What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-06 compared with 2023-03-08 · 228 added, 204 removed, 361 unchanged (54% of the section changed)

15 unchanged sentences

Net income overview

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 decrease in our earnings per share attributable to NL stockholders from 2021 to 2022 is primarily due to the net effects of:

Our net loss attributable to NL stockholders was $2.3 million, or $.05 per share, in 2023 compared to net income of $33.8 million, or $.69 per share, in 2022 and net income of $51.2 million, or $1.05 per share, in 2021.

As more fully described below, the decrease in our earnings attributable to NL stockholders from 2022 to 2023 is primarily due to the net effects of:

● equity in losses from Kronos in 2023 of $15.0 million compared to equity in earnings of $31.9 million in 2022,

● higher interest and dividend income of $5.8 million in 2023, and

● a non-cash loss on the termination of our U.K.

pension plan of $4.9 million in 2023 .

Our 2023 net loss per share attributable to NL stockholders includes:

● a loss of $.08 per share, net of tax, due to the termination of our U.K.

pension plan recognized in the second quarter,

● a loss of $.02 per share, net of tax, due to Kronos’ recognition, primarily in the fourth quarter, of restructuring costs related to workforce reductions,

● income of $.01 per share, net of tax, due to Kronos’ recognition in the first, second and third quarters of a pre-tax insurance settlement gain related to a business interruption insurance claim arising from Hurricane Laura in 2020, and

● a loss of $.01 per share, net of tax, due to Kronos’ recognition in the fourth quarter of a fixed asset impairment related to the write-off of certain costs resulting from a capital project termination .

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 attributable to NL stockholders from 2021 to 2022 is primarily due to the effects of:

● 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,

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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.

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 2024 to be higher than 2023 primarily due to higher equity in earnings from Kronos, partially offset by lower expected income from operations attributable to CompX and higher litigation fees and related costs.

Income from operations

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Income from operations

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

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

Years ended December 31,

(Dollars in millions)

Equity in earnings of Kronos

Equity in earnings (losses) of Kronos

Marketable equity securities

unrealized gain (loss)

Loss on pension plan termination

Other components of net periodic pension

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Income from operations

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.

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.

Net sales – CompX’s net sales decreased approximately $5.3 million in 2023 compared to 2022 due to lower Marine Components sales primarily to the towboat market, partially offset by higher Security Products sales largely in the fourth quarter of 2023 .

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.

Cost of sales and gross margin – CompX’s cost of sales decreased in 2023 compared to 2022 primarily due to the effects of lower production costs at both Security Products and Marine Components as well as lower Marine Components sales.

Gross margin as a percentage of sales increased over the same period primarily due to the factors affecting cost of sales.

CompX’s 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 .

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 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 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.

General - CompX’s profitability primarily depends on its ability to utilize production capacity effectively, which is affected by, among other things, the demand for its products and its ability to control manufacturing costs, primarily comprised of labor costs and materials.

The materials used in its products consist of purchased components and raw materials some of which are subject to fluctuations in the commodity markets such as zinc, brass and stainless steel.

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, 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.

Operating costs and expenses – CompX’s 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.

CompX’s operating costs and expenses increased in 2023 compared to 2022 predominantly due to higher salary and benefit costs at Security Products which increased by $.6 million.

As a percentage of sales, CompX’s operating costs and expenses increased in 2023 compared to 2022 primarily due to the effect of the increased operating costs and expenses on lower sales.

CompX’s 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, CompX’s operating costs and expenses decreased in 2022 compared to 2021 primarily due to the effect of higher sales .

Income from operations - As a percentage of net sales, CompX’s operating income increased in 2023 compared to 2022 and increased in 2022 compared to 2021.

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

General - CompX’s profitability primarily depends on its ability to utilize its production capacity effectively, which is affected by, among other things, the demand for its products and its ability to control its manufacturing costs, primarily comprised of labor costs and materials.

