What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-03-08 compared with 2022-03-09 · 184 added, 199 removed, 381 unchanged (50% of the section changed)

9 unchanged sentences

CompX is a leading manufacturer of engineered components utilized in a variety of applications and industries.

Through its Security Products operations, CompX manufactures mechanical and electronic cabinet locks and other locking mechanisms used in 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 through its Marine Components operations.

Through its Security Products operations, CompX manufactures mechanical and electronic cabinet locks and other locking mechanisms used in postal, recreational transportation, office and institutional furniture, cabinetry, tool storage and healthcare applications.

CompX also manufactures wake enhancement systems, stainless steel exhaust systems, gauges, throttle controls, trim tabs and related hardware and accessories for the recreational marine and other industries through its Marine Components operations.

We account for our 31% non-controlling interest in Kronos by the equity method.

3 unchanged sentences

Our net income attributable to NL stockholders was $33.8 million, or $.69 per share, in 2022 compared to net income of $51.2 million, or $1.05 per share, in 2021 and net income of $14.7 million, or $.30 per share, in 2020.

As more fully described below, the increase in our earnings per share attributable to NL stockholders from 2020 to 2021 is primarily due to the effects of:

● equity in earnings from Kronos in 2021 of $34.3 million compared to $19.4 million in 2020,

● favorable relative changes in the value of marketable equity securities of $24.9 million, and

● higher income from operations attributable to CompX of $8.7 million in 2021.

As more fully described below, the decrease in our earnings per share attributable to NL stockholders from 2021 to 2022 is primarily due to the net effects of:

● a pre-tax litigation settlement expense of $19.3 million in 2019 (mostly recognized in the second quarter)

● an unrealized loss in the relative value of marketable equity securities of $8.1 million in 2022 compared to a gain of $16.2 million in 2021,

● higher income from operations attributable to CompX of $4.9 million in 2022, and

● equity in earnings from Kronos in 2022 of $31.9 million compared to $34.3 million in 2021.

● unfavorable relative changes in the value of marketable equity securities of $7.8 million,

● lower income from operations attributable to CompX of $5.9 million in 2020,

● lower insurance recoveries in 2020 of $5.0 million related primarily to a single insurance recovery settlement of $4.5 million in 2019 for certain past and future litigation defense costs,

● a gain of $4.4 million in 2019 related to a sale of excess property, recognized in the third quarter,

● a gain of $3.0 million in 2019 related to the sale of our insurance and risk management business, recognized in the fourth quarter, and

● lower litigation fees and related costs of $2.1 million in 2020.

Our 2019 net income per share attributable to NL stockholders includes:

● a loss of $.31 per share, net of income tax benefit, related to the litigation settlement expense, recognized mainly in the second quarter,

● income of $.08 per share, net of income tax expense, related to insurance recoveries, recognized mainly in the second quarter,

● income of $.07 per share, net of income tax expense, related to a gain from a sale of excess property, recognized in the third quarter,

● income of $.05 per share, net of income tax expense, related to a gain from the sale of our insurance and risk management business, recognized in the fourth quarter,

● a loss of $.03 per share related to Kronos’ fourth quarter recognition of a non-cash deferred income tax expense primarily related to the revaluation of Kronos’ net deferred income tax asset in Germany as a result of a decrease in the German trade tax rate,

● income of $.01 per share related to Kronos’ fourth quarter recognition of an income tax benefit related to the favorable settlement of a prior year tax matter in Germany, and

● income of $.01 per share related to Kronos’ insurance settlement gain recognized in the fourth quarter.

Excluding any potential effects from changes in the relative value of marketable securities, we currently expect our net income attributable to NL stockholders in 2022 to be higher than 2021 primarily due to higher expected income from operations attributable to CompX and higher equity in earnings from Kronos partially offset by higher litigation fees and related costs and higher environmental remediation and related costs.

Income (loss) from operations

The following table shows the components of our income (loss) from operations.

Our 2022 net income per share attributable to NL stockholders includes income of $.01 per share, recognized in the third quarter, related to Kronos’ business interruption insurance claim arising from Hurricane Laura in 2020.

As more fully described below, the increase in our earnings per share attributable to NL stockholders from 2020 to 2021 is primarily due to the effects of:

● an unrealized gain in the relative value of marketable equity securities of $16.2 million in 2021 compared to a loss of $8.7 million in 2020,

● equity in earnings from Kronos in 2021 of $34.3 million compared to $19.4 million in 2020, and

● higher income from operations attributable to CompX of $8.7 million in 2021.

Excluding any potential effects from changes in the relative value of marketable equity securities, we currently expect our net income attributable to NL stockholders in 2023 to be lower than 2022 primarily due to lower expected income from operations attributable to CompX, lower equity in earnings from Kronos, higher litigation fees and related costs and higher environmental remediation and related costs.

Income from operations

The following table shows the components of our income from operations.

Years ended December 31,

(Dollars in millions)

Insurance recoveries

Other income, net

Litigation settlement expense, net

Corporate expense

Income (loss) from operations

Not meaningful.

The following table shows the components of our income before income taxes exclusive of our income (loss) from operations.

Income from operations

The following table shows the components of our income before income taxes exclusive of our income from operations.

Years ended December 31,

1 unchanged sentence

Equity in earnings of Kronos

Marketable equity securities unrealized (loss) gain

Other components of net periodic pension and

Marketable equity securities

unrealized gain (loss)

Other components of net periodic pension

and OPEB cost

Interest and dividend income

10 unchanged sentences

Income from operations

Net sales - Net sales increased approximately $26.3 million in 2021 compared to 2020 primarily due to higher sales at both CompX business units, particularly in the second quarter of 2021, as many of CompX’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.

Net sales – CompX’s net sales increased approximately $25.8 million in 2022 compared to 2021 primarily due to higher Marine Component sales primarily to the towboat market and, to a lesser extent, higher Security Products sales across a variety of markets.

Net sales increased approximately $26.3 million in 2021 compared to 2020 primarily due to higher sales at both CompX business units, particularly in the second quarter of 2021, as many of CompX’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.

Beginning in the third quarter of 2020 and continuing through 2021, Marine Components sales exceeded pre-pandemic levels.

Security Products sales generally improved since 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.

Net sales decreased approximately $9.7 million in 2020 compared to 2019 primarily due to lower Security Products sales across a variety of markets due to reduced demand resulting from the COVID-19 pandemic, offset slightly by higher Marine Component sales to the towboat market.

Cost of sales and gross margin - Cost of sales increased in 2022 compared to 2021 primarily due to the effects of higher sales, as well as increased production costs at both of CompX’s business units.

Gross margin as a percentage of sales decreased over the same period primarily due to the decrease in CompX’s Security Products gross margin percentage.

Cost of sales increased in 2021 compared to 2020 primarily due to the effects of higher sales, as well as increased production costs at both of CompX’s business units.

Gross margin as a percentage of sales increased over the same period due to the increase in CompX’s Security Products gross margin percentage partially offset by the decrease in CompX’s Marine Components gross margin percentage .

Cost of sales decreased in 2020 compared to 2019 primarily due to the effects of lower sales for CompX’s Security Products business slightly offset by the higher CompX Marine Component sales discussed above.

Gross margin as a percentage of sales decreased over the same period primarily as a result of the lower gross margin percentage at Security Products.

