Executive Summary / Key Takeaways

• Valhi's Chemicals segment is experiencing a severe cyclical downturn, with Q3 2025 operating income swinging to a $15.9 million loss from a $42.6 million profit a year prior, driven by 7% lower TiO2 selling prices, 3% volume declines, and $27 million in unabsorbed fixed costs from reduced capacity utilization.

• The holding company structure is providing crucial downside protection: Component Products grew operating income 45% year-over-year through Q3 2025 on strong security and marine sales, while Real Estate Management generated higher operating income despite 60% lower land sales thanks to $34.2 million in infrastructure reimbursements.

• Financial stability remains intact with modest leverage (0.49 debt-to-equity), $232.8 million in cash, and a new $350 million revolver, giving management flexibility to navigate the downturn and invest in the July 2024 LPC acquisition integration.

• Industry consolidation is accelerating, with significant capacity reductions by Chinese and European producers in 2025, positioning Kronos to gain market share and potentially realize pricing upside in 2026, though near-term margins remain under pressure.

• The central investment thesis hinges on whether the TiO2 cycle troughs before the non-chemicals segments can no longer offset the drag, with critical variables being customer inventory destocking behavior, execution of cost reduction initiatives, and the pace of competitor capacity exits.

Setting the Scene: A Holding Company in TiO2's Perfect Storm

Valhi, Inc., incorporated in 1932 and headquartered in Dallas, Texas, operates as a classic holding company, managing three distinct segments that share little beyond common ownership. The Chemicals segment, operated through majority-owned Kronos Worldwide, produces titanium dioxide (TiO2) pigments—the white pigment essential for paints, plastics, and paper. Component Products, via CompX International, manufactures security and marine components. Real Estate Management and Development, through LandWell Company, develops land in Henderson, Nevada. This structure creates both resilience and complexity: when one segment falters, others can provide ballast, but capital allocation decisions become paramount.

The TiO2 industry structure explains why Valhi's Chemicals segment dominates the narrative despite generating roughly 80-90% of revenue. TiO2 is fundamentally a commodity chemical where price and availability drive competition, with product quality and technical support serving as secondary differentiators. The market is cyclical, tied to GDP growth and construction activity, but with an inventory cycle overlay—customers build or destock based on price expectations. This creates volatility that can swamp operational improvements. Kronos holds an estimated 10-15% global market share, positioning it as a mid-tier player behind integrated giants Chemours and Tronox but ahead of distressed Venator .

Valhi's history shapes its current risk profile. The 2024 acquisition of the remaining 50% interest in Louisiana Pigment Company (LPC) for $64.5 million was transformative, making LPC a wholly-owned subsidiary and expanding Kronos's North American capacity. However, this came just as the cycle turned. Meanwhile, legacy environmental liabilities through NL Industries —dating back to lead pigment operations—continue to require cash, with a $16.7 million final payment made in October 2025 for the Santa Clara litigation. These liabilities are largely contained but represent a known drain on liquidity.

Technology and Strategic Differentiation: Process Matters More Than Patents

Valhi's competitive moat in Chemicals isn't built on proprietary technology in the Silicon Valley sense, but on manufacturing process expertise and customer-specific formulations. Kronos produces both sulfate process TiO2 and chloride process TiO2 , with the sulfate process historically valued for its suitability in decorative laminates and fiber applications where dispersibility and opacity are critical. While Chemours and Tronox emphasize chloride-route efficiency and vertical integration into feedstocks, Kronos has built customer loyalty through technical support and consistent quality in niche applications.

This differentiation is economically significant. The majority of TiO2 products are commodities, but the 20-30% of Kronos's portfolio serving specialized applications commands pricing premiums and stickier relationships. When customers reformulate paints or plastics around a specific pigment grade, switching costs rise. This provides some insulation during price wars but cannot fully protect against industry-wide overcapacity. The LPC acquisition enhances this moat by adding North American production that can serve regional customers with shorter supply chains and reduced logistics costs.

The Component Products segment offers a different type of moat. CompX's security products serve government markets with stringent certification requirements, creating barriers to entry. Its marine components, including wake enhancement systems and stainless steel exhausts, benefit from brand recognition in the towboat and industrial markets. These are not high-tech disruptors but defensible, cash-generating businesses that provide balance during Chemicals downturns.