The materials used in CompX’s products consist of purchased components and raw materials some of which are subject to fluctuations in the commodity markets such as zinc, brass,

aluminum and stainless steel.

Total material costs represented approximately 48% of CompX’s cost of sales in 2023, with commodity-related raw materials representing approximately 13% of its cost of sales.

After increasing in 2021 and the first half of 2022, prices for the primary commodity-related raw materials used in the manufacture of CompX’s locking mechanisms, primarily zinc and brass, generally began to stabilize in the latter half of 2022 and into 2023 and generally began to soften in the latter half of 2023.

Prices for aluminum and stainless steel, the primary raw material used for the manufacture of marine exhaust headers and pipes, wake enhancement systems, throttles and trim tabs experienced significant volatility during 2021 and 2022 but were more stable in 2023.

Although raw commodity costs declined during 2023 from elevated levels experienced in 2021 and 2022, in most cases materials CompX purchases also include processing and conversion costs such as alloying, extrusion and rolling which continue to be elevated due to costs of labor, transportation and energy.

Based on current economic conditions, CompX expects the prices for zinc, brass, aluminum, stainless steel and other manufacturing materials in 2024 to be relatively stable.

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.

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Operating income margin

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.

Security Products - Security Products net sales increased 6% to $121.2 million in 2023 compared to $114.5 million in 2022 primarily due to higher sales related to a pilot project for a government security customer.

Relative to prior year, sales were $8.3 million higher to the government security market and $1.5 million higher to distributors, partially offset by $1.7 million lower sales to the office furniture market and $.7 million lower sales to the gas station security market.

Gross margin as a percentage of net sales for 2023 increased as compared to 2022 primarily due to lower production costs (including lower material, overtime and shipping costs) and increased coverage of fixed costs on higher sales, primarily in the fourth quarter.

Operating income margin increased for 2023 compared to 2022 primarily due to the factors impacting gross margin, as well as increased coverage of operating costs and expenses from higher sales, partially offset by increased operating costs and expenses, including higher employee salaries and benefit costs of $.6 million.

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.

Gross margin as a percentage of net sales for 2021 increased as compared to 2020 due to increased coverage of fixed costs from higher sales, 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 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.

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.

Years ended December 31,

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Operating income margin

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

Marine Components - Marine Components net sales decreased 23% in 2023 as compared to 2022.

Relative to prior year, sales were $12.8 million lower to the towboat market (primarily to original equipment boat manufacturers) and $2.0 million lower to the engine builder market, partially offset by $1.2 million higher industrial sales and $.8 million higher sales to the center console boat market.

Gross margin as a percentage of sales increased in 2023 compared to 2022 primarily due to lower raw material costs (primarily stainless steel and aluminum), lower supplies costs driven by lower volume, lower shipping costs and lower labor costs from reduced employee overtime due to lower sales volumes, partially offset by decreased coverage of fixed costs as a result of lower sales.

Operating income as a percentage of net sales decreased slightly in 2023 compared to 2022 primarily due to the factors impacting gross margin, as well as decreased coverage of operating costs and expenses from lower sales.

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.

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.

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.

Outlook – In 2023, CompX’s Security Products reporting unit achieved record sales as a result of increased sales to the government security market including a pilot project to a government security customer.

Absent this project, Security Products sales would have declined compared to the prior year due to sluggish demand in many of the other markets Security Products serves.

At CompX’s Marine Components reporting unit, the strong demand experienced in 2021 and 2022 carried into the first quarter of 2023 when the towboat market began experiencing softening demand that accelerated as the year progressed.

Labor markets have become favorable in each of the regions CompX operates, and material prices have either stabilized or, in the case of certain commodity raw materials, started to decline slightly.

CompX’s supply chains are stable and transportation and logistical delays are minimal.

CompX has adjusted its labor force and production rates at its facilities to reflect the stability of its raw material supplies and near-term demand levels.

CompX expects Security Products sales in 2024 will be lower than 2023 as the sluggishness it observed across a variety of the markets Security Products served during 2023 will continue with customers expressing uncertainty regarding sustained consumer demand.