Operating costs and expenses - Operating costs and expenses consist primarily of sales and administrative-related personnel costs, sales commissions and advertising expenses directly related to product sales and administrative costs relating to CompX’s businesses and its corporate management activities, as well as gains and losses on property and equipment.

Operating costs and expenses increased in 2021 compared to 2020 predominantly due to higher salary and

benefit costs which increased by $.9 million.

Operating costs and expenses increased in 2022 compared to 2021 predominantly due to higher salary and employment related costs which increased by $.7 million.

As a percentage of sales, operating costs and expenses decreased in 2022 compared to 2021 primarily due to the effect of higher sales.

Operating costs and expenses in 2020 were comparable to 2019.

As a percentage of sales, operating costs and expenses increased in 2020 compared to 2019 due to the effect of lower sales.

Income from operations - As a percentage of net sales, operating income increased in 2021 compared to 2020 and decreased in 2020 compared to 2019.

Operating costs and expenses increased in 2021 compared to 2020 predominantly due to higher salary and benefit costs which increased by $.9 million.

As a percentage of sales, operating costs and expenses decreased in 2021 compared to 2020 primarily due to the effect of higher sales .

Income from operations - As a percentage of net sales, operating income increased in 2022 compared to 2021 and increased in 2021 compared to 2020.

Operating margins were primarily impacted by the factors impacting net sales, cost of sales, gross margin and operating costs discussed above.

2 unchanged sentences

Total material costs represented approximately 47% of CompX’s cost of sales in 2022, with commodity-related raw materials accounting for approximately 17% of cost of sales.

Prices for the primary commodity-related raw materials used in the manufacture of its locking mechanisms, primarily zinc and brass, remained relatively stable during 2020 but generally increased throughout 2021.

Prices for stainless steel, the primary raw material used for the manufacture of marine exhaust headers and pipes and wake enhancement systems, remained relatively stable in 2020 but experienced significant volatility during 2021.

Based on current economic conditions, CompX expects the prices for its primary commodity-related raw materials and other manufacturing materials to be volatile during 2022.

Prices for the primary commodity-related raw materials used in the manufacture of its locking mechanisms, primarily zinc and brass, generally increased throughout 2021 and the first half of 2022.

Prices began to stabilize in the latter half of 2022, although at elevated levels.

The prices for stainless steel, the primary raw material used for the manufacture of marine exhaust headers and pipes and wake enhancement systems, experienced significant volatility during 2021 and 2022.

Based on current economic conditions, CompX expects the prices for its primary commodity-related raw materials and other manufacturing materials in 2023 to be relatively stable, although at the elevated levels it experienced in the second half of 2022.

CompX occasionally enters into short-term commodity-related raw material supply arrangements to mitigate the impact of future increases in commodity related raw material costs.

9 unchanged sentences

Operating income margin

Security Products - Security Products net sales increased 20% to $105.1 million in 2021 compared to $87.9 million in 2020 when it experienced reduced demand across a variety of markets due to the COVID-19 pandemic.

Security Products - Security Products net sales increased 9% to $114.5 million in 2022 compared to $105.1 million in 2021 due to increased sales across a variety of markets.

Relative to prior year, sales were $3.8 million higher to the government security market, $1.8 million higher to the office furniture market, $1.5 million higher to distributors, $1.0 million higher to the tool storage market, and $.9 million higher to the gas station security market.

Gross margin as a percentage of net sales for 2022 decreased as compared to 2021 primarily due to higher cost of sales, most significantly in the third and fourth quarters of 2022, as price increases and surcharges did not fully offset higher cost inventory sold in the latter half of the year.

Operating income margin decreased for 2022 compared to 2021 primarily due to the factors impacting gross margin, as well as increased operating costs and expenses, resulting from higher salaries and employment related costs, partially offset by increased coverage of operating costs and expenses from higher sales.

Security Products net sales increased 20% to $105.1 million in 2021 compared to $87.9 million in 2020 when it experienced reduced demand across a variety of markets due to the COVID-19 pandemic.

Relative to prior year, sales were $7.2 million higher to the government security market, $4.9 million higher to the transportation market, and $2.0 million higher to distribution customers.

1 unchanged sentence

Operating income margin increased for 2021 compared to 2020 primarily due to increased coverage of operating costs and expenses on higher sales, partially offset by the higher production costs impacting gross margin and increased sales and administrative-related salary and benefit costs of $.7 million.

Security Products net sales decreased 12% to $87.9 million in 2020 compared to $99.3 million in 2019.

Certain security products market segments were slower to recover from the negative impact of the COVID-19 pandemic, primarily in the second and third quarters, including transportation which had $4.4 million lower sales than 2019, distribution

customers which were $2.5 million lower than 2019, and office furniture which was $1.8 million lower than 2019.

Gross margin and operating income margin for 2020 declined as compared to 2019 primarily due to lower sales and higher cost inventory produced during the second and third quarters and sold in the last half of the year.

Security Products inventory produced during the second and third quarters of 2020 had a higher carrying value compared to prior periods due to higher cost per unit of production as a result of lower production volumes during these quarters of 2020.

This negatively impacted gross margin and operating income margin as this higher cost inventory was sold during the last half of 2020.

Additionally, gross margin and operating income margin were unfavorably impacted by employer paid medical costs, unrelated to the pandemic, which increased $2.1 million in 2020 compared to 2019.

Years ended December 31,

5 unchanged sentences

Operating income margin

Marine Components - Marine Components net sales increased 34% in 2021 as compared to 2020 primarily due to increased sales of $7.2 million to several original equipment boat manufactures in the towboat market.

Marine Components - Marine Components net sales increased 46% in 2022 as compared to 2021.

Relative to prior year, sales were $11.5 million higher to the towboat market (primarily to original equipment boat manufacturers), $2.1 million higher to the engine builder market, and $2.0 million higher to the industrial market.

Gross margin as a percentage of sales increased slightly in 2022 compared to 2021 with increased sales due to price increases and

surcharges more than offsetting higher production costs, as well as increased coverage of cost of sales from higher sales.

Operating income as a percentage of net sales increased in 2022 compared to 2021 primarily due to the factors impacting gross margin, as well as increased coverage of operating costs and expenses from higher sales.

Marine Components net sales increased 34% in 2021 as compared to 2020 primarily due to increased sales of $7.2 million to several original equipment boat manufactures in the towboat market.

Gross margin as a percentage of sales decreased in 2021 compared to 2020 as increased coverage of fixed costs from higher sales were more than offset by higher production costs including raw materials costs (primarily stainless steel), higher shipping costs, and increased labor costs resulting from higher overtime costs and increased headcount.

Operating income as a percentage of net sales increased slightly in 2021 compared to 2020 due to increased coverage of operating costs and expenses from higher sales, partially offset by the factors impacting gross margin.

Marine Components net sales increased 7% in 2020 as compared to 2019 primarily due to increased sales of $2.9 million to the towboat market, primarily wake enhancement systems and surf pipes to an original equipment boat manufacturer, predominantly in the second half of the year.

Gross margin as a percentage of sales in 2020 was slightly below 2019 due to higher cost inventory produced during the second quarter and sold in the third quarter of the year, as well as higher depreciation expense resulting from the timing of capital expenditures.

Operating income as a percentage of net sales increased in 2020 compared to 2019 principally due to the slight decrease in operating costs and expenses.

Outlook – Beginning in the second half of 2020, CompX’s sales began to steadily improve from the historically low levels it experienced during the second quarter of 2020 as a result of the COVID-19 pandemic.