Financial Performance: Chemicals Collapse, Diversification Cushions

Valhi's consolidated Q3 2025 results tell a stark story: a net loss of $22.2 million versus $57.5 million net income in Q3 2024, with the swing entirely attributable to Chemicals. The segment's net sales fell 5.7% to $456.9 million, but the margin collapse is more alarming. Gross margin compressed from 21% to just 10%, while operating margin turned negative 3% from positive 9%. This reflects three converging forces: a 7% decline in average selling prices, $27 million in unabsorbed fixed costs from operating at 85% capacity (down from 93%), and higher-cost inventory flowing through cost of sales.

The Component Products segment demonstrates the holding company structure's value. Net sales rose 19% in Q3 2025 to $40 million, with operating income up 45% to $4.8 million. Gross margins held steady at 28%, and operating margins expanded to 12% from 10%. This growth was driven by higher security product sales to government markets and marine component sales to towboat, government, and industrial customers. While the segment represents only about 8% of total revenue, its $17 million in nine-month operating income provides a $12 million offset to Chemicals' $70 million year-over-year decline.

Real Estate Management presents the most complex picture. Land sales revenue plummeted 57% in Q3 to $6.6 million and 60% year-to-date to $20.8 million, reflecting the near-completion of the residential planned community. Yet operating income for the nine months rose to $41.6 million from $36 million, entirely due to $34.2 million in tax increment infrastructure reimbursements versus $14.2 million in the prior year. This demonstrates how development agreements can generate cash long after land is sold. With substantially all residential land sold by October 2025 and $28.6 million in deferred revenue to be recognized over one to two years, this segment will shift from a cash generator to a cash user as LandWell fulfills remaining development obligations.

Cash flow reveals the real stress. Operating cash flow was negative $1.9 million in Q3 and negative $136.1 million year-to-date, compared to near-breakeven in 2024. This $134 million deterioration stems from $59.8 million lower operating income, $56.7 million in environmental settlement payments, $10.6 million higher interest, and $7.6 million higher taxes. The environmental payments are largely behind the company, but the operating income shortfall persists. Capital expenditures of $49 million for 2025, plus $30 million in land development costs, will further strain cash generation.

Outlook and Execution: Managing Through the Trough

Management's guidance frames 2025 as a transition year. They expect consolidated operating income to be lower than 2024, with Chemicals' weakness only partially offset by gains in Component Products and Real Estate. This sets realistic expectations while highlighting the diversification thesis. The company is taking aggressive action: further reducing operating rates in Q4 2025 to cut inventory, implementing workforce reductions more significant than 2023-2024 levels, and investing in LPC facility improvements during the curtailment.

Raw material and energy costs are trending lower, with this moderation expected to continue through year-end. This provides a potential margin tailwind into 2026, though it may be offset by continued pricing pressure. The critical catalyst is industry capacity reduction. Multiple producers have announced shutdowns or curtailments in China and Europe during Q3 2025. Kronos believes it can gain market share from these exits, particularly in Europe, and that anti-dumping duties in various jurisdictions will support pricing recovery in 2026.

The LPC integration remains on track. The acquisition adds 100% ownership of a North American asset that expands product offerings and enables supply chain optimization. However, the benefits are masked by weak demand. Management is using the downturn to invest in technological and manufacturing improvements that should enhance flexibility and cost-effectiveness when volumes recover. This is classic cyclical playbook execution: maintain assets, gain share, and position for the upturn.

Component Products is expected to continue growing, with security products benefiting from government demand and marine components gaining from higher sales volumes. Tariff-related surcharges on Asian electronic components, which began in Q2 2025, are being passed through via price increases, though full recovery depends on customer acceptance and substitution options.

Real Estate will see the final 20 residential acres close in October 2025, with remaining obligations extending one to two years. The segment will generate negative operating cash flow as development work continues, but the $209 million maximum Owner Participation Agreement reimbursement (with $46.2 million collected to date) provides a long-term cash flow stream through 2032.

Risks: When the Buffer Becomes a Burden

The most material risk is that the TiO2 cycle proves deeper and longer than anticipated. Customer inventory destocking has been "unprecedented" in 2025, driven by global uncertainty and high interest rates. If this behavior persists into 2026, Kronos's capacity reductions and cost cuts may be insufficient to restore profitability. The segment's operating loss in Q3 2025, combined with $45 million in unabsorbed fixed costs year-to-date, shows how quickly high fixed-cost assets can burn cash when utilization falls.