CompX does not currently have additional orders with regard to the 2023 pilot project, and it has no knowledge of any future orders.

After implementing aggressive price increases over the last several years to maintain operating margins, CompX believes its customers will accept only modest price increases in the current environment.

Overall, CompX expects Security Products gross margin will be comparable in 2024, although it expects operating income as a percentage of sales to decline due to its limited pricing power along with reduced coverage of selling, general and administrative costs as a result of lower expected sales.

CompX expects Marine Components net sales in 2024 to also be lower as compared to 2023 because it believes demand in the towboat market will further decline, and expected increases in sales to the industrial and center console boat markets will not fully offset reduced towboat demand.

The recreational marine industry faces strong headwinds due to higher interest rates and broader market weakness.

Several original equipment boat manufacturers, including certain of CompX’s customers, have publicly announced reductions to production schedules for 2024.

Overall, CompX expects Marine Components gross margin as a percentage of net sales for 2024 to be lower than 2023 due to lower coverage of fixed overhead as a result of lower expected sales, and operating income as a percentage of net sales will similarly be lower as a result of reduced coverage of selling, general and administrative expenses due to lower expected sales.

CompX ended the year with elevated inventory balances at its Marine Components reporting unit as a result of increased orders of certain raw materials due to previously long lead times coupled with the rapidly changing towboat demand which created a misalignment of its raw materials with near term demand.

CompX expects inventory balances to be in alignment with current demand by mid-year 2024.

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 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.

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 geopolitical 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

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Accordingly, these insurance recoveries are recognized when receipt is probable and the amount is determinable.

We received $.5 million in insurance recoveries during 2023 which are included in corporate expenses on our Consolidated Statement of Operations.

See Note 16 to our Consolidated Financial Statements.

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.

Corporate expense - Corporate expenses were $11.3 million in 2023, $.4 million or 3% lower than in 2022 primarily due to lower administrative expenses and insurance recoveries noted above.

Included in corporate expenses are:

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● environmental remediation and related costs of $.6 million in 2023 compared to $.5 million in 2022.

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.

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.

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.

Overall, we currently expect that our general corporate expenses in 2024 will be higher than in 2023 primarily due to higher expected litigation fees and related costs.

The level of our litigation fees and related costs 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.

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Interest and dividend income - Interest income increased $5.8 million in 2023 compared to 2022 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.

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.

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

See Note 5 to our Consolidated Financial Statements.

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.

Income tax expense (benefit) - We recognized income tax expense of $7.5 million in 2021 and $2.8 million in 2022 and an income tax benefit of $7.0 million in 2023.

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

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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 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.

We received aggregate dividends from Kronos of $25.4 million in 2021, and $26.8 million in each of 2022 and 2023.

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 5.5% expense in 2021, a 3.4% expense in 2022 and a 58.5% expense in 2023.

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.

The increase in our effective rate from 2022 to 2023 is attributable to the effects of Kronos’ loss in 2023 as compared to earnings in 2022.

See Note 13 to our Consolidated Financial Statements for more information about our 2023 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.

Noncontrolling interest - Noncontrolling interest in net income is directly attributable to CompX’s net income.

The increase in noncontrolling interest is the result of CompX’s increase in net income in 2021, 2022 and 2023.

Related party transactions - We are a party to certain transactions with related parties.

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Cost of sales

Income from operations

Other loss, net

Income (loss) from operations

Other gain (loss), net

Interest expense

Income before income taxes

Income tax expense

Income (loss) before income taxes

Income tax expense (benefit)

Net income (loss)

Percentage of net sales:

Cost of sales

Income from operations

Equity in earnings of

Income (loss) from operations

Equity in earnings (losses) of

Kronos Worldwide, Inc.

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* Thousands of metric tons

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.

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.

Industry conditions and 2023 overview - Kronos and the TiO 2 industry are experiencing an extended period of significantly reduced demand across all major markets, which is reflected in its sales volumes in 2023.