Throughout 2021, CompX experienced strong demand at both its business units.

CompX’s manufacturing facilities operated at elevated production rates during 2021 in line with improved demand, although labor markets are tight in each of the regions in which it operates and, as a result, CompX has experienced and continues to have challenges maintaining staffing levels aligned with current and forecasted demand, particularly at its Marine Components business unit.

Based on current market conditions, CompX expects demand levels to remain strong in 2022 and it expects to report increased net sales and operating income in 2022 compared to 2021.

CompX’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 CompX has been able to manage through these disruptions with minimal impact on its operations.

In addition, CompX is experiencing increased production costs including higher labor, shipping, and increasing costs of many of the raw materials it uses including zinc, brass and stainless steel.

In response, CompX implemented price increases and surcharges;

however, the extent to which the price increases and surcharges will mitigate the rising costs is uncertain and CompX expects increasing production costs will negatively impact gross margins in 2022 as higher cost inventories are sold.

CompX’s operations teams meet frequently to ensure they are taking appropriate actions to minimize material or supply related operational disruptions, manage inventory levels, and improve operating margins and to maintain a safe working environment for all its employees.

Outlook – While CompX continued to experience strong demand at both of its business units during the fourth quarter of 2022, the order rate and backlog at both business units began to soften late in the fourth quarter.

CompX operated its manufacturing facilities at elevated production rates throughout 2022 in line with the strong demand and it continues to monitor demand levels and will adjust production rates accordingly.

While labor markets continue to be competitive in each of the regions in which CompX operates and labor costs continue to rise, CompX has been able to achieve and maintain more balanced staffing levels aligned with current and forecasted demand, particularly at its Marine Components business unit.

CompX continues to face shortages related to certain electronic components;

however, its supply chains are generally stable and recently transportation and logistical delays have been minimal.

CompX expects gross margins at its Security Products business unit will continue to be challenged during 2023 as higher cost inventory continues to work its way through cost of sales and anticipated reduced demand may limit its ability to implement further price increases.

While CompX expects its Marine Components net sales to remain strong during the first quarter, it expects net sales will decline as compared to 2022 as marine market demand is being challenged by higher interest rates and several original equipment boat manufacturers, including certain of CompX’s customers, have publicly announced reduced production schedules in 2023 compared to 2022.

CompX currently expects Marine Components gross margins as a percentage of net sales in 2023 to be comparable to 2022.

Based on the softening demand and general economic conditions in North America, CompX currently expects to report lower net sales and operating income at both business units during 2023 compared to 2022.

CompX is focused on managing inventory levels to support anticipated lower demand in 2023.

With raw materials and other components more readily available, CompX believes it will be able to achieve additional operating efficiencies during the year although the extent and impact of such efficiencies is not yet known.

CompX’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 the COVID-19 pandemic on CompX’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.

As noted above, there continue to be some global and domestic supply chain challenges and any future impacts on CompX’s operations will depend on, among other things, any future disruption in its operations or its suppliers’ operations, the impact of economic conditions and geo-political events on demand for its products or its customers’ and suppliers’ operations, all of which remain uncertain and cannot be predicted.

General corporate items, interest and dividend income, interest expense, provision for income taxes, noncontrolling interest and related party transactions

1 unchanged sentence

Insurance recoveries include amounts we received from these insurance carriers.

We recognized $5.1 million in insurance recoveries in 2019 primarily related to a single settlement we reached with one of our insurance carriers in which they agreed to reimburse us for a portion of our past and future litigation defense costs.

The agreements with certain of our insurance carriers also include reimbursement for a portion of our future litigation defense costs.

2 unchanged sentences

See Note 16 to our Consolidated Financial Statements.

Other income, net - Other income, net in 2019 includes a gain of $4.4 million related to a sale of excess property in the third quarter and a gain of $3.0 million related to the sale of our insurance and risk management business in the fourth quarter.

See Note 13 to our Consolidated Financial Statements.

Litigation settlement expense - We recognized a pre-tax $19.3 million litigation settlement expense net of expected insurance recoveries in 2019 related to the lead pigment litigation in California.

See Note 17 to our Consolidated Financial Statements.

Corporate expense - Corporate expenses were $10.1 million in 2021, $.6 million or 6% higher than in 2020 primarily due to higher environmental remediation and related costs partially offset by lower administrative expenses.

Corporate expense - Corporate expenses were $11.7 million in 2022, $1.7 million or 17% higher than in 2021 primarily due to higher litigation fees and related costs partially offset by lower environmental remediation and related costs.

Included in corporate expenses are:

● litigation fees and related costs of $1.9 million in each of 2021 and 2020, and

● litigation fees and related costs of $4.2 million in 2022 compared to $1.9 million in 2021, and

● environmental remediation and related costs of $.5 million in 2022 compared to $.8 million in 2021.

Corporate expenses were $9.5 million in 2020, $3.0 million or 24% lower than in 2019 primarily due to lower litigation fees and related costs and lower administrative expenses partially offset by higher environmental remediation and related costs.

Corporate expenses were $10.0 million in 2021, $.6 million or 6% higher than in 2020 primarily due to higher environmental remediation and related costs partially offset by lower administrative expenses.

Included in corporate expenses are:

● litigation fees and related costs of $1.9 million in 2020 compared to $4.0 million in 2019, and

● environmental remediation and related costs of $.1 million in 2020 compared to a benefit of $.6 million in 2019.

● litigation fees and related costs of $1.9 million in each of 2021 and 2020, and

● environmental remediation and related costs of $.8 million in 2021 compared to $.1 million in 2020.

Overall, we currently expect that our general corporate expenses in 2023 will be higher than in 2022 primarily due to higher expected litigation fees and related costs and higher environmental remediation and related costs.

4 unchanged sentences

Obligations for environmental remediation and related costs are difficult to assess and estimate and it is possible that actual costs for environmental remediation will exceed accrued amounts or that costs will be incurred in the future for sites in which we cannot currently estimate our liability.

If these events were to occur in 2022, our corporate expenses

would be higher than we currently estimate.

If these events were to occur in 2023, our corporate expenses would be higher than we currently estimate.

In addition, we adjust our environmental accruals as further information becomes available to us or as circumstances change.

1 unchanged sentence

See Note 16 to our Consolidated Financial Statements.

Interest and dividend income - Interest income decreased $1.0 million in 2021 compared to 2020 primarily due to lower average balances on CompX’s revolving promissory note receivable from Valhi.

Interest income decreased $4.1 million in 2020 compared to 2019 primarily due to lower average balances and lower interest rates on CompX’s revolving promissory note receivable from Valhi as well as lower average interest rates on invested balances partially offset by higher cash and cash equivalents available for investment.

We also recognized $.6 million of accrued interest income on the insurance recovery receivable in the second quarter of 2019.

Interest and dividend income - Interest income increased $2.2 million in 2022 compared to 2021 primarily due to higher interest rates and increased investment balances, somewhat offset by lower average balances on CompX’s revolving promissory note receivable from Valhi.

Interest decreased $1.0 million in 2021 compared to 2020 primarily due to lower average balances on CompX’s revolving promissory note receivable from Valhi.

Marketable equity securities - Unrealized gains or losses on our marketable equity securities are recognized in Marketable equity securities on our Consolidated Statements of Income.

See Note 5 to our Consolidated Financial Statements.

