 2 selling prices will increase or decrease generally as a result of competitive market pressures, changes in the relative level of supply and demand as well as changes in raw material and other manufacturing costs.

Current wording

Net Sales– Our Chemicals Segment’s net sales in the second quarter of 2024 increased 13%, or $57.3 million, compared to the second quarter of 2023 primarily due to the net effects of a 29% increase in sales volumes (which increased net sales by approximately $129 million) and an 8% decrease in average TiO 2 selling prices (which decreased net sales by approximately $35 million). In addition to the impact of sales volumes and average TiO 2 selling prices, our Chemicals Segment estimates that changes in currency exchange rates (primarily the euro) increased its net sales by approximately $2 million in the second quarter of 2024 as compared to the second quarter of 2023. TiO 2 selling prices will increase or decrease generally as a result of competitive market pressures, changes in the relative level of supply and demand as well as changes in raw material and other manufacturing costs.

Previous wording

Our Chemicals Segment’s sales volumes increased 28% in the first quarter of 2024 as compared to the first quarter of 2023 due to higher overall demand across all major markets.

Current wording

Our Chemicals Segment’s sales volumes increased 29% in the second quarter of 2024 as compared to the second quarter of 2023 due to higher overall demand across all major markets.

Previous wording

Cost of Sales and Gross Margin– Our Chemicals Segment’s cost of sales increased $12.1 million, or 3%, in the first quarter of 2024 compared to the first quarter of 2023 due to the net effects of a 28% increase in sales volumes, a 15% increase in production volumes (in responseto improved near-term customer demand) somewhat offset by lower production costs of approximately $64 million (primarily energy and raw materials). Our Chemicals Segment’s unabsorbed fixed production costs decreased $10 million from $22 million in the first quarter of 2023 to $12 million in the first quarter of 2024.

Current wording

Cost of Sales and Gross Margin– Our Chemicals Segment’s cost of sales increased by $1.3 million in the second quarter of 2024 compared to the second quarter of 2023 due to the net effects of a 29% increase in sales volumes, higher plant utilization rates (99% in the second quarter of 2024 compared to 64% in the second quarter of 2023), and lower production costs of approximately $20 million (primarily energy and raw materials). Cost of sales in the second quarter of 2024 includes a charge of approximately $2 million

Previous wording

Our Chemicals Segment’s cost of sales as a percentage of net sales improved to 85% in the first quarter of 2024 compared to 93% in the same period of 2023 primarily due to the favorable effects of lower production costs and higher production volumes resulting in increased coverage of fixed production costs.

Current wording

Our Chemicals Segment’s cost of sales as a percentage of net sales improved to 80% in the second quarter of 2024 compared to 90% in the same period of 2023 primarily due to the favorable effects of lower production costs and higher production volumes resulting in increased coverage of fixed production costs.

Previous wording

Our Chemicals Segment’s gross margin as a percentage of net sales increased to 15% in the first quarter of 2024 compared to 7% in the first quarter of 2023. As discussed and quantified above, our Chemicals Segment’s gross margin as a percentage of net sales increased primarily due to lower production costs and higher production and sales volumes, somewhat offset by lower average TiO 2 selling prices.

Current wording

Our Chemicals Segment’s gross margin as a percentage of net sales increased to 20% in the second quarter of 2024 compared to 10% in the second quarter of 2023. As discussed and quantified above, our Chemicals Segment’s gross margin as a percentage of net sales increased primarily due to higher sales and production volumes and lower production costs, which were partially offset by lower average TiO 2 selling prices.

Previous wording

Operating Income (Loss)– Our Chemicals Segment had operating income of $22.8 million in the first quarter of 2024 compared to an operating loss of $15.1 million in the first quarter of 2023 as a result of the factors impacting gross margin discussed above. Our Chemicals Segment recognized a gain of $1.7 million in the first quarter of 2023 related to cash received from the settlement of a business interruption insurance claim. See Note 12 to our Condensed Consolidated Financial Statements. We estimate changes in currency exchange rates had a nominal effect on our Chemicals Segment’s operating income in the first quarter of 2024 as compared to the same period in 2023, as discussed in the Effects of currency exchange rates section below.

Current wording

Operating Income (Loss)– Our Chemicals Segment’s operating income increased by $43.1 million to $40.5 million in the second quarter of 2024 compared to an operating loss of $2.6 million in the second quarter of 2023 as a result of the factors impacting gross margin discussed above. Our Chemicals Segment recognized a gain of $.5 million in the second quarter of 2023 related to cash received from the settlement of a business interruption insurance claim. See Note 12 to our Condensed Consolidated Financial Statements. We estimate changes in currency exchange rates decreased our Chemicals Segment’s operating income by approximately $3 million in the second quarter of 2024 as compared to the same period in 2023, as discussed in the Effects of currency exchange rates section below.

