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Dynamic quotes 
OFFON

VALHI, INC.

(VHI)
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VALHI INC /DE/ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

11/04/2021 | 03:51pm EST

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 (NYSE: KRO), NL (NYSE: NL) and CompX
(NYSE American: CIX) each file periodic reports with the SEC.

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 and healthcare

applications. CompX also manufactures stainless steel exhaust systems,

gauges, throttle controls, wake enhancement systems, trim tabs and

related hardware and accessories for the recreational marine and other

         industries.


      ?  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, aluminum, steel and energy costs);


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

? General global economic and political conditions that harm the worldwide

economy, disrupt our supply chain, increase material costs, reduce demand

or perceived demand for TiO2, component products and land held for

development or impair our ability to operate our facilities (including

         changes in the level of gross domestic product in various regions of the
         world, natural disasters, terrorist acts, global conflicts and public
         health crises such as COVID-19);


  ? Competitive products and substitute products;


  ? Customer and competitor strategies;


  ? Potential difficulties in integrating future acquisitions;


                                     - 22 -
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      ?  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 or trade disputes;


  ? 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 and between the euro and the Norwegian krone) or

         possible disruptions to our business 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, cyber-attacks and public health
         crises such as COVID-19);

? 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 ability to utilize income tax attributes, the benefits of which may

         or may not 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

such as those seeking to limit or classify TiO2 or its use;

? The ultimate resolution of pending litigation (such as NL's lead pigment

         and environmental matters);


      ?  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;


  ? 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.




                                     - 23 -
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Operations Overview

Quarter Ended September 30, 2021 Compared to the Quarter Ended September 30, 2020 -


We reported net income attributable to Valhi stockholders of $39.0 million or
$1.36 per diluted share in the third quarter of 2021 compared to net income of
$15.4 million or $.54 per diluted share in the third quarter of 2020. As
discussed more fully below, our net income attributable to Valhi stockholders
increased from 2020 to 2021 primarily due to the net effects of:

? higher operating income from all of our segments in 2021 compared to 2020;


  ? increase in income tax expense of $28.3 million in 2021;

? recognition of a gain on the sale of land not used in our operations of

$10.4 million in 2021; and

? recognition of a gain of $4.0 million in 2020 from proceeds received

related to a prior land sale.

Our diluted net income per share in the third quarter of 2021 includes a gain of $.28 per share related to the sale of land not used in our operations.


Our diluted net income per share in the third quarter of 2020 includes a gain of
$.07 per share related to the proceeds received associated with a prior land
sale.

Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020 -


We reported net income attributable to Valhi stockholders of $75.2 million or
$2.64 per diluted share in the first nine months of 2021 compared to $30.7
million or $1.08 per diluted share in the first nine months of 2020. As
discussed more fully below, our net income attributable to Valhi stockholders
increased from 2020 to 2021 primarily due to the net effects of:

      ?  higher operating income from our Chemicals and Component Products
         segments in 2021 compared to 2020;

? income from infrastructure reimbursement of $6.2 million in 2021 compared

         to $19.6 million in 2020;


  ? increase in income tax expense of $14.0 million in 2021;

? recognition of a gain on the sale of land not used in our operations of

         $16.0 million in the first nine months of 2021; and


      ?  recognition of a gain of $4.0 million in the third quarter of 2020 from
         proceeds received related to a prior land sale.

Our diluted net income per share in the first nine months of 2021 includes:

? income of $.11 per share related to the tax increment infrastructure

         reimbursement; and


      ?  a gain of $.43 per share related to the sale of land not used in our
         operations.

Our diluted net income per share in the first nine months of 2020 includes:

? income of $.35 per share related to the tax increment infrastructure

reimbursement;

? a gain of $.07 per share from the proceeds received in the third quarter

related to a prior land sale; and

? a gain of $.03 per share related to an insurance recovery for a property

damage claim at our Chemicals Segment.

Current Forecast for 2021 -


We currently expect to report higher consolidated operating income for 2021 as
compared to 2020 primarily due to higher operating income from all of our
segments. Beginning in the second half of 2020 and continuing through the first
nine months of 2021, sales at each of our operating segments have improved from
reduced levels experienced in the first half of 2020 resulting from the COVID-19
pandemic. We expect the improved demand experienced since late 2020 to continue
for the remainder of 2021 and we expect our operating results to reflect the
elevated demand. See additional discussion on expectations for each of our
operating segments below.

Segment Operating Results - 2021 Compared to 2020 -

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 to be consistent with our expectations for the long-term growth in GDP.
However, even if our Chemicals Segment and its 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 Chemicals Segment's
customers. We believe that our Chemicals Segment's 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 Chemicals Segment's TiO2 grades

                                     - 24 -

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are considered specialty pigments, the majority of its grades and substantially
all of its production are considered commodity pigment products with price and
availability being the most significant competitive factors along with product
quality and customer and technical support services.



The factors having the most impact on our Chemicals Segment's reported operating results are:

  ? TiO2 selling prices,


  ? our Chemicals Segment's TiO2 sales and production volumes,

? manufacturing costs, particularly raw materials such as third-party

         feedstock, maintenance and energy-related expenses, and


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


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



                                 Three months ended September 30,                      Nine months ended September 30,
                              2020              2021           % Change            2020                2021           % Change
                                       (Dollars in millions)                                (Dollars in millions)
Net sales                  $     416.9       $     499.8              20   %   $     1,223.9       $     1,443.4             18   %
Cost of sales                    337.3             377.1              12               961.8             1,116.7             16
Gross margin               $      79.6       $     122.7              54       $       262.1       $       326.7             25
Operating income           $      21.6       $      60.3             179       $       104.3       $       145.4             39
Percent of net sales:
Cost of sales                       81    %           75    %                             79    %             77   %
Gross margin                        19                25                                  21                  23
Operating income                     5                12                                   9                  10
TiO2 operating statistics:
Sales volumes*                     136               142               6   %             396                 427              8   %
Production volumes*                122               137              13   %             387                 404              4   %
Percent change in net
sales:
TiO2 sales volumes                                                     6   %                                                  8   %
TiO2 product pricing                                                  11                                                      4
TiO2 product mix/other                                                 2                                                      2
Changes in currency
exchange rates                                                         1                                                      4
Total                                                                 20   %                                                 18   %



* Thousands of metric tons



Current Industry Conditions - Our Chemicals Segment started 2021 with average
TiO2 selling prices 3% lower than at the beginning of 2020. Average TiO2 selling
prices were 11% higher in the third quarter of 2021 as compared to the third
quarter of 2020 and 4% higher in the first nine months of 2021 as compared to
the first nine months of 2020. Average TiO2 selling prices at the end of the
third quarter of 2021 were 10% higher than the end of 2020. Our Chemicals
Segment experienced higher sales volumes in all major markets in the first nine
months of 2021 as compared to the same period of 2020 primarily due to the
COVID-19 related demand contraction in 2020 which impacted the second and third
quarters and was most acute in the second quarter of 2020.

