Executive Summary / Key Takeaways

• Valhi, Inc. ($VHI) operates as a diversified holding company with significant interests in chemicals (titanium dioxide pigments), component products (security and marine), and real estate development, providing a unique blend of cyclical and defensive revenue streams.
• The Chemicals segment, primarily Kronos Worldwide, faces near-term headwinds from global economic uncertainty, lower TiO2 selling prices, and reduced demand, leading to a substantial operating loss in Q3 2025 and an expected lower full-year 2025 operating income compared to 2024.
• Conversely, the Component Products segment (CompX) and Real Estate Management and Development segment (LandWell) demonstrated resilience, with CompX achieving higher sales and operating income in the first nine months of 2025, and LandWell benefiting from significant infrastructure reimbursements despite a slower pace of land sales.
• Valhi maintains a strong liquidity position with $232.8 million in cash and marketable securities as of September 30, 2025, and has proactively managed its debt profile through refinancing and increased credit facilities, ensuring compliance with all debt covenants.
• The company's long-term investment thesis is underpinned by its diversified portfolio, strategic cost reduction initiatives in its Chemicals segment, and the continued monetization of its real estate assets, with potential for pricing upside in TiO2 in 2026 due to industry capacity reductions.

Valhi's Diverse Portfolio and Strategic Foundation

Valhi, Inc. is a holding company with a rich history, tracing its roots back to 1932. Headquartered in Dallas, Texas, the company operates through wholly-owned and majority-owned subsidiaries across three distinct segments: Chemicals, Component Products, and Real Estate Management and Development. This diversified structure, shaped by strategic acquisitions over decades, including significant stakes in NL Industries, Inc. and Kronos Worldwide, Inc., positions Valhi to participate in various industrial, commercial, and consumer markets.

The Chemicals segment, primarily driven by Kronos Worldwide, is a leading global producer and marketer of titanium dioxide (TiO2) pigments. TiO2 is a "quality of life product" essential for imparting whiteness, brightness, opacity, and durability to a vast array of products, from paints and plastics to paper, fibers, and ceramics. Demand for TiO2 is closely tied to global gross domestic product (GDP) and overall economic conditions, with long-term growth expected at 2% to 3% annually. However, the market is cyclical, and short-term demand can be influenced by customer inventory levels and expectations for future pricing.

The Component Products segment, operated through CompX International Inc., manufactures a wide range of security products, including mechanical and electrical cabinet locks, and specialized marine components such as wake enhancement systems and stainless steel exhaust systems. This segment serves diverse industries, from postal and recreational transportation to healthcare and tool storage. The Real Estate Management and Development segment, managed by Basic Management, Inc. (BMI) and The LandWell Company (LandWell), owns and develops real property in Henderson, Nevada, for commercial, industrial, and residential purposes.

Valhi's overarching strategy leverages this diversification to generate long-term value. The company focuses on operational efficiency, strategic cost reduction initiatives, and the monetization of its asset base. Recent strategic moves, such as Kronos' acquisition of the remaining 50% joint venture interest in Louisiana Pigment Company, L.P. (LPC) in July 2024, underscore this approach. This acquisition was intended to expand product offerings, increase sales in the North American market, and realize significant commercial, overhead, and supply chain synergies.

Technological Differentiators and Operational Enhancements

Within its Chemicals segment, Valhi's Kronos brand is a recognized name in the TiO2 market. While TiO2 is largely considered a commodity pigment, Kronos differentiates itself through product quality and comprehensive customer and technical support services. The company's ongoing investment in its manufacturing capabilities is a key aspect of its operational technology. For instance, during a planned fourth-quarter curtailment in 2025, the Chemicals segment is investing in "technological and manufacturing improvements to the LPC facility". These enhancements are specifically designed to "improve the flexibility, quality and cost effectiveness of the facility over the long term". For investors, these targeted improvements are crucial as they aim to bolster Kronos' competitive position by enhancing its production efficiency and product consistency, which are vital in a price-sensitive commodity market.

