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10-Q: VALHI INC /DE/

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(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Business Overview

We are primarily a holding company. We operate through our wholly-owned and majority-owned subsidiaries, including NL Industries, Inc., Kronos Worldwide, Inc., CompX International, Inc., Tremont LLC, Basic Management, Inc. ("BMI") and the LandWell Company ("LandWell"). Kronos /zigman2/quotes/203604290/composite KRO +4.16% , NL /zigman2/quotes/210222881/composite NL +8.54% and CompX /zigman2/quotes/205448789/composite CIX +5.15% each file periodic reports with the SEC.

On January 26, 2018 we sold our Waste Management Segment to JFL-WCS Partners, LLC ("JFL Partners"), an entity sponsored by certain investment affiliates of J.F. Lehman & Company, for consideration consisting of the assumption of all of WCS' third-party indebtedness and other liabilities; accordingly the results of operations of our Waste Management Segment is reflected as discontinued operations in our Consolidated Statements of Income for the three and six months ended June 30, 2018. We recognized a pre-tax gain of approximately $58 million on the transaction in the first quarter of 2018 because the carrying value of the liabilities of the business assumed by the purchaser exceeded the carrying value of the assets sold at the time of sale in large part due to a long-lived asset impairment of $170.6 million recognized with respect to the Waste Management Segment in the second quarter of 2017. Such pre-tax gain is classified as part of discontinued operations. The sale of our former Waste Management Segment enables us to focus on our remaining profitable businesses. See Note 3 to our Condensed Consolidated Financial Statements.

We have three consolidated reportable operating segments:

Chemicals-Our chemicals segment is operated through our majority control of Kronos. Kronos is a leading global producer and marketer of value-added titanium dioxide pigments ("TiO2"). TiO2 is used to impart whiteness, brightness, opacity and durability to a wide variety of products, including paints, plastics, paper, fibers and ceramics. Additionally, TiO2 is a critical component of everyday applications, such as coatings, plastics and paper, as well as many specialty products such as inks, foods and cosmetics.

Component Products-We operate in the component products industry through our majority control of CompX. CompX is a leading manufacturer of security products used in the recreational transportation, postal, office and institutional furniture, cabinetry, tool storage, healthcare and a variety of other industries. CompX is also a leading manufacturer of stainless steel exhaust systems, gauges, throttle controls, wake enhancement systems and trim tabs for the recreational marine industry.

Real Estate Management and Development-We operate in real estate management and development through our majority control of BMI and LandWell. BMI provides utility services to certain industrial and municipal customers and owns real property in Henderson, Nevada. LandWell is engaged in efforts to develop certain land holdings for commercial, industrial and residential purposes in Henderson, Nevada.

General

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Statements in this Quarterly Report that are not historical facts are forward-looking in nature and represent management's beliefs and assumptions based on currently available information. In some cases, you can identify forward-looking statements by the use of words such as "believes," "intends," "may," "should," "could," "anticipates," "expects" or comparable terminology, or by discussions of strategies or trends. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we do not know if these expectations will be correct. Such statements by their nature involve substantial risks and uncertainties that could significantly impact expected results. Actual future results could differ materially from those predicted. The factors that could cause actual future results to differ materially from those described herein are the risks and uncertainties discussed in this Quarterly Report and those described from time to time in our other filings with the SEC and include, but are not limited to, the following:

Future supply and demand for our products;

The extent of the dependence of certain of our businesses on certain market sectors;

The cyclicality of certain of our businesses (such as Kronos' TiO2 operations);

Customer and producer inventory levels;

Unexpected or earlier-than-expected industry capacity expansion (such as the TiO2 industry);

Changes in raw material and other operating costs (such as ore, zinc, brass, steel and energy costs) and our ability to pass those costs on to our customers or offset them with reductions in other operating costs;

- 27 -

Changes in the availability of raw materials (such as ore);

General global economic and political conditions (such as changes in the level of gross domestic product in various regions of the world and the impact of such changes on demand for, among other things, TiO2 and component products);

Competitive products and prices and substitute products, including increased competition from low-cost manufacturing sources (such as China);

