Item 9A. Controls and Procedures
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
We maintain disclosure controls and procedures which, as defined in Exchange Act Rule 13a-15(e), means controls and other procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit to the SEC under the Securities Exchange Act of 1934, as amended (the Act), is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports we file or submit to the SEC under the Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions to be made regarding required disclosure. Each of Courtney J. Riley, our President and Chief Executive Officer and Amy Allbach Samford, our Executive Vice President and Chief Financial Officer, have evaluated the design and effectiveness of our disclosure controls and procedures as of December 31, 2023. Based upon their evaluation, these executive officers have concluded that our disclosure controls and procedures are effective as of the date of this evaluation.
Management’s report on internal control over financial reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting which, as defined by Exchange Act Rule 13a-15(f) means a process designed by, or under the supervision of, our principal executive and principal financial officers, or persons performing similar functions, and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”), and includes those policies and procedures that:
● pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets,
● provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and directors, and
● provide reasonable assurance regarding prevention or timely detection of an unauthorized acquisition, use or disposition of assets that could have a material effect on our Consolidated Financial Statements.
Our evaluation of the effectiveness of internal control over financial reporting is based upon the framework established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013 (commonly referred to as the “2013 COSO” framework). Based on our evaluation under that framework, we have concluded that our internal control over financial reporting was effective as of December 31, 2023.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this annual report.
Other
As permitted by the SEC, our assessment of internal control over financial reporting excludes (i) internal control over financial reporting of equity method investees and (ii) internal control over the preparation of any financial statement
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schedules which would be required by Article 12 of Regulation S-X. However, our assessment of internal control over financial reporting with respect to equity method investees did include controls over the recording of amounts related to our investment that are recorded in the consolidated financial statements, including controls over the selection of accounting methods for our investments, the recognition of equity method earnings and losses and the determination, valuation and recording of our investment account balances.
Changes in internal control over financial reporting
There has been no change to our internal control over financial reporting during the quarter ended December 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Certifications
Our chief executive officer is required to annually file a certification with the New York Stock Exchange (NYSE), certifying our compliance with the corporate governance listing standards of the NYSE. During 2023, our chief executive officer filed such annual certification with the NYSE. The 2023 certification was unqualified.
Our chief executive officer and chief financial officer are also required to, among other things, quarterly file certifications with the SEC regarding the quality of our public disclosures, as required by Section 302 of the Sarbanes-Oxley Act of 2002. We have filed the certifications for the quarter ended December 31, 2023 as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K.
ITEM 9B. OTHER INFORMATION
N ot a ppl i cab l e
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated by reference to our 2024 definitive proxy statement to be filed with the SEC pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to our 2024 proxy statement.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference to our 2024 proxy statement.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated by reference to our 2024 proxy statement. See also Note 15 to our Consolidated Financial Statements.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The Information required by this Item is incorporated by reference to our 2024 proxy statement.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) and (c) Financial Statements
The Registrant
The consolidated financial statements of the Registrant listed on the accompanying Index of Financial Statements (see page F-1) are filed as part of this Annual Report.
50%-or-less persons
The consolidated financial statements of Kronos (31%-owned at December 31, 2023) are incorporated by reference in Exhibit 99.1 of this Annual Report pursuant to Rule 3-09 of Regulation S-X. Management’s Report on Internal Control Over Financial Reporting of Kronos is not included as part of Exhibit 99.1. The Registrant is not required to provide any other consolidated financial statements pursuant to Rule 3-09 of Regulation S-X.
(b) Exhibits
We have included as exhibits the items listed in the Exhibit Index. We will furnish a copy of any of the exhibits listed below upon payment of $4.00 per exhibit to cover our cost to furnish the exhibits. Pursuant to Item 601(b)(4)(iii) of Regulation S-K, any instrument defining the rights of holders of long-term debt issues and other agreements related to indebtedness which do not exceed 10% of consolidated total assets as of December 31, 2023 will be furnished to the Commission upon request.
Item No.
Exhibit Index
3.1
Certificate of Amended and Restated Certificate of Incorporation dated May 22, 2008 - incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on May 23, 2008.
3.2
Amended and Restated Bylaws of NL Industries, Inc. as of October 26, 2023 - incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on October 26, 2023.
4.1
Description of the Registrant’s Capital Stock. - incorporated by reference to Exhibit 4.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2019.
10.1
Lease Contract dated June 21, 1952, between Farbenfabriken Bayer Aktiengesellschaft and Titangesellschaft mit beschrankter Haftung (German language version and English translation thereof) - incorporated by reference to Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K (File No. 001-00640) for the year ended December 31, 1985. (P)
10.2
Formation Agreement dated as of October 18, 1993 among Tioxide Americas Inc., Kronos Louisiana, Inc. and Louisiana Pigment Company, L.P. - incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-00640) for the quarter ended September 30, 1993. (P)
10.3
Joint Venture Agreement dated as of October 18, 1993 between Tioxide Americas Inc. and Kronos Louisiana, Inc. - incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-00640) for the quarter ended September 30, 1993. (P)
10.4
Kronos Offtake Agreement dated as of October 18, 1993 between Kronos Louisiana, Inc. and Louisiana Pigment Company, L.P. - incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-00640) for the quarter ended September 30, 1993. (P)
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Item No.
Exhibit Index
10.5
Amendment No. 1 to Kronos Offtake Agreement dated as of December 20, 1995 between Kronos Louisiana, Inc. and Louisiana Pigment Company, L.P. - incorporated by reference to Exhibit 10.22 to the Registrant’s Annual Report on Form 10-K (File No. 001-00640) for the year ended December 31, 1995. (P)
10.6
Tioxide Americas Offtake Agreement dated as of October 18, 1993 between Tioxide Americas Inc. and Louisiana Pigment Company, L.P. - incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-00640) for the quarter ended September 30, 1993. (P)
10.7
Amendment No. 1 to Tioxide Americas Offtake Agreement dated as of December 20, 1995 between Tioxide Americas Inc. and Louisiana Pigment Company, L.P. - incorporated by reference to Exhibit 10.24 to the Registrant’s Annual Report on Form 10-K (File No. 001-00640) for the year ended December 31, 1995. (P)
10.8
Parents’ Undertaking dated as of October 18, 1993 between ICI American Holdings Inc. and Kronos Worldwide, Inc. (f/k/a Kronos, Inc.) - incorporated by reference to Exhibit 10.9 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-00640) for the quarter ended September 30, 1993. (P)
10.9
Allocation Agreement dated as of October 18, 1993 between Tioxide Americas Inc., ICI American Holdings, Inc., Kronos Worldwide, Inc. (f/k/a Kronos, Inc.). and Kronos Louisiana, Inc. - incorporated by reference to Exhibit 10.10 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-00640) for the quarter ended September 30, 1993. (P)
10.10
Form of Assignment and Assumption Agreement, dated as of January 1, 1999, between Kronos Inc. (formerly known as Kronos (USA), Inc.) and Kronos International, Inc. - incorporated by reference to Exhibit 10.9 to Kronos International, Inc.’s Registration Statement on Form S-4 (File No. 333-100047). (P)
10.11
Form of Cross License Agreement, effective as of January 1, 1999, between Kronos Inc. (formerly known as Kronos (USA), Inc.) and Kronos International, Inc. - incorporated by reference to Exhibit 10.10 to Kronos International, Inc.’s Registration Statement on Form S-4 (File No. 333-100047).
10.12
Unsecured Revolving Demand Promissory Note dated December 31, 2022 in the principal amount of $25.0 million executed by Valhi, Inc. and payable to the order of Kronos Worldwide, Inc. – incorporate by reference to Exhibit 10.12 to the Registrant’s Annual Report on Form 10K for the year ended December 31, 2022.
10.13**
Cancellation of Unsecured Revolving Demand Promissory Note between Valhi, Inc. and Kronos Worldwide, Inc. dated February 21, 2024.
10.14
Restated and Amended Agreement by and between Richards Bay Titanium (Proprietary) Limited (acting through its sales agent Rio Tinto Iron & Titanium Limited) and Kronos (US), Inc. effective January 1, 2016 – incorporated by reference to Exhibit 10.26 to the Kronos Worldwide, Inc. Annual Report on Form 10-K for the year ended December 31, 2015 .
10.15 *
Kronos Worldwide, Inc. 2012 Director Stock Plan - incorporated by reference to Exhibit 4.4 of Kronos Worldwide, Inc. Registration statement on Form S-8.
10.16 *
CompX International Inc. 2012 Director Stock Plan - incorporated by reference to Exhibit 10.2 of CompX International Inc.’s Annual Report on Form 10-K for the year ended December 31, 2012.
10.17 *
NL Industries, Inc. 2023 Non-Employee Director Stock Plan - incorporated by reference to Exhibit 10.1 of Registrant’s Quarterly Report on Form 10Q for the quarter ended June 30, 2023.
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Item No.
Exhibit Index
10.18
Second Amended and Restated Agreement Regarding Shared Insurance among CompX International Inc., Contran Corporation, Kronos Worldwide, Inc., NL Industries, Inc. and Valhi, Inc. dated January 25, 2019 – incorporated by reference to Exhibit 10.20 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2018.
10.19
Intercorporate Services Agreement by and between Contran Corporation and Kronos Worldwide, Inc. - incorporated by reference to Exhibit 10.1 to the Kronos Worldwide, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.
10.20
Intercorporate Services Agreement between CompX International Inc. and Contran Corporation effective as of January 1, 2004 - incorporated by reference to Exhibit 10.2 to the CompX International Inc. Annual Report on Form 10-K for the year ended December 31, 2003.
10.21
Intercorporate Services Agreement by and between Contran Corporation and NL Industries, Inc. effective as of January 1, 2004 - incorporated by reference to Exhibit 10.1 to the NL Industries, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.
10.22
Tax Agreement between Valhi, Inc. and Kronos Worldwide, Inc. dated as of January 1, 2020 - incorporated by reference to Exhibit 10.1 to the Kronos Worldwide, Inc. Annual Report on Form 10-K for the year ended December 31, 2019.
10.23
Tax Agreement among NL Industries, Inc., Valhi, Inc. and Contran Corporation dated as of January 1, 2020 - incorporated by reference to Exhibit 10.25 to the Registrant’s Annual Report on Form 10-K (for the year ended December 31, 2019.
10.24
Unsecured Revolving Demand Promissory Note dated December 31, 2023 in the principal amount of $25 .0 million executed by Valhi, Inc. and payable to the order of CompX International Inc. - incorporated by reference to Exhibit 10.5 to the Annual Report on Form 10-K of CompX International Inc. for the year ended December 31, 2023.
10.25
Loan Agreement between NLKW Holding, LLC, as Borrower, and Valhi, Inc., as Lender, dated as of November 14, 2016 incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of the Registrant dated November 14, 2016 and filed on November 15, 2016.
10.26
First Amendment to Loan Agreement between NLKW Holding, LLC, as Borrower, and Valhi, Inc. as Lender, dated as of November 9, 2022 incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of the Registration dated November 9, 2022 .
10.27
Pledge and Security Agreement made by and between NLKW Holding, LLC in favor of Valhi, Inc., dated as of November 14, 2016 incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of the Registrant dated November 14, 2016 and filed on November 15, 2016.
10.28
Back-to-Back Loan Agreement between the registrant, as Borrower, and NLKW Holding, LLC, as Lender, dated as of November 14, 2016 incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K of the Registrant dated November 14, 2016 and filed on November 15, 2016.
10.29
First Amendment to Back-to-Back Loan Agreement between NL Industries, Inc., as Borrower, and NLKW Holding, LLC, as Lender, dated as of November 9, 2022 incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of the Registrant dated November 9, 2022 .
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Item No.
Exhibit Index
10.30
Back-to-Back Pledge and Security Agreement made by and between the registrant in favor of Valhi, Inc., dated as of November 14, 2016 incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K of the Registrant dated November 14, 2016 and filed on November 15, 2016.
10.31
Indenture, dated as of September 13, 2017, among Kronos International, Inc., the guarantors named therein, and Deutsche Bank Trust Company Americas, as trustee, collateral agent, paying agent, transfer agent and registrar – incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of Kronos Worldwide, Inc. dated September 13, 2017 and filed on September 13, 2017.
10.32
Supplemental Indenture No. 1, dated as of February 12, 2024, among Kronos International, Inc., the guarantors named therein, and Deutsche Bank Trust Company Americas, as trustee, collateral agent, paying agent, transfer agent and registrar – incorporated by reference to Exhibit 4.1 to Kronos Worldwide Inc.’s Current Report on Form 8-K filed on February 12, 2024.
10.33
Indenture, dated as of February 12, 2024, among Kronos International, Inc., the guarantors named therein, and Deutsche Bank Trust Company Americas, as trustee, collateral agent, paying agent, transfer agent and registrar – incorporated by reference to Exhibit 4.2 to Kronos Worldwide Inc.’s Current Report on Form 8-K filed on February 12, 2024.
10.34
Pledge Agreement, dated as of September 13, 2017, among Kronos International, Inc., the guarantors named therein and Deutsche Bank Trust Company Americas, as collateral agent – incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K of Kronos Worldwide, Inc. dated September 13, 2017 and filed on September 13, 2017.
10.35
Additional Notes Priority Joinder Agreement dated February 12, 2024, executed by Deutsche Bank Trust Company Americas, as trustee and collateral agent for the holders of Kronos International, Inc.’s 9.50% Senior Secured Notes due 2029 and as existing agent under the Pledge Agreement dated September 13, 2017 entered into in connection with Kronos International Inc.’s 3.75% Senior Secured Notes due 2025 – incorporated by reference to Exhibit 4.4 to Kronos Worldwide Inc.’s Current Report on Form 8-K filed on February 12, 2024.
10.36
Credit Agreement dated as of April 20, 2021 by and among Kronos Worldwide, Inc., Kronos Louisiana, Inc., Kronos (US), Inc., Kronos Canada, Inc., Kronos Europe NV, Kronos Titan GmbH and Wells Fargo Bank, National Association as administrative agent and lender – incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021.
10.37
First Amendment to Credit Agreement dated May 8, 2023, among Kronos Worldwide, Inc., Kronos Louisiana, Inc., Kronos (US), Inc., Kronos Canada, Inc., Kronos Europe NV, Kronos Titan GmgH, Wells Fargo Bank, National Association, as administrative agent, and the lenders a party thereto – incorporated by reference to Exhibit 10.1 of Kronos Worldwide, Inc.’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on May 9, 2023.
10.38
Guaranty and Security Agreement dated as of April 20, 2021, by and among Kronos Worldwide, Inc., Kronos Louisiana, Inc., Kronos (US), Inc., Kronos Canada, Inc., Kronos International, Inc. and Wells Fargo Bank, National Association as administrative agent and lender – incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021.
10.39
Unsecured Subordinated Term Promissory Note dated February 12, 2024 in the principal amount of $53,705,000 executed by Kronos Worldwide, Inc. and the guarantors named therein and payable to the order of Contran Corporation – incorporated by reference to Exhibit 4.5 to Kronos Worldwide Inc.’s Current Report on Form 8-K filed on February 12, 2024.
21.1 **
Subsidiaries of the Registrant
23.1 **
Consent of PricewaterhouseCoopers LLP with respect to NL’s consolidated financial statements .
-61-
Item No.
Exhibit Index
23.2 **
Consent of PricewaterhouseCoopers LLP with respect to Kronos’ consolidated financial statements.
31.1 **
Certification
31.2 **
Certification
32.1 **
Certification
97**
Policy for the Recovery of Erroneously Awarded Compensation.
99.1
Consolidated financial statements of Kronos Worldwide, Inc. - incorporated by reference to Kronos’ Annual Report on Form 10-K for the year ended December 31, 2023.
101.INS**
Inline XBRL Instance – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH**
Inline XBRL Taxonomy Extension Schema
101.CAL**
Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF**
Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB**
Inline XBRL Taxonomy Extension Label Linkbase
101.PRE**
Inline XBRL Taxonomy Extension Presentation Linkbase
104
Cover page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*
Management contract, compensatory plan or arrangement.
**
Filed herewith
(P) Paper exhibits
-62-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NL Industries, Inc.
(Registrant)
By:
/s/Courtney J. Riley
Courtney J. Riley, March 6, 2024
(President and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
/s/ Loretta J. Feehan
/s/ John E. Harper
Loretta J. Feehan, March 6, 2024
John E. Harper, March 6, 2024
(Chair of the Board (non-executive))
(Director)
/s/ Michael S. Simmons
/s/ Meredith W. Mendes
Michael S. Simmons, March 6, 2024
Meredith W. Mendes, March 6, 2024
(Vice Chairman and Director)
(Director)
/s/ Amy Allbach Samford
/s/ Kevin B. Kramer
Amy Allbach Samford, March 6, 2024
Kevin B. Kramer, March 6 2024
(Executive Vice President and Chief Financial Officer,
Principal Financial Officer)
(Director)
/s/ Amy E. Ruf
/s/ Cecil H. Moore, Jr.
Amy E. Ruf, March 6, 2024
Cecil H. Moore, Jr., March 6, 2024
(Vice President and Controller,
Principal Accounting Officer)
(Director)
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NL INDUSTRIES, INC.
Annual Report on Form 10-K
Items 8, 15(a) and 15(c)
Index of Financial Statements
Financial Statements
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID 238 )
F-2
Consolidated Balance Sheets - December 31, 2022 and 2023
F-4
Consolidated Statements of Operations - Years ended December 31, 2021, 2022 and 2023
F-6
Consolidated Statements of Comprehensive Income - Years ended December 31, 2021, 2022 and 2023
F-7
Consolidated Statements of Stockholders’ Equity - Years ended December 31, 2021, 2022 and 2023
F-8
Consolidated Statements of Cash Flows - Years ended December 31, 2021, 2022 and 2023
F-9
Notes to Consolidated Financial Statements
F-11
All financial statement schedules have been omitted either because they are not applicable or required, or the information that would be required to be included is disclosed in the Notes to the Consolidated Financial Statements.
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of NL Industries, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of NL Industries, Inc. and its subsidiaries (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of operations, of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2023, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
F-2
Environmental Remediation and Related Matters
As described in Note 16 to the consolidated financial statements, management evaluates the potential range of the Company’s liability for environmental remediation and related costs at sites where the Company has been named as a potentially responsible party (PRP) or defendant. As of December 31, 2023, management accrued approximately $91 million related to approximately 33 sites associated with remediation and related matters. Liabilities related to environmental remediation and related matters (including costs associated with damages for property damage and/or damages for injury to natural resources) are recorded when management determines that estimated future expenditures are probable and reasonably estimable. As disclosed by management, environmental remediation and related costs accruals (and the potential range of the Company’s liabilities) are adjusted as further information becomes available or as circumstances change which involves management’s judgment regarding current facts and circumstances for each site and is subject to various assumptions and estimates.
The principal considerations for our determination that performing procedures relating to environmental remediation and related matters is a critical audit matter are the significant judgment by management when assessing the accruals and the potential range of the Company’s liabilities and when determining whether estimated future expenditures are probable and reasonably estimable, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating evidence related to management’s assessment of the accruals and the potential range of the liabilities.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s evaluation of environmental remediation and related matters (including costs and estimates associated with damages for property damage and/or damages for injury to natural resources), including controls over determining whether estimated future expenditures are probable and reasonably estimable, as well as the related financial statement disclosures. These procedures also included, among others, (i) obtaining the rollforward of environmental accrual activity for each matter and, for a sample of sites, reviewing and discussing site activity with management, (ii) obtaining and evaluating responses to letters of audit inquiry from internal and external legal counsel, and (iii) evaluating the sufficiency of the Company’s environmental remediation and related matters disclosures.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
March 6, 2024
We have served as the Company’s auditor since 1924.
F-3
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
2022
2023
ASSETS
Current assets:
Cash and cash equivalents
$
68,868
$
111,522
Restricted cash and cash equivalents
2,864
2,917
Marketable securities
70,164
53,149
Accounts and other receivables, net
17,870
17,101
Receivables from affiliates
636
628
Inventories, net
31,290
30,712
Prepaid expenses and other
2,276
2,235
Total current assets
193,968
218,264
Other assets:
Restricted cash and cash equivalents
25,770
26,943
Note receivable from affiliate
13,200
10,600
Marketable securities
26,350
18,194
Investment in Kronos Worldwide, Inc.
292,206
247,582
Goodwill
27,156
27,156
Other assets, net
2,523
2,060
Total other assets
387,205
332,535
Property and equipment:
Land
5,390
5,390
Buildings
23,181
23,239
Equipment
74,113
74,315
Construction in progress
722
676
103,406
103,620
Less accumulated depreciation
74,712
77,757
Net property and equipment
28,694
25,863
Total assets
$
609,867
$
576,662
F-4
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except per share data)
December 31,
2022
2023
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
$
3,537
$
3,148
Accrued litigation settlement
11,830
11,830
Accrued and other current liabilities
13,393
13,182
Accrued environmental remediation and related costs
2,627
1,655
Payables to affiliates
665
634
Total current liabilities
32,052
30,449
Noncurrent liabilities:
Long-term debt from affiliate
500
500
Accrued environmental remediation and related costs
89,731
89,451
Long-term litigation settlement
27,427
16,122
Deferred income taxes
50,119
41,733
Accrued pension costs
3,012
1,571
Other
4,279
5,074
Total noncurrent liabilities
175,068
154,451
Equity:
NL stockholders' equity:
Preferred stock, no par value; 5,000 shares authorized;
none issued
—
—
Common stock; $ .125 par value; 150,000 shares authorized;
48,816 and 48,833 shares issued and outstanding
6,101
6,103
Additional paid-in capital
298,598
298,868
Retained earnings
300,442
284,462
Accumulated other comprehensive loss
( 222,991 )
( 219,621 )
Total NL stockholders' equity
382,150
369,812
Noncontrolling interest in subsidiary
20,597
21,950
Total equity
402,747
391,762
Total liabilities and equity
$
609,867
$
576,662
Commitments and contingencies (Notes 13 and 16)
See accompanying Notes to Consolidated Financial Statements.
F-5
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years ended December 31,
2021
2022
2023
Net sales
$
140,815
$
166,562
$
161,287
Cost of sales
98,066
117,763
112,068
Gross margin
42,749
48,799
49,219
Selling, general and administrative expense
22,223
23,363
23,784
Corporate expense
10,035
11,705
11,306
Income from operations
10,491
13,731
14,129
Equity in earnings (losses) of Kronos Worldwide, Inc.
34,323
31,873
( 15,003 )
Other income (expense):
Interest and dividend income
1,603
3,797
9,636
Marketable equity securities
16,229
( 8,085 )
( 8,156 )
Loss on pension plan termination
—
—
( 4,911 )
Other components of net periodic pension and OPEB cost
( 665 )
( 1,134 )
( 1,368 )
Interest expense
( 1,142 )
( 941 )
( 746 )
Income (loss) before income taxes
60,839
39,241
( 6,419 )
Income tax expense (benefit)
7,479
2,785
( 7,001 )
Net income
53,360
36,456
582
Noncontrolling interest in net income of subsidiary
2,172
2,612
2,890
Net income (loss) attributable to NL stockholders
$
51,188
$
33,844
$
( 2,308 )
Amounts attributable to NL stockholders:
Basic and diluted net income (loss) per share
$
1.05
$
.69
$
( .05 )
Weighted average shares used in the calculation of
net income (loss) per share
48,797
48,811
48,827
See accompanying Notes to Consolidated Financial Statements.
F-6
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Years ended December 31,
2021
2022
2023
Net income
$
53,360
$
36,456
$
582
Other comprehensive income (loss), net of tax:
Currency translation
( 1,660 )
( 6,956 )
1,072
Defined benefit pension plans
12,236
24,611
2,484
Marketable debt securities
—
( 50 )
53
Other postretirement benefit plans
( 143 )
160
( 221 )
Total other comprehensive income, net
10,433
17,765
3,388
Comprehensive income
63,793
54,221
3,970
Comprehensive income attributable to noncontrolling interest
2,172
2,612
2,908
Comprehensive income attributable to NL stockholders
$
61,621
$
51,609
$
1,062
See accompanying Notes to Consolidated Financial Statements.
F-7
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years ended December 31, 2021, 2022 and 2023
(In thousands)
Accumulated
Additional
other
Noncontrolling
Common
paid-in
Retained
comprehensive
interest in
Total
stock
capital
earnings
loss
subsidiary
equity
Balance at December 31, 2020
$
6,098
$
299,093
$
257,875
$
( 251,189 )
$
23,472
$
335,349
Net income
—
—
51,188
—
2,172
53,360
Other comprehensive income,
net of tax
—
—
—
10,433
—
10,433
Issuance of NL common stock
2
99
—
—
—
101
Dividends paid - $ .24 per share
—
—
( 11,712 )
—
—
( 11,712 )
Dividends paid to noncontrolling
interest
—
—
—
—
( 1,324 )
( 1,324 )
Other, net
—
583
—
—
( 1,819 )
( 1,236 )
Balance at December 31, 2021
6,100
299,775
297,351
( 240,756 )
22,501
384,971
Net income
—
—
33,844
—
2,612
36,456
Other comprehensive income,
net of tax
—
—
—
17,765
—
17,765
Issuance of NL common stock
1
119
—
—
—
120
Dividends paid - $ .63 per share
—
—
( 30,753 )
—
—
( 30,753 )
Dividends paid to noncontrolling
interest
—
—
—
—
( 4,304 )
( 4,304 )
Other, net
—
( 1,296 )
—
—
( 212 )
( 1,508 )
Balance at December 31, 2022
6,101
298,598
300,442
( 222,991 )
20,597
402,747
Net income (loss)
—
—
( 2,308 )
—
2,890
582
Other comprehensive income,
net of tax
—
—
—
3,370
18
3,388
Issuance of NL common stock
2
98
—
—
—
100
Dividends paid - $ .28 per share
—
—
( 13,672 )
—
—
( 13,672 )
Dividends paid to noncontrolling
interest
—
—
—
—
( 1,555 )
( 1,555 )
Other, net
—
172
—
—
—
172
Balance at December 31, 2023
$
6,103
$
298,868
$
284,462
$
( 219,621 )
$
21,950
$
391,762
See accompanying Notes to Consolidated Financial Statements.
F-8
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years ended December 31,
2021
2022
2023
Cash flows from operating activities:
Net income
$
53,360
$
36,456
$
582
Depreciation and amortization
3,839
3,977
3,973
Deferred income taxes
7,453
2,291
( 7,308 )
Equity in (earnings) losses of Kronos Worldwide, Inc.
( 34,323 )
( 31,873 )
15,003
Dividends received from Kronos Worldwide, Inc.
25,356
26,766
26,766
Marketable equity securities
( 16,229 )
8,085
8,156
Loss on pension plan termination
—
—
4,911
Benefit plan expense greater (less) than cash funding
( 220 )
130
461
Noncash interest income
—
( 267 )
( 3,591 )
Noncash interest expense
1,116
908
695
Other, net
( 31 )
( 21 )
247
Change in assets and liabilities:
Accounts and other receivables, net
( 4,488 )
( 2,275 )
754
Inventories, net
( 7,479 )
( 5,832 )
333
Prepaid expenses and other
( 991 )
353
42
Accounts payable and accrued liabilities
( 9,386 )
( 10,398 )
( 12,624 )
Accounts with affiliates
279
( 662 )
578
Accrued environmental remediation and related costs
( 476 )
( 582 )
( 1,252 )
Other noncurrent assets and liabilities, net
( 171 )
( 125 )
( 723 )
Net cash provided by operating activities
17,609
26,931
37,003
Cash flows from investing activities:
Capital expenditures
( 4,094 )
( 3,695 )
( 1,130 )
Marketable securities:
Purchases
—
( 69,959 )
( 61,366 )
Proceeds from maturities
—
—
82,000
Note receivable from affiliate:
Collections
40,600
29,800
30,500
Loans
( 29,800 )
( 24,300 )
( 27,900 )
Other, net
2
284
—
Net cash provided by (used in) investing activities
6,708
( 67,870 )
22,104
Cash flows from financing activities:
Dividends paid
( 11,712 )
( 30,753 )
( 13,672 )
Subsidiary treasury stock acquired
( 1,311 )
( 1,744 )
—
Dividends paid to noncontrolling interests in subsidiary
( 1,324 )
( 4,304 )
( 1,555 )
Net cash used in financing activities
( 14,347 )
( 36,801 )
( 15,227 )
F-9
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
Years ended December 31,
2021
2022
2023
Cash and cash equivalents and restricted cash and cash
equivalents - net change from:
Operating, investing and financing activities
$
9,970
$
( 77,740 )
$
43,880
Balance at beginning of year
165,272
175,242
97,502
Balance at end of year
$
175,242
$
97,502
$
141,382
Supplemental disclosures - cash paid (received) for:
Interest
$
26
$
34
$
50
Income taxes, net
32
1,140
( 300 )
See accompanying Notes to Consolidated Financial Statements.
F-10
NL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2023
Note 1 - Summary of significant accounting policies:
Nature of our business - NL Industries, Inc. (NYSE: NL) is primarily a holding company. We operate in the component products industry through our majority-owned subsidiary, CompX International Inc. (NYSE American: CIX). We operate in the chemicals industry through our noncontrolling interest in Kronos Worldwide, Inc. (NYSE: KRO).
Organization - At December 31, 2023, Valhi, Inc. (NYSE: VHI) held approximately 83 % of our outstanding common stock and a wholly-owned subsidiary of Contran Corporation held approximately 91 % of Valhi’s outstanding common stock. A majority of Contran’s outstanding voting stock is held directly by Lisa K. Simmons, Thomas C. Connelly (the husband of Ms. Simmons’ late sister) and various family trusts established for the benefit of Ms. Simmons, Mr. Connelly and their children and for which Ms. Simmons or Mr. Connelly, as applicable, serve as trustee (collectively, the “Other Trusts”). With respect to the Other Trusts for which Mr. Connelly serves as trustee, he is required to vote the shares of Contran voting stock held by such trusts in the same manner as Ms. Simmons. Such voting rights of Ms. Simmons last through April 22, 2030 and are personal to Ms. Simmons. The remainder of Contran’s outstanding voting stock is held by another trust (the “Family Trust”), which was established for the benefit of Ms. Simmons and her late sister and their children and for which a third-party financial institution serves as trustee. Consequently, at December 31, 2023 Ms. Simmons and the Family Trust may be deemed to control Contran, and therefore may be deemed to indirectly control the wholly-owned subsidiary of Contran, Valhi and us.
Unless otherwise indicated, references in this report to “we,” “us” or “our” refer to NL Industries, Inc. and its subsidiaries and affiliate, Kronos, taken as a whole.
Management’s estimates - In preparing our financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP), we are required to make estimates and assumptions that affect the reported amounts of our assets and liabilities and disclosures of contingent assets and liabilities at each balance sheet date and the reported amounts of our revenues and expenses during each reporting period. Actual results may differ significantly from previously-estimated amounts under different assumptions or conditions.
Principles of consolidation - Our consolidated financial statements include the financial position, results of operations and cash flows of NL and our wholly-owned and majority-owned subsidiaries, including CompX. We account for the 13 % of CompX stock we do not own as a noncontrolling interest. We eliminate all material intercompany accounts and balances. Changes in ownership of our wholly-owned and majority-owned subsidiaries are accounted for as equity transactions with no gain or loss recognized on the transaction unless there is a change in control.
Currency translation - The financial statements of Kronos’ non-U.S. subsidiaries are translated to U.S. dollars. The functional currency of Kronos’ non-U.S. subsidiaries is generally the local currency of their country. Accordingly, Kronos translates the assets and liabilities at year-end rates of exchange, while it translates its revenues and expenses at average exchange rates prevailing during the year. We accumulate the resulting translation adjustments in stockholders’ equity as part of accumulated other comprehensive income (loss), net of related deferred income taxes. Kronos recognizes currency transaction gains and losses in income which is reflected as part of our equity in earnings (losses) of Kronos.
C ash and cash equivalents - We classify bank time deposits and highly liquid investments, including government and commercial notes and bills, with original maturities of three months or less as cash equivalents.
Restricted cash and cash equivalents - We classify cash equivalents that have been segregated or are otherwise limited in use as restricted. Such restrictions include cash pledged as collateral with respect to performance obligations or letters of credit required by regulatory agencies for certain environmental remediation sites and cash pledged as collateral
F-11
with respect to certain workers compensation liabilities or legal settlements. To the extent the restricted amount relates to a recognized liability, we classify such restricted amount as either a current or noncurrent asset to correspond with the classification of the liability. To the extent the restricted amount does not relate to a recognized liability, we classify restricted cash as a current asset. Restricted cash equivalents classified as a current asset or a noncurrent asset are presented separately on our Consolidated Balance Sheets.
Marketable securities and securities transactions - We carry marketable debt and equity securities at fair value. Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures , establishes a consistent framework for measuring fair value and (with certain exceptions) this framework is generally applied to all financial statement items required to be measured at fair value. The standard requires fair value measurements to be classified and disclosed in one of the following three categories:
● Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
● Level 2 - Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the assets or liability; and
● Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.
We classify all of our marketable securities as available-for-sale. We accumulate unrealized gains and losses on marketable debt securities as part of accumulated other comprehensive income (loss), net of related deferred income taxes. We recognize unrealized gains or losses on the marketable equity securities in Marketable equity securities on our Consolidated Statements of Operations. We base realized gains and losses upon the specific identification of the securities sold. See Notes 5 and 11.
Accounts receivable - We provide an allowance for doubtful accounts for known and estimated potential losses arising from sales to customers based on a periodic review of these accounts. See Note 3.
Inventories and cost of sales - We state inventories at the lower of cost or net realizable value. We record a provision for obsolete and slow-moving inventories. We generally base inventory costs for all inventory categories on an average cost that approximates the first-in, first-out method. Inventories include the costs for raw materials, the cost to manufacture the raw materials into finished goods and overhead. Depending on the inventory’s stage of completion, our manufacturing costs can include the costs of packing and finishing, utilities, maintenance and depreciation, shipping and handling, and salaries and benefits associated with our manufacturing process. We allocate fixed manufacturing overhead costs based on normal production capacity. Unallocated overhead costs resulting from periods with abnormally low production levels are charged to expense as incurred. As inventory is sold to third parties, we recognize the cost of sales in the same period that the sale occurs. We periodically review our inventory for estimated obsolescence or instances when inventory is no longer marketable for its intended use and we record any write-down equal to the difference between the cost of inventory and its estimated net realizable value based on assumptions about alternative uses, market conditions and other factors. See Note 4.
Investment in Kronos Worldwide, Inc. - We account for our 31 % non-controlling interest in Kronos by the equity method. Distributions received from Kronos are classified for statement of cash flow purposes using the “nature of distribution” approach under ASC Topic 230. See Note 6.
Goodwill - Goodwill represents the excess of cost over fair value of individual net assets acquired in business combinations. Goodwill is not subject to periodic amortization. We evaluate goodwill for impairment annually, or when circumstances indicate the carrying value may not be recoverable. See Note 7.
Leases - We enter into various arrangements (or leases) that convey the rights to use and control identified underlying assets for a period of time in exchange for consideration. We lease various facilities and equipment. From time
F-12
to time, we may also enter into an arrangement in which the right to use and control an identified underlying asset is embedded in another type of contract. We determine if an arrangement is a lease (including leases embedded in another type of contract) at inception. All of our leases are classified as operating leases under ASC Topic 842 Leases . Operating leases are not material.
Property and equipment; depreciation expense - We state property and equipment, including purchased computer software for internal use, at cost. We compute depreciation of property and equipment for financial reporting purposes principally by the straight-line method over the estimated useful lives of 15 to 40 years for buildings and 3 to 20 years for equipment and software. We use accelerated depreciation methods for income tax purposes, as permitted. Upon sale or retirement of an asset, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is recognized in income currently. Expenditures for maintenance, repairs and minor renewals are expensed; expenditures for major improvements are capitalized.
We perform impairment tests when events or changes in circumstances indicate the carrying value may not be recoverable. We consider all relevant factors. We perform impairment tests by comparing the estimated future undiscounted cash flows associated with the asset to the asset’s net carrying value to determine whether impairment exists.
Employee benefit plans - Accounting and funding policies for our defined benefit pension and defined contribution retirement plans are described in Note 11. We also provide certain postretirement benefits other than pensions (OPEB), consisting of health care and life insurance benefits, to certain U.S. and Canadian retired employees, which are not material. See Note 12.
Income taxes - We, Valhi and our qualifying subsidiaries are members of Contran’s consolidated U.S. federal income tax group (the Contran Tax Group) and we and certain of our qualifying subsidiaries also file consolidated unitary state income tax returns with Contran in qualifying U.S. jurisdictions. As a member of the Contran Tax Group, we are jointly and severally liable for the federal income tax liability of Contran and the other companies included in the Contran Tax Group for all periods in which we are included in the Contran Tax Group. See Note 16. As a member of the Contran Tax Group, we are party to a tax sharing agreement with Valhi and Contran which provides that we compute our provision for income taxes on a separate-company basis using the tax elections made by Contran. Pursuant to our tax sharing agreement, we make payments to or receive payments from Valhi in amounts that we would have paid to or received from the U.S. Internal Revenue Service or the applicable state tax authority had we not been a member of the Contran Tax Group. We made net payments to Valhi for income taxes of nil in 2021, $ 1.1 million in 2022 and received net refunds from Valhi of $ .3 million in 2023.
We recognize deferred income tax assets and liabilities for the expected future tax consequences of temporary differences between the income tax and financial reporting carrying amounts of assets and liabilities, including investments in our subsidiaries and affiliates who are not members of the Contran Tax Group and undistributed earnings of non-U.S. subsidiaries which are not deemed to be permanently reinvested. In addition, we recognize deferred income taxes with respect to the excess of the financial reporting carrying amount over the income tax basis of our direct investment in Kronos common stock because the exemption under GAAP to avoid recognition of such deferred income taxes is not available to us. Deferred income tax assets and liabilities for each tax-paying jurisdiction in which we operate are netted and presented as either a noncurrent deferred income tax asset or liability, as applicable. We periodically evaluate our deferred tax assets in the various taxing jurisdictions in which we operate and adjust any related valuation allowance based on the estimate of the amount of such deferred tax assets that we believe does not meet the more-likely-than-not recognition criteria.
We account for the tax effects of a change in tax law as a component of the income tax provision related to continuing operations in the period of enactment, including the tax effects of any deferred income taxes originally established through a financial statement component other than continuing operations (i.e. other comprehensive income). Changes in applicable income tax rates over time as a result of changes in tax law, or times in which a deferred income tax asset valuation allowance is initially recognized in one year and subsequently reversed in a later year, can give rise to “stranded” tax effects in accumulated other comprehensive income in which the net accumulated income tax (benefit)
F-13
remaining in accumulated other comprehensive income does not correspond to the then-applicable income tax rate applied to the pre-tax amount which resides in accumulated other comprehensive income. As permitted by GAAP, our accounting policy is to remove any such stranded tax effect remaining in accumulated other comprehensive income, by recognizing an offset to our provision for income taxes related to continuing operations, only at the time when there is no remaining pre-tax amount in accumulated other comprehensive income. For accumulated other comprehensive income related to currency translation, this would occur only upon the sale or complete liquidation of one of our non-U.S. subsidiaries. For defined pension benefit plans and OPEB plans, this would occur whenever one of our subsidiaries which previously sponsored a defined benefit pension or OPEB plan had terminated such a plan and had no future obligation or plan asset associated with such a plan (such as in 2023 when we terminated our U.K. pension plan).
We record a reserve for uncertain tax positions for tax positions where we believe it is more-likely-than-not our position will not prevail with the applicable tax authorities. The amount of the benefit associated with our uncertain tax positions that we recognize is limited to the largest amount for which we believe the likelihood of realization is greater than 50 %. We accrue penalties and interest on the difference between tax positions taken on our tax returns and the amount of benefit recognized for financial reporting purposes. We classify our reserves for uncertain tax positions in a separate current or noncurrent liability, depending on the nature of the tax position. See Note 13.
Environmental remediation costs - We record liabilities related to environmental remediation obligations when estimated future expenditures are probable and reasonably estimable. We adjust these accruals as further information becomes available to us or as circumstances change. We generally do not discount estimated future expenditures to present value. We recognize any recoveries of remediation costs from other parties when we deem their receipt probable. At December 31, 2022 and 2023, we had not recognized any such receivables for recoveries. We expense any environmental remediation related legal costs as incurred. See Note 16.
Net sales - Our sales involve single performance obligations to ship our products pursuant to customer purchase orders. In some cases, the purchase order is supported by an underlying master sales agreement, but our purchase order verification notice generally evidences the contract with our customer by specifying the key terms of product and quantity ordered, price and delivery and payment terms. In accordance with ASC Topic 606, Revenue from Contracts with Customers, we record revenue when we satisfy our performance obligations to our customers by transferring control of our products to them, which generally occurs at point of shipment or upon delivery. Such transfer of control is also evidenced by transfer of legal title and other risks and rewards of ownership (giving the customer the ability to direct the use of, and obtain substantially all of the benefits of, the product), and our customers becoming obligated to pay us and it is probable we will receive payment. In certain arrangements we provide shipping and handling activities after the transfer of control to our customer (e.g. when control transfers prior to delivery). In such arrangements shipping and handling are considered fulfillment activities, and accordingly, such costs are accrued when the related revenue is recognized.
Revenue is recorded in an amount that reflects the net consideration we expect to receive in exchange for our products. Prices for our products are based on terms specified in published list prices and purchase orders, which generally do not include financing components, noncash consideration or consideration paid to our customers. As our standard payment terms are less than one year, we have elected the practical expedient under ASC 606 and we have not assessed whether a contract has a significant financing component. We state sales net of price, early payment and distributor discounts as well as volume rebates (collectively, variable consideration). Variable consideration, to the extent present, is not material and is recognized as the amount to which we are most-likely to be entitled, using all information (historical, current and forecasted) that is reasonably available to us, and only to the extent that a significant reversal in the amount of the cumulative revenue recognized is not probable of occurring in a future period. Differences, if any, between estimates of the amount of variable consideration to which we will be entitled and the actual amount of such variable consideration have not been material in the past. We occasionally receive partial or full consideration from our customers prior to the completion of our performance obligation (shipment of product). We record estimated deferred revenue on the amount to which we are most likely to be entitled and deferred revenue is recognized into revenue as our performance obligation has been satisfied. Deferred revenue has not been material in the past. We report any tax assessed by a governmental authority that we collect from our customers that is both imposed on and concurrent with our revenue-producing activities (such as
F-14
sales, use, value added and excise taxes) on a net basis (meaning we do not recognize these taxes either in our revenues or in our costs and expenses).
Frequently, we receive orders for products to be delivered over dates that may extend across reporting periods. We invoice for each delivery upon shipment and recognize revenue for each distinct shipment when all sales recognition criteria for that shipment have been satisfied. As scheduled delivery dates for these orders are within a one year period, under the optional exemption provided by ASC 606, we do not disclose sales allocated to future shipments of partially completed contracts.
Selling, general and administrative expenses; advertising costs; research and development costs - Selling, general and administrative expenses include costs related to marketing, sales, distribution, research and development, and administrative functions such as accounting, treasury and finance, as well as costs for salaries and benefits, travel and entertainment, promotional materials and professional fees. We expense advertising costs and research and development costs as incurred. Advertising and research and development costs were not significant in any year presented.
Corporate expenses - Corporate expenses include environmental, legal and other costs attributable to formerly-owned business units.
Note 2 - Business and geographic information:
We operate in the security products industry and marine components industry through our majority ownership of CompX. CompX manufactures and sells security products including locking mechanisms and other security products for sale to the postal, transportation, office and institutional furniture, cabinetry, tool storage, healthcare and other industries. CompX also manufactures and distributes wake enhancement systems, stainless steel exhaust systems, gauges, throttle controls, trim tabs and related hardware and accessories primarily for ski/wakeboard boats and performance boats.
The following table disaggregates our net sales by reporting unit, which are the categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors (as required by ASC 606).
Years ended December 31,
2021
2022
2023
(In thousands)
Net sales:
Security Products
$
105,124
$
114,519
$
121,182
Marine Components
35,691
52,043
40,105
Total
$
140,815
$
166,562
$
161,287
For geographic information, the point of origin (place of manufacture) for all net sales is the U.S., the point of destination for net sales is based on the location of the customer.
Years ended December 31,
2021
2022
2023
(In thousands)
Net sales - point of destination:
United States
$
129,160
$
153,982
$
155,092
Canada
8,061
9,227
3,153
Mexico
589
722
829
Other
3,005
2,631
2,213
Total
$
140,815
$
166,562
$
161,287
F-15
Note 3 - Accounts and other receivables, net:
December 31,
2022
2023
(In thousands)
Trade receivables - CompX
$
17,910
$
17,131
Other receivables
30
40
Allowance for doubtful accounts
( 70 )
( 70 )
Total
$
17,870
$
17,101
Accrued insurance recoveries are discussed in Note 16.
Note 4 - Inventories, net:
December 31,
2022
2023
(In thousands)
Raw materials
$
6,245
$
5,738
Work in process
19,983
19,042
Finished products
5,062
5,932
Total
$
31,290
$
30,712
Note 5 - Marketable securities:
Our current marketable securities are invested in U.S. government treasuries with original maturities ranging in length from 4 months to 12 months . The fair value of our current marketable securities are determined using Level 2 inputs (because although these securities are traded, in many cases the market is not active and the year-end valuation is generally based on the last trade of the year, which may be several days prior to December 31).
Our noncurrent marketable securities consist of investments in the publicly-traded shares of our immediate parent company Valhi, Inc. Our shares of Valhi common stock are accounted for as available-for-sale securities, which are carried at fair value using quoted market prices in active markets and represent a Level 1 input within the fair value hierarchy.
Fair value
Cost or
measurement
Market
amortized
Unrealized
level
value
cost
gain (loss)
(In thousands)
December 31, 2022
Current assets - fixed income securities
2
$
70,164
$
70,226
$
( 62 )
Noncurrent assets
Valhi common stock
1
$
26,350
$
24,347
$
2,003
December 31, 2023
Current assets - fixed income securities
2
$
53,149
$
53,181
$
( 32 )
Noncurrent assets
Valhi common stock
1
$
18,194
$
24,347
$
( 6,153 )
F-16
At December 31, 2022 and 2023, we held approximately 1.2 million shares of our immediate parent company, Valhi. See Note 1. The per share quoted market price of Valhi common stock at December 31, 2022 and 2023 was $ 22.00 and $ 15.19 , respectively.
The Valhi common stock we own is subject to the restrictions on resale pursuant to certain provisions of the SEC Rule 144. In addition, as a majority-owned subsidiary of Valhi we cannot vote our shares of Valhi common stock under Delaware General Corporation Law, but we do receive dividends from Valhi on these shares, when declared and paid.
Note 6 - Investment in Kronos Worldwide, Inc.:
At December 31, 2022 and 2023, we owned approximately 35.2 million shares of Kronos common stock. The per share quoted market price of Kronos common stock at December 31, 2022 and 2023 was $ 9.40 and $ 9.94 per share, respectively, or an aggregate market value of $ 331.1 million and $ 350.1 million, respectively. The change in the carrying value of our investment in Kronos during the past three years is summarized below:
Years ended December 31,
2021
2022
2023
(In millions)
Balance at the beginning of the period
$
242.4
$
264.8
$
292.2
Equity in earnings (loss) of Kronos
34.3
31.9
( 15.0 )
Dividends received from Kronos
( 25.4 )
( 26.8 )
( 26.8 )
Equity in Kronos' other comprehensive income (loss):
Currency translation
( 2.1 )
( 8.8 )
1.1
Defined benefit pension plans
15.6
30.9
( 3.9 )
Other postretirement benefit plans
—
—
( .1 )
Other
—
.2
.1
Balance at the end of the period
$
264.8
$
292.2
$
247.6
Selected financial information of Kronos is summarized below:
December 31,
2022
2023
(In millions)
Current assets
$
1,242.2
$
1,117.4
Property and equipment, net
484.5
482.9
Investment in TiO 2 joint venture
112.9
111.0
Other noncurrent assets
94.8
126.7
Total assets
$
1,934.4
$
1,838.0
Current liabilities
$
326.7
$
370.8
Long-term debt
424.1
440.9
Accrued pension costs
128.6
150.0
Other noncurrent liabilities
97.8
68.0
Stockholders’ equity
957.2
808.3
Total liabilities and stockholders’ equity
$
1,934.4
$
1,838.0
F-17
Years ended December 31,
2021
2022
2023
(In millions)
Net sales
$
1,939.4
$
1,930.2
$
1,666.5
Cost of sales
1,493.2
1,539.1
1,501.6
Income (loss) from operations
187.1
159.6
( 56.0 )
Income tax expense (benefit)
40.5
29.4
( 23.8 )
Net income (loss)
112.9
104.5
( 49.1 )
Note 7 - Goodwill:
All of our goodwill is related to our component products operations and was generated from CompX’s acquisitions of certain business units. There have been no changes in the carrying amount of our goodwill during the past three years.
We assign goodwill based on the reporting unit (as that term is defined in ASC Topic 350-20-20 Goodwill ) which corresponds to CompX’s security products operations. We test for goodwill impairment at the reporting unit level. In accordance with ASC 350-20-35, we test for goodwill impairment during the third quarter of each year or when circumstances arise that indicate an impairment might be present.
In 2021, 2022 and 2023, our goodwill was tested for impairment only in the third quarter of each year in connection with our annual testing. No impairment was indicated as part of such annual review of goodwill. As permitted by GAAP, during 2021, 2022 and 2023 we used the qualitative assessment of ASC 350-20-35 for our annual impairment test and determined it was not necessary to perform the quantitative goodwill impairment test. Prior to 2021, all of the goodwill related to CompX’s marine components operations (which aggregated $ 10.1 million) was impaired, and all of the goodwill related to our wholly-owned subsidiary EWI Re, Inc., (EWI) which was formerly an insurance brokerage and risk management services company (which aggregated $ 6.4 million), was impaired. Our gross goodwill at December 31, 2023 was $ 43.7 million.
Note 8 - Other assets, net:
December 31,
2022
2023
(In thousands)
Pension asset
$
1,105
$
—
Other
1,418
2,060
Total
$
2,523
$
2,060
Note 9 - Accrued and other current liabilities:
December 31,
2022
2023
(In thousands)
Employee benefits
$
11,023
$
11,290
Other
2,370
1,892
Total
$
13,393
$
13,182
F-18
Note 10 - Long-term debt:
In November 2016, we entered into a financing transaction with Valhi. Previously, and in contemplation of the financing transaction described herein, we formed NLKW Holding, LLC and capitalized it with 35.2 million shares of the common stock of Kronos held by us.
The financing transaction consisted of two steps. Under the first step, NLKW entered into a $ 50 million revolving credit facility (the “Valhi Credit Facility”) pursuant to which NLKW can borrow up to $ 50 million from Valhi (with such commitment amount subject to increase from time to time at Valhi’s sole discretion). Proceeds from any borrowings by NLKW under the Valhi Credit Facility would be available for one or more loans from NLKW to us in accordance with the terms of the second step of the financing transaction: a Back-to-Back Credit Facility, as described below. Outstanding borrowings under the Valhi Credit Facility bear interest at the prime rate plus 1.875 % per annum, payable quarterly , with all amounts due on the maturity date. The maximum principal amount which may be outstanding from time-to-time under the Valhi Credit Facility is limited to 50 % of the amount determined by multiplying the number of shares of Kronos common stock pledged by the most recent closing price of such security on the New York Stock Exchange. Borrowings under the Valhi Credit Facility are collateralized by the assets of NLKW (consisting primarily of the shares of Kronos common stock pledged) and 100 % of the membership interest in NLKW held by us . The Valhi Credit Facility contains a number of covenants and restrictions which, among other things, restrict NLKW’s ability to incur additional debt, incur liens, and merge or consolidate with, or sell or transfer substantially all of NLKW’s assets to, another entity, and require NLKW to maintain a minimum specified level of consolidated net worth. Upon an event of default, Valhi will be entitled to terminate its commitment to make further loans to NLKW, to declare the outstanding loans (with interest) immediately due and payable, and, in the case of certain insolvency events with respect to NLKW or us, to exercise its rights with respect to the collateral. Such collateral rights include the right to purchase all of the shares of Kronos common stock pledged at a purchase price equal to the aggregate market value of such stock (with such market value determined by an independent third-party valuation provider), less amounts owing to Valhi under the Valhi Credit Facility, with up to 50 % of such purchase price being payable by Valhi in the form of an unsecured promissory note bearing interest at the prime rate plus 2.75 % per annum, payable quarterly, with all amounts due no later than five years from the date of purchase, and with the remainder of such purchase price payable in cash at the date of purchase.
Contemporaneously with the entering into the Valhi Credit Facility, NLKW entered into a $ 50 million revolving credit facility (the “Back-to-Back Credit Facility”) with us, pursuant to which we can borrow up to $ 50 million from NLKW (with such commitment amount subject to increase from time to time at NLKW’s sole discretion). Proceeds from any borrowings under the Back-to-Back Credit Facility would be available for our general corporate purposes, including providing resources to assist us in the resolution of certain claims and contingent liabilities which may be asserted against us. Outstanding borrowings under the Back-to-Back Credit Facility bear interest at the same rate and are payable on the same maturity date as are borrowings by NLKW under the Valhi Credit Facility. Borrowings under the Back-to-Back Credit Facility are on an unsecured basis; however, as a condition thereto, we pledged to Valhi as collateral for the Valhi Credit Facility our 100 % membership interest in NLKW. Any outstanding borrowings and interest on such borrowings under the Back-to-Back Credit Facility are eliminated in the preparation of the consolidated financial statements.
In November 2022, NLKW and Valhi entered into a first amendment to the Valhi Credit Facility to extend the latest maturity date (and consequently the latest borrowing date) under the Valhi Credit Facility from December 31, 2023 to December 31, 2030; and NLKW and NL entered into a first amendment to the Back-to-Back Credit Facility to extend the latest maturity date (and consequently the latest borrowing date) under the Back-to-Back Credit Facility from December 31, 2023 to December 31, 2030. The related collateral arrangements remained unchanged by these amendments.
We had outstanding borrowings under the Valhi Credit Facility of $ .5 million as of December 31, 2022 and 2023. The interest rate as of December 31, 2023 was 10.4 % and the average interest rate for the year then ended was 10.1 %. See Note 15. NLKW is in compliance with all of the covenants contained in the Valhi Credit Facility at December 31, 2023.
F-19
Note 11 - Employee benefit plans:
Defined contribution plans - We maintain various defined contribution pension plans. Company contributions are based on matching or other formulas. Defined contribution plan expense approximated $ 3.7 million in 2021 and $ 3.9 million in each of 2022 and 2023.
Defined benefit pension plans - We maintain a defined benefit pension plan in the U.S. The benefits under our defined benefit plan is based upon years of service and employee compensation. The plan is closed to new participants and no additional benefits accrue to existing plan participants. Our funding policy is to contribute annually the minimum amount required under ERISA (or equivalent non-U.S.) regulations plus additional amounts as we deem appropriate.
We previously maintained a defined benefit pension plan in the 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 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.
We expect to contribute approximately $ 1.0 million to our defined benefit pension plan during 2024. Benefit payments to all plan participants out of plan assets are expected to be the equivalent of:
Years ending December 31,
Amount
(In thousands)
2024
$
3,012
2025
2,923
2026
2,849
2027
2,766
2028
2,668
Next 5 years
11,725
F-20
The funded status of our defined benefit pension plans is presented in the table below.
December 31,
2022
2023
(In thousands)
Change in projected benefit obligations (PBO):
Benefit obligations at beginning of the year
$
50,367
$
36,090
Interest cost
1,138
1,619
Plan settlement
( 188 )
( 5,537 )
Actuarial (gains) losses
( 10,777 )
265
Change in currency exchange rates
( 965 )
116
Benefits paid
( 3,485 )
( 3,115 )
Benefit obligations at end of the year
36,090
29,438
Change in plan assets:
Fair value of plan assets at beginning of the year
47,940
34,126
Actual return on plan assets
( 10,263 )
2,009
Employer contributions
1,228
196
Plan settlement
( 188 )
( 5,537 )
Change in currency exchange rates
( 1,106 )
131
Benefits paid
( 3,485 )
( 3,115 )
Fair value of plan assets at end of year
34,126
27,810
Funded status
$
( 1,964 )
$
( 1,628 )
Amounts recognized in the balance sheet:
Noncurrent pension asset
$
1,105
$
—
Accrued pension costs:
Current
( 57 )
( 57 )
Noncurrent
( 3,012 )
( 1,571 )
Total
( 1,964 )
( 1,628 )
Accumulated other comprehensive loss - actuarial losses, net
27,530
21,802
Total
$
25,566
$
20,174
Accumulated benefit obligations (ABO)
$
36,090
$
29,438
The amounts shown in the table above for actuarial (gains) losses at December 31, 2022 and 2023 have not been recognized as components of our periodic defined benefit pension cost as of those dates. These amounts will be recognized as components of our periodic defined benefit cost in future years. These amounts, net of deferred income taxes, are recognized in our accumulated other comprehensive income (loss) at December 31, 2022 and 2023.
The total net underfunded status of our defined benefit pension plans decreased from $ 2.0 million at December 31, 2022 to $ 1.6 million at December 31, 2023 due to the change in our plan assets exceeding the change in our PBO during 2023. Plan assets increased relative to our PBO primarily due to improved returns on plan assets during 2023.
F-21
The table below details the changes in other comprehensive income (loss) during 2021, 2022 and 2023.
Years ended December 31,
2021
2022
2023
(In thousands)
Changes in plan assets and benefit obligations recognized in
other comprehensive income:
Net actuarial gain (loss) arising during the year
$
1,618
$
( 1,034 )
$
( 574 )
Plan settlement
—
104
4,911
Amortization of unrecognized net actuarial gain (loss)
( 1,562 )
1,664
1,391
Total
$
56
$
734
$
5,728
The components of our net periodic defined benefit pension cost are presented in the table below. The amounts shown below for recognized actuarial losses in 2021, 2022 and 2023, net of deferred income taxes, was recognized as a component of our accumulated other comprehensive income at December 31, 2020, 2021 and 2022, respectively.
Years ended December 31,
2021
2022
2023
(In thousands)
Net periodic pension cost:
Interest cost
$
947
$
1,138
$
1,619
Expected return on plan assets
( 1,603 )
( 1,552 )
( 1,452 )
Plan settlement
—
104
4,911
Recognized actuarial losses
1,562
1,664
1,391
Total
$
906
$
1,354
$
6,469
Certain information concerning our defined benefit pension plans (including information concerning certain plans for which ABO exceeds the fair value of plan assets as of the indicated date) is presented in the table below. As discussed above, our U.K. plan was terminated in the second quarter of 2023.
December 31,
2022
2023
(In thousands)
PBO at end of the year:
U.S. plan
$
30,254
$
29,438
U.K. plan
5,836
—
Total
$
36,090
$
29,438
Fair value of plan assets at end of the year:
U.S. plan
$
27,185
$
27,810
U.K. plan
6,941
—
Total
$
34,126
$
27,810
Plans for which the ABO exceeds plan assets (only our U.S. plan):
PBO
$
30,254
$
29,438
ABO
30,254
29,438
Fair value of plan assets
27,185
27,810
The weighted-average discount rate assumptions used in determining the actuarial present value of our benefit obligations as of December 31, 2022 and 2023 are 5.1 % and 5.0 %, respectively. Such weighted-average rates were determined using the projected benefit obligations at each date. Since our plans are closed to new participants and no new additional benefits accrue to existing plan participants, assumptions regarding future compensation levels are not
F-22
applicable. Consequently, the accumulated benefit obligations for all of our defined benefit pension plans were equal to the projected benefit obligations at December 31, 2022 and 2023.
The weighted-average rate assumptions used in determining the net periodic pension cost for 2021, 2022 and 2023 are presented in the table below. Such weighted-average discount rates were determined using the projected benefit obligations as of the beginning of each year and the weighted-average long-term return on plan assets was determined using the fair value of plan assets as of the beginning of each year.
Years ended December 31,
Rate
2021
2022
2023
Discount rate
2.1
%
2.3
%
5.1
%
Long-term rate of return on plan assets
3.3
%
3.3
%
4.9
%
Variances from actuarially assumed rates will result in increases or decreases in accumulated pension obligations, pension expense and funding requirements in future periods.
In determining the expected long-term rate of return on our U.S. and our previously maintained non-U.S. plan asset assumptions, we consider the long-term asset mix (e.g. equity vs. fixed income) for the assets for each of our plans and the expected long-term rates of return for such asset components. In addition, we receive third-party advice about appropriate long-term rates of return. In the U.S. we currently have a plan asset target allocation of 33 % to equity securities, 59 % to fixed income securities, and the remainder is allocated to multi-asset and other strategies. The expected long-term rate of return for such investments is approximately 7 % and 5 %, respectively (before plan administrative expenses). Approximately 98 % of our U.S. plan assets are invested in funds that are valued at net asset value (NAV) and, in accordance with ASC 820-10, not subject to classification in the fair value hierarchy. During 2022 and through plan termination in 2023, the non-U.S. plan assets were invested primarily in insurance contracts and were a Level 3 input.
We regularly review our actual asset allocation for each plan, and will periodically rebalance the investments in each plan to more accurately reflect the targeted allocation and/or maximize the overall long-term return when considered appropriate.
The composition of our pension plan assets by fair value level at December 31, 2022 and 2023 is shown in the tables below.
Fair Value Measurements
Quoted prices
Significant other
Significant
in active
observable
unobservable
Assets measured
Total
markets (Level 1)
inputs (Level 2)
inputs (Level 3)
at NAV
(In thousands)
December 31, 2022:
U.S.:
Equities
$
8,591
$
694
$
—
$
—
$
7,897
Fixed income
15,954
149
—
—
15,805
Cash and other
2,640
1,903
—
44
693
U.K. - Other
6,941
1,104
—
5,837
—
Total
$
34,126
$
3,850
$
—
$
5,881
$
24,395
As noted above, in March 2021 we purchased a bulk annuity for our U.K. pension plan and such annuity is considered a Level 3 asset included with “U.K. – Other” in the table above.
F-23
Fair Value Measurements
Quoted prices
Significant other
Significant
in active
observable
unobservable
Assets measured
Total
markets (Level 1)
inputs (Level 2)
inputs (Level 3)
at NAV
(In thousands)
December 31, 2023:
U.S.:
Equities
$
7,786
$
—
$
—
$
—
$
7,786
Fixed income
18,733
—
—
—
18,733
Cash and other
1,291
489
—
41
761
Total
$
27,810
$
489
$
—
$
41
$
27,280
Note 12 - Other noncurrent liabilities:
December 31,
2022
2023
(In thousands)
Reserve for uncertain tax positions
$
2,714
$
3,707
OPEB
637
524
Insurance claims and expenses
625
579
Other
303
264
Total
$
4,279
$
5,074
Our reserve for uncertain tax positions is discussed in Note 13.
Note 13 - Income taxes:
The provision for income taxes and the difference between the provision for income taxes and the amount that would be expected using the U.S. federal statutory income tax rate are presented below.
Years ended December 31,
2021
2022
2023
(In thousands)
Expected tax expense (benefit), at U.S. federal statutory
income tax rate of 21 %
$
12,776
$
8,241
$
( 1,348 )
Nontaxable dividends received from Kronos
( 5,325 )
( 5,621 )
( 5,621 )
U.S. state income taxes and other, net
28
165
( 32 )
Income tax expense (benefit)
$
7,479
$
2,785
$
( 7,001 )
Components of income tax expense (benefit):
Currently payable
$
26
$
495
$
307
Deferred income tax expense (benefit)
7,453
2,290
( 7,308 )
Income tax expense (benefit)
$
7,479
$
2,785
$
( 7,001 )
Comprehensive provision (benefit) for income taxes allocable to:
Net income
$
7,479
$
2,785
$
( 7,001 )
Other comprehensive income:
Currency translation
( 429 )
( 1,849 )
241
Pension plans
3,252
6,542
( 291 )
OPEB plans
( 44 )
69
( 35 )
Total
$
10,258
$
7,547
$
( 7,086 )
F-24
In accordance with GAAP, we recognize deferred income taxes on our undistributed equity in earnings (losses) of Kronos. Because we and Kronos are part of the same U.S. federal income tax group, any dividends we receive from Kronos are nontaxable to us. Accordingly, we do not recognize and we are not required to pay income taxes on dividends from Kronos. We received aggregate dividends from Kronos of $ 25.4 million in 2021, and $ 26.8 million in each of 2022 and 2023. See Note 6.
The components of the net deferred tax liability at December 31, 2022 and 2023 are summarized in the following table.
December 31,
2022
2023
Assets
Liabilities
Assets
Liabilities
(In thousands)
Tax effect of temporary differences related to:
Inventories
$
369
$
—
$
373
$
—
Marketable securities
—
( 5,290 )
—
( 3,586 )
Property and equipment
—
( 2,025 )
—
( 1,467 )
Accrued OPEB costs
168
—
139
—
Accrued pension costs
412
—
124
—
Accrued employee benefits
1,342
—
1,421
—
Accrued environmental liabilities
24,332
—
21,332
—
Goodwill
—
( 1,693 )
—
( 1,693 )
Other accrued liabilities and deductible differences
161
—
149
—
Other taxable differences
—
( 2,391 )
—
( 2,392 )
Investment in Kronos Worldwide, Inc.
—
( 65,504 )
—
( 56,133 )
Adjusted gross deferred tax assets (liabilities)
26,784
( 76,903 )
23,538
( 65,271 )
Netting of items by tax jurisdiction
( 26,784 )
26,784
( 23,538 )
23,538
Net noncurrent deferred tax liability
$
—
$
( 50,119 )
$
—
$
( 41,733 )
At December 31, 2023, we have a deferred tax asset relating to our NOL carryforwards for federal income tax purposes of $ 3.6 million all of which have an indefinite carryforward period subject to an 80% annual usage limitation. Our deferred tax asset for such NOL carryforward is net of a portion of our uncertain tax positions as discussed below.
We believe we have adequate accruals for additional taxes and related interest expense which could ultimately result from tax examinations. We believe the ultimate disposition of tax examinations should not have a material adverse effect on our consolidated financial position, results of operations or liquidity.
At December 31, 2021, 2022, and 2023, the gross amount of our uncertain tax positions (exclusive of the effect of interest and penalties) was $ 7.3 million, and this amount has not changed during the past three years. Previously, we made certain pro-rata distributions to our stockholders in the form of Kronos common stock and we recognized a taxable gain related to such distributions. Our uncertain tax positions are attributable to such prior period distribution of Kronos common stock. As discussed in Note 1, we are part of the Contran Tax Group and we have not paid this liability because Contran has not paid the liability to the applicable tax authority. This liability would be payable by Contran to the applicable tax authority only if the shares of Kronos common stock were to be sold or otherwise disposed outside of the Contran Tax Group. At December 31, 2023, $ 3.6 million of our uncertain tax position is classified as a component of our noncurrent deferred tax liability. If our uncertain tax position at December 31, 2023 was recognized, a benefit of $ 7.3 million would affect our effective income tax rate. We currently estimate that our unrecognized tax benefits will not change materially during the next twelve months.
We and Contran file income tax returns in U.S. federal and various state and local jurisdictions. Our U.S. income tax returns prior to 2020 are generally considered closed to examination by applicable tax authorities.
F-25
Income tax matters related to Kronos
Kronos periodically reviews its deferred tax assets (“DTA”) to determine if a valuation allowance is required. At December 31, 2023, Kronos has German corporate and trade net operating loss (“NOL”) carryforwards of $ 478.7 million (DTA of $ 75.8 million) and $ 54.5 million (DTA of $ 5.9 million), respectively; Belgian corporate NOL carryforwards of $ 47.0 million (DTA of $ 11.8 million) and Canadian corporate and provincial NOL carryforwards of $ 31.5 million (DTA of $ 4.7 million) and $ 34.9 million (DTA of $ 4.0 million), respectively.
Kronos has concluded that no deferred income tax asset valuation allowance is required to be recognized with respect to such carryforwards, principally because (i) such carryforwards have lengthy carryforward periods (the German and Belgian carryforwards may be carried forward indefinitely and the Canadian carryforwards may be carried forward 20 years ), (ii) Kronos has utilized a portion of such carryforwards during the most recent three-year period and (iii) Kronos currently expects to utilize the remainder of such carryforwards over the long term. However, prior to the complete utilization of such carryforwards, if Kronos were to generate additional losses in its German, Belgian or Canadian operations for an extended period of time, or if applicable laws were to change such that the carryforward periods were more limited, it is possible that it might conclude the benefit of such carryforwards would no longer meet the more-likely-than-not recognition criteria, at which point Kronos would be required to recognize a valuation allowance against some or all of the then-remaining tax benefit associated with the carryforwards.
The 2017 Tax Act limited Kronos’ business interest expense to the sum of its business interest income and 30% of its adjusted taxable income as defined in the Tax Act. Any business interest expense disallowed as a deduction as a result of the limitation may be carried forward indefinitely. At December 31, 2022 and December 31, 2023, Kronos has recorded deferred tax assets of $ .9 million and $ 3.5 million, respectively, for the carryforwards associated with the nondeductible portion of its interest expense and has concluded it is required to recognize a valuation allowance for such deferred tax asset under the more-likely-than-not recognition criteria. During 2023, Kronos recognized a non-cash deferred income tax expense of $ 2.6 million with respect to the valuation allowance recorded on additional interest expense carryforwards .
Prior to the enactment of the 2017 Tax Act, the undistributed earnings of Kronos’ European subsidiaries were deemed to be permanently reinvested (Kronos had not made a similar determination with respect to the undistributed earnings of its Canadian subsidiary). Pursuant to the one-time repatriation tax (Transition Tax) provisions of the 2017 Tax Act which imposed a one-time repatriation tax on post-1986 undistributed earnings, Kronos recognized current income tax expense of $ 74.5 million and elected to pay such tax in annual installments over an eight-year period beginning in 2018. At December 31, 2023 the balance of its unpaid Transition Tax is $ 33.5 million, with two remaining payments of $ 14.9 million due in 2024 and $ 18.6 million due in 2025. The payments are recorded as a current and noncurrent payable to affiliate (income taxes payable to Valhi) on Kronos’ Consolidated Balance Sheet at December 31, 2023.
Tax authorities are examining certain of Kronos’ U.S. and non-U.S. tax returns and may propose tax deficiencies, including penalties and interest. Because of the inherent uncertainties involved in settlement initiatives and court and tax proceedings, Kronos cannot guarantee that these tax matters, if any, will be resolved in Kronos’ favor, and therefore its potential exposure, if any, is also uncertain. Kronos believes it has adequate accruals for additional taxes and related interest expense which could ultimately result from tax examinations. Kronos believes the ultimate disposition of tax examinations should not have a material adverse effect on its consolidated financial position, results of operations or liquidity.
Note 14 - Stockholders’ equity:
Long-term incentive compensation plan – Prior to 2021, our board of directors adopted a plan that provided for the award of stock to our board of directors, and up to a maximum of 200,000 shares could be awarded. We awarded 13,750 shares in 2021, 15,000 shares in 2022 and 17,750 shares in 2023 under this plan. In February 2023, our board of directors voted to replace the existing director stock plan with a new plan that would provide for the award of stock to non-employee members of our board of directors, and up to a maximum of 200,000 shares could be awarded. The new
F-26
plan was approved at our May 2023 shareholder meeting, and the prior director stock plan terminated effective June 30, 2023. At December 31, 2023, 200,000 shares were available for future award under this new plan.
Long-term incentive compensation plans of subsidiaries and affiliates - CompX and Kronos each have a share-based incentive compensation plan pursuant to which an aggregate of up to 200,000 shares of their common stock can be awarded to members of their board of directors. At December 31, 2023, Kronos had 97,100 shares available for award and CompX had 124,450 shares available for award.
Dividends - Our board of directors approved and we paid quarterly dividends per share to stockholders of $ .06 in 2021 aggregating $ 11.7 million and $ .07 in each of 2022 and 2023 aggregating $ 13.7 million in each year. In addition, our board of directors declared a special dividend on our common stock which totaled $ 17.1 million ($ .35 per share) that we paid on August 31, 2022. 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. 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.
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Accumulated other comprehensive loss - Changes in accumulated other comprehensive loss attributable to NL stockholders, including amounts resulting from our investment in Kronos Worldwide (see Note 6), are presented in the table below.
Years ended December 31,
2021
2022
2023
(In thousands)
Accumulated other comprehensive loss, net of tax:
Currency translation:
Balance at beginning of period
$
( 169,575 )
$
( 171,235 )
$
( 178,191 )
Other comprehensive income (loss)
( 1,660 )
( 6,956 )
1,072
Balance at end of period
$
( 171,235 )
$
( 178,191 )
$
( 177,119 )
Defined benefit pension plans:
Balance at beginning of period
$
( 80,704 )
$
( 68,468 )
$
( 43,857 )
Other comprehensive income (loss):
Amortization of prior service cost and net losses included in
net periodic pension cost
4,813
3,592
1,436
Net actuarial gain (loss) arising during the year
7,423
20,881
( 3,094 )
Plan settlement
—
138
4,142
Balance at end of period
$
( 68,468 )
$
( 43,857 )
$
( 41,373 )
OPEB plans:
Balance at beginning of period
$
( 910 )
$
( 1,053 )
$
( 893 )
Other comprehensive income (loss):
Amortization of net gain included in net periodic
OPEB cost
( 143 )
( 369 )
( 357 )
Net actuarial gain arising during the year
—
529
136
Balance at end of period
$
( 1,053 )
$
( 893 )
$
( 1,114 )
Marketable debt securities:
Balance at beginning of period
$
—
$
—
$
( 50 )
Other comprehensive income (loss) - unrealized gain (loss)
arising the period.
—
( 50 )
35
Balance at end of period
$
—
$
( 50 )
$
( 15 )
Total accumulated other comprehensive loss:
Balance at beginning of period
$
( 251,189 )
$
( 240,756 )
$
( 222,991 )
Other comprehensive income
10,433
17,765
3,370
Balance at end of period
$
( 240,756 )
$
( 222,991 )
$
( 219,621 )
See Note 5 for further discussion on our marketable securities and Note 11 for amounts related to our defined benefit pension plans.
Other – During 2022, we purchased 2,000 shares of our common stock from Kronos for a nominal amount in a private transaction that was approved in advance by our independent directors. We cancelled these treasury shares and allocated their cost to common stock at par value and additional paid-in capital.
During 2022, CompX acquired 78,900 shares of its Class A common stock for an aggregate amount of approximately $ 1.7 million under prior repurchase authorizations. Of these shares, 70,000 shares were purchased in a market transaction, and 8,900 shares were purchased from two of its affiliates in two separate private transactions that were also approved in advance by CompX’s independent directors. During 2021, CompX purchased 75,000 shares of its
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Class A common stock in a market transaction for approximately $ 1.3 million. At December 31, 2023, 523,647 shares were available for purchase under CompX’s prior repurchase authorizations.
Note 15 - Related party transactions:
We may be deemed to be controlled by Ms. Simmons and the Family Trust. See Note 1. Corporations that may be deemed to be controlled by or affiliated with such individuals sometimes engage in (a) intercorporate transactions such as guarantees, management and expense sharing arrangements, shared fee arrangements, joint ventures, partnerships, loans, options, advances of funds on open account, and sales, leases and exchanges of assets, including securities issued by both related and unrelated parties and (b) common investment and acquisition strategies, business combinations, reorganizations, recapitalizations, securities repurchases, and purchases and sales (and other acquisitions and dispositions) of subsidiaries, divisions or other business units, which transactions have involved both related and unrelated parties and have included transactions which resulted in the acquisition by one related party of a publicly-held noncontrolling interest in another related party. While no transactions of the type described above are planned or proposed with respect to us other than as set forth in these financial statements, we continuously consider, review and evaluate, and understand that Contran and related entities consider, review and evaluate such transactions. Depending upon the business, tax and other objectives then relevant, it is possible that we might be a party to one or more such transactions in the future.
Current receivables and payables to affiliates are summarized in the table below:
December 31,
2022
2023
(In thousands)
Current receivables from affiliates:
Other receivables from affiliates
$
—
$
601
Income taxes receivable from Valhi
636
27
$
636
$
628
Current payables to affiliates:
Other - trade items
$
665
$
634
From time to time, we may have loans and advances outstanding between us and various related parties, pursuant to term and demand notes. We generally enter into these loans and advances for cash management purposes. When we loan funds to related parties, we are generally able to earn a higher rate of return on the loan than the lender would earn if the funds were invested in other instruments and when we borrow from related parties, we are generally able to pay a lower rate of interest than we would pay if we borrowed from unrelated parties. While certain of such loans may be of a lesser credit quality than cash equivalent instruments otherwise available to us, we believe that we have evaluated the credit risks involved and reflected those credit risks in the terms of the applicable loans. NLKW had borrowings outstanding of $ .5 million as of December 31, 2022 and 2023 under the Valhi Credit Facility, and we incurred a nominal amount of interest expense under such credit facility for the years ended December 31, 2021, 2022 and 2023. See Note 10. In addition, prior to 2021, CompX entered into an unsecured revolving demand promissory note with Valhi under which, as amended, CompX has agreed to loan Valhi up to $ 25 million. CompX’s loan to Valhi, as amended, bears interest at prime plus 1.00 %, payable quarterly, with all principal due on demand, but in any event no earlier than December 31, 2025. Loans made to Valhi at any time are at CompX’s discretion. At December 31, 2022 and 2023, the outstanding principal balance receivable from Valhi under the promissory note was $ 13.2 million and $ 10.6 million, respectively. Interest income (including unused commitment fees) on CompX’s loan to Valhi was $ 1.2 million in 2021, $ 1.0 million in 2022 and $ 1.2 million in 2023. In February 2024, Kronos entered into a $ 53.7 million subordinated, unsecured term loan with Contran.
Under the terms of various intercorporate services agreements (ISAs) we enter into with Contran, employees of Contran will provide certain management, tax planning, financial and administrative services to the Company on a fee basis. Such fees are based on the compensation of individual Contran employees providing services for us and/or estimates of time devoted to our affairs by such persons. Because of the number of companies affiliated with Contran, we believe
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we benefit from cost savings and economies of scale gained by not having certain management, financial and administrative staffs duplicated at each entity, thus allowing certain Contran employees to provide services to multiple companies but only be compensated by Contran. We, CompX and Kronos negotiate fees annually and agreements renew quarterly. The net ISA fees charged to us by Contran, (including amounts attributable to Kronos for all periods) aggregated approximately $ 33.2 million in 2021, $ 33.5 million in 2022 and $ 30.8 million in 2023.
Contran and certain of its subsidiaries and affiliates, including us, purchase certain of their insurance policies and risk management services as a group, with the costs of the jointly-owned policies and services being apportioned among the participating companies. Tall Pines Insurance Company, a subsidiary of Valhi, underwrites certain insurance policies for Contran and certain of its subsidiaries and affiliates, including us. Tall Pines purchases reinsurance from highly rated (as determined by A.M. Best or other internationally recognized ratings agency) third-party insurance carriers for substantially all of the risks it underwrites. Consistent with insurance industry practices, Tall Pines receives commissions from the reinsurance underwriters and/or assesses fees for certain of the policies that it underwrites. During 2021, 2022 and 2023 we paid $ 26.3 million, $ 24.3 million and $ 28.4 million, respectively, under the group insurance program (including amounts attributable to Kronos for all periods, including its Louisiana Pigment Company joint venture) which amounts principally represent insurance premiums, including $ 19.5 million, $ 18.2 million and $ 20.7 million in 2021, 2022 and 2023, respectively, for policies written by Tall Pines. Amounts paid under the group insurance program also include payments to insurers or reinsurers for the reimbursement of claims within our applicable deductible or retention ranges that such insurers and reinsurers paid to third parties on our behalf, as well as amounts for claims and risk management services and various other third-party fees and expenses incurred by the program. We expect these relationships will continue in 2024.
With respect to certain of such jointly-owned policies, it is possible that unusually large losses incurred by one or more insured party during a given policy period could leave the other participating companies without adequate coverage under that policy for the balance of the policy period. As a result, and in the event that the available coverage under a particular policy would become exhausted by one or more claims, Contran and certain of its subsidiaries and affiliates, including us, have entered into a loss sharing agreement under which any uninsured loss arising because the available coverage had been exhausted by one or more claims will be shared ratably by those entities that had submitted claims under the relevant policy. We believe the benefits in the form of reduced premiums and broader coverage associated with the group coverage for such policies justifies the risk associated with the potential for any uninsured loss.
Contran and certain of its subsidiaries, including us, participate in a combined information technology data services program that Contran provides for primary data processing and failover. The program apportions its costs among the participating companies. The aggregate amount Kronos paid to Contran for such services was $ .3 million in each of 2021 and 2022 and $ .4 million in 2023. Under the terms of a sublease agreement between Contran and Kronos, Kronos leases certain office space from Contran. Kronos paid Contran $ .4 million in 2021, $ .5 million in 2022 and $ .6 million in 2023 for such rent and related ancillary services. We expect that these relationships with Contran will continue in 2024.
Note 16 - Commitments and contingencies:
Lead pigment litigation
Our former operations included the manufacture of lead pigments for use in paint and lead-based paint. We, other former manufacturers of lead pigments for use in paint and lead-based paint (together, the “former pigment manufacturers”), and the Lead Industries Association (LIA), which discontinued business operations in 2002, have been named as defendants in various legal proceedings seeking damages for personal injury, property damage and governmental expenditures allegedly caused by the use of lead-based paints. Certain of these actions have been filed by or on behalf of states, counties, cities or their public housing authorities and school districts, and certain others have been asserted as class actions. These lawsuits seek recovery under a variety of theories, including public and private nuisance, negligent product design, negligent failure to warn, strict liability, breach of warranty, conspiracy/concert of action, aiding and abetting, enterprise liability, market share or risk contribution liability, intentional tort, fraud and misrepresentation, violations of state consumer protection statutes, supplier negligence and similar claims.
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The plaintiffs in these actions generally seek to impose on the defendants responsibility for lead paint abatement and health concerns associated with the use of lead-based paints, including damages for personal injury, contribution and/or indemnification for medical expenses, medical monitoring expenses and costs for educational programs. To the extent the plaintiffs seek compensatory or punitive damages in these actions, such damages are generally unspecified. In some cases, the damages are unspecified pursuant to the requirements of applicable state law. A number of cases are inactive or have been dismissed or withdrawn. Most of the remaining cases are in various pre-trial stages. Some are on appeal following dismissal or summary judgment rulings or a trial verdict in favor of either the defendants or the plaintiffs.
We believe we have substantial defenses to these actions, and we intend to continue to deny all allegations of wrongdoing and liability and to defend against all actions vigorously. We do not believe it is probable we have incurred any liability with respect to pending lead pigment litigation cases to which we are a party, and with respect to all such lead pigment litigation cases to which we are a party, we believe liability to us that may result, if any, in this regard cannot be reasonably estimated, because:
● we have never settled any of the market share, intentional tort, fraud, nuisance, supplier negligence, breach of warranty, conspiracy, misrepresentation, aiding and abetting, enterprise liability, or statutory cases (other than the Santa Clara case discussed below) ,
● no final, non-appealable adverse judgments have ever been entered against us, and
● we have never ultimately been found liable with respect to any such litigation matters, including over 100 cases over a thirty-year period for which we were previously a party and for which we have been dismissed without any finding of liability.
Accordingly, we have not accrued any amounts for any of the pending lead pigment and lead-based paint litigation cases filed by or on behalf of states, counties, cities or their public housing authorities and school districts, or those asserted as class actions. In addition, we have determined that liability to us which may result, if any, cannot be reasonably estimated at this time because there is no prior history of a loss of this nature on which an estimate could be made and there is no substantive information available upon which an estimate could be based.
In the matter titled County of Santa Clara v. Atlantic Richfield Company, et al . (Superior Court of the State of California, County of Santa Clara, Case No. 1-00-CV-788657) on July 24, 2019, an order approving a global settlement agreement entered into among all of the plaintiffs and the three defendants remaining in the case (the Sherwin Williams Company, ConAgra Grocery Products and us) was entered by the court and the case was dismissed with prejudice. The global settlement agreement provides that an aggregate $ 305 million will be paid collectively by the three co-defendants in full satisfaction of all claims resulting in a dismissal of the case with prejudice and the resolution of (i) all pending and future claims by the plaintiffs in the case, and (ii) all potential claims for contribution or indemnity between us and our co-defendants in respect to the case . In the agreement, we expressly deny any and all liability and the dismissal of the case with prejudice was entered by the court without a final judgment of liability entered against us. The settlement agreement fully concludes this matter.
Under the terms of the global settlement agreement, each defendant must pay an aggregate $ 101.7 million to the plaintiffs as follows: $ 25.0 million within sixty days of the court’s approval of the settlement and dismissal of the case, and the remaining $ 76.7 million in six annual installments beginning on the first anniversary of the initial payment ($ 12.0 million for the first five installments and $ 16.7 million for the sixth installment). Our sixth installment will be made with funds already on deposit at the court, which is included in noncurrent restricted cash on our Consolidated Balance Sheets, that are committed to the settlement, including all accrued interest at the date of payment, with any remaining balance to be paid by us (and any amounts on deposit in excess of the final payment would be returned to us). Pursuant to the settlement agreement, we placed an additional $ 9.0 million into an escrow account which is included in noncurrent restricted cash on our Consolidated Balance Sheets.
For financial reporting purposes, using a discount rate of 1.9 % per annum, we discounted the aggregate $ 101.7 million settlement to the estimated net present value of $ 96.3 million. We made the initial $ 25.0 million payment in September 2019 and the first, second, third and fourth annual installment payments of $ 12.0 million each in
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September 2020, 2021, 2022 and 2023. We recognized an aggregate accretion expense of $ 1.1 million, $ .9 million, and $ .7 million in 2021, 2022, and 2023 respectively.
New cases may continue to be filed against us. We do not know if we will incur liability in the future in respect of any of the pending or possible litigation in view of the inherent uncertainties involved in court and jury rulings. In the future, if new information regarding such matters becomes available to us (such as a final, non-appealable adverse verdict against us or otherwise ultimately being found liable with respect to such matters), at that time we would consider such information in evaluating any remaining cases then-pending against us as to whether it might then have become probable we have incurred liability with respect to these matters, and whether such liability, if any, could have become reasonably estimable. The resolution of any of these cases could result in the recognition of a loss contingency accrual that could have a material adverse impact on our net income for the interim or annual period during which such liability is recognized and a material adverse impact on our consolidated financial condition and liquidity.
Environmental matters and litigation
Our operations are governed by various environmental laws and regulations. Certain of our businesses are and have been engaged in the handling, manufacture or use of substances or compounds that may be considered toxic or hazardous within the meaning of applicable environmental laws and regulations. As with other companies engaged in similar businesses, certain of our past and current operations and products have the potential to cause environmental or other damage. We have implemented and continue to implement various policies and programs in an effort to minimize these risks. Our policy is to maintain compliance with applicable environmental laws and regulations at all of our plants and to strive to improve environmental performance. From time to time, we may be subject to environmental regulatory enforcement under U.S. statutes, the resolution of which typically involves the establishment of compliance programs. It is possible that future developments, such as stricter requirements of environmental laws and enforcement policies, could adversely affect our production, handling, use, storage, transportation, sale or disposal of such substances. We believe all of our facilities are in substantial compliance with applicable environmental laws.
Certain properties and facilities used in our former operations, including divested primary and secondary lead smelters and former mining locations, are the subject of civil litigation, administrative proceedings or investigations arising under federal and state environmental laws and common law. Additionally, in connection with past operating practices, we are currently involved as a defendant, potentially responsible party (PRP) or both, pursuant to the Comprehensive Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act (CERCLA), and similar state laws in various governmental and private actions associated with waste disposal sites, mining locations, and facilities that we or our predecessors, our subsidiaries or their predecessors currently or previously owned, operated or used, certain of which are on the United States Environmental Protection Agency’s (EPA) Superfund National Priorities List or similar state lists. These proceedings seek cleanup costs, damages for personal injury or property damage and/or damages for injury to natural resources. Certain of these proceedings involve claims for substantial amounts. Although we may be jointly and severally liable for these costs, in most cases we are only one of a number of PRPs who may also be jointly and severally liable, and among whom costs may be shared or allocated. In addition, we are occasionally named as a party in a number of personal injury lawsuits filed in various jurisdictions alleging claims related to environmental conditions alleged to have resulted from our operations.
Obligations associated with environmental remediation and related matters are difficult to assess and estimate for numerous reasons including the:
● complexity and differing interpretations of governmental regulations,
● number of PRPs and their ability or willingness to fund such allocation of costs,
● financial capabilities of the PRPs and the allocation of costs among them,
● solvency of other PRPs,
● multiplicity of possible solutions,
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● number of years of investigatory, remedial and monitoring activity required,
● uncertainty over the extent, if any, to which our former operations might have contributed to the conditions allegedly giving rise to such personal injury, property damage, natural resource and related claims, and
● number of years between former operations and notice of claims and lack of information and documents about the former operations.
In addition, the imposition of more stringent standards or requirements under environmental laws or regulations, new developments or changes regarding site cleanup costs or the allocation of costs among PRPs, solvency of other PRPs, the results of future testing and analysis undertaken with respect to certain sites or a determination that we are potentially responsible for the release of hazardous substances at other sites, could cause our expenditures to exceed our current estimates. Actual costs could exceed accrued amounts or the upper end of the range for sites for which estimates have been made, and costs may be incurred for sites where no estimates presently can be made. Further, additional environmental and related matters may arise in the future. If we were to incur any future liability, this could have a material adverse effect on our consolidated financial statements, results of operations and liquidity.
We record liabilities related to environmental remediation and related matters (including costs associated with damages for personal injury or property damage and/or damages for injury to natural resources) when estimated future expenditures are probable and reasonably estimable. We adjust such accruals as further information becomes available to us or as circumstances change. Unless the amounts and timing of such estimated future expenditures are fixed and reasonably determinable, we generally do not discount estimated future expenditures to their present value due to the uncertainty of the timing of the payout. We recognize recoveries of costs from other parties, if any, as assets when their receipt is deemed probable. At December 31, 2022 and 2023, we had no t recognized any receivables for recoveries.
We do not know and cannot estimate the exact time frame over which we will make payments for our accrued environmental and related costs. The timing of payments depends upon a number of factors, including but not limited to the timing of the actual remediation process; which in turn depends on factors outside of our control. At each balance sheet date, we estimate the amount of our accrued environmental and related costs which we expect to pay within the next twelve months, and we classify this estimate as a current liability. We classify the remaining accrued environmental costs as a noncurrent liability.
The table below presents a summary of the activity in our accrued environmental costs during the past three years. The amount charged to expense is included in corporate expense on our Consolidated Statements of Operations.
Years ended December 31,
2021
2022
2023
(In thousands)
Balance at the beginning of the period
$
93,416
$
92,940
$
92,358
Additions charged to expense, net
788
486
558
Payments, net
( 1,264 )
( 1,068 )
( 1,810 )
Balance at the end of the period
$
92,940
$
92,358
$
91,106
Amounts recognized in the balance sheet:
Current liability
$
2,643
$
2,627
$
1,655
Noncurrent liability
90,297
89,731
89,451
Balance at the end of the period
$
92,940
$
92,358
$
91,106
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On a quarterly basis, we evaluate the potential range of our liability for environmental remediation and related costs at sites where we have been named as a PRP or defendant, including sites for which our wholly-owned environmental management subsidiary, NL Environmental Management Services, Inc. (EMS), has contractually assumed our obligations. At December 31, 2023, we had accrued approximately $ 91 million related to approximately 33 sites associated with remediation and related matters we believe are at the present time and/or in their current phase reasonably estimable. The upper end of the range of reasonably possible costs to us for remediation and related matters for which we believe it is possible to estimate costs is approximately $ 118 million, including the amount currently accrued. These accruals have not been discounted to present value.
We believe it is not reasonably possible to estimate the range of costs for certain sites. At December 31, 2023, there were approximately five sites for which we are not currently able to reasonably estimate a range of costs. For these sites, generally the investigation is in the early stages, and we are unable to determine whether or not we actually had any association with the site, the nature of our responsibility, if any, for the contamination at the site, if any, and the extent of contamination at and cost to remediate the site. The timing and availability of information on these sites is dependent on events outside of our control, such as when the party alleging liability provides information to us. At certain of these previously inactive sites, we have received general and special notices of liability from the EPA and/or state agencies alleging that we, sometimes with other PRPs, are liable for past and future costs of remediating environmental contamination allegedly caused by former operations. These notifications may assert that we, along with any other alleged PRPs, are liable for past and/or future clean-up costs. As further information becomes available to us for any of these sites which would allow us to estimate a range of costs, we would at that time adjust our accruals. Any such adjustment could result in the recognition of an accrual that would have a material effect on our consolidated financial statements, results of operations and liquidity.
Insurance coverage claims
We are involved in certain legal proceedings with a number of our former insurance carriers regarding the nature and extent of the carriers’ obligations to us under insurance policies with respect to certain lead pigment and asbestos lawsuits. The issue of whether insurance coverage for defense costs or indemnity or both will be found to exist for our lead pigment and asbestos litigation depends upon a variety of factors and we cannot assure you that such insurance coverage will be available.
We have agreements with certain of our former insurance carriers pursuant to which the carriers reimburse us for a portion of our future lead pigment litigation defense costs, and one such carrier reimburses us for a portion of our future asbestos litigation defense costs. We are not able to determine how much we will ultimately recover from these carriers for defense costs incurred by us because of certain issues that arise regarding which defense costs qualify for reimbursement. While we continue to seek additional insurance recoveries, we do not know if we will be successful in obtaining reimbursement for either defense costs or indemnity. Accordingly, we recognize insurance recoveries in income only when receipt of the recovery is probable and we are able to reasonably estimate the amount of the recovery. In this regard we received $ .5 million in insurance recoveries in 2023 and recoveries in each of 2021 and 2022 were nominal.
Other litigation
In addition to the litigation described above, we and our affiliates are also involved in various other environmental, contractual, product liability, patent (or intellectual property), employment and other claims and disputes incidental to present and former businesses. In certain cases, we have insurance coverage for these items, although we do not expect additional material insurance coverage for environmental matters. We currently believe the disposition of all of these various other claims and disputes (including asbestos-related claims), individually and in the aggregate, should not have a material adverse effect on our consolidated financial position, results of operations or liquidity beyond the accruals already provided.
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Concentrations of credit risk
Component products are sold primarily in North America to original equipment manufacturers. The ten largest customers related to our Component Products operations accounted for approximately 51 % of total sales in 2021 and 52 % in each of 2022 and 2023. One customer of CompX’s Security Products business accounted for 16 % of total sales in 2021, 14 % in 2022 and 24 % in 2023 (of which 11 % relates to a pilot project). One customer of CompX’s Marine Components business accounted for 12 % of consolidated sales in 2022.
Income taxes
We are a party to a tax sharing agreement with Contran and Valhi providing for the allocation of tax liabilities and tax payments as described in Note 1. Under applicable law, we, as well as every other member of the Contran Tax Group, are each jointly and severally liable for the aggregate federal income tax liability of Contran and the other companies included in the Contran Tax Group for all periods in which we are included in the Contran Tax Group. Valhi has agreed, however, to indemnify us for any liability for income taxes of the Contran Tax Group in excess of our tax liability computed in accordance with the tax sharing agreement.
Note 17 - Financial instruments:
See Note 5 for information on how we determine fair value of our marketable securities.
The following table presents the financial instruments that are not carried at fair value but which require fair value disclosure as of December 31, 2022 and 2023:
December 31, 2022
December 31, 2023
Carrying
Fair
Carrying
Fair
amount
value
amount
value
(In thousands)
Cash, cash equivalents and restricted cash
$
97,502
$
97,502
$
141,382
$
141,382
Due to their near-term maturities, the carrying amounts of accounts receivable and accounts payable are considered equivalent to fair value.
Note 18 - Recent Accounting Pronouncements:
In November 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures . The ASU requires public companies to disclose significant segment expenses and other segment items on an annual and interim basis. The ASU also mandates public companies to provide all annual segment disclosures currently required annually in interim periods. Public companies will also be required to disclose the title and position of the chief operating decision maker (CODM) and explain how the CODM uses the reported measure of segment profit or loss in assessing segment performance and allocation resources. The ASU is effective for us beginning with our 2024 Annual Report, and for interim reporting, in the first quarter of 2025, with retrospective application required. We are in the process of evaluating the additional disclosure requirements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures . The ASU requires additional annual disclosure and disaggregation for the rate reconciliation, income taxes paid and income tax expense by federal, state and foreign tax jurisdictions. In addition, the standard increases the disclosure requirements for items included in the rate reconciliation that meet a quantitative threshold. The ASU is effective for us beginning with our 2025 Annual Report. The ASU may be applied prospectively; however, entities have the option to apply it retrospectively. We are in the process of evaluating the additional disclosure requirements.
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