Demand first began to decrease in the third quarter of 2022, and although there has been some stabilization at this reduced level, overall demand remained below average historical levels during 2023.

While Kronos started 2023 with average TiO 2 selling prices 16% higher than at the beginning of 2022, this extended period of reduced demand has put downward pressure on its average TiO 2 selling prices and, as a result, prices declined 13% in 2023.

Overall sales volumes declined in 2023 compared to 2022 primarily due to lower demand in all of its major markets.

Kronos began curtailing production in the fourth quarter of 2022 at certain of its European facilities due to decreased demand and increased production costs.

During 2023, Kronos continued operating its production facilities at reduced rates to align production with expected customer demand.

As a result, Kronos operated its production facilities at 72% of practical capacity utilization in 2023 compared to 89% of practical capacity utilization in 2022.

The following table shows our capacity utilization rates during 2022 and 2023.

Production Capacity Utilization Rates

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Fourth Quarter

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.

Net sales - Kronos’ net sales in 2023 decreased 14%, or $263.7 million, compared to 2022 primarily due to a 13% decrease in sales volumes (which decreased net sales by approximately $251 million) and a 4% decrease in average TiO 2 selling prices (which decreased net sales by approximately $77 million).

Changes in product mix positively contributed to net sales, primarily due to higher average selling prices and sales volumes in its complementary businesses which somewhat offset declines in TiO 2 sales volumes.

In addition to the impact of sales volumes and average TiO 2 selling prices, Kronos estimates that changes in currency exchange rates (primarily the euro) increased its net sales by approximately $10 million in 2023 as compared to 2022.

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 13% in 2023 as compared to 2022 due to lower overall demand across all major markets noted above.

The lower overall demand Kronos began experiencing in the second half of 2022 continued throughout most of 2023.

However, Kronos’ sales volumes were 29% higher in the fourth quarter of 2023 as compared to the fourth quarter of 2022 due to strengthening demand for TiO 2 in its primary markets of Europe and North America .

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.

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.

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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).

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.

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.

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.

Cost of sales and gross margin – Kronos’ cost of sales decreased $37.5 million, or 2%, in 2023 compared to 2022 due to the net effects of a 13% decrease in sales volumes, a 19% decrease in production volumes at certain of its manufacturing facilities to align inventory levels to anticipated near-term customer demand (which resulted in $96 million of unabsorbed fixed production costs) and higher production costs of approximately $65 million (primarily raw materials).

Kronos’ cost of sales as a percentage of net sales increased to 90% in 2023 compared to 80% in 2022 primarily due to the unfavorable effects of higher production costs (primarily raw materials) and unabsorbed fixed production costs due to lower production volumes.

Gross margin as a percentage of net sales decreased to 10% in 2023 compared to 20% in 2022.

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

Kronos’ 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.

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.

Gross margin as a percentage of net sales increased to 23% in 2021 compared to 21% in 2020.

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.

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.

Other operating income and expense, net - Kronos’ selling, general and administrative expenses decreased $20.1 million, or 9%, in 2023 compared to 2022 primarily due to lower distribution costs related to lower overall sales volumes during the year.

Selling, general and administrative expense as a percentage of net sales increased in 2023 compared to 2022 as a result of lower net sales and $5.8 million in charges related to workforce reductions.

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 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 – Kronos had a loss from operations of $56.0 million in 2023 compared to income from operations of $159.6 million in 2022 as a result of the factors impacting gross margin discussed above.

Kronos recognized a gain of $2.5 million in 2023 and 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 changes in currency exchange rates decreased its loss from operations by approximately $16 million in 2023 as compared to 2022, as discussed in the Effects of currency exchange rates section below.

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.

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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.

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.

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.

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.

Damages resulting from Hurricane Delta were not as severe and production activities were resumed within five days from the time of initial shutdown prior to landfall of the hurricane.