Possible disruption of our business or increases in the cost of doing business resulting from terrorist activities or global conflicts;

Customer and competitor strategies;

Potential difficulties in integrating future acquisitions;

Potential difficulties in upgrading or implementing accounting and manufacturing software systems;

Potential consolidation of our competitors;

Potential consolidation of our customers;

The impact of pricing and production decisions;

Competitive technology positions;

Our ability to protect or defend intellectual property rights;

The introduction of trade barriers;

The ability of our subsidiaries to pay us dividends;

The impact of current or future government regulations (including employee healthcare benefit related regulations);

Uncertainties associated with new product development and the development of new product features;

Fluctuations in currency exchange rates (such as changes in the exchange rate between the U.S. dollar and each of the euro, the Norwegian krone and the Canadian dollar) or possible disruptions to our business resulting from potential instability resulting from uncertainties associated with the euro or other currencies;

Operating interruptions (including, but not limited to, labor disputes, leaks, natural disasters, fires, explosions, unscheduled or unplanned downtime, transportation interruptions and cyber-attacks);

Decisions to sell operating assets other than in the ordinary course of business;

The timing and amounts of insurance recoveries;

Our ability to renew, amend, refinance or establish credit facilities;

Our ability to maintain sufficient liquidity;

The ultimate outcome of income tax audits, tax settlement initiatives or other tax matters, including future tax reform;

Our ultimate ability to utilize income tax attributes, the benefits of which may or may not presently have been recognized under the more-likely-than-not recognition criteria;

Environmental matters (such as those requiring compliance with emission and discharge standards for existing and new facilities, or new developments regarding environmental remediation at sites related to our former operations);

Government laws and regulations and possible changes therein (such as changes in government regulations which might impose various obligations on former manufacturers of lead pigment and lead-based paint, including NL, with respect to asserted health concerns associated with the use of such products) including new environmental health and safety regulations;

The ultimate resolution of pending litigation (such as NL's lead pigment litigation, environmental and other litigation);

Our ability to comply with covenants contained in our revolving bank credit facilities;

Our ability to complete and comply with the conditions of our licenses and permits;

Changes in real estate values and construction costs in Henderson, Nevada;

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Water levels in Lake Mead; and

Possible future litigation.

Should one or more of these risks materialize (or the consequences of such development worsen), or should the underlying assumptions prove incorrect, actual results could differ materially from those currently forecasted or expected. We disclaim any intention or obligation to update or revise any forward-looking statement whether as a result of changes in information, future events or otherwise.

Operations Overview

Quarter Ended June 30, 2019 Compared to the Quarter Ended June 30, 2018 -

We reported net income from continuing operations attributable to Valhi stockholders of $7.1 million or $.02 per diluted share in the second quarter of 2019 compared to $11.3 million or $.03 per diluted share in the second quarter of 2018. As discussed more fully below, our net income from continuing operations attributable to Valhi stockholders decreased from 2018 to 2019 primarily due to the net effects of:

lower operating income from our Chemicals Segment in 2019 compared to 2018;

a pre-tax litigation settlement expense of $19.6 million recognized in the second quarter of 2019 compared to $62.0 million recognized in the second quarter of 2018;

income from infrastructure reimbursement of $7.7 million in the second quarter of 2019;

insurance recoveries related to a single insurance recovery settlement of $4.7 million in the second quarter of 2019;

lower interest expense in 2019 as a result of the deemed repayment of the Snake River debt in August 2018; and

lower environmental remediation and related costs in 2019.

Our diluted net income from continuing operations per share in the second quarter of 2019 includes:

a charge of $.04 per share related to a litigation settlement expense recognized;

a gain of $.01 per share related to the infrastructure reimbursement recognized; and

a gain of $.01 per share related to the insurance recoveries recognized.

Our diluted net income from continuing operations per share in 2018 includes a charge of $.12 per share related to the litigation settlement expense recognized in the second quarter.