Competitive dynamics pose a structural threat. Chemours and Tronox are vertically integrated into titanium feedstocks, giving them cost advantages when ilmenite prices rise. Kronos's reliance on purchased feedstocks makes it vulnerable to input cost inflation, though current trends are favorable. More concerning is the scale differential: Chemours and Tronox can spread R&D and overhead across larger production volumes, while Kronos's smaller scale (estimated 500-600 kt/year) leaves it with higher unit costs. If the downturn forces a choice between market share and margins, Kronos may be forced to cede share to better-capitalized competitors.

Environmental liabilities remain a wild card. While the Santa Clara settlement is complete and the Raritan Bay Slag settlement is largely funded, NL Industries still faces potential new lead pigment litigation. Management acknowledges they "do not know if we will incur liability in the future" due to inherent uncertainties in court rulings. The $56.7 million in environmental payments made in 2025 represents real cash that could have been used for debt reduction or investment.

German tax legislation enacted in July 2025 creates a non-cash deferred tax expense but also reduces the corporate tax rate from 15% to 10% by 2032. While this will benefit cash taxes long-term, it forced a $19.3 million charge in Q3 2025. More concerning is the risk that extended losses in German operations could trigger a valuation allowance against deferred tax assets, creating future earnings volatility.

The holding company structure itself introduces governance risk. Valhi is controlled by Contran Corporation, creating potential conflicts between minority shareholders and the controlling owner. While this has enabled long-term thinking, it also means capital allocation decisions may not prioritize public shareholder returns. The company's routine comparison of liquidity needs against subsidiary cash flows and potential asset sales suggests divestitures could occur if Chemicals' drag becomes too severe.

Valuation Context: Pricing for Cyclical Distress

At $12.81 per share, Valhi trades at a market capitalization of $360 million and an enterprise value of $857 million, reflecting a 0.17 price-to-sales ratio and 3.96 EV/EBITDA multiple. The significance of these multiples is that they price the stock for a cyclical trough, not a structural decline. The 0.34 price-to-book ratio suggests the market believes book value is at risk of impairment if Chemicals losses persist.

Peer comparisons provide context. Chemours (CC) trades at 0.98x sales and 8.72x EV/EBITDA, reflecting its larger scale and more diversified portfolio. Tronox (TROX) trades at 0.26x sales and 11.35x EV/EBITDA, despite its own challenges, indicating market preference for vertical integration. Venator (VNTR), at 0.01x sales, shows how distressed TiO2 assets are priced. Valhi sits between these extremes, suggesting the market recognizes its diversification but remains concerned about Chemicals' trajectory.

The 2.58% dividend yield, with a 49% payout ratio, signals management's commitment to returning capital despite the downturn. The dividend provides income while investors wait for a cycle turn, but also consumes cash that could be used for debt reduction or investment. The balance sheet strength—0.49 debt-to-equity, $232.8 million cash, and $342 million revolver availability—provides a cushion that many pure-play TiO2 competitors lack.

Free cash flow is negative in the near term, but the company expects $11.6 million in dividends from Kronos and $14.5 million from NL Industries in 2025, plus a non-recurring $8.5 million special dividend from NL Industries (NL). These upstream dividends are critical to Valhi's ability to service corporate overhead and pay its own dividend. If Chemicals' losses force Kronos to cut its dividend, Valhi's corporate-level cash flow would be strained.

Conclusion: Surviving to Participate in the Recovery

Valhi's investment thesis is a test of whether diversification and financial stability can outlast a severe cyclical downturn in its core business. The Chemicals segment's Q3 2025 operating loss, margin collapse, and cash consumption are stark reminders of TiO2's cyclicality. Yet the holding company structure is working as intended: Component Products' 45% operating income growth and Real Estate's infrastructure reimbursements have partially offset Chemicals' $70 million year-to-date profit decline, while the balance sheet remains solid.

The critical variables to monitor are industry capacity exits and customer inventory behavior. The capacity reductions announced by Chinese and European producers in Q3 2025, combined with anti-dumping duties, create a credible path to pricing recovery in 2026. However, if customers continue destocking through 2026, Kronos's cost cuts and market share gains may prove insufficient. Management's decision to further reduce operating rates in Q4 2025 is prudent but will exacerbate fixed cost absorption headwinds.

For long-term investors, Valhi represents a levered play on a TiO2 cycle recovery with downside protection. The stock's valuation reflects cyclical distress, not structural obsolescence. If Chemicals returns to even mid-cycle profitability, the combination of improved segment results, continued Component Products growth, and diminishing Real Estate obligations could drive meaningful earnings leverage. The risk is that the cycle proves longer than the company's financial flexibility, forcing asset sales or dividend cuts. The next six months will reveal whether Valhi's diversification is a bridge or merely a buffer.