Our Chemicals Segment operated its production facilities at overall average
capacity utilization rates of 99% in the first nine months of 2021 compared to
92% in the first nine months of 2020. Our Chemicals Segment's TiO2 production
volumes were higher in the first nine months of 2021 as compared to the first
nine months of 2020 due to higher customer demand in 2021. Our Chemicals Segment
decreased production levels in 2020 (primarily in the third quarter) to
correspond to the temporary decline in demand resulting from the COVID-19
pandemic. The table below lists our Chemicals Segment's comparative quarterly
production capacity utilization rates.


                                     - 25 -

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                 Production Capacity Utilization Rates
                    2020                      2021
First quarter              95%                       97%
Second quarter             96%                      100%
Third quarter              86%                      100%


Net Sales - Our Chemicals Segment's net sales in the third quarter of 2021
increased 20%, or $82.9 million, compared to the third quarter of 2020 primarily
due to an 11% increase in average TiO2 selling prices (which increased net sales
by approximately $46 million) and a 6% increase in sales volumes (which
increased net sales by approximately $25 million). In addition to the impact of
higher sales volumes and higher average selling prices, we estimate that changes
in currency exchange rates (primarily the euro) increased our Chemicals
Segment's net sales by approximately $5 million in the third quarter of 2021 as
compared to the third quarter of 2020. 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 6% in the third quarter of 2021
as compared to the third quarter of 2020 due to higher demand primarily in its
European and North American markets from continuing improvements in global
economic activity in the third quarter of 2021 compared to the same period in
2020, which was negatively impacted by the COVID-19 pandemic.

Our Chemicals Segment's net sales in the first nine months of 2021 increased
18%, or $219.5 million, compared to the first nine months of 2020 primarily due
to an 8% increase in sales volumes (which increased net sales by approximately
$98 million) and a 4% increase in average TiO2 selling prices (which increased
net sales by approximately $49 million). In addition to the impact of higher
sales volumes and higher average selling prices, we estimate that changes in
currency exchange rates (primarily the euro) increased our Chemicals Segment's
net sales by approximately $47 million in the first nine months of 2021 as
compared to the first nine months of 2020.

Our Chemicals Segment's sales volumes increased 8% in the first nine months of
2021 as compared to the first nine months of 2020 primarily due to higher sales
volumes in all major markets, with a significant portion of the increase
occurring in the second and third quarters as a result of the impact of COVID-19
on the comparable periods in 2020, as discussed above.

Cost of Sales and Gross Margin - Our Chemicals Segment's cost of sales increased
12% in the third quarter of 2021 compared to the third quarter of 2020 due to a
6% increase in sales volumes and higher production costs of approximately $16
million (including higher costs for raw materials and energy). Our Chemicals
Segment's cost of sales as a percentage of net sales decreased to 75% in the
third quarter of 2021 compared to 81% in the same period of 2020 primarily due
to the favorable effects of higher average TiO2 selling prices and increased
coverage of fixed costs from higher production, partially offset by higher
production costs including higher raw material and energy costs, as discussed
above.

Our Chemicals Segment's gross margin as a percentage of net sales increased to
25% in the third quarter of 2021 compared to 19% in the third quarter of
2020. As discussed and quantified above, our Chemicals Segment's gross margin as
a percentage of net sales increased primarily due to the net effects of higher
production and sales volumes and higher average TiO2 selling prices, partially
offset by higher production costs including higher raw material and energy
costs.

Our Chemicals Segment's cost of sales increased 16% in the first nine months of
2021 compared to the first nine months of 2020 due to an 8% increase in sales
volumes and higher production costs of approximately $17 million (including
higher costs for raw materials and energy) and the effects of currency
fluctuations (primarily the Canadian dollar). Our Chemicals Segment's cost of
sales as a percentage of net sales decreased slightly to 77% in the first nine
months of 2021 compared to 79% in the same period of 2020 primarily due to the
favorable effects of higher average TiO2 selling prices and increased coverage
of fixed costs from higher production, partially offset by higher production
costs as well as the effects of fluctuations in currency exchange rates, as
discussed below.

Our Chemicals Segment's gross margin as a percentage of net sales increased to
23% in the first nine months of 2021 compared to 21% in the first nine months of
2020. As discussed and quantified above, our Chemicals Segment's gross margin as
a percentage of net sales increased primarily due to the net effects of higher
average TiO2 selling prices, higher production and sales volumes, higher raw
material and other production costs and fluctuations in currency exchange rates.

Operating Income - Our Chemicals Segment's operating income increased by $38.7
million, or 179%, in the third quarter of 2021 compared to the third quarter of
2020. Operating income as a percentage of net sales increased to 12% in the
third quarter of 2021 from 5% in the same period of 2020 as a result of the
factors impacting gross margin discussed above. We estimate changes in currency
exchange rates increased our Chemicals Segment's operating income by
approximately $2 million in the third quarter of 2021 as compared to the same
period in 2020, as discussed in the Currency Exchange Rates section below.

                                     - 26 -

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Our Chemicals Segment's operating income increased by $41.1 million, or 39%, in
the first nine months of 2021 compared to the first nine months of
2020. Operating income as a percentage of net sales increased to 10% in the
first nine months of 2021 from 9% in the same period of 2020. This increase was
driven by the higher gross margin discussed above. We estimate that changes in
currency exchange rates decreased our Chemicals Segment's operating income by
approximately $15 million in the first nine months of 2021 as compared to the
same period in 2020.

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 $1.1
million in the first nine months of 2021 and $2.7 million in the same period of
2020, 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 Chemicals Segment's sales generated from its 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 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 non-U.S. operations are holding non-local
currency (primarily U.S. dollars).

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 September 30, 2021 vs September 30, 2020

                                                                                              Translation             Total
                                                                                            gains (losses)-         currency
                                       Transaction gains (losses) recognized                   impact of             impact
                                 2020                    2021                Change           rate changes        2021 vs 2020
                                                                        (In millions)
Impact on:
Net sales                    $           -           $          -         $          -      $              5     $             5
Operating income                        (3 )                    1                    4                    (2 )                 2


The $5 million increase in our Chemicals Segment's net sales (translation gain)
was caused primarily by a weakening of the U.S. dollar relative to the euro, as
euro-denominated sales were translated into more U.S. dollars in 2021 as
compared to 2020. The weakening of the U.S. dollar relative to the Canadian
dollar and the Norwegian krone in 2021 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.