Previous wording

Our Chemicals Segment’s operating income (loss) 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 $.6 million and $.3 million in the first three months of 2024 and 2023, respectively, which reduced our reported Chemicals Segment’s operating income as compared to amounts reported by Kronos.

Current wording

Our Chemicals Segment’s operating income (loss) is net of amortization of purchase accounting adjustments made in conjunction with our acquisitions of interests in NL and Kronos. As a result, we recognize additional depreciation expense above the amounts Kronos reports separately, substantially all of which is included within cost of sales. We recognized additional depreciation expense of $1.1 million and $.7 million in the first six months of 2024 and 2023, respectively, which reduced our reported Chemicals Segment’s operating income as compared to amounts reported by Kronos.

Previous wording

denominated in currencies other than the U.S. dollar, principally the euro, other major European currencies and the Canadian dollar. A portion of our Chemicals Segment’s sales generated from its non-U.S. operations is denominated in the U.S. dollar (and consequently our Chemicals Segment’s non-U.S. operations will generally hold U.S. dollars from time to time). Certain raw materials used in all our Chemicals Segment’s production facilities, primarily titanium-containing feedstocks, are purchased primarily in U.S. dollars, while labor and other production and administrative costs are incurred primarily in local currencies. Consequently, the translated U.S. dollar value of our Chemicals Segment’s non-U.S. sales and operating results are subject to currency exchange rate fluctuations which may favorably or unfavorably impact reported earnings and may affect the comparability of period-to-period operating results. In addition to the impact of the translation of sales and expenses over time, our Chemicals Segment’s non-U.S. operations also generate currency transaction gains and losses which primarily relate to (i) the difference between the currency exchange rates in effect when non-local currency sales or operating costs (primarily U.S. dollar denominated) are initially accrued and when such amounts are settled with the non-local currency, and (ii) changes in currency exchange rates during time periods when our Chemicals Segment’s non-U.S. operations are holding non-local currency (primarily U.S. dollars).

Current wording

Currency Exchange Rates– Our Chemicals Segment has substantial operations and assets located outside the United States (primarily in Germany, Belgium, Norway and Canada). The majority of our Chemicals Segment’s sales from non-U.S. operations are denominated in currencies other than the U.S. dollar, principally the euro, other major European currencies and the Canadian dollar. A portion of our Chemicals Segment’s sales generated from its non-U.S. operations is denominated in the U.S. dollar (and consequently our Chemicals Segment’s non-U.S. operations will generally hold U.S. dollars from time to time). Certain raw materials used in all our Chemicals Segment’s production facilities, primarily titanium-containing feedstocks, are purchased primarily in U.S. dollars, while labor and other production and administrative costs are incurred primarily in local currencies. Consequently, the translated U.S. dollar value of our Chemicals Segment’s non-U.S. sales and operating results are subject to currency exchange rate fluctuations which may favorably or unfavorably impact reported earnings and may affect the comparability of period-to-period operating results. In addition to the impact of the translation of sales and expenses over time, our Chemicals Segment’s non-U.S. operations also generate currency transaction gains and losses which primarily relate to (i) the difference between the currency exchange rates in effect when non-local currency sales or operating costs (primarily U.S. dollar denominated) are initially accrued and when such amounts are settled with the non-local currency, and (ii) changes in currency exchange rates during time periods when our Chemicals Segment’s non-U.S. operations are holding non-local currency (primarily U.S. dollars).

Previous wording

The $4 million increase in our Chemicals Segment’s net sales (translation gains) was caused primarily by a weakening of the U.S. dollar relative to the euro, as its euro-denominated sales were translated into more U.S. dollars in 2024 as compared to 2023. The strengthening of the U.S. dollar relative to the Norwegian krone in 2024 and the weakening of the U.S. dollar relative to the Canadian dollar in 2024 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.

Current wording

The $6 million increase in our Chemicals Segment’s net sales (translation gains) was caused primarily by a weakening of the U.S. dollar relative to the euro, as its euro-denominated sales were translated into more U.S. dollars in 2024 as compared to 2023. The weakening of the U.S. dollar relative to the Canadian dollar and strengthening of the U.S. dollar relative to the Norwegian krone in 2024 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.

Previous wording

Outlook – During the first quarter of 2024 our Chemicals Segment experienced improved customer demand across all major markets, although overall demand levels remain below historical averages. Based on the recently experienced improved demand and our Chemicals Segment’s expectation that demand will continue to improve in 2024, along with the severe demand contraction it experienced during most of 2023, our Chemicals Segment expects sales volumes in 2024 to exceed 2023 sales volumes. Our Chemicals Segment has increased production rates in line with the current and expected near-term improved demand and believes its production rates for the remainder of 2024 will continue to be higher than comparable periods in 2023. Our Chemicals Segment has implemented TiO 2 selling price increases which will need to be realized to achieve margins more in-line with historical levels.