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 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 non-operating income (expense) - Kronos recognized unrealized losses of $1.0 million in each of 2023 and 2022 on the change in value of its marketable equity securities.

Other components of net periodic pension and OPEB cost in 2023 decreased $7.2 million compared to 2022 primarily due to the net effects of higher discount rates impacting interest cost, previously unrecognized actuarial losses and $1.3 million in settlement costs related to the termination and buy-out of its pension plan in the United Kingdom during the second quarter of 2023.

Interest expense in 2023 was comparable to interest expense in 2022.

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.

Kronos recognized an insurance settlement gain of $1.5 million during 2020 related to a property damage claim.

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.

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 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 .

Income tax expense (benefit) - Kronos recognized an income tax benefit of $23.8 million in 2023 compared to income tax expense of $29.4 million in 2022.

The difference is primarily due to lower earnings in 2023 and the jurisdictional mix of such earnings.

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

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

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.

Kronos would generally expect its overall effective tax rate to be higher than the U.S.

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

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Impact of changes in currency exchange rates - 2023 vs 2022

gains (losses)-

Total currency

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(In millions)

Income from operations

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.

Income (loss) from operations

The $10 million increase in Kronos’ net sales (translation gains) 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.

dollars in 2023 as compared to 2022.

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 $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 relative to the Canadian dollar and the Norwegian krone in 2023 did not have a significant effect on Kronos net sales, as a substantial portion of the sales generated by its Canadian and Norwegian operations is denominated in the U.S.

The $16 million decrease in loss from operations was comprised of the following:

● Lower net currency transaction gains of approximately $11 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 Kronos’ non-U.S.

operations, and in Norwegian krone denominated receivables and payables held by its non-U.S.

dollar currency held

by Kronos’ non-U.S.

operations, and in Norwegian krone denominated receivables and payables held by Kronos’ non-U.S.

operations, and

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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 2023 as compared to 2022.

The effect of the weakening of the U.S.

dollar relative to the euro was nominal in 2023 as compared to 2022.

Impact of changes in currency exchange rates - 2022 vs 2021

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Total currency

Transaction gains/(losses) recognized

Transaction gains recognized

(In millions)

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.

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.

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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.

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’ customer demand stabilized during the fourth quarter of 2023, particularly in the North American and export markets, while demand in Europe improved but remained below historical levels.

Kronos expects consumer demand to improve in 2024, and it believes customer destocking of TiO 2 is largely complete and customer inventories are historically low.

As a result, Kronos expects sales volumes in 2024 to exceed 2023 sales volumes.

In this regard, Kronos is experiencing improved demand thus far in the first quarter of 2024 in all major markets.

Kronos has increased production rates in line with current and expected near-term improved demand and believes its production volumes in 2024 will be higher than 2023, although below estimated full practical capacity.

During 2023, Kronos’ selling prices came under increasing pressure, primarily due to low-cost imports from China impacting European and export pricing.

Kronos expects these pricing pressures to be somewhat mitigated in 2024 and believes there is potential industry pricing upside in 2024 as a result of improved demand.

Throughout 2023 Kronos implemented cost reduction initiatives designed to improve its long-term cost structure, including targeted workforce reductions and the implementation of certain ongoing technology innovations and process improvement initiatives.

Energy costs in Europe have generally stabilized after a period of market disruptions, although

in early 2023, in order to provide cost certainty, Kronos entered into forward contracts for a portion of its energy needs in 2023 which in many cases were priced above subsequent market rates.

As a result of contracts expiring in late 2023, Kronos expects its energy costs will be further reduced in 2024.

Kronos expects raw material and other input costs, which began to decline in 2023, will continue to moderate in 2024.

This, along with lower expected energy costs and the cost reduction initiatives discussed above, will result in improved margins in 2024 as compared to 2023.

Overall, due to the expected improved demand and lower production costs, including lower unabsorbed fixed costs, Kronos expects to report higher operating results for the full year of 2024 as compared to 2023.

Throughout 2023 Kronos took necessary actions to align its production and inventories to then current demand levels including production curtailments.

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

Kronos believes the steps it took during 2023 to preserve its liquidity while maintaining global market share has positioned its business to capitalize on its expectations for improved demand in 2024.

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.

Kronos has experienced global market disruptions including high energy costs and future impacts on its operations will depend on, among other things, future energy costs 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

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Our significant accounting policies are more fully described in Note 1 to our Consolidated Financial Statements.

Our Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) which requires us to make estimates, judgments and assumptions we believe are reasonable based on our historical experience, observation of known trends in our company and the industry as a whole and information available from other outside sources.

Our estimates affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period.

Actual results may differ significantly from those initial estimates.

Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or (GAAP).

The preparation of these financials statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expense during the reporting period.

On an ongoing basis we evaluate our estimates, including those related to the recoverability of long-lived assets, goodwill, pension and other postretirement benefit obligations and the underlying actuarial assumptions related thereto, the realization of deferred income tax assets and accruals for litigation, income tax and other contingencies.

We base our estimates on historical experience and on various other assumptions which we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the reported amounts of assets, liabilities, revenues and expenses.

Actual results may differ significantly from previously-estimated amounts under different assumptions or conditions.

We believe the most critical accounting policies and estimates involving significant judgment primarily relate to contingencies, certain long-lived assets, considerations in the recoverability and impairment assessments for goodwill and defined benefit pension plans.

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● Defined benefit pension plans - We maintain a defined benefit pension plan in the U.S.

and a plan in the United Kingdom (U.K.) See Note 11 to our Consolidated Financial Statements.

We recognized consolidated defined benefit pension plan expense of $1.0 million in 2020, $.9 million in 2021 and $1.4 million in 2022.

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 $1.8 million in 2020, and $1.2 million in each of 2021 and 2022.

and we previously maintained a plan in the United Kingdom (U.K.) related to a former disposed U.K.

business unit.

In accordance with applicable U.K.

pension regulations, we entered into an agreement in March 2021 for the bulk annuity purchase, or “buy-in”, with a specialist insurer of defined benefit pension plans.

Following the buy-in, individual policies will replace the bulk annuity policy in a “buy-out” which is expected to be completed in 2023.

The buy-out is expected to be completed with existing plan funds.

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 final plan settlement gain or loss (which we are currently unable to estimate) will be included in net periodic pension cost.

Following the buy-in, individual policies replaced the bulk annuity policy in a “buy-out” which was completed as of May 1, 2023.

The buy-out was completed with existing plan funds.

At the completion of the buy-out, the assets and liabilities of the U.K.

pension plan were removed from our Consolidated Financial Statements and a non-cash pension plan termination loss of $4.9 million was recognized in the second quarter of 2023.

See Note 11 to our Consolidated Financial Statements.

We recognized consolidated defined benefit pension plan expense of $.9 million in 2021, $1.4 million in 2022 and $6.5 million in 2023, including the loss on the termination of the U.K.

pension plan of $4.9 million discuss above.

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

In 2023, we made a net contribution of $.2 million to our plans (a contribution of approximately $1.1 million to our U.S.

plan and a refund of approximately $.9 million as a result of the termination of the U.K.

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.

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

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.

plan, which is associated with a former disposed business.

We use different discount rate assumptions in determining our defined benefit pension plan obligations and expense for the plans we maintain in the United States and the U.K.

As noted above, we terminated our UK pension plan in May 2023.

At December 31, 2023, our projected benefit obligations for our U.S.

defined benefit plan is $29.4 million.

We use different discount rate assumptions in determining our defined benefit pension plan obligations and expense for the plan we maintain in the United States and previously in the U.K.

as the interest rate environment differs from country to country.

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United States

United Kingdom

United Kingdom (through date of plan termination)

The assumed long-term rate of return on plan assets represents the estimated average rate of earnings expected to be earned on the funds invested or to be invested from the plans’ assets provided to fund the benefit payments inherent in the projected benefit obligations.