The $2 million increase in our Chemicals Segment's operating income was comprised of the following:

      ?  Higher net currency transaction gains of approximately $4 million
         primarily caused by relative changes in currency exchange rates at each
         applicable balance sheet date between the U.S. dollar and the euro,
         Canadian dollar and the Norwegian krone, and between the euro and the

Norwegian krone, which causes increases or decreases, as applicable, in

U.S. dollar-denominated receivables and payables and U.S. dollar currency

held by our Chemicals Segment's non-U.S. operations, and in Norwegian

         krone denominated receivables and payables held by our Chemicals
         Segment's non-U.S. operations, and

? Approximately $2 million from net currency translation losses primarily

         caused by a weakening of the U.S. dollar relative to the Canadian dollar
         and the Norwegian krone, as local currency-denominated operating costs
         were translated into more U.S. dollars in 2021 as compared to 2020,

partially offset by net currency translation gains primarily caused by a

weakening of the U.S. dollar relative to the euro as the positive effects

of the weaker U.S. dollar on euro-denominated sales more than offset the

unfavorable effects of euro-denominated operating costs being translated

         into more U.S. dollars in 2021 as compared to 2020.


                                     - 27 -
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                                      Impact of changes in currency exchange rates
                               Nine months ended September 30, 2021 vs September 30, 2020

                                                                                         Translation            Total
                                                                                      gains (losses) -        currency
                                        Transaction gains recognized                      impact of            impact
                                 2020                2021              Change           rate changes        2021 vs 2020
                                                                    (In millions)
Impact on:
Net sales                    $          -         $         -        $         -      $              47     $          47
Operating income                        3                   1                 (2 )                  (13 )             (15 )


The $47 million increase in our Chemicals Segment's net sales (translation gain)
was caused primarily by a weakening of the U.S. dollar relative to the euro, as
euro-denominated sales were translated into more U.S. dollars in 2021 as
compared to 2020. The weakening of the U.S. dollar relative to the Canadian
dollar and the Norwegian krone in 2021 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.



The $15 million decrease in our Chemicals Segment's operating income was comprised of the following:

      ?  Lower net currency transaction gains of approximately $2 million
         primarily caused by relative changes in currency exchange rates at each
         applicable balance sheet date between the U.S. dollar and the euro,
         Canadian dollar and the Norwegian krone, and between the euro and the

Norwegian krone, which causes increases or decreases, as applicable, in

U.S. dollar-denominated receivables and payables and U.S. dollar currency

held by our Chemicals Segment's non-U.S. operations, and in Norwegian

         krone denominated receivables and payables held by our Chemicals
         Segment's non-U.S. operations, and

? Approximately $13 million from net currency translation losses primarily

         caused by a weakening of the U.S. dollar relative to the Canadian dollar
         and Norwegian krone, as local currency-denominated operating costs were

translated into more U.S. dollars in 2021 as compared to 2020, partially

offset by net currency translation gains primarily caused by a weakening

of the U.S. dollar relative to the euro as the positive effects of the

weaker U.S. dollar on our Chemicals Segment's euro-denominated sales more

than offset the unfavorable effects of euro-denominated operating costs

being translated into more U.S. dollars in 2021 as compared to 2020.



Outlook - Based on current market conditions, we expect global demand for
consumer products, including those of our Chemicals Segment's customers, to
remain strong throughout the remainder of 2021 and therefore we expect our
Chemicals Segment's sales and production volumes will be higher in 2021 as
compared to 2020. As global economic activity continues to recover, our
Chemicals Segment is experiencing certain disruptions in global supply chains
including availability of third-party feedstock and other raw materials along
with transportation and logistics delays. Thus far the Chemicals Segment's
operations team has been able to manage through these disruptions with minimal
impact on its operations; however, our Chemicals Segment expects these
challenges to continue for the foreseeable future. In addition, our Chemicals
Segment continues to experience increasing production costs, including higher
raw material and related shipping costs and higher energy costs, all of which
are likely to continue through the end of the year. As a result of rising costs
and continued strong customer demand, we expect selling prices for TiO2 will
continue to rise through the remainder of 2021, mitigating increases in
distribution, raw material, energy and other production costs. As such, we
expect our Chemical Segment's 2021 sales and operating income will be higher
than in 2020; however, our Chemicals Segment expects increasing costs to
continue to challenge margins. Our Chemicals Segment continues to monitor
current and anticipated near-term customer demand levels and will align its
production and inventories accordingly.

Our expectations for the TiO2 industry and our Chemicals Segment's operations
are based on a number of factors outside our control, including the ongoing
economic effects of the COVID-19 pandemic. As noted above, our Chemicals Segment
has experienced global supply chain disruptions, including disruptions related
to COVID-19, and future impacts of COVID-19 on its operations will depend on,
among other things, any future disruption in its operations or its suppliers'
operations, or related possible shipping delays, and the timing and
effectiveness of the global measures deployed to fight COVID-19 and its
variants, all of which remain uncertain and cannot be predicted.

Component Products -


Our Component Products Segment's product offerings consist of a significantly
large number of products that have a wide variation in selling price and
manufacturing cost, which results in certain practical limitations on its
ability to quantify the impact of changes in individual product sales quantities
and selling prices on the segment's net sales, cost of sales and gross margin.
The key performance indicator for our Component Products Segment is operating
income and margins.

                                     - 28 -
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In the third quarter of 2021 our Component Products Segment's operating income
increased to $5.1 million compared to $2.1 million in the third quarter of
2020. Operating income for the first nine months of 2021 was $16.7 million
compared to $9.5 million in the first nine months of 2020. The increase in our
Component Products Segment's operating income in the third quarter and first
nine months of 2021 compared to the same periods in 2020 primarily resulted from
higher sales volumes at both its security products and marine components
reporting units. Our Component Products Segment's operating income was
negatively impacted by the COVID-19 pandemic in the second and third quarters of
2020, which significantly impacts operating income comparisons for the third
quarter and nine-month comparative periods. Our Component Products Segment
sustained the greatest negative sales impact from COVID-19 in the second quarter
of 2020. Beginning in the third quarter of 2020 and continuing through the third
quarter of 2021, marine components sales exceeded pre-pandemic levels. Security
products sales generally improved since the third quarter of 2020, but did not
recover to pre-pandemic levels until the second quarter of 2021 when sales
improved in markets that had been slower to recover from the COVID-19 pandemic,
particularly sales to distributors and the office furniture market.