Current wording

Outlook – During the second quarter of 2024, our Chemicals Segment’s customer demand continued to improve across all major markets, although overall demand levels remain below historical averages. Based on the recently improved demand and our Chemicals Segment’s expectation that demand will continue to improve in 2024, along with the severe demand contraction it experienced during most of 2023, our Chemicals Segment expects sales volumes in 2024 to exceed 2023 sales volumes. Our Chemicals Segment has increased production rates in line with the current and expected near-term improved demand and believes its production rates for the remainder of 2024 will continue to be higher than comparable periods in 2023. Our Chemicals Segment has implemented TiO 2 selling price increases which will need to continue to be realized to achieve margins more in-line with historical levels.

Previous wording

As noted above, throughout 2023 our Chemicals Segment implemented cost reduction initiatives designed to improve its long-term cost structure, including targeted workforce reductions and, in April 2024, our Chemicals Segment announced plans to close the sulfate process line at its facility in Canada which will further improve its gross margins after the charges (primarily non-cash) related to the closure are recognized in the second and third quarters. In addition, raw material, energy and other input costs have generally improved compared to 2023. The full positive impact of input cost improvements and our Chemicals Segment’s cost reduction efforts are not yet fully reflected in its gross margin. As our Chemicals Segment replaces the higher cost inventory produced towards the end of 2023 with lower cost inventory produced in 2024, coupled with the realization of TiO 2 selling price increases noted above, it expects gross margins to improve. Overall, due to expected improved demand, higher selling prices and lower production costs, including lower unabsorbed fixed costs, our Chemicals Segment expects to report higher operating results for the full year of 2024 as compared to 2023.

Current wording

Throughout 2023, our Chemicals Segment implemented cost reduction initiatives designed to improve its long-term cost structure, including targeted workforce reductions. In April 2024, our Chemicals Segment announced plans to optimize production of its purified grades, which will result in the closure of the sulfate process line at its facility in Canada, which will further improve gross margins after the charges (primarily non-cash) related to the closure are recognized including $12 million ($10 million non-cash) noted above in the second quarter and an additional $5 million non-cash charge expected to be recognized in the third quarter. Raw material, energy and other input costs have generally improved compared to 2023. While the full positive impact of input cost improvements and cost reduction efforts are not yet fully reflected in its gross margin, our Chemicals Segment began experiencing improved gross margins during the second quarter that it expects to build on over the remainder of the year as it replaces higher cost inventory with lower cost inventory produced in 2024. Overall, if our Chemicals Segment experiences improved demand, higher selling prices and lower production costs, including lower unabsorbed fixed costs, it expects to report higher operating results for the full year of 2024 as compared to 2023.

Previous wording

In the first quarter of 2024 our Component Products Segment’s operating income decreased to $3.7 million compared to $7.0 million in the first quarter of 2023. The decrease in operating income in the first quarter of 2024 compared to 2023 is primarily due to lower marine components sales and gross margin.

Current wording

Our Component Products Segment’s operating income in the second quarter of 2024 was $5.1 million compared to $4.4 million in the second quarter of 2023. The increase in operating income in the second quarter of 2024 compared to 2023 is due to higher security products sales and gross margin which more than offset lower marine components sales and gross margin. Operating income for the first six months of 2024 was $8.8 million compared to $11.4 million in the first six months of 2023. The decrease in operating income in the first six months of 2024 compared to 2023 is primarily due to lower marine components sales and gross margin partially offset by higher security products sales and higher security products gross margin in the second quarter of 2024 compared to the second quarter of 2023.

Previous wording

Net Sales– Our Component Products Segment’s net sales decreased $3.2 million in the first quarter of 2024 compared to the same period in 2023 due to lower marine components sales primarily to the towboat market, partially offset by higher security products sales to the government security market. Relative to the first quarter of 2023, security products sales were $1.8 million higher to the government security market. Relative to the first quarter of 2023, marine components sales were $4.3 million lower to the towboat market, $.7 million lower to the industrial market, $.3 million lower to the engine builder market and $.3 million lower to distributors.

Current wording

Net Sales– Our Component Products Segment’s net sales decreased $.7 million and $3.9 million in the second quarter and for the first six months of 2024, respectively, compared to the same periods in 2023 due to lower marine components sales primarily to the towboat market, partially offset by higher security products sales to the government security market. Relative to prior year, the increase in second quarter security products sales was primarily due to $2.8 million higher sales to the government security market partially offset by $.4 million lower sales to distributors. Relative to 2023, the increase in security products sales for the first six months of 2024 was primarily due to $4.6 million higher sales to the government security market partially offset by $.5 million lower sales to distributors. Relative to prior year, the decrease in second quarter marine components sales was primarily due to $3.1 million lower sales to the towboat market. Relative to 2023, the decrease in marine components sales for the first six months of 2024 was primarily due to $7.4 million lower sales to the towboat market, $.6 million lower sales to each the engine builder and industrial markets and $.5 million lower sales to distributors.

