Executive Summary / Key Takeaways

• Valhi, Inc. operates as a holding company with three distinct segments: Chemicals (primarily TiO₂ pigments via Kronos), Component Products (security and marine components via CompX), and Real Estate Management and Development (land development in Henderson, NV).
• First quarter 2025 results showed a significant increase in net income attributable to Valhi stockholders, rising to $16.9 million ($0.59 per diluted share) from $7.8 million ($0.27 per diluted share) in Q1 2024, primarily driven by strong performance in the Chemicals segment.
• The Chemicals segment benefited from a 5% increase in sales volumes and lower production costs, leading to an 81% increase in operating income despite a modest 2% rise in net sales and negative currency impacts. The recent acquisition of the remaining 50% of LPC is expected to positively impact 2025 earnings.
• The Component Products segment also saw improved operating income (up 60%) on 6% higher net sales, driven by strength in marine components and improved margins.
• The Real Estate segment's revenue and operating income declined due to delays in the pace of development for previously sold land, although future land sales and OPA reimbursements are anticipated.
• Valhi faces ongoing risks from legacy environmental and litigation matters, which significantly impacted operating cash flow in Q1 2025 due to a large settlement payment, alongside market uncertainties like potential tariffs and demand volatility.

Valhi's Multi-faceted Structure and Strategic Foundation

Valhi, Inc. presents a complex investment profile, functioning primarily as a holding company with significant, majority-owned subsidiaries operating across disparate industries: chemicals, component products, and real estate. This diversified structure, largely shaped by historical acquisitions and activities, forms the bedrock of its strategy. The company's performance is intrinsically linked to the fortunes of its key operating entities: Kronos Worldwide, Inc. (KRO) (Chemicals), CompX International Inc. (CIX) (Component Products), and Basic Management, Inc. and The LandWell Company (Real Estate Management and Development).

At its core, Valhi's Chemicals segment, driven by Kronos, is a major global player in the titanium dioxide (TiO₂) pigment market. TiO₂ is a fundamental ingredient, prized for its ability to impart whiteness, brightness, opacity, and durability to a vast array of products, from paints and plastics to paper and cosmetics. While a majority of Kronos's output consists of commodity pigments where price and availability are paramount competitive factors, certain grades are considered specialty products. The value proposition here lies in providing essential functional properties to manufactured goods. The company's operational focus includes process improvement initiatives aimed at optimizing production, particularly of purified grades, to enhance gross margins.

In the Component Products segment, CompX manufactures specialized security products and recreational marine components. This segment serves diverse end markets, providing critical hardware and systems. The Real Estate segment, centered in Henderson, Nevada, manages and develops land holdings, converting raw property into commercial, industrial, and residential sites, with revenue tied to development progress and land sales.

This multi-segment approach provides Valhi with a degree of insulation from downturns in any single market, a strategic advantage compared to more focused competitors. However, it also introduces complexity and requires navigating distinct market dynamics and competitive landscapes across each business.

Chemicals Segment: Riding the Wave of Improved Demand and Operational Efficiency

The Chemicals segment, representing the largest portion of Valhi's business through Kronos, demonstrated significant operational leverage in the first quarter of 2025. Net sales saw a modest 2% increase, reaching $489.8 million compared to $478.8 million in Q1 2024. This growth was primarily volume-driven, with sales volumes rising 5%, contributing approximately $24 million to net sales. Average TiO₂ selling prices also saw a 2% increase year-over-year, adding about $10 million, although prices declined 3% during the first quarter itself due to market pressure and product mix shifts. Changes in currency exchange rates, notably the strengthening U.S. dollar against the euro, acted as a headwind, decreasing net sales by an estimated $11 million.

Despite the relatively small top-line increase, the segment's profitability surged. Cost of sales decreased by 6% to $383.4 million, leading to a substantial improvement in gross margin percentage, from 15% in Q1 2024 to 22% in Q1 2025. This margin expansion was attributed to lower per-metric-ton production costs, including reduced raw material and utility expenses, and better absorption of fixed costs due to higher production volumes. Operating income consequently jumped 81%, from $22.8 million to $41.2 million. Currency exchange rate fluctuations negatively impacted operating income by an estimated $5 million, primarily due to lower net currency transaction gains.

Kronos operated its production facilities at 93% of practical capacity utilization in Q1 2025, up from 87% in Q1 2024, reflecting increased customer demand, particularly in Europe. This contrasts with North American demand, which management expects to remain challenging due to uncertainty surrounding potential U.S. tariffs on imports from Canada, where Kronos has a facility. European demand, however, has seen improvement, partly attributed to the European Commission's duties on Chinese TiO₂ imports enacted in mid-2024, which impacts competitors like Tronox Holdings plc (TROX) and Chemours Company (CC) as well.