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Differences between the expected return on plan assets for a given year and the actual return are deferred and amortized over future periods based on the average remaining life expectancy of the inactive participants.

At December 31, 2022, approximately 80% of the plan assets were related to our plan in the U.S., with the remainder related to the U.K.

We use different long-term rates of return on plan asset assumptions for our U.S.

defined benefit pension plan expense because the respective plan assets are invested in a different mix of investments and the long-term rates of return for different investments differ from country to country.

We used different long-term rates of return on plan asset assumptions for our U.S.

and previously maintained U.K.

defined benefit pension plan expense because the respective plan assets were invested in a different mix of investments and the long-term rates of return for different investments differ from country to country.

In determining the expected long-term rate of return on plan asset assumptions, we consider the long-term asset mix (e.g.

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United States

United Kingdom

Our long-term rate of return on plan asset assumptions in 2023 used for purposes of determining our 2023 defined benefit pension plan expense is 5.0% for the U.S.

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 throughout 2022 all of the assets of the U.K.

United Kingdom (through date of plan termination)

Our long-term rate of return on plan asset assumptions in 2024 used for purposes of determining our 2024 defined benefit pension plan expense is 5.0%.

As noted above, during 2021 and 2022 and through the approximate plan termination date in 2023, all of the assets of the U.K.

plan were invested primarily in insurance contracts.

In addition to the actuarial assumptions discussed above, because we maintain a defined benefit pension plan in the U.K., the amount of recognized defined benefit pension expense and the amount of net pension asset and net pension liability will vary based upon relative changes in currency exchange rates.

Based on the actuarial assumptions described above and our current expectation for what actual average currency exchange rates will be during 2023, we expect to recognize defined benefit pension expense of approximately $1.6 million in 2023.

Based on the actuarial assumptions described above, we expect to recognize defined benefit pension expense of approximately $1.5 million in 2024.

In comparison, we expect to be required to contribute approximately $1.0 million to such plans during 2024.

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We believe that all of the actuarial assumptions used are reasonable and appropriate.

However, if we had lowered the assumed discount rate by 25 basis points for each of our plans as of December 31, 2022, our aggregate projected benefit obligations would have increased by approximately $.6 million at that date.

However, if we had lowered the assumed discount rate by 25 basis points for our plan as of December 31, 2023, our aggregate projected benefit obligation would have increased by approximately $.6 million at that date.

Such a change would not materially impact our defined benefit pension expense for 2024.

Similarly, if we lowered the assumed long-term rate of return on plan assets by 25 basis points for our plans, such a change would not materially impact our defined benefit pension expense for 2023.

Similarly, if we lowered the assumed long-term rate of return on plan assets by 25 basis points for our plan, such a change would not materially impact our defined benefit pension expense for 2024.

LIQUIDITY AND CAPITAL RESOURCES

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Net cash provided by operating activities was $37.0 million in 2023 compared to $26.9 million in 2022.

The $10.1 million net increase in cash provided by operating activities includes the effects of:

● lower net cash used for relative changes in receivables, inventories, prepaid expenses, payables and accrued liabilities in 2023 of $6.7 million;

● a $2.6 million increase in interest received in 2023 due to higher interest rates and increased investment balances, offset by lower average balances on CompX’s revolving promissory note receivable from affiliate;

● a $1.4 million decrease in cash paid for taxes in 2023 due to the relative timing of payments.

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:

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● 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:

● higher net cash used for relative changes in receivables, inventories, prepaid expenses, payables and accrued liabilities in 2021 of $8.2 million;

● higher income from operations from CompX in 2021 of $8.7 million;

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

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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 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.

As shown below, our total average days sales outstanding decreased from December 31, 2022 to December 31, 2023 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 decreased from December 31, 2022 to December 31, 2023 primarily due to a decrease at CompX’s Security Products reporting unit due to the fulfillment and shipping of a significant order during the fourth quarter of 2023, partially offset by an increase at CompX’s Marine Components reporting unit due to lower sales and

increased inventory balances as a result of prior orders of certain raw materials with longer lead times discussed in CompX’s Outlook above.