Income tax expense (benefit) - We recognized an income tax expense of $.6 million in 2019, an income tax benefit of $2.5 million in 2020 and an income tax expense of $7.5 million in 2021.

Income tax expense (benefit) - We recognized an income tax benefit of $2.5 million in 2020 and income tax expense of $7.5 million in 2021 and $2.8 million in 2022.

In accordance with GAAP, we recognize deferred income taxes on our undistributed equity in earnings of Kronos.

7 unchanged sentences

During interim periods, our effective income tax rate may not necessarily correspond to the foregoing due to the application of accounting for income taxes in interim periods which requires us to base our effective rate on full year projections.

We received aggregate dividends from Kronos of $25.4 million in each of 2019, 2020 and 2021.

Our effective tax rate attributable to our equity in earnings (losses) of Kronos, including the effect of non-taxable dividends we received from Kronos, was .9% expense in 2019, a 6.4% benefit in 2020 and 5.5% expense in 2021.

The reduction in our effective rate from 2019 to 2020 and increase in our effective rate from 2020 to 2021 is primarily attributable to the net effects of Kronos’ lower earnings in 2020 as compared to 2019 and higher earnings in 2021 as compared to 2020 and the impact of the income tax benefit related to the non-taxable dividends received from Kronos.

See Note 14 to our Consolidated Financial Statements for more information about our 2021 income tax items, including a tabular reconciliation of our statutory tax expense (benefit) to our actual tax expense (benefit).

We received aggregate dividends from Kronos of $25.4 million in each of 2020 and 2021 and $26.8 million in 2022.

Our effective tax rate attributable to our equity in earnings (losses) of Kronos, including the effect of non-taxable dividends we received from Kronos, was a 6.4% benefit in 2020, 5.5% expense in 2021 and 3.4% expense in 2022.

The increase in our effective rate from 2020 to 2021 is primarily attributable to the effects of Kronos’ higher earnings in 2021 as compared to 2020.

The decrease in our effective rate from

2021 to 2022 is attributable to the combined effects of Kronos’ lower earnings and the higher non-taxable dividend income we received from Kronos in 2022 as compared to 2021.

See Note 13 to our Consolidated Financial Statements for more information about our 2022 income tax items, including a tabular reconciliation of our statutory tax expense to our actual tax expense (benefit).

Noncontrolling interest - Noncontrolling interest in net income of CompX attributable to continuing operations is consistent in 2021 and 2022 but lower in 2020 due to lower earnings of CompX in 2020 as a result of reduced demand resulting from the COVID-19 pandemic.

14 unchanged sentences

Income from operations

Equity in earnings of Kronos Worldwide, Inc.

Equity in earnings of

Kronos Worldwide, Inc.

TiO 2 operating statistics:

7 unchanged sentences

* Thousands of metric tons

Industry conditions and 2021 overview - Kronos started 2021 with average TiO 2 selling prices 3% lower than at the beginning of 2020.

Kronos’ average TiO 2 selling prices in 2021 were 16% higher than the beginning of the year, including a 6% increase in the last quarter of the year, in response to its rising production costs and strong customer demand.

Kronos experienced higher sales volumes in its European, North American and Latin American markets in 2021 as compared to sales volumes in 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.

Industry conditions and 2022 overview - Kronos started 2022 with average TiO 2 selling prices 16% higher than at the beginning of 2021 and Kronos’ average TiO 2 selling prices increased 16% throughout 2022 in response to its rising production costs.

Overall sales volumes declined in 2022 compared to 2021 primarily due to demand contraction in Kronos’ European and export markets, particularly in the third and fourth quarters.

The following table shows Kronos’ capacity utilization rates during 2022 and 2021.

TiO 2 production volumes were higher in 2021 as compared to 2020 to meet higher customer demand in 2021.

Kronos decreased production levels in 2020 (primarily in the third quarter) to correspond to the temporary decline in demand resulting from the COVID-19 pandemic.

Throughout most of 2021 and continuing into the first quarter of 2022, Kronos’ production facilities operated at full practical capacity.

Due to the decreased demand in its European and export markets along with increased production costs, particularly energy costs in Europe, Kronos curtailed production in the third and fourth quarters of 2022 at certain of its European facilities to align its production and inventory levels to anticipated near-term customer demand.

Production Capacity Utilization Rates

First Quarter

2 unchanged sentences

Fourth Quarter

Net sales - Kronos net sales increased $300.6 million, or 18%, in 2021 compared to 2020, primarily due to an 8% increase in average TiO 2 selling prices (which increased net sales by approximately $131 million) and a 6% increase in

sales volumes (which increased net sales by approximately $98 million).

In addition to the impact of higher sales volumes and higher average selling prices, Kronos estimates that changes in currency exchange rates (primarily the euro) increased its net sales by approximately $43 million, or 3%, as compared to 2020.

Net sales - Kronos’ net sales in 2022 were consistent with net sales in 2021 primarily due to the net effects of a 21% increase in average TiO 2 selling prices (which increased net sales by approximately $407 million) and a 15% decrease in sales volumes (which decreased net sales by approximately $291 million).

Kronos estimates that changes in currency exchange rates (primarily the euro) decreased net sales by approximately $106 million, or 5% in 2022 as compared to 2021.

TiO 2 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.

Kronos’ sales volumes decreased 15% in 2022 as compared to 2021 primarily due to lower demand in its European and export markets which Kronos began experiencing towards the end of the second quarter and which accelerated during the third and fourth quarters of 2022.

Kronos’ sales volumes were 40% lower in the fourth quarter of 2022 as compared to the fourth quarter of 2021.

Kronos also experienced lower sales volumes in its North American market in the second half of 2022, although to a lesser extent than the declines in its European and export markets .

Kronos’ net sales increased $300.6 million, or 18%, in 2021 compared to 2020, primarily due to an 8% increase in average TiO 2 selling prices (which increased net sales by approximately $131 million) and a 6% increase in sales volumes (which increased net sales by approximately $98 million).

Kronos’ sales volumes increased 6% in 2021 as compared to 2020 primarily due to higher demand in its European, North American and Latin American markets, with a significant portion of the increase occurring in the second and third quarters as a result of the impact of the COVID-19 pandemic on the comparable periods in 2020, as discussed above.

Kronos’ net sales decreased $92.3 million, or 5%, in 2020 compared to 2019, primarily due to a 6% decrease in sales volumes (which decreased net sales by approximately $104 million) and a 2% decrease in average TiO 2 selling prices (which decreased net sales by approximately $35 million).

In addition to the impact of lower sales volumes and lower average selling prices, Kronos estimates that changes in currency exchange rates (primarily the euro) increased its net sales by approximately $9 million, or 1%, as compared to 2019.

Kronos’ sales volumes decreased 6% in 2020 as compared to the sales volumes of 2019 due to lower sales volumes in all major markets, with the European and export markets experiencing the most significant reductions.

A significant portion of the sales volume decrease occurred in the second and third quarters as a result of the demand contraction related to the COVID-19 pandemic.

Cost of sales and gross margin – Kronos’ cost of sales increased $205.6 million, or 16%, in 2021 compared to 2020 due to a 6% increase in sales volumes and higher production costs of approximately $69 million (including higher costs for raw materials and energy) and the effects of currency fluctuations (primarily the Canadian dollar).

Cost of sales and gross margin – Cost of sales increased $45.9 million, or 3%, in 2022 compared to 2021 primarily due to the net effects of higher production costs of approximately $285 million (including higher costs for raw materials and energy), a 15% decrease in sales volumes and changes in currency exchange rates.