The acquisition of the remaining 50% interest in Louisiana Pigment Company, L.P. (LPC) in July 2024 is a key strategic move aimed at strengthening Kronos's position in North America, expanding product offerings, and realizing synergies. While expected to positively impact 2025 earnings, management cautions that soft demand, competitive pressures, and increased debt service costs from financing the acquisition may temper this impact. Kronos is also pursuing cost reduction initiatives, including process improvements and the closure of its Canadian sulfate process line, to optimize production of purified grades and improve its long-term cost structure. Raw material and input costs are generally trending lower, although European energy costs remain volatile.

Competitively, Kronos operates in a market with major players like KRO (which is Kronos itself, highlighting the complex structure), Chemours, and Tronox. While specific technological differentiators beyond general TiO₂ properties and process optimization aren't detailed, the focus on cost reduction and optimizing purified grades production suggests an effort to compete on efficiency and product quality within the commodity and specialty segments. Compared to peers, Kronos's Q1 2025 gross margin of 22% is lower than Chemours' reported 32% in 2024 but comparable to KRO's 19% and TROX's 17% in 2024, suggesting varying cost structures and market conditions. The ability to manage raw material costs and optimize production rates is critical in this environment.

Component Products: Marine Strength Offsets OEM Softness

Valhi's Component Products segment, operated through CompX, saw a solid increase in performance in the first quarter of 2025. Net sales grew 6% to $40.3 million, up from $38.0 million in Q1 2024. This growth was primarily fueled by a 24% increase in marine components sales, driven by higher demand from the towboat and government markets. Security products sales saw a more modest 1% increase, with gains in the government security and healthcare markets largely offset by softness across various other original equipment manufacturing (OEM) markets.

The segment's gross margin percentage improved to 30% in Q1 2025 from 25% in the prior-year period. This margin expansion was mainly due to the marine components unit benefiting from lower cost inventory produced in late 2024 and sold in Q1 2025, as well as better fixed cost coverage on higher sales volumes. Operating income for the segment increased 60%, rising from $3.7 million to $5.9 million, reflecting the improved sales and gross margin performance.

Management expects security products net sales to improve modestly in 2025, with slightly better margins due to price increases implemented in Q1 and an improved product mix. Marine components sales are projected to increase, predominantly driven by the government and industrial markets, although towboat market demand is expected to normalize after a Q1 stocking event. Overall, the marine unit is anticipated to see improved margins and operating income percentages in 2025 due to increased fixed cost coverage on higher expected sales volumes.

The segment faces competition from companies like Allegion plc (ALLE) in security products. While direct quantitative comparisons on technology or specific product performance metrics are not provided, CompX's ability to increase selling prices to offset rising raw material costs (including tariff-related surcharges) will be key to maintaining profitability in a competitive market. The extent of this ability depends on factors like the ultimate tariff rate and customer substitution possibilities.

Real Estate: Development Pace Dictates Revenue Flow

The Real Estate Management and Development segment, comprising BMI and LandWell, saw a decline in net sales and operating income in the first quarter of 2025. Net sales, substantially all from land sales, decreased to $8.5 million from $13.8 million in Q1 2024. Operating income fell 40% to $3.0 million from $5.0 million.

This decrease was not due to a lack of sales contracts, but rather a slower pace of development activity for previously sold parcels within the residential planned community in Henderson, Nevada. Revenue recognition for these sales occurs over time using cost-based input methods, meaning delays in development activities directly impact recognized revenue. Management cited delays in receiving city permits and environmental-related approvals as primary reasons for the slower pace.

LandWell has sold substantially all of the land in the residential planned community, with approximately 20 saleable acres remaining under contract with a home builder, scheduled to close by mid-2025. An additional 15 saleable acres zoned for light industrial and commercial use are also in escrow, expected to close in the third and fourth quarters of 2025.

LandWell is focused on completing its land development obligations, which are expected to take one to two more years for previously sold land. This requires significant investment in infrastructure projects, some of which are large community-wide projects tied to housing permit issuance under an Owner Participation Agreement (OPA) with the City of Henderson. While these large project costs are not tied to the cost-based revenue recognition for specific parcels, they are expected to be eligible for tax increment reimbursement under the OPA, with a maximum reimbursement of $209 million anticipated over the next 7 to 10 years. LandWell expects to spend approximately $53 million on land development costs in 2025, comparable to 2024 levels. Due to the timing of cash receipts from past sales versus ongoing development expenditures, LandWell is expected to generate negative operating cash flows as it completes this work.

Consolidated Financials and Liquidity: Managing Legacy and Growth Investments

Valhi's consolidated net income attributable to stockholders in Q1 2025 was $16.9 million, a significant improvement from $7.8 million in Q1 2024, primarily reflecting the stronger operating performance of the Chemicals segment.

Consolidated cash flow from operating activities saw a substantial increase in cash used, totaling $155.9 million in the first three months of 2025 compared to $48.8 million used in the same period of 2024. This increase was largely driven by a $57.4 million cash payment related to the settlement of an environmental remediation site liability, higher net cash used associated with changes in working capital (receivables, inventories, payables), higher cash paid for interest, lower distributions from the TiO₂ joint venture (due to the LPC acquisition), and higher cash paid for income taxes.

Working capital trends showed an increase in Kronos's average days sales outstanding (DSO) and days sales in inventory (DSI) from year-end 2024 to March 31, 2025, reflecting timing of collections and higher inventory volumes (partly due to tariff mitigation efforts). CompX's DSO also increased, while its DSI remained comparable.

Interest expense increased to $13.2 million in Q1 2025 from $11.3 million in Q1 2024, primarily due to higher overall debt levels and interest rates following Kronos's debt transactions in 2024. The company expects interest expense to remain higher in 2025. Income tax expense rose to $8.0 million from $4.4 million, reflecting higher pre-tax earnings and the jurisdictional mix.

Valhi's consolidated debt stood at $607.8 million at March 31, 2025. Key obligations include Kronos's Senior Secured Notes (including $75 million due in September 2025) and its revolving credit facility, and Valhi's credit facility with Contran. Management expects to repay the $75 million Kronos notes due in September 2025 using cash from operations or borrowings under the Global Revolver.

The company believes it has sufficient liquidity to meet its short-term (12 months) and long-term (5 years) obligations, relying on cash from operations and available borrowings. As of March 31, 2025, Valhi had $110.8 million available under its facility with Contran and approximately $300 million (less outstanding amounts) available under Kronos's Global Revolver.

Capital expenditures for 2025 are projected at approximately $58 million, primarily for maintaining and improving existing facilities in the Chemicals ($55 million) and Component Products ($3 million) segments. LandWell expects to spend an additional $53 million on land development. These expenditures are expected to be funded by operating cash flow or existing credit facilities.

Valhi's ability to service its parent-level obligations and pay dividends is dependent on distributions from its subsidiaries. Expected regular quarterly dividends from Kronos and NL (NL) in 2025 are projected to provide $11.6 million and $14.5 million, respectively, to Valhi.

Risks and Challenges Ahead

Despite the positive start to 2025, Valhi faces a range of significant risks. The most prominent are the legacy environmental remediation and litigation matters, particularly those stemming from NL Industries' former operations. While accruals are made for estimated liabilities ($18.2 million accrued at March 31, 2025), the ultimate costs are difficult to estimate and could exceed current provisions, especially for sites where investigations are in early stages or if new cases are filed. The $57.4 million environmental settlement payment in Q1 2025 highlights the material impact these can have on cash flow. Ongoing lead pigment litigation also poses a risk of future liability.

Market risks include the cyclicality of the Chemicals segment, where demand is tied to GDP and sensitive to customer inventory levels and competitive pricing pressures. Uncertainty around potential U.S. tariffs and retaliatory measures could disrupt supply chains and temper demand, particularly in North America. Volatility in raw material, energy, and other input costs also impacts profitability.

Operational risks include potential interruptions from labor disputes, natural disasters, or unplanned downtime. Technology-related disruptions, including cyber-attacks, could also impact operations.

Financial risks include the ability to maintain compliance with debt covenants, particularly if operating results deteriorate. The dependence on subsidiary dividends for parent-level liquidity is a key vulnerability if subsidiaries face restrictions or financial difficulties.

The Real Estate segment faces risks related to the pace of development, which is subject to external factors like permitting and environmental approvals, potentially delaying revenue recognition and OPA reimbursements. Changes in real estate values and construction costs could also impact profitability.

Conclusion

Valhi's first quarter 2025 results paint a picture of a holding company benefiting significantly from a strong rebound in its core Chemicals segment, complemented by solid performance in Component Products. The strategic acquisition of the remaining LPC interest positions Kronos to potentially enhance its North American presence and realize synergies, contributing to an expected higher consolidated operating income in 2025. The Real Estate segment, while facing near-term pace challenges, holds long-term value through land development and anticipated OPA reimbursements.

However, the investment thesis is tempered by the persistent overhang of legacy environmental and litigation liabilities, which continue to consume significant cash resources. Market uncertainties, including potential tariffs and demand fluctuations, also remain key variables influencing the outlook. While liquidity appears sufficient for current plans, the ability of subsidiaries to maintain dividend payments is crucial for parent-level financial health. Investors in Valhi are essentially investing in a portfolio of distinct businesses, requiring careful consideration of the specific dynamics, opportunities, and risks inherent in each segment, alongside the consolidated financial structure and the enduring impact of historical operations. The trajectory of the Chemicals segment, particularly the successful integration of LPC and navigation of market volatility, will likely be the primary determinant of Valhi's consolidated performance in the near term.