In the Component Products segment, CompX's offerings span a broad array of security and marine products. While the company does not detail specific proprietary technologies with quantifiable performance advantages, its strength lies in manufacturing specialized components for niche applications, such as integrated inventory and access control secured narcotics boxes and wake enhancement systems. The "so what" for investors here is CompX's ability to serve diverse, specialized markets, which can provide more stable demand compared to broader, more commoditized product lines.

Segment Performance and Financial Trends

Valhi's financial performance in the first nine months of 2025 reflects a mixed picture across its diversified segments, heavily influenced by global economic conditions and strategic actions.

The Chemicals Segment experienced significant headwinds. For the nine months ended September 30, 2025, net sales decreased by 2% to $1,441.1 million, down from $1,464 million in the prior year period. Operating income for the segment saw a substantial 66% decline, falling to $35.6 million from $105.9 million in the first nine months of 2024. This downturn was primarily driven by a 2% decrease in average TiO2 selling prices and unfavorable fixed cost absorption, with approximately $45 million in additional unabsorbed fixed production costs recognized due to reduced operating rates. The segment's practical capacity utilization dropped to 85% in the first nine months of 2025 from 93% in the same period of 2024, a direct response to lower demand. A non-cash deferred income tax expense of $19.3 million in the third quarter of 2025, resulting from a German tax rate reduction, further impacted net income.

In contrast, the Component Products Segment demonstrated robust growth. Net sales increased by 12% to $120.6 million for the first nine months of 2025, up from $107.5 million in 2024. This growth was fueled by higher sales in both security products (up 8% to $91.2 million) and marine components (up 29% to $29.4 million). Operating income for this segment surged by 40% to $17 million, compared to $12.1 million in the prior year, reflecting improved gross margins due to increased coverage of fixed costs on higher sales volumes.

The Real Estate Management and Development Segment presented a nuanced performance. While net sales from land sales decreased to $20.8 million in the first nine months of 2025 from $52.2 million in 2024, reflecting a decreased pace of development activity for previously sold parcels, operating income actually increased by 15.6% to $41.6 million. This improvement was largely attributable to a significant increase in tax increment infrastructure reimbursement, which rose to $34.2 million in the first nine months of 2025 from $14.2 million in the comparable period of 2024.

Consolidated, Valhi reported a net loss attributable to Valhi stockholders of $4.4 million, or $0.15 per diluted share, for the first nine months of 2025, a stark contrast to net income of $85.2 million, or $2.99 per diluted share, in the same period of 2024. This shift was primarily due to the Chemicals segment's lower operating results and the non-cash gain recognized in Q3 2024 from the LPC acquisition.

Liquidity and Capital Allocation

Valhi maintains a solid liquidity position, which is critical given the cyclical nature of its Chemicals business. As of September 30, 2025, the company held $232.8 million in aggregate restricted and unrestricted cash, cash equivalents, and marketable securities, with $34.6 million held by non-U.S. subsidiaries. Despite a significant increase in cash used in operating activities, which rose to $136.1 million in the first nine months of 2025 from $1.8 million in the prior year, primarily due to lower operating income and higher environmental remediation payments, the company has managed its capital structure effectively.

Total consolidated indebtedness stood at $662.3 million at September 30, 2025. Kronos proactively refinanced $75 million of 3.75% Senior Secured Notes due in September 2025 by issuing additional 9.50% Senior Secured Notes due in 2029. Furthermore, Kronos increased its Global Revolver credit facility to $350 million in July 2025, enhancing its borrowing availability to approximately $342 million at September 30, 2025, less any outstanding amounts. Valhi was in compliance with all debt covenants as of September 30, 2025, indicating a well-managed balance sheet.

The company anticipates aggregate capital expenditures of approximately $49 million for 2025, with $45 million allocated to the Chemicals segment and $4 million to Component Products, alongside an additional $30 million for LandWell's land development costs. These expenditures are expected to be funded through cash generated from operations or existing credit facilities. Valhi also continues its common stock repurchase programs, with shares available for repurchase at Valhi, Kronos, and CompX.