Kronos’ cost of sales as a percentage of net sales increased to 80% in 2022 compared to 77% in 2021 due to the impact of higher production costs, including higher raw material and energy costs partially offset by the favorable effects of higher average TiO 2 selling prices.

In addition, cost of sales in 2022 includes approximately $26 million of unabsorbed fixed production and other manufacturing costs associated with production curtailments at certain of Kronos’ European facilities throughout the fourth quarter.

Gross margin as a percentage of net sales decreased to 20% in 2022 compared to 23% in 2021.

As discussed and quantified above, Kronos’ gross margin as a percentage of net sales decreased primarily due to the net effects of higher average TiO 2 selling prices, lower production and sales volumes, higher production costs and fluctuations in currency exchange rates.

Kronos’ cost of sales increased $205.6 million, or 16%, in 2021 compared to 2020 due to a 6% increase in sales volumes and higher production costs of approximately $69 million (including higher costs for raw materials and energy) and the effects of currency fluctuations (primarily the Canadian dollar).

Kronos’ cost of sales as a percentage of net sales decreased to 77% in 2021 compared to 79% in 2020 primarily due to the favorable effects of higher average TiO 2 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 well as the effects of fluctuations in currency exchange rates, as discussed below.

1 unchanged sentence

Kronos’ gross margin as a percentage of net sales in 2021 increased primarily due to the net effects of higher average TiO 2 selling prices, higher production and sales volumes, higher production costs and fluctuations in currency exchange rates.

Kronos’ cost of sales decreased $57.3 million, or 4%, in 2020 compared to 2019 due to the net effect of a 6% decrease in sales volumes, higher raw materials and other production costs of approximately $6 million (including higher cost for third-party feedstock and other raw materials) and currency exchange rate fluctuations.

Kronos’ cost of sales per metric ton of TiO 2 sold in 2020 was higher as compared to 2019 (excluding the effect of changes in currency exchange rates) primarily due to a moderate rise in the cost of third-party feedstock we procured in 2019 and the first half of 2020.

Kronos’ cost of sales as a percentage of net sales increased to 79% in 2020 compared to 78% in 2019 primarily due to the unfavorable effects of lower average TiO 2 selling prices and higher raw materials and other production costs, as discussed above, partially offset by improved sales and production volumes from its ilmenite mine operations.

Kronos’ gross margin as a percentage of net sales decreased to 21% in 2020 compared to 22% in 2019.

Kronos’ gross margin as a percentage of net sales 2020 decreased primarily due to the net effect of lower sales volumes, lower average TiO 2 selling prices, higher raw materials and other production costs and higher sales from its ilmenite mine operations.

Other operating income and expense, net – Kronos’ selling, general and administrative expenses were approximately 13% of net sales in each of 2021, 2020 and 2019.

Other operating income and expense, net - Kronos’ selling, general and administrative expenses decreased $17.6 million, or 7%, in 2022 compared to 2021 primarily due to changes in currency exchange rates (primarily the euro) and lower variable costs (primarily distribution costs) related to lower overall sales volumes.

Selling, general and administrative expense as a percentage of net sales decreased to 12% of net sales in 2022 compared to 13% in 2021.

Kronos’ selling, general and administrative expenses increased $30.3 million, or 14%, in 2021 compared to 2020 primarily due to higher variable costs (primarily distribution costs) related to higher overall sales volumes.

Kronos’ selling, general and administrative expenses decreased $9.6 million, or 4%, in 2020 compared to 2019 primarily due to variable costs related to lower overall sales volumes.

Income from operations – Kronos’ income from operations increased by $70.9 million or 61%, from $116.2 million in 2020 to $187.1 million in 2021.

Kronos’ selling, general and administrative expenses were approximately 13% of net sales in each of 2021 and 2020.

Income from operations - Kronos’ income from operations decreased by $27.5 million or 15%, from $187.1 million in 2021 to $159.6 million in 2022.

Income from operations as a percentage of net sales decreased to 8% in 2022 from 10% in 2021.

This decrease was driven by the net effects of lower gross margin and lower selling, general and administrative expenses for the comparable periods discussed above.

Kronos experienced a loss from operations of $19.7 million in the fourth quarter of 2022 compared to income from operations of $52.0 million in the fourth quarter of 2021.

Kronos also recognized a gain of $2.7 million in 2022 related to cash received from the settlement of a business interruption insurance claim related to Hurricane Laura.

Kronos estimates that changes in currency exchange rates increased income from operations by approximately $23 million in 2022 as compared to 2021, as discussed in the Effects of currency exchange rates section below.

Kronos’ income from operations increased by $70.9 million or 61%, from $116.2 million in 2020 to $187.1 million in 2021.

Income from operations as a percentage of net sales increased to 10% in 2021 from 7% in 2020.

This increase was driven by the higher gross margin for the comparable periods discussed above.

estimates that changes in currency exchange rates decreased income from operations by approximately $13 million in 2021 as compared to 2020 as discussed in the Effects of currency exchange rates section below.

Kronos’ income from operations decreased by $29.6 million, from $145.8 million in 2019 to $116.2 million in 2020.

Income from operations as a percentage of net sales was 7% in 2020 compared to 8% in 2019.

This decrease was driven by the lower gross margin discussed above for the comparable periods.

Kronos’ income from operations in 2020 was also minimally impacted by the effects of Hurricane Laura which temporarily halted production at LPC on August 24, 2020.

Although storm damage to core manufacturing facilities was not severe, a variety of factors, including loss of utilities, limited availability of employees to return to work and restrictions on the facility’s access to raw materials, prevented the resumption of operations until September 25, 2020.

Kronos estimates that changes in currency exchange rates decreased income from operations by approximately $13 million in 2021 as compared to 2020.

Kronos’ income from operations was minimally impacted by the effects of Hurricane Laura which temporarily halted production at LPC on August 24, 2020 with the resumption of operations on September 25, 2020.

LPC believes insurance (subject to applicable deductibles) will cover a majority of its losses, including those related to property damage and the disruption of its operations.

The Kronos warehouse and slurry facilities located near LPC’s facility were also temporarily closed due to the hurricane, but property damage to these facilities was not significant.

Kronos’ 2020 income from operations includes immaterial costs related to Hurricane Laura, primarily costs to relocate inventory and modify shipping schedules in order to maintain service levels to its customers following the hurricane.

Kronos believes insurance (subject to applicable deductibles) will cover a majority of its losses from the hurricane, including property damage, business interruption losses related to its share of LPC’s lost production and other costs resulting from the disruption of operations.

To date, Kronos has not yet recognized any insurance recoveries because the ultimate disposition of its portion of the business interruption claim is not yet determinable;

however, LPC has received a portion of the proceeds related to its property damage claim.

As of December 31, 2021, Kronos had not yet recognized any insurance recoveries because the ultimate disposition of its portion of the business interruption claim was not yet determinable;

however, as of December 31, 2021, LPC had received a portion of the proceeds related to its property damage claim.

On October 9, 2020 Hurricane Delta caused an additional temporary halt to production at the LPC facility.

1 unchanged sentence

Similar to Hurricane Laura, losses determined to be incurred by LPC and Kronos as a result of Hurricane Delta are expected to be recoverable from insurance (subject to applicable deductibles).