For comparative purposes, we have provided 2021 numbers below.

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Capital expenditures were $4.1 million in 2021, $3.7 million in 2022 and $1.1 million in 2023.

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.

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.

Capital expenditures in 2021 and 2022 were higher 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 through 2023, 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 collections of $10.8 million ($29.8 million of gross borrowings and $40.6 million of gross repayments) in 2021, net collections of $5.5 million ($24.3 million of gross borrowings and $29.8 million of gross repayments) in 2022 and net collections of $2.6 million ($27.9 million of gross borrowings and $30.5 million of gross repayments) in 2023 under a promissory note receivable from an affiliate.

See Note 15 to our Consolidated Financial Statements.

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

During 2023, we purchased marketable debt securities totaling $61.4 million, of which $36.3 million relates to CompX, and received gross proceeds totaling $82.0 million, of which $36.0 million relate to CompX.

See Note 5 to our Consolidated Financial Statements.

Financing activities

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.

Quarterly dividends paid totaled $11.7 million ($.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 each of 2022 and 2023.

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.

In February 2024 our board of directors declared a first quarter 2024 dividend of $.08 per share, to be paid on March 21, 2024 to NL stockholders of record as of March 11, 2024.

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 directors.

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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 $.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.

Cash flows from financing activities include CompX dividends paid to its stockholders other than us aggregating $1.3 million in 2021, $4.3 million in 2022 ($2.7 million of which relates to a special dividend) and $1.6 million in 2023.

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.

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At December 31, 2023, NL had outstanding debt obligations of $.5 million under its secured revolving credit facility with Valhi, and CompX did not have any outstanding debt obligations.

We are in compliance with all of the covenants contained in our revolving credit facility with Valhi at December 31, 2022.

We are in compliance with all of the

covenants contained in our revolving credit facility with Valhi at December 31, 2023.

See Note 10 to our Consolidated Financial Statements.

Kronos’ Global Revolver and its Senior Secured Notes contain a number of covenants and restrictions which, among other things, restrict its ability to incur additional debt, incur liens, pay dividends or merge or consolidate with, or sell or transfer substantially all of its assets to, another entity, and contains other provisions and restrictive covenants customary in lending transactions of this type.

In February 2024 Kronos exchanged of €325 million principal amount of its outstanding 3.75% Senior Secured Notes due in September 2025 (the “Old Notes”) for newly issued €276.174 million aggregate outstanding 9.50% Senior Secured Notes due March 2029 (the “New Notes” and together with the Old Notes, the “Senior Secured Notes”) plus additional cash consideration of €50 million ($53.7 million).

Kronos financed the €50 million cash consideration with a new unsecured term loan from Contran Corporation due in September 2029.

The Contran term loan is subordinated in right of payment to Kronos’ Senior Secured and its $225 million global revolving credit facility (Global Revolver).

Kronos’ Senior Secured Notes, Global Revolver and the Contran term loan contain a number of covenants and restrictions which, among other things, restrict its ability to incur additional debt, incur liens, pay dividends 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 this type.

Certain of 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.

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Kronos is in compliance with all of its debt covenants at December 31, 2023.

Kronos believes that it will be able to continue to comply with the financial covenants contained in its credit facility through their maturity.

Kronos believes that it will be able to continue to comply with the financial covenants contained in its credit facility through its maturity.

Future cash requirements

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These companies 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.

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.

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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 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.

A detail of annual dividends we expect to receive from our subsidiaries and affiliates in 2024, based on the number of shares of common stock of these affiliates we own as of December 31, 2023 and their current regular quarterly dividend rate, is presented in the table below.

In this regard, in February 2024 CompX increased its regular quarterly dividend from $.25 to $.30 per share beginning with the dividends payable in March 2024.

Annual expected

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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.

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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