Six Months Ended June 30, 2019 Compared to the Six Months Ended June 30, 2018 -

We reported net income from continuing operations attributable to Valhi stockholders of $25.3 million or $.07 per diluted share in the first six months of 2019 compared to $63.0 million or $.18 per diluted share in the first six months of 2018. As discussed more fully below, our net income from continuing operations attributable to Valhi stockholders decreased from 2018 to 2019 primarily due to the net effects of:

lower operating income from our Chemicals Segment in 2019 compared to 2018;

a pre-tax litigation settlement expense of $19.6 million recognized in the second quarter of 2019 compared to $62.0 million recognized in the second quarter of 2018;

recognition of a gain on sale of land of $12.5 million in 2018;

income from infrastructure reimbursement of $8.8 million in 2019 compared to $3.1 million in 2018;

insurance recoveries related to a single insurance recovery settlement of $4.7 million in the second quarter of 2019;

lower interest expense in 2019 as a result of the deemed repayment of the Snake River debt in August 2018; and

lower litigation and related costs and environmental and related expenses in 2019.

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Our diluted net income per share in 2019 includes:

a charge of $.04 per share related to the litigation settlement expense recognized in the second quarter;

a gain of $.01 per share related to the infrastructure reimbursement recognized in the second quarter; and

a gain of $.01 per share related to the insurance recoveries recognized in the second quarter.

Our diluted net income per share in 2018 includes:

a gain of $.03 per share related to the sale of land not used in our operations; and

a charge of $.12 per share related to the litigation settlement expense recognized in the second quarter.

Current Forecast for 2019-

We currently expect to report lower consolidated operating income for 2019 as compared to 2018 primarily due to the net effects of:

lower operating income from our Chemicals Segment in 2019, as the favorable impact of higher expected sales volumes would be more than offset by the unfavorable impact of lower expected average selling prices and higher raw material costs (principally feedstock ore) in 2019; and

higher operating income from our Real Estate Management and Development Segment in 2019 as we anticipate increased land development activities.

Segment Operating Results-2019 Compared to 2018 -

Chemicals -

We consider TiO2 to be a "quality of life" product, with demand affected by gross domestic product, or GDP, and overall economic conditions in our markets located in various regions of the world. Over the long-term, we expect demand for TiO2 will grow by 2% to 3% per year, consistent with our expectations for the long-term growth in GDP. However, even if we and our competitors maintain consistent shares of the worldwide market, demand for TiO2 in any interim or annual period may not change in the same proportion as the change in GDP, in part due to relative changes in the TiO2 inventory levels of our customers. We believe that our customers' inventory levels are influenced in part by their expectations for future changes in market TiO2 selling prices as well as their expectations for future availability of product. Although certain of our TiO2 grades are considered specialty pigments, the majority of our grades and substantially all of our production are considered commodity pigment products, with price and availability being the most significant competitive factors along with quality and customer service.

The factors having the most impact on our reported operating results are:

TiO2 selling prices,

our TiO2 sales and production volumes,

manufacturing costs, particularly raw materials such as third-party feedstock ore, maintenance and energy-related expenses, and

currency exchange rates (particularly the exchange rate for the U.S. dollar relative to the euro, the Norwegian krone and the Canadian dollar).

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Our Chemicals Segment's key performance indicators are our TiO2 average selling prices, our level of TiO2 sales and production volumes, and the cost of our third-party feedstock ore. TiO2 selling prices generally follow industry trends and prices will increase or decrease generally as a result of competitive market pressures.







                                      Three months ended June 30,                    Six months ended June 30,
                                                                   %                                            %
                                  2018             2019         Change           2018            2019        Change
        Net sales              $    471.8       $    484.5             3 %    $    902.2       $  921.0             2 %
        Cost of sales               300.5            375.4            25           556.6          703.1            26
        Gross margin           $    171.3       $    109.1           (36 )    $    345.6       $  217.9           (37 )
        Operating income       $    123.6       $     50.5           (59 )    $    234.2       $  103.3           (56 )
        Percent of net sales:
        Cost of sales                  64 %             77 %                          62 %           76 %
        Gross margin                   36               23                            38             24
        Operating income               26               10                            26             11
        TiO2 operating
        statistics:
        Sales volumes*                137              158            15 %           262            301            15 %
        Production volumes*           136              136             -             269            270             -
        Percent change in net
        sales:
        TiO2 product pricing                                          (8 )%                                        (8 )%
        TiO2 sales volumes                                            15                                           15
        TiO2 product mix/other                                         -                                           (1 )
        Changes in currency
        exchange rates                                                (4 )                                         (4 )
        Total                                                          3 %                                          2 %
        