                                 Three months ended September 30,                     Nine months ended September 30,
                              2020              2021           % Change           2020              2021            % Change
                                       (Dollars in millions)                               (Dollars in millions)
Net sales:
Security products          $      21.2       $      25.8              22   %   $     65.2       $       79.3               22   %
Marine components                  7.2               8.7              21             19.3               27.4               42
Total net sales                   28.4              34.5              22             84.5              106.7               26
Cost of sales                     21.1              23.6              12             59.4               73.4               24
Gross margin               $       7.3       $      10.9              49       $     25.1       $       33.3               32

Operating income           $       2.1       $       5.1             146   %   $      9.5       $       16.7               76   %

Percent of net sales:
Cost of sales                       74    %           68    %                          70    %            69    %
Gross margin                        26                32                               30                 31
Operating income                     7                15                               11                 15




Net Sales - Our Component Products Segment's net sales increased $6.1 million in
the third quarter of 2021 compared to the same period in 2020 primarily due to
higher security products sales across a variety of markets and to a lesser
extent higher marine components sales primarily to the towboat market. Net sales
increased $22.2 million for the first nine months of 2021 compared to the same
period in 2020 primarily due to higher sales volumes for both security products
and marine components, particularly in the second quarter of 2021, as many of
our Component Products Segment's customers were temporarily closed or reduced
production during the second quarter of 2020 due to government ordered closures
or reduced demand resulting from the COVID-19 pandemic. Relative to prior year,
third quarter security products sales were $2.1 million higher to the government
security market, $1.3 million higher to the transportation market, and $.6
million higher to distribution customers, and sales for the first nine months of
2021 were $5.6 million higher to the government security market, $4.5 million
higher to the transportation market, and $2.0 million higher to distribution
customers. Marine sales to the towboat market were $1.4 million higher for the
third quarter and $6.5 million higher for the first nine months of 2021 compared
to the same periods in 2020.

Costs of Sales and Gross Margin - Our Component Products Segment's cost of sales
as a percentage of net sales for the third quarter and for the first nine months
of 2021 was lower than the same periods in 2020. As a result, gross margin as a
percentage of net sales increased over the same periods. The increase in gross
margin percentage in the third quarter and for the first nine months of 2021 is
primarily due to the increase in the security products gross margin percentage
related to increased coverage of fixed costs from higher production, partially
offset by higher production costs including increased raw materials costs across
a variety of commodities and component inputs, higher shipping costs, and
increased labor costs primarily due to higher overtime costs and increased
headcount.

Operating Income - As a percentage of net sales, our Component Products
Segment's operating income for the third quarter and first nine months of 2021
increased compared to the same periods of 2020 due to increased coverage of
selling, general and administrative expenses on higher sales and the factors
impacting cost of sales and gross margin discussed above.

Outlook - Beginning in the second half of 2020, our Component Products Segment's
sales began to recover from the historically low levels it experienced during
the second quarter of 2020, with sales steadily improving for the remainder of
last year. Throughout the first nine months of 2021, our Component Products
Segment experienced strong demand, particularly for marine components. During
the second and third quarters of 2021, its security products reporting unit has
seen improved demand from distributors and the office furniture market that had
been slower to recover. In the first nine months of 2021, our Component Products

                                     - 29 -

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Segment's manufacturing facilities operated at elevated production rates in line
with improved demand, although labor markets are tight in each of the regions in
which it operates and, as a result, our Component Products Segment has
experienced and continues to have challenges maintaining staffing levels aligned
with current and forecasted demand, particularly at its marine components
reporting unit.

Based on current market conditions, our Component Products Segment expects
demand levels to remain strong for the remainder of 2021 and it expects to
report increased sales and operating income in 2021 compared to 2020. Our
Component Products Segment's supply chains remain intact, although the current
global and domestic supply chain disruptions continue to present challenges in
sourcing certain raw materials due to increased lead times, availability
shortages and transportation and logistics delays. Thus far our Component
Products Segment has been able to manage through these disruptions with minimal
impact on its operations. In addition, our Component Products Segment is
experiencing increased production costs including higher labor, shipping, and
increasing costs of many of the raw materials it uses. In response, our
Component Products Segment implemented price increases and surcharges in the
second and third quarters of 2021; however, the extent to which the price
increases and surcharges will mitigate the rising costs is uncertain and it
expects increasing production costs will negatively impact gross margins in the
fourth quarter as higher cost inventories are sold. Our Component Products
Segment's operations teams meet frequently to ensure they are taking appropriate
actions to maintain a safe working environment for all its employees, minimize
material or supply related operational disruptions, manage inventory levels and
improve operating margins.

Our Component Products Segment's expectations for its operations and the markets
it serves are based on a number of factors outside its control. As noted above,
there are global and domestic supply chain challenges and any future impacts of
COVID-19 on our Component Products Segment's operations will depend on, among
other things, any future disruption in its operations or its suppliers'
operations, demand for its products and the timing and effectiveness of the
global measures deployed to fight COVID-19, all of which remain uncertain and
cannot be predicted.


Real Estate Management and Development -




                       Three months ended          Nine months ended
                          September 30,              September 30,
                       2020           2021         2020           2021
                                       (In millions)
Net sales:
Land sales           $    10.6       $  41.9     $    16.8       $ 57.0
Water delivery sales       2.2           2.3           6.2          4.8
Utility and other           .5            .4           1.5          1.3
Total net sales           13.3          44.6          24.5         63.1
Cost of sales             10.5          25.5          18.3         36.5
Gross margin         $     2.8       $  19.1     $     6.2       $ 26.6

Operating income     $     5.2       $  15.8     $    25.4       $ 26.0




General - Our Real Estate Management and Development Segment consists of BMI and
LandWell. BMI provides utility services, among other things, to an industrial
park located in Henderson, Nevada and is responsible for the delivery of water
to the City of Henderson and various other users through a water distribution
system owned by BMI. 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 and approximately 400 acres zoned for
commercial and light industrial use.

Beginning in December 2013 and through the first nine months of 2021, LandWell
has closed or entered into escrow on approximately 1,300 acres of the
residential/planned community and approximately 70 acres zoned for commercial
and light industrial use. Contracts for land sales are negotiated on an
individual basis and sales terms and prices will vary based on such factors as
location (including location within a planned community), expected development
work, and individual buyer needs. Although land may be under contract or in
escrow, in most instances buyers can cancel the escrow agreement with no
financial penalties until shortly before the closing date. Land sales may be
completed but we do not recognize revenue until we have satisfied the criteria
for revenue recognition set forth in ASC Topic 606. In some instances, we will
receive cash proceeds at the time the contract closes and record deferred
revenue for some or all of the cash amount received, with such deferred revenue
being recognized in subsequent periods. We expect our development work on the
residential/planned community to continue for 4 to 7 years although we may have
sold or transferred ownership of all of the land within the community prior to
development work completion.