Other non-operating income (expense) - Kronos recognized a gain of $2.0 million in 2021 and a loss of $1.1 million in 2020 on the change in value of its marketable equity securities.

Other non-operating income (expense) - Kronos recognized a loss of $1.0 million in 2022 compared to a gain of $2.0 million in 2021 on the change in value of its marketable equity securities.

Other components of net periodic pension and OPEB cost in 2022 decreased $3.6 million compared to 2021 primarily due to the net effects of higher discount rates impacting interest cost and previously unrecognized actuarial losses.

Interest expense in 2022 decreased $2.7 million compared to 2021 due to fees associated with the refinancing of Kronos’ revolving credit facility in the second quarter of 2021 and the effects of changes in currency exchange rates.

Kronos recognized a gain of $2.0 million in 2021 and a loss of $1.1 million in 2020 on the change in value of its marketable equity securities.

Other components of net periodic pension and postretirement benefits other than pensions, or OPEB, cost in 2021 decreased $2.9 million compared to 2020 primarily due to higher expected returns on plan assets offset by the net effects of lower discount rates impacting interest cost and previously unrecognized actuarial losses.

1 unchanged sentence

Interest expense in 2021 increased $.6 million compared to 2020 due to the refinancing of Kronos’ revolving credit facility in the second quarter of 2021 and the effects of changes in currency exchange rates.

Kronos recognized a loss of $1.1 million in 2020 and $.1 million in 2019 on the change in value of its marketable equity securities.

Other components of net periodic pension and OPEB cost in 2020 increased $4.2 million compared to 2019 primarily due to increased amortization costs from previously unrecognized actuarial losses as a result of lower discount rates and lower expected returns on plan assets.

Interest expense in 2020 was comparable to 2019.

Income tax expense - Kronos recognized income tax expense of $29.4 million in 2022 compared to income tax expense of $40.5 million in 2021.

The increase is primarily due to higher earnings in 2021 and the jurisdictional mix of Kronos’ earnings.

The difference is primarily due to lower earnings in 2022, the jurisdictional mix of Kronos’ earnings and the release of a portion of its valuation allowance associated with the 2022 utilization of a portion of its business interest expense carryforwards .

Kronos recognized income tax expense of $40.5 million in 2021 compared to income tax expense of $16.1 million in 2020.

The decrease is primarily due to lower earnings in 2020 and the jurisdictional mix of such earnings.

In addition, Kronos’ income tax expense in 2019 includes an income tax benefit recognized in the fourth quarter of $3.0 million related to the favorable settlement of a prior year tax matter in Germany, with $1.5 million recognized as a current cash tax benefit and $1.5 million recognized as a non-cash deferred income tax benefit related to an increase to its German net operating loss carryforward.

In addition, in the fourth quarter of 2019, Kronos recognized a non-cash deferred income tax expense of $5.5 million primarily related to the revaluation of its net deferred income tax asset in Germany resulting from a decrease in the German trade tax rate.

The increase is primarily due to higher earnings in 2021 and the jurisdictional mix of Kronos’ earnings.

Kronos’ earnings are subject to income tax in various U.S.

jurisdictions.

Generally, Kronos’ consolidated effective income tax rate is higher than the U.S.

federal statutory tax rate of 21% primarily because the income tax rates applicable to the pre-tax earnings (losses) of its non-U.S.

jurisdictions, and the income tax rates applicable to the pre-tax earnings (losses) of Kronos’ non-U.S.

operations are generally higher than the income tax rates applicable to its U.S.

However, in 2020 Kronos’ consolidated effective income tax rate was lower than

federal statutory rate of 21% due to the effect of lower earnings and tax benefits associated with losses incurred in certain high tax jurisdictions.

Kronos would generally expect its overall effective tax rate, excluding the impact of the reversal of a portion of its deferred income tax asset valuation allowance, to be higher than the U.S.

federal statutory rate of 21% primarily because of Kronos’ sizeable non-U.S.

Kronos’ consolidated effective income tax rate in 2023 is expected to be higher than the U.S.

federal statutory rate of 21% because the income tax rates applicable to the earnings (losses) of its non-U.S.

federal statutory rate of 21% because the income tax rates applicable to the earnings (losses) of Kronos’ non-U.S.

operations will be higher than the income tax rates applicable to its U.S.

26 unchanged sentences

Income from operations

The $43 million increase in Kronos’ net sales (translation gain) was caused primarily by a weakening of the U.S.

dollar relative to the euro, as Kronos’ euro-denominated sales were translated into more U.S.

The $106 million decrease in Kronos’ net sales (translation losses) was caused primarily by a strengthening of the U.S.

dollar relative to the euro, as Kronos’ euro-denominated sales were translated into fewer U.S.

dollars in 2022 as compared to 2021.

The weakening of the U.S.

The strengthening of the U.S.

dollar relative to the Canadian dollar and the Norwegian krone in 2022 did not have a significant effect on the reported amount of Kronos’ net sales, as a substantial portion of the sales generated by its Canadian and Norwegian operations are denominated in the U.S.

The $13 million decrease in income from operations was comprised of the following:

The $23 million increase in income from operations was comprised of the following:

● Higher net currency transaction gains of approximately $10 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 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.

2 unchanged sentences

operations, and

● Approximately $19 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 euro-denominated sales more than offset the unfavorable effects of euro-denominated operating costs being translated into more U.S.

● Approximately $13 million from net currency translation gains primarily caused by a strengthening of the U.S.

dollar relative to the Canadian dollar and Norwegian krone, as local currency-denominated operating costs were translated into fewer U.S.

dollars in 2022 as compared to 2021, partially offset by net currency translation losses primarily caused by a strengthening of the U.S.

dollar relative to the euro as the negative effects of the stronger U.S.

dollar on euro-denominated sales more than offset the favorable effects of euro-denominated operating costs being translated into fewer U.S.

dollars in 2022 as compared to 2021.

Impact of changes in currency exchange rates - 2021 vs 2020

gains (losses)-

Total currency

3 unchanged sentences

The $43 million increase in Kronos’ net sales (translation gain) was caused primarily by a weakening of the U.S.

dollar relative to the euro, as its euro-denominated sales were translated into more U.S.

dollar relative to the euro, as Kronos’ euro-denominated sales were translated into more U.S.

dollars in 2021 as compared to 2020.

The strengthening of the U.S.

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 Kronos’ net sales, as a substantial portion of the sales generated by its Canadian and Norwegian operations are denominated in the U.S.

The $6 million increase in income from operations was comprised of the following:

● Lower net currency transaction gains of approximately $6 million primarily caused by relative changes in currency exchange rates at each applicable balance sheet date between the U.S.

The $13 million decrease in income from operations was comprised of the following:

● Higher net currency transaction gains of approximately $6 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.

3 unchanged sentences

operations, and

● Approximately $12 million from net currency translation gains primarily caused by a strengthening of the U.S.

dollar relative to the Canadian dollar and Norwegian krone, as local currency-denominated operating costs were translated into fewer U.S.

dollars in 2020 as compared to 2019, and such translation, as it related to the U.S.

dollar relative to the euro, had a nominal effect on income from operations in 2020 as compared to 2019.

Based on current market conditions, Kronos expects global demand for consumer products, including those of its customers, to remain strong throughout 2022.

Therefore, Kronos expects to continue to produce at full capacity and will match sales volumes with production volumes which will result in lower sales volumes in 2022 as compared to 2021 based on current inventory levels.