Competitive Landscape and Strategic Positioning

Valhi operates within highly competitive industries, each with distinct dynamics. In the Chemicals segment, Kronos competes as a leading global producer of TiO2 pigments, where "price and availability" are the most significant competitive factors, alongside product quality and customer support. Key competitors include Chemours Company (CC) and Tronox Holdings plc (TROX). Chemours, for instance, appears more focused on innovation and sustainability in its chemical products, potentially offering a competitive edge in performance materials. Huntsman Corporation (HUN) also competes in various chemical productions, with its scaled operations and global supply chains potentially providing an advantage in competitive pricing.

Valhi's strategy in this environment involves leveraging its established brand and distribution network. While it may not always lead in operational scale compared to larger rivals, its diversified revenue streams across segments offer a degree of financial resilience. The company is actively responding to market pressures by implementing cost reduction initiatives, including targeted workforce reductions, and reviewing costs with partners and suppliers. The Chemicals segment believes it can gain market share from industry capacity reductions, including recent facility closures in China and Europe.

In the Component Products segment, CompX's market positioning is strong in its specialized niches, such as security products for government and industrial markets, and marine components for towboat and government sectors. While direct quantitative comparisons with all niche competitors are challenging to ascertain, CompX's sustained demand and improved operating income suggest effective competitive execution. The company is actively working to mitigate cost pressures from raw material price increases and tariff-related surcharges by increasing selling prices to customers.

The Real Estate Management and Development segment operates in a localized competitive environment in Henderson, Nevada. LandWell's strategic advantage lies in its long-term development agreements and the Owner Participation Agreement (OPA) with the City of Henderson, which provides for infrastructure reimbursements up to $209 million, with $46.2 million collected to date and the remainder expected over the next 7 to 10 years. This predictable stream of reimbursements provides a stable financial underpinning for the segment.

Outlook and Risks

Valhi's outlook for 2025 anticipates lower consolidated operating income compared to 2024, primarily driven by the Chemicals segment's challenges, partially offset by stronger performance in Component Products and Real Estate. The Chemicals segment expects weak demand to persist in the near term, with fourth-quarter operating results projected to be lower than the third quarter, leading to a full-year 2025 operating income below 2024 levels. However, management foresees "pricing upside in 2026" due to industry capacity reductions and anti-dumping duties. The Component Products segment expects improved net sales in 2025, though gross margin and operating income percentages may be slightly below prior year due to cost pressures. The Real Estate segment will continue to recognize revenue from previously sold land over the next one to two years as post-closing obligations are completed, with additional commercial and industrial land sales expected to close in Q4 2025.

Several risks could impact Valhi's future performance. The cyclicality of the TiO2 market, coupled with global economic and geopolitical uncertainties, poses a significant threat to the Chemicals segment's profitability. Fluctuations in raw material and energy costs, as well as the impact of tariffs, could erode margins across all manufacturing segments. Furthermore, Valhi faces ongoing litigation related to NL Industries' former lead pigment and environmental matters, with potential for material adverse impacts if liabilities exceed current estimates or if new cases arise. The company's dependence on dividends from its subsidiaries to meet parent company obligations also presents a risk, as these distributions can be subject to credit agreement limitations.

Conclusion

Valhi, Inc. stands as a diversified holding company demonstrating a blend of resilience and vulnerability in the current economic climate. While its Chemicals segment faces significant near-term challenges from a soft TiO2 market, the company's strategic responses, including operational adjustments and cost reductions, aim to position it for a rebound, with potential pricing upside anticipated in 2026. The consistent performance of its Component Products segment and the steady, long-term revenue generation from its Real Estate Management and Development segment, particularly through infrastructure reimbursements, provide crucial stability and diversification to the overall portfolio.

For investors, Valhi represents a complex yet intriguing opportunity. Its strong liquidity, proactive debt management, and commitment to shareholder returns through dividends and share repurchases underscore a disciplined financial approach. The company's ability to leverage its diversified asset base and adapt to changing market dynamics will be key to unlocking long-term value. While the inherent cyclicality of its largest segment and ongoing litigation risks warrant careful consideration, Valhi's strategic focus on operational efficiency, targeted growth in its resilient segments, and the potential for a recovery in the TiO2 market present a compelling narrative for discerning investors.