Previous wording

Cost of Sales and Gross Margin– Our Component Products Segment’s cost of sales as a percentage of net sales increased 6% in the first quarter of 2024 compared to the same period in 2023. As a result, gross margin as a percentage of net sales decreased over the same time period. Gross margin percentage decreased in the first quarter of 2024 compared to the same period in 2023 primarily due to lower gross margin percentages at both the security products and marine components reporting units. The security products reporting unit’s gross margin as a percentage of net sales decreased for the first quarter of 2024 compared to the same period in 2023 primarily due to the relative changes in fixed costs allocated to cost of sales during the quarter. Additionally, a less favorable customer and product mix in the first quarter of 2024 negatively impacted gross margin as a percentage of net sales over the comparable period. The marine components reporting unit’s gross margin as a percentage of net sales decreased in the first quarter of 2024 compared to the same period last year primarily due to higher cost inventory produced during the fourth quarter of 2023 and sold in the first quarter of 2024. Marine components inventory produced during the fourth quarter of 2023 had a higher carrying value due to higher production cost per unit as a result of lower production volumes. Additionally, gross margin was unfavorably impacted by decreased coverage of production costs on lower sales.

Current wording

Our Component Products Segment’s cost of sales as a percentage of sales increased 2% for the first six months of 2024 compared to the same period in 2023. As a result, gross margin as a percentage of sales declined over the same period. The decline in gross margin percentage for the six-month comparative period is primarily due to lower gross margin percentage at marine components, particularly in the first quarter of 2024, partially offset by higher gross margin percentage at security products in the second quarter of 2024. For the first six months of 2024, marine components gross margin as a percentage of net sales declined compared to the same period in 2023 primarily due to higher cost inventory produced during the fourth quarter of 2023 and sold in the first quarter of 2024 and decreased coverage of fixed costs as a result of lower sales, partially offset by a more favorable customer and product mix in the second quarter of 2024. Security products gross margin as a percentage of net sales for the first six months of 2024 increased as compared to the same period in 2023 primarily due to effects of higher sales and increased coverage of fixed costs and operating costs and expenses as a result of higher sales, partially offset by a less favorable customer and product mix and increased operating costs and expenses related to higher employee salaries and benefits.

Previous wording

Operating Income– As a percentage of net sales, our Component Products Segment’s operating income for the first quarter of 2024 decreased compared to the same period of 2023 and was primarily impacted by the factors impacting sales, cost of sales and gross margin discussed above.

Current wording

Operating Income– As a percentage of net sales, our Component Products Segment’s operating income for the second quarter and the first six months of 2024 compared to the same periods of 2023 was primarily impacted by the factors affecting sales, cost of sales and gross margin discussed above.

Previous wording

Outlook* –*In the first quarter of 2024, our Component Products Segment’s security products reporting unit benefitted from increased sales of mechanical locks to the government security market while the other markets it serves were relatively flat compared to the same period of 2023. At our Component Products Segment’s marine components reporting unit, the decline in sales to the towboat market as a result of the contraction in the recreational marine industry that began late in the first quarter of 2023 has continued. Our Component Products Segment is focused on aligning its resources with current demand levels, and particularly at its marine components reporting unit, our Component Products Segment is adjusting inventory levels, operating expenses and labor resources to align with current demand while also preserving its ability to respond quickly when demand increases. Generally, raw material prices have stabilized, our Component Products Segment’s supply chains are stable and transportation and logistical delays are minimal. Our Component Products Segment has adjusted its order patterns in response to the stability of its raw material supplies.

Current wording

Outlook* –*In the first six months of 2024, our Component Products Segment’s security products reporting unit benefitted from a general increase in sales across many markets and particularly increased sales of mechanical locks to the government security market; however, some of the overall demand improvement was offset by lower demand from distributors as noted above. At our Component Products Segment’s marine components reporting unit, the decline in sales to the towboat market as a result of the contraction in the recreational marine industry that began late in the first quarter of 2023 has continued. Our Component Products Segment is focused on aligning its resources with current demand levels, and particularly at marine components, our Component Products Segment is adjusting inventory levels, operating expenses and labor resources to align with current demand while also preserving its ability to respond quickly when demand increases. Generally, raw material prices have stabilized, our Component Products Segment’s supply chains are stable and transportation and logistical delays are minimal. Our Component Products Segment has adjusted its order patterns in response to the stability of its raw material supplies.