Net Sales and Operating Income - A substantial portion of the net sales from our
Real Estate Management and Development Segment in the third quarter and first
nine months of 2020 and 2021 consisted of revenues from land sales. As noted
above, we recognize

                                     - 30 -
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revenue in our residential/planned community over time using cost based input
methods (previously known as percentage completion method) and substantially all
of the revenue we recognized in 2020 and 2021 was under this method of revenue
recognition. The contracts on these sales (both within the planned community and
otherwise) include approximately 1,200 acres of the residential planned
community and certain other acreage which closed in December 2013 and through
the third quarter of 2021. Land sales revenues were higher in the third quarter
and first nine months of 2021 as compared to the same periods in 2020 primarily
due to an increase in the amount of acreage sold in 2021 compared to 2020 and
increased development activity in the second and third quarters of 2021 compared
to the same periods of 2020. During the second and third quarters of 2020 we
slowed infrastructure spending within the residential planned community due to
the uncertainty associated with the COVID-19 pandemic. Cost of sales related to
land sales revenues was $32.0 million in the first nine months of 2021 compared
to $12.8 million in the first nine months of 2020. Operating income includes
$6.2 million in the first nine months of 2021 (all in the first quarter) and
$19.1 million in the first nine months of 2020 (all in the first quarter) of
income related to the recognition of tax increment reimbursement note
receivables, as discussed in Note 11 to our Condensed Consolidated Financial
Statements. In addition during the third quarter of 2020 we recognized a gain of
$4.0 million from proceeds from a prior land sale.

The remainder of net sales and cost of sales related to this segment primarily relates to water delivery fees and expenses. We deliver water to several customers under long-term contracts.


Outlook - As a result of the COVID-19 pandemic, LandWell experienced a decline
in land sales activity during the second quarter of 2020 and, as a result,
LandWell reduced development spending where possible to align with expected
residential builder output. Beginning in the second half of 2020 and continuing
through the first nine months of 2021, land sales activities increased,
including increases in both the number of acres sold and the selling price per
acre sold. In addition, approximately 150 acres are under escrow agreements at
September 30, 2021.  In order to support increased sales activity, LandWell
returned to more normalized infrastructure development spending in late 2020,
and thus far in 2021 infrastructure activity has continued at a heavy pace to
support the increase in acreage sold or entering escrow.  Throughout the
COVID-19 pandemic, LandWell has continued to actively develop and market land it
manages, primarily to residential builders, for the residential/planned
community in Henderson and BMI has continued to provide utility and water
delivery services to its customers without interruption.  Our Real Estate
Management and Development management team remains focused on protecting the
health and safety of its employees and contractors including implementation of
enhanced health and safety protocols.

Based on current land sales activities, including current land sales in escrow,
we expect the level of land sales in the near term to continue to be strong.  As
noted above, we cannot guarantee land held in escrow will close as currently
scheduled because builders can generally cancel without financial penalty until
shortly before scheduled closing. In addition, there are still several COVID-19
mitigation procedures in effect from the City of Henderson and utility providers
that, in some cases, add time to the typical permitting and mapping process
required to be completed before the necessary approvals can be obtained to close
a land sale. 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 has been required to
begin several of these large projects in 2021 and, as a result, we expect land
development costs to increase during 2021 as compared to 2020.  Because these
costs relate to the entirety of the residential/planned community, these costs
are not part of the cost based inputs used to recognize revenue and therefore
this spending will not correlate to revenue recognition but it is expected to be
eligible for tax increment reimbursement.

General Corporate Items, Interest Expense, Income Taxes and Noncontrolling Interest - 2021 Compared to 2020


Gain on Land Sales - In the first nine months of 2021 we sold excess property
not used in our operations for net proceeds of approximately $23.4 million and
recognized a pre-tax gain of $16.0 million.

Insurance Recoveries - NL has agreements with certain insurance carriers pursuant to which the carriers reimburse NL for a portion of its past lead pigment and asbestos litigation defense costs. Insurance recoveries include amounts NL received from these insurance carriers.


The agreements with certain of NL's insurance carriers also include
reimbursement for a portion of its future litigation defense costs. We are not
able to determine how much NL will ultimately recover from these carriers for
defense costs incurred by NL because of certain issues that arise regarding
which defense costs qualify for reimbursement. Accordingly, these insurance
recoveries are recognized when the receipt is probable and the amount is
determinable. See Note 15 to our Condensed Consolidated Financial Statements.

Kronos recognized $1.5 million of insurance recoveries in the first quarter of 2020 related to a property damage claim.


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 2020 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

                                     - 31 -
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stock to the extent of our proportional ownership interest in each
subsidiary. We recognized a loss of $.2 million in the third quarter of 2021
compared to a gain of $.7 million in the same period of 2020 and a gain of $2.0
million in the first nine months of 2021 compared to a loss of $2.2 million in
the first nine months of 2020 in our Condensed Consolidated Statements of
Income, which represents the unrealized gain or loss in respect of these shares
during such periods attributable to the noncontrolling interest of Kronos and
NL.

Other General Corporate Items - Corporate expenses in the third quarter and first nine months of 2021 were comparable to the same periods of 2020. Included in corporate expense are:

? litigation and related costs at NL of $.6 million in the third quarter of

         2021 compared to $.3 million in the third quarter of 2020 and $1.4
         million in each of the first nine months of 2021 and 2020; and

? environmental remediation and related costs of $.4 million in the third

quarter of 2021 compared to $.1 million in the third quarter of 2020 and

$1.3 million in the first nine months of 2021 compared to $.5 million in

the first nine months of 2020.



Overall, we currently expect that our net general corporate expenses in 2021
will be higher than 2020 primarily due to higher expected litigation and related
costs and higher environmental remediation and related costs.

The level of our litigation and related expenses varies from period to period
depending upon, among other things, the number of cases in which we are
currently involved, the nature of such cases and the current stage of such cases
(e.g. discovery, pre-trial motions, trial or appeal, if applicable). See Note 15
to our Condensed Consolidated Financial Statements. If our current expectations
regarding the number of cases in which we expect to be involved during 2021, or
the nature of such cases, were to change, our corporate expenses could be higher
than we currently estimate.

Obligations for environmental remediation and related costs are difficult to
assess and estimate, and it is possible that actual costs for environmental
remediation and related costs will exceed accrued amounts or that costs will be
incurred in the future for sites in which we cannot currently estimate the
liability. If these events occur in 2021, our corporate expense could be higher
than we currently estimate. In addition, we adjust our accruals for
environmental remediation and related costs as further information becomes
available to us or as circumstances change. Such further information or changed
circumstances could result in an increase or reduction in our accrued
environmental remediation and related costs. See Note 15 to our Condensed
Consolidated Financial Statements.

Interest Expense - Interest expense of $7.9 million in the third quarter of 2021
and $25.2 million in the first nine months of 2021 decreased $1.0 million and
$2.2 million, respectively, compared to the same prior year periods primarily
due to lower average interest rates and lower average balances on variable-rate
indebtedness in 2021.

We expect interest expense will continue to be lower in the remainder of 2021 as compared to 2020 due to lower average balances.


Provision for Income Taxes - We recognized income tax expense of $16.9 million
in the third quarter of 2021 compared to income tax benefit of $11.4 million in
the third quarter of 2020 and income tax expense of $35.2 million in the first
nine months of 2021 compared to $21.2 million in the first nine months of
2020. The increase in both periods is primarily due to higher earnings in 2021,
the jurisdictional mix of our earnings and, in 2020, a reduction in the expected
annual effective income tax rate recognized in the third quarter. Income tax
expense for the first nine months of 2021 includes lower amounts recognized for
global intangible low-tax income (GILTI) due to limitations in 2020 on related
deductions and tax credits and an increase in the valuation allowance in 2020
for the nondeductible amount of business interest expense carryforward not
expected to be fully utilized under the more-likely-than-not recognition
criteria. For interim financial reporting purposes, we apply an estimated annual
effective tax rate in determining our provision for income taxes and in 2020 our
estimated annual effective tax rate was significantly impacted due to the
effects of GILTI and the increase to the valuation allowance relative to our
earnings. Our earnings are subject to income tax in various U.S. and non-U.S.
jurisdictions, and the income tax rates applicable to the pre-tax earnings
(losses) of our non-U.S. operations are generally higher than the income tax
rates applicable to our U.S. operations. Excluding the effect of any increase or
decrease in our deferred income tax asset valuation allowance or changes in our
reserve for uncertain tax positions, we would generally expect our overall
effective tax rate to be higher than the U.S. federal statutory tax rate of 21%
primarily because of our non-U.S. operations.

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, 2020, we had
recognized a deferred income tax liability with respect to our direct investment
in Kronos of $35.5 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 such deferred income tax liability we would be
required to have recognized (the cap) is $155.4 million.  During the first nine
months of 2021, we recognized a non-cash deferred income tax expense with
respect to our direct investment in Kronos of $.7 million for the increase 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, to the extent such reduction related
to our equity in Kronos' net income during such period. We recognized a similar
deferred income tax benefit of $1.8 million in the first nine months of 2020. 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.

                                     - 32 -

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See Note 12 to our Condensed Consolidated Financial Statements for a tabular reconciliation of our statutory income tax provision to our actual tax provision.


Noncontrolling Interest in Net Income of Subsidiaries - Noncontrolling interest
in operations of subsidiaries increased in 2021 compared to 2020 primarily due
to increased operating income at Kronos and CompX. See Note 13 to our Condensed
Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

Consolidated Cash Flows

Operating Activities -


Trends in cash flows from operating activities (excluding the impact of
significant asset dispositions and relative changes in assets and liabilities)
are generally similar to trends in our operating income. In addition to the
impact of the operating, investing and financing cash flows discussed below,
changes in the amount of cash, cash equivalents and restricted cash we report
from period to period can be impacted by changes in currency exchange rates,
since a portion of our cash, cash equivalents and restricted cash is held by our
non-U.S. subsidiaries.

Cash provided by operating activities was $189.2 million in the first nine months of 2021 compared to cash provided by operating activities of $45.2 million in the first nine months of 2020. This $144.0 million increase in cash provided was primarily due to the net effect of the following items:

? a $72.1 million decrease in the amount of net cash used in relative

changes in receivables, inventories, payables and accrued liabilities in

the first nine months of 2021;

? consolidated operating income of $188.1 million in the first nine months

         of 2021, an increase of $48.9 million compared to operating income of
         $139.2 million in the first nine months of 2020; and


      ?  higher net cash paid for income taxes in 2021 of $30.0 million due to
         increased earnings in 2021 and the timing of tax payments.

Changes in working capital were affected by accounts receivable and inventory changes as shown below:

? Kronos' average days sales outstanding ("DSO") decreased from

December 31, 2020 to September 30, 2021 primarily due to relative changes

         in the timing of collections.


      ?  Kronos' average days sales in inventory ("DSI") decreased from

December 31, 2020 to September 30, 2021 primarily due to lower inventory

         volumes attributable to sales volumes exceeding production volumes in the
         first nine months of 2021 compared to 2020.


      ?  CompX's average DSO at September 30, 2021 increased from December 31,
         2020 primarily as a result of relative changes in the timing of
         collections but is in line with prior year.


      ?  CompX's average DSI increased from December 31, 2020 to September 30,
         2021 due to increased raw material and production costs as well as
         increased purchases of certain components and raw materials that have
         longer lead times or for which CompX has experienced availability issues.


For comparative purposes, we have also provided comparable prior period numbers
below.



                                     December 31,        September 30,       December 31,        September 30,
                                         2019                2020                2020                2021
Kronos:
Days sales outstanding                      71 days             67 days             68 days             66 days
Days sales in inventory                     83 days             66 days             74 days             51 days
CompX:
Days sales outstanding                      36 days             39 days             33 days             40 days
Days sales in inventory                     81 days             83 days             75 days             91 days




                                     - 33 -
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We do not have complete access to the cash flows of our majority-owned
subsidiaries, due in part to limitations contained in certain credit agreements
of our subsidiaries and because we do not own 100% of these subsidiaries. A
detail of our consolidated cash flows from operating activities is presented in
the table below. Intercompany dividends have been eliminated.



                                                   Nine months ended
                                                     September 30,
                                                   2020          2021
                                                     (In millions)
Cash provided by (used in) operating activities:
Valhi exclusive of its subsidiaries              $    28.1     $   84.8
Kronos                                                56.0        125.9
NL exclusive of its subsidiaries                       2.7          8.3
CompX                                                  8.7          8.1
BMI                                                   12.6         35.1
LandWell                                              12.6         96.5
Tremont exclusive of its subsidiaries                  7.9         32.2
Eliminations and other                               (83.4 )     (201.7 )
Total                                            $    45.2     $  189.2


Investing Activities -

We spent $39.2 million in capital expenditures during the first nine months of 2021 including:

  ? $35.9 million in our Chemicals Segment;


  ? $2.3 million in our Component Products Segment; and


  ? $1.0 million in our Real Estate Management and Development Segment.

We had net proceeds from the sale of land not used in our operations of $23.4 million in the first nine months of 2021.

Financing Activities -

During the nine months ended September 30, 2021, we:

? repaid $66.2 million under the Contran credit facility and repaid $1.5

million under Tremont's deferred payment obligation;

? paid aggregate quarterly dividends to Valhi stockholders of $.24 per

share ($6.8 million); and

? CompX acquired shares of its Class A common stock for a purchase price of

$.8 million.



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 nine
months of 2021 are comprised of CompX dividends paid to shareholders other than
NL and Kronos dividends paid to shareholders other than us and NL.

Outstanding Debt Obligations

At September 30, 2021, our consolidated indebtedness was comprised of:

? Valhi's $204.5 million outstanding on its $320 million credit facility

with Contran which is due no earlier than December 31, 2022;

? €400 million aggregate outstanding on the KII 3.75% Senior Secured Notes

($460.4 million carrying amount, net of unamortized debt issuance costs)

due in September 2025;

? $15.9 million on BMI's bank loan ($15.3 million carrying amount, net of

         unamortized debt issuance costs) due through September 2032;


  ? $13.9 million on LandWell's bank loan due in April 2036; and


  ? approximately $1.4 million of other indebtedness.


                                     - 34 -
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On April 20, 2021, Kronos entered into a new $225 million global revolving
credit facility ("Global Revolver") which matures in April 2026. Kronos has no
outstanding borrowings on the new Global Revolver at September 30, 2021 and the
full $225 million was available for borrowings thereunder. Kronos' Senior
Secured Notes and its new 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
outstanding at September 30, 2021 are discussed in Note 9 to our 2020 Annual
Report. See Note 6 to our Condensed Consolidated Financial Statements for
discussion of the terms of Kronos' new Global Revolver. We were in compliance
with all of our debt covenants at September 30, 2021. We believe we will be able
to maintain compliance with the financial covenants contained in our credit
facilities through their maturity.

Future Cash Requirements

Liquidity -


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,
(ii) refinance existing indebtedness, (iii) make investments in marketable and
other securities (including the acquisition of securities issued by our
subsidiaries and affiliates) or (iv) fund major capital expenditures or the
acquisition of other assets outside the ordinary course of business.
Occasionally we sell assets outside the ordinary course of business, and we
generally use the proceeds to (i) repay existing indebtedness (including
indebtedness which may have been collateralized by the assets sold), (ii) make
investments in marketable and other securities, (iii) fund major capital
expenditures or the acquisition of other assets outside the ordinary course of
business or (iv) pay dividends.

We routinely compare our liquidity requirements and alternative uses of capital
against the estimated future cash flows we expect to receive from our
subsidiaries, and the estimated sales value of those units. As a result of this
process, we have in the past sought, and may in the future seek, to raise
additional capital, refinance or restructure indebtedness, repurchase
indebtedness in the market or otherwise, modify our dividend policies, consider
the sale of our interests in our subsidiaries, affiliates, business units,
marketable securities or other assets, or take a combination of these and other
steps, to increase liquidity, reduce indebtedness and fund future activities.
Such activities have in the past and may in the future involve related
companies. From time to time, we and our subsidiaries may enter into
intercompany loans as a cash management tool. Such notes are structured as
revolving demand notes and pay and receive interest on terms we believe are
generally more favorable than current debt and investment market rates. The
companies that borrow under these notes have sufficient liquidity to repay the
notes. All of these notes and related interest expense and income are eliminated
in our Condensed Consolidated Financial Statements.

We periodically evaluate acquisitions of interests in or combinations with
companies (including our affiliates) that may or may not be engaged in
businesses related to our current businesses. We intend to consider such
acquisition activities in the future and, in connection with this activity, may
consider issuing additional equity securities and increasing indebtedness. From
time to time, we also evaluate the restructuring of ownership interests among
our respective subsidiaries and related companies.

We believe we will be able to comply with the financial covenants contained in
our credit facilities through their maturities; however, if future operating
results differ materially from our expectations we may be unable to maintain
compliance. Based upon our expectations of our operating performance, and the
anticipated demands on our cash resources, we expect to have sufficient
liquidity to meet our short-term (defined as the twelve-month period ending
September 30, 2022) and long-term obligations (defined as the five-year period
ending September 30, 2026). If actual developments differ from our expectations,
our liquidity could be adversely affected.



                                     - 35 -

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At September 30, 2021, we had $115.5 million available for borrowing under our
credit facility with Contran. Amounts available under this facility are at
Contran's discretion. Kronos' new $225 million Global Revolver entered into in
April 2021, which replaced Kronos' North American and European facilities,
matures in April 2026 and currently the full $225 million is available for
borrowing under this facility and Kronos could borrow all available amounts
without violating its existing debt covenants. See Note 6 to our Condensed
Consolidated Financial Statements.



At September 30, 2021, we had an aggregate of $621.3 million of restricted and
unrestricted cash, cash equivalents and marketable securities, including $111.2
million held by our non-U.S. subsidiaries. A detail by entity is presented in
the table below.



                                                                          Amount
                                                                       held outside
                                                         Total             U.S.
                                                              (In millions)
Kronos                                                $      379.7     $       111.2
CompX                                                         76.0                 -
NL exclusive of its subsidiaries                              94.4          

-

Tremont exclusive of its subsidiaries                          9.9                 -
LandWell                                                      40.0                 -
BMI                                                           19.6                 -
Valhi exclusive of its subsidiaries                            1.7          

-

Total restricted and unrestricted cash, cash
equivalents and
  marketable securities                               $      621.3     $       111.2



Capital Expenditures and Other -

We currently expect our aggregate capital expenditures for 2021 will be approximately $79 million as follows:

  ? $70 million by our Chemicals Segment;


  ? $5 million by our Component Products Segment; and


  ? $4 million by our Real Estate Management and Development Segment.


Capital spending for 2021 is expected to be funded primarily through cash
generated from operations and borrowing under existing credit facilities.
Planned capital expenditures in 2021 at Kronos and CompX will primarily be to
maintain and improve the cost-effectiveness of our facilities. It is possible we
will delay planned capital projects based on market conditions.

Repurchases of Common Stock -


We, Kronos and CompX have programs to repurchase common stock from time to time
as market conditions permit. These stock repurchase programs do not include
specific price targets or timetables and may be suspended at any time. Depending
on market conditions, these programs may be terminated prior to completion. Cash
on hand will be used to acquire the shares, and repurchased shares will be added
to treasury shares and cancelled.

At September 30, 2021, Valhi had approximately .3 million shares available to repurchase under authorizations made by our board of directors.




Kronos' board of directors authorized the repurchase of up to 2.0 million shares
of its common stock in open market transactions, including block purchases, or
in privately-negotiated transactions at unspecified prices and over an
unspecified period of time. Kronos may repurchase its common stock from time to
time as market conditions permit. At September 30, 2021, approximately 1.6
million shares are available for repurchase.



CompX's board of directors authorized the repurchase of its Class A common stock
in open market transactions, including block purchases, or in
privately-negotiated transactions at unspecified prices and over an unspecified
period of time. During the first nine months of 2021, CompX acquired 50,000
shares of its Class A common stock in an open market purchase under such
repurchase program for $.8 million. At September 30, 2021, approximately .6
million shares were available for purchase under these authorizations.

Dividends -

Because our operations are conducted primarily through subsidiaries and affiliates, our long-term ability to meet parent company level corporate obligations is largely dependent on the receipt of dividends or other distributions from our subsidiaries and

                                     - 36 -

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affiliates. Kronos paid a regular dividend of $.18 per share in each quarter of
2020. If Kronos were to pay its $.18 per share in each quarter of 2021 based on
the 58.0 million shares we held of Kronos common stock at September 30, 2021, we
would receive aggregate annual regular dividends from Kronos of $41.8
million. NL paid a regular quarterly dividend of $.04 per share in 2020 for
which we received $6.5 million. In February 2021 the NL board of directors
approved a quarterly dividend of $.06 per share. If NL were to pay its $.06 per
share dividend in each quarter of 2021 based on the 40.4 million shares we hold
of NL common stock at September 30, 2021, we would receive aggregate annual
dividends from NL of $9.7 million. BMI and LandWell pay cash dividends from time
to time, but the timing and amount of such dividends are uncertain. In this
regard, we received aggregate dividends from BMI and LandWell of $43.0 million
in 2020 and $41.8 million during the first nine months of 2021. We do not know
if we will receive additional dividends from BMI and LandWell during 2021. All
of our ownership interest in CompX is held through our ownership in NL; as such
we do not receive any dividends from CompX. Instead any dividend paid by CompX
is paid to NL.

Our subsidiaries have various credit agreements with unrelated third-party lenders which contain customary limitations on the payment of dividends; however, these restrictions in the past have not significantly impacted their ability to pay dividends.

Investment in our Subsidiaries and Affiliates and Other Acquisitions -




We have in the past, and may in the future, purchase the securities of our
subsidiaries and affiliates or third parties in market or privately-negotiated
transactions. We base our purchase decisions on a variety of factors, including
an analysis of the optimal use of our capital, taking into account the market
value of the securities and the relative value of expected returns on
alternative investments. In connection with these activities, we may consider
issuing additional equity securities or increasing our indebtedness. We may also
evaluate the restructuring of ownership interests of our businesses among our
subsidiaries and related companies.



We generally do not guarantee any indebtedness or other obligations of our
subsidiaries or affiliates. Our subsidiaries are not required to pay us
dividends. If one or more of our subsidiaries were unable to maintain its
current level of dividends, either due to restrictions contained in a credit
agreement or to satisfy its liabilities or otherwise, our ability to service our
liabilities or to pay dividends on our common stock could be adversely impacted.
If this were to occur, we might consider reducing or eliminating our dividends
or selling interests in subsidiaries or other assets. If we were required to
liquidate assets to generate funds to satisfy our liabilities, we might be
required to sell at less than what we believe is the long-term value of such
assets.



Prior to 2020, we entered into a $50 million revolving credit facility with a
subsidiary of NL secured with approximately 35.2 million shares of the common
stock of Kronos held by NL's subsidiary as collateral. Outstanding borrowings
under the credit facility bear interest at the prime rate plus 1.875% per annum,
payable quarterly, with all amounts due on December 31, 2023.  The maximum
principal amount which may be outstanding from time-to-time under the credit
facility is limited to 50% of the value of the Kronos stock using the most
recent closing price. The credit facility contains a number of covenants and
restrictions which, among other things, restrict NL's subsidiary's ability to
incur additional debt, incur liens, and merge or consolidate with, or sell or
transfer substantially all of NL's subsidiary's assets to, another entity, and
require NL's subsidiary to maintain a minimum specified level of consolidated
net worth.  Upon an event of default (as defined in the credit facility), Valhi
will be entitled to terminate its commitment to make further loans to NL's
subsidiary, declare the outstanding loans (with interest) immediately due and
payable, and exercise its rights with respect to the collateral under the loan
documents.  Such collateral rights include, upon certain insolvency events with
respect to NL's subsidiary or NL, the right to purchase all of the Kronos common
stock at a purchase price equal to the aggregate market value, less amounts
owing to Valhi under the loan documents, and up to 50% of such purchase price
may be paid by Valhi in the form of an unsecured promissory note bearing
interest at the prime rate plus 2.75% per annum, payable quarterly, with all
amounts due no later than five years from the date of purchase, with the
remainder of such purchase price payable in cash at the date of purchase. We
also eliminate any such intercompany borrowings in our Condensed Consolidated
Financial Statements. Prior to 2020 NL's subsidiary borrowed $.5 million under
this facility, no additional amounts have been borrowed since then, and $.5
million is outstanding under this facility at September 30, 2021. We eliminate
any such intercompany borrowings in our Condensed Consolidated Financial
Statements.



We have an unsecured revolving demand promissory note with Kronos which, as
amended, provides for borrowings from Kronos of up to $40 million. We eliminate
any such intercompany borrowings in our Condensed Consolidated Financial
Statements. The facility, as amended, is due on demand, but in any event no
earlier than December 31, 2022. We had no borrowings from Kronos under this
facility during the first nine months of 2021, and there was no outstanding
balance at September 30, 2021. We could borrow $40.0 million under our current
intercompany facility with Kronos at September 30, 2021. Kronos' obligation to
loan us money under this note is at Kronos' discretion.



We also have an unsecured revolving demand promissory note with CompX which, as
amended, provides for borrowings from CompX of up to $40 million. We eliminate
any such intercompany borrowings in our Condensed Consolidated Financial
Statements. The facility, as amended, is due on demand, but in any event no
earlier than December 31, 2022. We had gross borrowings of $25.4 million and
gross repayments of $33.1 million during the first nine months of 2021, and
$21.8 million was outstanding at September 30, 2021. We could borrow $18.2
million under our current intercompany facility with CompX at September 30,
2021. CompX's obligation to loan us money under this note is at CompX's
discretion.

                                     - 37 -

--------------------------------------------------------------------------------

Off-balance Sheet Financing


We do not have any off-balance sheet financing arrangements.

Commitments and Contingencies

There have been no material changes in our contractual obligations since we filed our 2020 Annual Report and we refer you to that report for a complete description of these commitments.


We are subject to certain commitments and contingencies, as more fully described
in our 2020 Annual Report, or in Notes 12 and 15 to our Condensed Consolidated
Financial Statements and in Part II, Item 1 of this Quarterly Report, including:

? certain income tax contingencies in various U.S. and non-U.S. jurisdictions;


  ? certain environmental remediation matters involving NL and BMI;

? certain litigation related to NL's former involvement in the manufacture

         of lead pigment and lead-based paint; and


  ? certain other litigation to which we are a party.


In addition to such legal proceedings, various legislation and administrative
regulations have, from time to time, been proposed that seek to (i) impose
various obligations on present and former manufacturers of lead pigment and
lead-based paint (including NL) with respect to asserted health concerns
associated with the use of such products and (ii) effectively overturn court
decisions in which NL and other pigment manufacturers have been successful.
Examples of such proposed legislation include bills which would permit civil
liability for damages on the basis of market share, rather than requiring
plaintiffs to prove that the defendant's product caused the alleged damage, and
bills which would revive actions barred by the statute of limitations. While no
legislation or regulations have been enacted to date that are expected to have a
material adverse effect on our consolidated financial position, results of
operations or liquidity, enactment of such legislation could have such an
effect.

Recent Accounting Pronouncements

Not applicable

Critical Accounting Policies


There have been no changes in the first nine months of 2021 with respect to our
critical accounting policies presented in Management's Discussion and Analysis
of Financial Condition and Results of Operation in our 2020 Annual Report.


                                     - 38 -

--------------------------------------------------------------------------------

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