As global economic activity continued to recover from the COVID-19 pandemic throughout 2021, Kronos experienced certain disruptions in global supply chains including availability of third-party feedstock and other raw materials along with transportation and logistics delays.

Thus far, Kronos’ operations team has been able to manage through these disruptions with minimal impact on its operations;

however, Kronos expects these challenges to continue for the foreseeable future.

Kronos experienced increases in its feedstock costs in 2021 (primarily in the second half of 2021) and it expects its feedstock costs to continue to increase in 2022 as compared to the average 2021 costs.

In addition to feedstock increases, Kronos continues to experience increasing production costs, including higher raw material and related shipping costs and higher energy and utility costs (especially in Europe), all of which are likely to continue into 2022.

At the beginning of 2021, Kronos’ average TiO 2 selling prices were 3% lower than at the beginning of 2020 and average TiO 2 selling prices increased 16% in 2021.

As a result of rising costs and continued strong customer demand, Kronos expects selling prices for TiO 2 will continue to rise in 2022, which Kronos expects to mitigate increases in distribution, raw material, energy and other production costs.

Kronos expects 2022 sales and income from operations will be higher than in 2021;

however, increasing costs will continue to challenge margins.

Kronos continues to monitor current and anticipated near-term customer demand levels and will align its production and inventories accordingly.

Kronos’ expectations for the TiO 2 industry and its operations are based on a number of factors outside its control, including the ongoing economic effects of the COVID-19 pandemic.

As noted above, Kronos 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.

● Approximately $19 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 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.

As previously reported, late in the third quarter of 2022, demand in Europe and the export markets began to rapidly deteriorate as many of Kronos’ customers in those regions reduced their production rates in response to economic conditions and geopolitical uncertainties.

This weakness continued through the fourth quarter.

In addition, in the second half of 2022 Kronos experienced rapidly rising costs particularly in Europe, led by natural gas, electricity and certain key raw materials.

In response to this decline in demand coupled with increased production costs, Kronos implemented production curtailments at certain of its European facilities throughout the fourth quarter to manage inventory levels.

Kronos also experienced declining demand in North America in the late second half of 2022, but to a lesser extent than its European and export markets.

At the beginning of 2023 Kronos began to see pockets of improving demand in Europe and certain export markets bolstered by customer inventory replenishment after significant destocking in the fourth quarter 2022.

Kronos is experiencing continued weak demand in North America in the first quarter of 2023.

Kronos expects customer demand to

gradually return during the first half of the year particularly in Europe and export markets.

Accordingly, at the beginning of 2023, Kronos began a measured ramp up of production with the expectation of operating its facilities at full practical capacity by the end of the second quarter of 2023.

Kronos’ selling prices have remained stable at the beginning of 2023;

however, Kronos expects selling prices to rise throughout the last three quarters of 2023 in response to higher production costs.

Based on the net effects of these factors, Kronos expects to report lower operating results for the full year of 2023 as compared to 2022.

Kronos will continue to monitor current and anticipated near-term customer demand levels and will align its production and inventories accordingly.

The long-term outlook for Kronos’ industry remains very positive, and the steps it is taking in the near term are intended to preserve its global market share and position its business to profitably grow in the future.

Kronos’ expectations for the TiO 2 industry and its operations are based on a number of factors outside its control.

As noted above, Kronos has experienced global market disruptions including high energy costs and availability concerns and future impacts on its operations will depend on, among other things, future energy costs and availability and the impact economic conditions and geopolitical events have on its operations or its customers’ and suppliers’ operations, all of which remain uncertain and cannot be predicted.

Operations outside the United States

Kronos - Kronos has substantial operations located outside the United States (principally Europe and Canada) for which the functional currency is not the U.S.

Kronos - Kronos has substantial operations located outside the United States for which the functional currency is not the U.S.

As a result, the reported amount of our net investment in Kronos will fluctuate based upon changes in currency exchange rates.

22 unchanged sentences

● Goodwill - Our net goodwill totaled $27.2 million at December 31, 2022, all related to CompX’s Security Products reporting unit.

Goodwill is required to be tested annually or at other times whenever an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its

carrying value.

Goodwill is required to be tested annually or at other times whenever an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying value.

CompX performs its annual goodwill impairment test in the third quarter of each year or at other times whenever an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying value.

19 unchanged sentences

The funding requirements for these defined benefit pension plans are generally based upon applicable regulations (such as ERISA in the U.S.) and will generally differ from pension expense recognized under GAAP for financial reporting purposes.

We made contributions to our plans of approximately $3.2 million in 2019, $1.8 million in 2020 and $1.2 million in 2021.

We made contributions to our plans of approximately $1.8 million in 2020, and $1.2 million in each of 2021 and 2022.

In accordance with applicable U.K.

3 unchanged sentences

At the completion of the buy-out we will remove the assets and liabilities of the U.K.

pension plan from our Consolidated Financial Statements and a plan settlement gain or loss (which we are currently unable to estimate) will be included in net periodic pension cost.

pension plan from our Consolidated Financial Statements and a final plan settlement gain or loss (which we are currently unable to estimate) will be included in net periodic pension cost.

Under defined benefit pension plan accounting, defined benefit pension plan expense and prepaid and accrued pension costs are each recognized based on certain actuarial assumptions, principally the assumed discount rate and the assumed long-term rate of return on plan assets.

5 unchanged sentences

We also use these discount rates to determine the interest component of defined benefit pension expense for the following year.

At December 31, 2021, our projected benefit obligations for defined benefit plans comprised $40.3 million related to the U.S.

At December 31, 2022, our projected benefit obligations for defined benefit plans is comprised of $30.3 million related to the U.S.

plan and $5.8 million for the U.K.

28 unchanged sentences

plan and 4.3% for the U.K.

As noted above

we are in the process of annuitizing our U.K.

pension plan and, as a result, during 2021 and into 2022 all of the assets of the U.K.

As noted above we are in the process of annuitizing our U.K.

pension plan and, as a result, during 2021 and throughout 2022 all of the assets of the U.K.

plan were invested primarily in insurance contracts.

10 unchanged sentences

Operating activities

Trends in cash flows from operating activities, excluding the impact of deferred taxes and relative changes in assets and liabilities, are generally similar to trends in our income (loss) from operations.

Trends in cash flows from operating activities, excluding the impact of deferred taxes and relative changes in assets and liabilities, are generally similar to trends in our income from operations.

Changes in working capital are primarily related to changes in receivables and inventories (as discussed below) and payables and accrued liabilities.

Net cash provided by operating activities was $26.9 million in 2022 compared to $17.6 million in 2021.

The $9.3 million net increase in cash provided by operating activities includes the net effects of:

● higher income from operations from CompX in 2022 of $4.9 million;

● lower net cash used for relative changes in receivables, inventories, prepaid expenses, payables and accrued liabilities in 2022 of $4.0 million;

● a $1.8 million increase in interest received in 2022 due to higher interest rates and increased investment balances, offset by lower average balances on CompX’s revolving promissory note receivable from affiliate;

● a $1.1 million increase in cash paid for taxes in 2022 due to the relative timing of payments.

Net cash provided by operating activities was $17.6 million in 2021 compared to $19.0 million in 2020.

The $1.4 million net decrease in cash provided by operating activities includes the net effects of:

2 unchanged sentences

● a $1.3 million decrease in interest received in 2021 due to lower average affiliate receivable balance and the relative timing of interest received.