Previous wording

Our Component Products Segment expects security products sales in 2024 will be lower than 2023 as the sluggishness it has experienced across a variety of the markets security products serves has continued through the first quarter of 2024 with customers continuing to express uncertainty regarding sustained consumer demand levels. In addition, our Component Products Segment does not expect 2024 sales to benefit from the pilot project to a government security customer it completed largely in the fourth quarter of 2023. After implementing aggressive price increases over the last several years to maintain operating margins, our Component Products Segment expects only modest price increases in 2024. Overall, our Component Products Segment expects its security products reporting unit’s gross margin will be comparable to 2023, although it expects operating income as a percentage of sales to decline due to its limited pricing power along with reduced coverage of selling, general and administrative costs as a result of lower expected sales. Our Component Products Segment expects marine components net sales for the full year of 2024 to be lower as compared to 2023 because it believes demand in the towboat market will further decline. The recreational marine industry faces strong headwinds due to higher interest rates and broader market weakness. Several original equipment boat manufacturers, including certain of our Component Products Segment customers, have publicly announced reduced production schedules for 2024. Overall, our Component Products Segment expects its marine components reporting unit’s gross margin as a percentage of net sales for 2024 to be lower than 2023 due to lower coverage of fixed overhead as a result of lower expected sales, and operating income as a percentage of net sales will similarly be lower as a result of reduced coverage of selling, general and administrative expenses due to lower expected sales. Our Component Products Segment ended 2023 with elevated inventory balances at its marine components reporting unit as a result of increased orders of certain raw materials due to previously long lead times coupled with the rapidly changing towboat demand which created a misalignment of its raw materials with near term demand. Our Component Products Segment made significant progress in aligning its marine components inventory balances with current demand in the first quarter of 2024 and expects this alignment to be complete by mid-year 2024.

Current wording

Our Component Products Segment expects security products net sales in 2024 to be lower than 2023 as the increase in demand experienced in the first half of 2024 is expected to be more than offset by lower comparative government security sales in the second half of the year as sales from the 2023 pilot project will not repeat. Additionally, our Component Products Segment is unsure if current demand levels across the variety of the markets security products serves are sustainable as its customers continue to express uncertainty regarding consumer demand levels. Overall, our Component Products Segment expects its security products reporting unit’s gross margin will be comparable to 2023, although it expects operating income as a percentage of sales to decline due to its limited pricing power along with reduced coverage of selling, general and administrative costs as a result of lower expected sales. Our Component Products Segment expects marine components net sales for the full year of 2024 will be lower as compared to 2023 because it believes demand in the towboat market will further decline. The recreational marine industry faces strong headwinds due to higher interest rates and broader market weakness. Several original equipment boat manufacturers, including certain of our Component Products Segment’s customers, have publicly announced further reductions to their 2024 production schedules. Overall, our Component Products Segment expects the marine components reporting unit’s gross margin as a percentage of net sales for 2024 to be lower than 2023 due to lower coverage of fixed overhead as a result of lower expected sales, and operating income as a percentage of net sales to be similarly lower as a result of reduced coverage of selling, general and administrative expenses due to lower expected sales. Our Component Products Segment ended 2023 with elevated inventory balances at its marine components reporting unit as a result of increased orders of certain raw materials due to previously long lead times coupled with the rapidly changing towboat demand which created a misalignment of its raw materials with near term demand. Our Component Products Segment made significant progress in aligning its marine components inventory balances with current demand in the first half of 2024 and expects this alignment to continue over the remainder of 2024.

Previous wording

*General –*Our Real Estate Management and Development Segment consists of BMI and LandWell. BMI and LandWell own real property in Henderson, Nevada. 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. BMI also provided certain utility services to an industrial park located in Henderson, Nevada prior to the sale of Basic Power Company (BPC), a wholly-owned subsidiary of BMI, on December 1, 2023. Following the sale of BPC, BMI no longer provides services to the industrial park which allows us to focus on land sales and development activity for the residential/planned community.

Current wording

*General –*Our Real Estate Management and Development Segment consists of BMI and LandWell. BMI and LandWell own real property in Henderson, Nevada. LandWell is actively engaged in developing certain real estate in Henderson, Nevada including approximately 2,100 acres zoned for residential/planned community purposes. BMI was also responsible for the delivery of water to the City of Henderson and various other users through a water distribution system owned and operated by Basic Water Company (BWC), a wholly-owned subsidiary of BMI, prior to BWC’s bankruptcy filing and deconsolidation in September 2022. Additionally, BMI provided certain utility services to an industrial park located in Henderson, Nevada prior to the sale of Basic Power Company (BPC), a wholly-owned subsidiary of BMI, on December 1, 2023. Following the sale of BPC, BMI no longer provides services to the industrial park which allows us to focus on land sales and development activity for the residential/planned community.

Previous wording

Net Sales and Operating Income – Substantially all of the net sales from our Real Estate Management and Development Segment in the first quarters of 2024 and 2023 were from land sales. We recognized $13.7 million in revenues on land sales during the first quarter of 2024 compared to $24.9 million in the first quarter of 2023. As noted above, we recognize revenue in our residential/planned community over time using cost-based input methods and substantially all of the land sales revenue we recognized in 2024 and 2023 was under this method of revenue recognition. Land sales revenue in the first quarter of 2024 decreased compared to the first quarter of 2023 due to the decreased pace of development activity for previously sold parcels within the residential/planned community. The pace of development activities is dictated by a number of factors such as city permit and design approval and labor and materials availability. Cost of sales related to land sales revenues was $8.0 million in the first quarter of 2024 compared to $14.1 million in the first quarter of 2023.

Current wording

Net Sales and Operating Income – Substantially all of the net sales from our Real Estate Management and Development Segment in the second quarter and first six months of 2024 and 2023 were from land sales. We recognized $23.2 million in revenues on land sales during the second quarter of 2024 compared to $27.0 million in the second quarter of 2023 and $36.9 million in the first six months of 2024 compared to $51.9 million in the same prior year period. Substantially all of the land sales revenues recognized in 2024 are related to land sold in prior years. As noted above, we recognize revenue in our residential/planned community over time using cost-based input methods, and substantially all of the land sales revenue we recognized in 2024 and 2023 was under this method of revenue recognition. Land sales revenue in the second quarter and first six months of 2024 decreased compared to the same prior year periods due to the decreased pace of development activity for previously sold parcels within the residential/planned community, primarily due to delays in receiving city permits. The pace of development activities is dictated by a number of factors such as city permit and design approval and labor and materials availability. Cost of sales related to land sales revenues was $12.8 million and $20.8 million in the second quarter and first six months of 2024, respectively, compared to $15.6 million and $29.7 million in the second quarter and first six months of 2023, respectively.

Previous wording

*Outlook –*LandWell is focused on developing the land it manages, primarily to residential builders, for the residential/planned community in Henderson. At March 31, 2024, substantially all of the land in the residential/planned community had been sold with approximately 20 saleable acres (currently zoned as retail or commercial) remaining. The Las Vegas area continues to benefit from a strong new home market and all land currently zoned as residential has been sold. There are also 15 saleable acres zoned for light industrial and commercial use outside of the 2,100 acre residential/planned community available for sale. Demand for retail and commercial use is more modest and we expect it will take more time to sell these remaining acres. At March 31, 2024 we have deferred revenue of $77.2 million related to post-closing obligations on land sales closed in 2024 and prior years. Because we recognize revenue over time using cost-based inputs, we will continue to recognize revenue on land previously sold over the development period, although we have already received substantially all the cash proceeds related to these sales. We currently expect to take three to four years to complete our post-closing obligations. Any delays or curtailments in infrastructure development related to post-closing obligation activities will delay the amount of revenue we recognize on previously closed land sales. Under LandWell’s development agreement with the City of Henderson, the issuance of a specified number of housing permits requires LandWell to complete certain large infrastructure projects. LandWell began construction on several of these community-wide large projects in late 2021 with the construction expected to continue for the next three to four years. We expect these land development costs in 2024 to be comparable to 2023 due to the timing of certain infrastructure projects. Because these large projects relate to the entirety of the residential/planned community, the costs associated with these large projects are not part of the cost-based inputs used to recognize revenue and therefore this spending will not correlate to revenue recognition. However, this spending is expected to be eligible for tax increment reimbursement under our Owner Participation Agreement (OPA) with the City of Henderson and delays or curtailments in eligible infrastructure development activities will also delay LandWell’s ability to submit completed costs to the City for approval of additional OPA note receivables. We expect to collect the maximum reimbursement amount of $209 million under the OPA over the next 7 to 10 years, including $27.3 million collected to date.

Current wording

approximately 20 saleable acres (currently zoned as retail or commercial) remaining. The Las Vegas area continues to benefit from a strong new home market, and all land currently zoned as residential has been sold. There are also 15 saleable acres zoned for light industrial and commercial use outside of the 2,100 acre residential/planned community available for sale. Demand for retail and commercial use is more modest, and we expect it will take more time to sell these remaining acres. At June 30, 2024 we have deferred revenue of $56.8 million related to post-closing obligations on land sales closed prior to 2024. Because we recognize revenue over time using cost-based inputs, we will continue to recognize revenue on land previously sold over the development period, although we have already received substantially all the cash proceeds related to these sales. We currently expect to take three to four years to complete our post-closing obligations. Any delays or curtailments in infrastructure development related to post-closing obligation activities will delay the amount of revenue we recognize on previously closed land sales. Under LandWell’s development agreement with the City of Henderson, the issuance of a specified number of housing permits requires LandWell to complete certain large infrastructure projects. LandWell began construction on several of these community-wide large projects in late 2021 with the construction expected to continue for the next three to four years. We expect these land development costs in 2024 to be comparable to 2023 due to the timing of certain infrastructure projects. Because these large projects relate to the entirety of the residential/planned community, the costs associated with these large projects are not part of the cost-based inputs used to recognize revenue, and therefore, this spending will not correlate to revenue recognition. However, this spending is expected to be eligible for tax increment reimbursement under our Owner Participation Agreement (OPA) with the City of Henderson, and delays or curtailments in eligible infrastructure development activities will also delay LandWell’s ability to submit completed costs to the City for approval of additional OPA note receivables. We expect to collect the maximum reimbursement amount of $209 million under the OPA over the next 7 to 10 years, including $27.3 million collected to date.

Previous wording

Kronos and NL recognize unrealized gains or losses on these shares of our common stock in the determination of each of their respective net income or losses. Under the principles of consolidation we eliminate any gains or losses associated with our common stock to the extent of our proportional ownership interest in each subsidiary. We recognized a gain of $.5 million in the first quarter of 2024 compared to a loss of $1.1 million in the first quarter of 2023 in our Condensed Consolidated Statements of Operations, which represents the unrealized gain (loss) in respect of these shares during such periods attributable to the noncontrolling interest of Kronos and NL.

Current wording

Changes in the Market Value of Valhi Common Stock held by Subsidiaries– Our subsidiaries, Kronos and NL, hold shares of our common stock. As discussed in the 2023 Annual Report, we account for our proportional interest in these shares of our common stock as treasury stock at Kronos’ and NL’s historical cost basis. The remaining portion of these shares of our common stock, which are attributable to the noncontrolling interest of Kronos and NL, are reflected in our Condensed Consolidated Balance Sheet at fair value. Kronos and NL recognize unrealized gains or losses on these shares of our common stock in the determination of each of their respective net income or losses. Under the principles of consolidation we eliminate any gains or losses associated with our common stock to the extent of our proportional ownership interest in each subsidiary. We recognized a gain of $.1 million in the second quarter of 2024 compared to a loss of $1.1 million in the second quarter of 2023 and a gain of $.6 million in the first six months of 2024 compared to a loss of $2.2 million in the first six months of 2023 in our Condensed Consolidated Statements of Operations, which represents the unrealized gain (loss) in respect of these shares during such periods attributable to the noncontrolling interest of Kronos and NL.

Previous wording

Interest Income and Other– Interest income and other increased $.8 million in the first quarter of 2024 compared to the first quarter of 2023 primarily due to higher average interest rates. See Note 12 to our Condensed Consolidated Financial Statements.

Current wording

Interest Income and Other– Interest income and other increased $.8 million in the second quarter and $1.6 million in the first six months of 2024 compared to the same periods of 2023 primarily due to higher average interest rates. See Note 12 to our Condensed Consolidated Financial Statements.

Previous wording

Other General Corporate Items– Corporate expenses in the first quarter of 2024 were comparable to the first quarter of 2023. Included in corporate expense are:

Current wording

Other General Corporate Items– Corporate expenses were 9% higher in the second quarter of 2024 and 4% higher in the first six months of 2024 compared to the same periods in 2023 primarily due to higher environmental remediation and related costs. Included in corporate expense are:

Previous wording

Interest Expense– Interest expense increased $4.3 million in the first quarter of 2024 compared to the first quarter of 2023 as a result of the Kronos February 2024 exchange of €325 million of its 3.75% Senior Secured Notes due 2025 for newly issued €276.174 million of 9.50% Senior Secured Notes due March 2029 plus additional cash consideration, and the new $53.7 million subordinated, unsecured term loan from Contran due September 2029 at an interest rate of 11.5%, which Kronos entered into in February 2024 in connection with the exchange. Interest expense for the first quarter of 2024 includes a charge of $1.5 million for the write-off of deferred financing costs as a result of the exchange. See Note 7 to our Condensed Consolidated Financial Statements.

Current wording

Interest Expense– Interest expense increased $4.7 million and $9.0 million in the second quarter and first six months of 2024 compared to the respective periods in 2023 as a result of the Kronos February 2024 exchange of €325 million of its 3.75% Senior Secured Notes due 2025 for newly issued €276.174 million of 9.50% Senior Secured Notes due March 2029 plus additional cash consideration, and the new $53.7 million subordinated, unsecured term loan from Contran due September 2029 at an interest rate of 11.5%, which Kronos entered into in February 2024 in connection with the exchange. Interest expense for the first six months of 2024 includes a charge of $1.5 million for the write-off of deferred financing costs as a result of the exchange. See Note 7 to our Condensed Consolidated Financial Statements.

Previous wording

We expect interest expense will be higher in 2024 as compared to 2023 primarily due to the higher interest rates on Kronos’ new debt issued in February 2024.

Current wording

We expect interest expense will be higher in 2024 as compared to 2023 primarily due to the higher debt balances as a result of the third quarter acquisition of LPC and higher interest rates on Kronos’ new debt issued in February and July of 2024.

Previous wording

Income Tax Expense (Benefit)* *– We recognized income tax expense of $4.4 million in the first quarter of 2024 compared to an income tax benefit of $6.1 million in the first quarter of 2023. The increase in the first quarter of 2024 is primarily due to higher earnings in 2024 and the jurisdictional mix of such earnings. During interim periods, our effective tax rate may not necessarily correspond to the current period income (loss) before taxes due to the application of accounting for income taxes in interim periods which requires us to base our effective rate on full year projections of pre-tax income (loss).

Current wording

Income Tax Expense (Benefit)* *– We recognized income tax expense of $7.9 million in the second quarter of 2024 compared to an income tax benefit of $6.8 million in the second quarter of 2023 and income tax expense of $12.3 million in the first six months of 2024 compared to an income tax benefit of $12.0 million in the first six months of 2023. The increase in the second quarter and the first six months of 2024 is primarily due to higher earnings in 2024 and the jurisdictional mix of such earnings. During interim periods, our effective tax rate may not necessarily correspond to the current period income (loss) before taxes due to the application of accounting for income taxes in interim periods which requires us to base our effective rate on full year projections of pre-tax income (loss).

Previous wording

We recognize deferred income taxes with respect to the excess of the financial reporting carrying amount over the income tax basis of our direct investment in Kronos common stock because the exemption under GAAP to avoid such recognition of deferred income taxes is not available to us. At December 31, 2023, we recognized a deferred income tax liability with respect to our direct investment in Kronos of $47.4 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 the cap is $153.6 million. During the first three months of 2024, we recognized a non-cash deferred income tax expense with respect to our direct investment in Kronos of $.1 million for the increase in the deferred income taxes required to be recognized with respect to the excess of the financial reporting carrying amount

Current wording

We recognize deferred income taxes with respect to the excess of the financial reporting carrying amount over the income tax basis of our direct investment in Kronos common stock because the exemption under GAAP to avoid such recognition of deferred income taxes is not available to us. At December 31, 2023, we recognized a deferred income tax liability with respect to our direct investment in Kronos of $47.4 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 the cap is $153.6 million. During the first six months of 2024, we recognized a non-cash deferred income tax benefit with respect to our direct investment in Kronos of $.6 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, this decrease related to our equity in Kronos’ net income during the period. We recognized a similar deferred income tax benefit of $3.3 million in the first six months of 2023. 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.

Previous wording

The Organization for Economic Cooperation and Development (OECD), the European Union and other countries have committed to enacting the OECD’s Pillar Two initiative that would provide a global minimum level of taxation for multinational companies to be applied on a country-by-country basis. Currently, many countries are drafting or have enacted legislation to implement the Pillar Two rules effective for years beginning on or after December 31, 2023. Based on legislation currently enacted, we do not anticipate any material impact to our Consolidated Financial Statements; however, until all the jurisdictions we operate in enact legislation, the full impact of Pillar Two to us is unknown.

Current wording

The Organization for Economic Cooperation and Development (OECD), the European Union and other countries have committed to enacting the OECD’s Pillar Two initiative that would provide a global minimum level of taxation for multinational companies to be applied on a country-by-country basis. Currently, many countries are drafting or have enacted legislation to implement

Previous wording

Cash used in operating activities was $48.8 million in the first three months of 2024 compared to cash used in operating activities of $126.8 million in the first three months of 2023. This $78.0 million decrease in cash used in operating activities in the first three months of 2024 includes:

Current wording

Cash used in operating activities was $15.3 million in the first six months of 2024 compared to cash used in operating activities of $95.1 million in the first six months of 2023. This $79.8 million decrease in cash used in operating activities in the first six months of 2024 includes:

Previous wording

The declaration and payment of future dividends, and the amount thereof, is discretionary and is dependent upon a number of factors including our current and future expected results of operations, financial condition, cash requirements for our businesses, contractual and other requirements and restrictions and other factors deemed relevant by our board of directors. The amount and timing of past dividends is not necessarily indicative of the amount or timing of any future dividends which might be paid. There are currently no contractual restrictions on the amount of dividends which we may pay. Distributions to noncontrolling interest in subsidiaries in the first three months of 2024 are comprised of CompX dividends paid to shareholders other than NL and Kronos dividends paid to shareholders other than us and NL.

Current wording

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 2024 are comprised of CompX dividends paid to shareholders other than NL, Kronos dividends paid to shareholders other than us and NL, and LandWell dividends paid to partners other than us and BMI.

Previous wording

Kronos had no outstanding borrowings at March 31, 2024 on its $225 million global revolving credit facility (Global Revolver). Availability under the Global Revolver is subject to a borrowing base calculation, as defined in the agreement, and at March 31, 2024 the full $225 million was available for borrowings. Kronos’ Senior Secured Notes, the Contran Term Loan and its 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 are discussed in Note 9 in our 2023 Annual Report. We are in compliance with all of our debt covenants at March 31, 2024. We believe we will be able to continue to comply with the financial covenants contained in our debt obligations through their maturity.

Current wording

Kronos’ Senior Secured Notes, the Contran Term Loan and its 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 are discussed in Note 9 in our 2023 Annual Report. We are in compliance with all of our debt covenants at June 30, 2024. We believe we will be able to continue to comply with the financial covenants contained in our debt obligations through their maturity.

Previous wording

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,

Current wording

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)