* Thousands of metric tons

Current industry conditions- Average selling prices rose during the first half of 2018; however, such average selling prices began to decline in the last half of 2018 and into the first quarter of 2019 before beginning to rise again in the second quarter of 2019. Prices in the second quarter of 2019 were 2% higher than at the end of the first quarter with higher prices in all major markets. Our Chemicals Segment started 2019 with average selling prices 3% lower than at the beginning of 2018 and our average selling prices at the end of the second quarter of 2019 were 2% lower than at the end of 2018 with lower prices in the European, North American and Latin American markets partially offset by higher prices in the export market. Our Chemicals Segment experienced higher sales volumes in all major markets in the first six months of 2019 as compared to the same period of 2018.

Our Chemicals Segment operated its production facilities at overall average capacity utilization rates of 97% in the first six months of 2019 compared to 96% in the first six months of 2018. The table below lists our Chemicals Segment's comparative quarterly production capacity utilization rates.







                                     Production Capacity Utilization Rates
                                         2018                       2019
                    First quarter                95%                      97%
                    Second quarter               97%                      97%
        


Primarily due to a rise in the cost of third-party feedstock ore we procured in 2018 and the first six months of 2019, our Chemicals Segment's cost of sales per metric ton of TiO2 sold in the first six months of 2019 was higher as compared to the first six months of 2018 (excluding the effect of changes in currency exchange rates).

Net sales- Our Chemicals Segment's net sales in the second quarter of 2019 increased 3%, or $12.7 million, compared to the second quarter of 2018 primarily due to the net effect of an 8% decrease in average TiO2 selling prices (which decreased net sales by approximately $38 million) and a 15% increase in sales volumes (which increased net sales by approximately $71 million). TiO2 selling prices will increase or decrease generally as a result of competitive market pressures, changes in the relative level of supply and demand as well as changes in raw material and other manufacturing costs.

Our Chemicals Segment's sales volumes increased 15% in the second quarter of 2019 as compared to the second quarter of 2018 primarily due to higher sales in the European, North American and export markets. In addition to the impact of changes in average TiO2 selling prices and sales volumes, we estimate that changes in currency exchange rates (primarily the euro) decreased our Chemicals Segment's net sales by approximately $17 million as compared to the second quarter of 2018.

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Our Chemicals Segment's net sales in the first six months of 2019 increased 2%, or $18.8 million, compared to the first six months of 2018 primarily due to the net effect of an 8% decrease in average TiO2 selling prices (which decreased net sales by approximately $72 million) and a 15% increase in sales volumes (which increased net sales by approximately $135 million).

Our Chemicals Segment's sales volumes increased 15% in the first six months of 2019 as compared to the first six months of 2018 primarily due to higher sales in all major markets. In addition to the impact of changes in average TiO2 selling prices and sales volumes, we estimate that changes in currency exchange rates decreased our Chemicals Segment's net sales by approximately $32 million as compared to the first six months of 2018.

Cost of Sales and Gross Margin- Our Chemicals Segment's cost of sales increased 25% in the second quarter of 2019 compared to the second quarter of 2018 due to the net effect of a 15% increase in sales volumes, higher raw materials and other production costs of approximately $31 million (primarily caused by higher third-party feedstock ore costs) and currency fluctuations (primarily the euro). TiO2 production volumes in the second quarter of 2019 were comparable to the second quarter of 2018. Our Chemicals Segment's cost of sales as a percentage of net sales increased to 77% in the second quarter of 2019 compared to 64% in the same period of 2018 primarily due to the unfavorable effects of lower average selling prices and higher raw materials and other production costs, as discussed above.

Our Chemicals Segment's gross margin as a percentage of net sales decreased to 23% in the second quarter of 2019 compared to 36% in the second quarter of 2018. As discussed and quantified above, our gross margin decreased primarily due to the net effect of lower average selling prices, higher sales volumes and higher raw materials and other production costs.

Our Chemicals Segment's cost of sales increased 26% in the first six months of 2019 compared to the same period in 2018 primarily due to the net impact of a 15% increase in sales volumes, higher raw materials and other production costs of approximately $77 million (primarily caused by higher third party feedstock ore costs) and currency fluctuations (primarily the euro). TiO2 production volumes in the first six months of 2019 were comparable to the same period in 2018. Our Chemicals Segment's cost of sales as a percentage of net sales increased to 76% in the first six months of 2019 compared to 62% in the same period of 2018 primarily due to the unfavorable effects of lower average selling prices and higher raw materials and other production costs, as discussed above.

Our Chemicals Segment's gross margin as a percentage of net sales decreased to 24% in the first six months of 2019 compared to 38% in the first six months of 2018. As discussed and quantified above, our Chemicals Segment's gross margin decreased primarily due to the net effect of lower average selling prices, higher sales volumes and higher raw materials and other production costs.

Operating Income- Our Chemicals Segment's operating income decreased 59% in the second quarter of 2019 compared to the second quarter of 2018, and operating income as a percentage of net sales decreased to 10% in 2019 from 26% in 2018. This decrease was driven by the lower gross margin, discussed above. We estimate that changes in currency exchange rates decreased operating income by approximately $9 million in the second quarter of 2019 as compared to the same period in 2018, as discussed below.

Our Chemicals Segment's operating income decreased 56% in the first six months of 2019 compared to the first six months of 2018, and operating income as a percentage of net sales decreased to 11% in 2019 from 26% in 2018. We estimate that changes in currency exchange rates decreased Chemicals Segment's operating income by approximately $1 million in the first six months of 2019 as compared to the same period in 2018.

Our Chemicals Segment's operating income 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 $1.2 million in the first six months of 2018 and $1.1 million in the same period of 2019, which reduced our reported Chemicals Segment's operating income as compared to amounts reported by Kronos.

Currency Exchange Rates-- Our Chemicals Segment has substantial operations and assets located 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 sales generated from our non-U.S. operations is denominated in the U.S. dollar (and consequently our non-U.S. operations will generally hold U.S. dollars from time to time). Certain raw materials used worldwide, primarily titanium-containing feedstocks, are purchased primarily in U.S. dollars, while labor and other production costs are purchased primarily in local currencies. Consequently, the translated U.S. dollar value of our 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 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

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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, (ii) changes in currency exchange rates during time periods when our non-U.S. operations are holding non-local currency (primarily U.S. dollars), and

Overall, we estimate that fluctuations in currency exchange rates had the following effects on the reported amounts of our Chemicals Segment's sales and operating income for the periods indicated.







                                                Impact of changes in currency exchange rates
                                             three months ended June 30, 2019 vs June 30, 2018
                                                                                                    Translation            Total
                                                                                                 gains (losses) -        currency
        . . .
        


Aug 08, 2019

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/zigman2/quotes/203604290/composite
US : U.S.: NYSE
$ 11.02
+0.44 +4.16%
Volume: 200,491
July 15, 2020 3:03p
P/E Ratio
15.28
Dividend Yield
6.51%
Market Cap
$1.22 billion
Rev. per Employee
$757,130
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/zigman2/quotes/210222881/composite
US : U.S.: NYSE
$ 3.56
+0.28 +8.54%
Volume: 31,955
July 15, 2020 3:00p
P/E Ratio
13.80
Dividend Yield
N/A
Market Cap
$159.92 million
Rev. per Employee
$216,119
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/zigman2/quotes/205448789/composite
US : U.S.: NYSE American
$ 13.69
+0.67 +5.15%
Volume: 2,262
July 15, 2020 2:51p
P/E Ratio
10.41
Dividend Yield
2.94%
Market Cap
$162.01 million
Rev. per Employee
$216,119
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