Net cash provided by operating activities was $19.0 million in 2020 compared to $27.4 million in 2019.

The $8.4 million net decrease in cash provided by operating activities includes the net effects of:

● first annual installment payment of $12.0 million in 2020 compared to the initial cash payment of $25.0 million in 2019 related to the litigation settlement discussed in Note 17 to our Consolidated Financial Statements;

● higher net cash used for relative changes in receivables, inventories, prepaid expenses, payables and accrued liabilities in 2020 of $14.8 primarily due to the reclassification of $15.0 million from accrued insurance recovery receivable to noncurrent restricted cash in 2019;

● lower income from operations from CompX in 2020 of $5.9 million;

● lower cash received for insurance recoveries in 2020 of $5.3 million;

● lower cash paid for environmental remediation and related costs in 2020 of $2.0 million related to settlement of an environmental site in 2019;

● a $2.8 million decrease in interest received in 2020 due to lower average interest rates and to a lesser extent a lower average affiliate receivable balance, partially offset by the relative timing of interest received.

We do not have complete access to CompX’s cash flows in part because we do not own 100% of CompX.

7 unchanged sentences

Relative changes in working capital can have a significant effect on cash flows from operating activities.

As shown below, our total average days sales outstanding increased from December 31, 2020 to December 31, 2021 primarily as a result of the timing of sales and collections in the last month of 2021 as compared to 2020.

As shown below, our average number of days in inventory increased from December 31, 2020 to December 31, 2021 primarily 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 we have experienced availability issues.

As shown below, our total average days sales outstanding was generally consistent from December 31, 2021 to December 31, 2022 and is primarily impacted by the timing of sales and collections in the last month of the year.

As shown below, our average number of days in inventory increased from December 31, 2021 to December 31, 2022 due to increased inventories of certain components and raw materials that had longer lead times or for which we have experienced availability issues and from the timing of sales relative to the end of the fourth quarter, primarily at CompX’s Security Products reporting unit.

For comparative purposes, we have provided 2020 numbers below.

5 unchanged sentences

As a result of the COVID-19 pandemic, CompX limited 2020 expenditures to those required to meet its expected customer demand and those required to properly maintain its facilities and technology infrastructure.

Our 2021 capital expenditures increased above pre-pandemic levels as CompX accelerated the timeline for certain projects designed to increase its capacity and improve its capabilities in response to strong customer demand.

Investing activities also include net collections by CompX from Valhi of $5.9 million ($34.9 million of gross borrowings and $40.8 million of gross repayments) in 2019, net borrowings of $1.4 million ($34.8 million of gross borrowings and $33.4 million of gross repayments) in 2020 and net collections of $10.8 million ($29.8 million of gross borrowings and $40.6 million of gross repayments) in 2021 under a promissory note receivable from an affiliate.

2021 capital expenditures increased above pre-pandemic levels as CompX accelerated the timeline for certain projects designed to increase its capacity and improve its capabilities in response to strong customer demand.

Beginning in the latter half of 2022, CompX limited investments primarily to those expenditures required to meet its existing demand and to properly maintain its facilities and technology infrastructure.

Investing activities also include net borrowings of $1.4 million ($34.8 million of gross borrowings and $33.4 million of gross repayments) in 2020, net collections of $10.8 million ($29.8 million of gross borrowings and $40.6 million of gross repayments) in 2021 and net collections of $5.5 million ($24.3 million of gross borrowings and $29.8 million of gross repayments) in 2022 under a promissory note receivable from an affiliate.

See Note 15 to our Consolidated Financial Statements.

During 2019, investing activities also included proceeds from a sale of excess property of $4.6 million in the third quarter and net proceeds from the sale of our insurance and risk management business of $2.9 million in the fourth quarter.

During 2022 we purchased marketable debt securities totaling $70.0 million, of which $33.0 million relates to CompX.

See Note 5 to our Consolidated Financial Statements.

Financing activities

Cash dividends paid totaled $7.8 million ($.16 per share, or $.04 per share per quarter) in 2020, and $11.7 million ($.24 per share, or $.06 per share per quarter) in 2021.

Quarterly dividends paid totaled $7.8 million ($.16 per share, or $.04 per share per quarter) in 2020, $11.7 million ($.24 per share, or $.06 per share per quarter) in 2021 and $13.7 million ($.28 per share, or $.07 per share per quarter) in 2022.

In addition, our board of directors declared a special dividend which totaled $17.1 million ($.35 per share) paid on August 31, 2022.

In March 2023 our board of directors declared a first quarter 2023 dividend of $.07 per share, to be paid on March 23, 2023 to NL stockholders of record as of March 7, 2023.

The declaration and payment of future dividends, and the amount thereof, is discretionary and is dependent upon our financial condition, cash requirements, contractual obligations and restrictions and other factors deemed relevant by our board of

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.

Cash flows from financing activities include CompX dividends paid to its stockholders other than us aggregating $.5 million in 2019, $.7 million in 2020 and $1.3 million in 2021.

Cash flows from financing activities include CompX dividends paid to its stockholders other than us aggregating $.7 million in 2020, $1.3 million in 2021 and $4.3 million in 2022 which includes $2.7 million related to a special dividend.

In addition, during 2021, CompX acquired 75,000 shares of its Class A common stock in market transactions for an aggregate purchase price of $1.3 million.

During 2022, CompX acquired 78,900 shares of its Class A common stock (8,900 shares from affiliates in two private transactions, and 70,000 shares in a single market transaction) for an aggregate purchase price of $1.7 million.

Outstanding debt obligations

11 unchanged sentences

We generally use these amounts to fund capital expenditures (substantially all of which relate to CompX), pay ongoing environmental remediation and litigation costs, and provide for the payment of dividends (if declared).

At December 31, 2021, we had aggregate cash, cash equivalents and restricted cash of $175.2 million, substantially all of which was held in the U.S.

At December 31, 2022, we had aggregate restricted and unrestricted cash, cash equivalents and current marketable securities of $167.7 million, substantially all of which was held in the U.S.

A detail (in millions) by entity is presented in the table below.

(In millions)

NL Parent and wholly-owned subsidiaries

17 unchanged sentences

Capital expenditures for 2023 are estimated at approximately $3.0 million, substantially all of which relate to CompX.

CompX’s 2022 capital investments are primarily to increase its capacity and its capability needs as well as to maintain and improve the cost-effectiveness of its facilities equipment, and technology infrastructure.

CompX’s 2023 capital investments are primarily to meet its expected customer demand and those required to properly maintain its facilities and technology infrastructure.

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 affiliates.

A detail of annual dividends we expect to receive from our subsidiaries and affiliates in 2022, based on the number of shares of common stock of these affiliates we own as of December 31, 2021 and their current regular quarterly dividend rate, is presented in the table below.

In this regard, in February 2022 Kronos increased its regular quarterly dividend from $.18 to $.19 per share and in March 2022 CompX increased its regular quarterly dividend from $.20 to $.25 per share, both increases begin with the dividends payable in March 2022.

A detail of annual dividends we expect to receive from our subsidiaries and affiliates in 2023,

based on the number of shares of common stock of these affiliates we own as of December 31, 2022 and their current regular quarterly dividend rate, is presented in the table below.

Annual expected

13 unchanged sentences

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.

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.

As more fully described in the Notes to our Consolidated Financial Statements, we are party to various debt, leases and other agreements which contractually and unconditionally commit us to pay certain amounts in the future.

4 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis