What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-09 compared with 2022-03-10 · 251 added, 233 removed, 504 unchanged (49% of the section changed)

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TiO 2 is used to impart whiteness, brightness, opacity and durability to a wide variety of products, including paints, plastics, paper, fibers and ceramics.

Additionally, TiO 2 is a critical component of everyday applications, such as coatings, plastics and paper, as well as many specialty products such as inks, foods and cosmetics.

Additionally, TiO 2 is a critical component of everyday applications, such as coatings, plastics and paper, as well as many specialty products such as inks, cosmetics and pharmaceuticals.

● Component Products – We operate in the component products industry through our majority control of CompX.

CompX is a leading manufacturer of security products used in the recreational transportation, postal, office and institutional furniture, cabinetry, tool storage, healthcare and a variety of other industries.

CompX also manufactures stainless steel exhaust systems, gauges, throttle controls, wake enhancements systems, trim tabs and related hardware and accessories for the recreational marine and other industries.

CompX is a leading manufacturer of security products used in the postal, recreational transportation, office and institutional furniture, cabinetry, tool storage, healthcare and a variety of other industries.

CompX is also a leading manufacturer of wake enhancements systems, stainless steel exhaust systems, gauges, throttle controls, trim tabs and related hardware and accessories for the recreational marine.

● Real Estate Management and Development – We operate in real estate management and development through our majority control of BMI and LandWell.

BMI provides utility services to certain industrial and municipal customers and owns real property in Henderson, Nevada.

BMI owns real property in Henderson, Nevada and through its wholly-owned subsidiaries provides utility services to certain industrial and municipal customers.

LandWell is engaged in efforts to develop certain land holdings for commercial, industrial and residential purposes in Henderson, Nevada.

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We reported net income from continuing operations attributable to Valhi stockholders of $90.2 million or $3.16 per diluted share in 2022 compared to $127.2 million or $4.46 per diluted share in 2021.

Our net income from continuing operations attributable to Valhi stockholders increased from 2020 to 2021 primarily due to the net effects of:

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

Our net income from continuing operations attributable to Valhi stockholders decreased from 2021 to 2022 primarily due to the net effects of:

● lower operating income from our Chemicals Segment in 2022 compared to 2021;

● lower operating income from our Real Estate Management and Development Segment in 2022 compared to 2021 including aggregate charges of $19.7 million in our Real Estate Management and Development Segment in 2022 related to the impairment of certain fixed assets and the bankruptcy filing of BWC in 2022;

● recognition of a gain on sales of land not used in our operations of $16.0 million in 2021.

● income from infrastructure reimbursement of $15.3 million in 2021 compared to $19.7 million in 2020.

Our diluted income from continuing operations per share in 2022 includes:

● aggregate charges of $.35 per share related to the bankruptcy filing of BWC, including $.29 per share related to the impairment of the water delivery system fixed assets, primarily recognized in the second quarter, and $.04 per share loss on the deconsolidation of BWC and $.02 per share of bad debt expense related to an intercompany receivable with BWC, both recognized in the third quarter;

● income of $.28 per share related to tax increment infrastructure reimbursements recognized in the third and fourth quarters;

● a gain of $.05 per share related to a business interruption insurance claim arising from Hurricane Laura in 2020 at our Chemicals Segment recognized in the third quarter;

● income of $.02 per share related to an energy utility infrastructure reimbursement recognized in the second quarter.

Our diluted income from continuing operations per share in 2021 includes:

● a gain of $.43 per share related to sales of land not used in our operations recognized in the second and third quarters;

● income of $.28 per share related to tax increment infrastructure reimbursements recognized in the first and fourth quarters.

Our diluted income from continuing operations per share in 2020 includes:

● income of $.35 per share related to the tax increment infrastructure reimbursement recognized in the first quarter;

● a gain of $.07 per share from the proceeds received in the third quarter related to a prior land sale;

● a gain of $.03 per share related to an insurance recovery for a property damage claim at our Chemicals Segment recognized in the first quarter.

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 –

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Our net income from continuing operations attributable to Valhi stockholders increased from 2020 to 2021 primarily due to the net effects of:

● lower operating income from our Chemicals and Component Products segments in 2020 compared to 2019;

● higher operating income from our Real Estate Management and Development Segment in 2020 compared to 2019 including higher income from tax increment infrastructure reimbursement and a gain recognized on a prior land sale;

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

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

● a gain of $3.0 million in 2019 related to the sale of our insurance and risk management business.

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

● recognition of a gain on sales of land not used in our operations of $16.0 million in 2021;

● income from infrastructure reimbursement of $15.3 million in 2021 compared to $19.7 million in 2020.

Our diluted income from continuing operations per share in 2021 includes:

● a gain of $.43 per share related to sales of land not used in our operations recognized in the second and third quarters;

● income of $.28 per share related to tax increment infrastructure reimbursements recognized in the first and fourth quarters.

Our diluted income from continuing operations per share in 2020 includes:

● income of $.35 per share related to the tax increment infrastructure reimbursement recognized in the first quarter;

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● a gain of $.03 per share related to an insurance recovery for a property damage claim at our Chemicals Segment recognized in the first quarter.

Our diluted income from continuing operations per share in 2019 includes:

● a charge of $.44 per share related to the litigation settlement expense recognized in the second quarter;

● income of $.16 per share related to the infrastructure reimbursement primarily recognized in the second quarter;

● a gain of $.11 per share related to the insurance recovery recognized in the second quarter;

● a gain of $.10 per share related to the sale of land in the third quarter;

● a gain of $.07 per share related to the sale of our insurance and risk management business.

We discuss these amounts more fully below.

Current Forecast for 2023 –

We currently expect to report higher consolidated operating income for 2022 as compared to 2021 primarily due to the net effects of:

● higher operating income from our Chemicals Segment in 2022 as the favorable impact of higher expected average TiO 2 selling prices is expected to more than offset the negative impact of higher manufacturing costs;

● lower operating income from our Real Estate Management and Development Segment in 2022 due to lower land sales revenues;

● higher expected corporate expenses, primarily due to increased litigation fees and related costs and environmental remediation and related costs at NL;

● an aggregate $16 million gain on land sales in 2021, which is not expected to recur.

We currently expect consolidated operating income for 2023 to be consistent as compared to 2022 primarily due to the net effects of:

● higher operating income from our Real Estate Management and Development Segment in 2023 due to the aggregate $19.7 million of charges recognized in 2022 related to BWC noted above which will not recur and higher expected infrastructure reimbursements;

● lower operating income from our Chemicals Segment in 2023 as the favorable impact of higher expected average TiO 2 selling prices is not expected to offset the negative impact of higher manufacturing costs;

● lower operating income from our Component Products Segment in 2023 as marine sales are expected to normalize below 2022 record levels.

Our expectations for our future operating results are based upon a number of factors beyond our control, including worldwide growth of gross domestic product, competition in the marketplace, continued operation of competitors, technological advances, worldwide production capacity and the consequences arising directly or indirectly out of the COVID-19 pandemic.

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However, even if our Chemicals Segment and its competitors maintain consistent shares of the worldwide market, demand for TiO 2 in any interim or annual period may not change in the same proportion as the change in GDP, in part due to relative changes in the TiO 2 inventory levels of our Chemicals Segment’s customers.

We believe that our Chemicals Segments’ customers’ inventory levels are influenced in part by their expectation for future changes in TiO 2 selling prices as well as their expectation for future availability of product.

We believe our Chemicals Segments’ customers’ inventory levels are influenced in part by their expectation for future changes in TiO 2 selling prices as well as their expectation for future availability of product.

Although certain of our Chemicals Segment’s TiO 2 grades are considered specialty pigments, the majority of its grades and substantially all of its production are considered commodity pigment products with price and availability being the most significant competitive factors along with product quality and customer and technical support services.

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dollar relative to the euro, the Norwegian krone and the Canadian dollar and the euro relative to the Norwegian krone).

Our Chemicals Segment’s key performance indicators are its TiO 2 average selling prices, its level of TiO 2 sales and production volumes and the cost of titanium-containing feedstock purchased from third parties.

Our Chemicals Segment’s key performance indicators are its TiO 2 average selling prices, its TiO 2 sales and production volumes and the cost of titanium-containing feedstock purchased from third parties.

TiO 2 selling prices generally follow industry trends and selling prices will increase or decrease generally as a result of competitive market pressures.

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Thousands of metric tons

Industry Conditions and 2021 Overview – Our Chemicals Segment started 2021 with average TiO 2 selling prices 3% lower than at the beginning of 2020.

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

Our Chemicals Segment experienced higher sales volumes in its European, North American and Latin American markets in 2021 as compared to sales volumes in 2020, primarily due to the COVID-19 related demand contraction in 2020 which impacted the second and third quarters and was most acute in the second quarter of 2020.

Industry Conditions and 2022 Overview – Our Chemicals Segment started 2022 with average TiO 2 selling prices 16% higher than at the beginning of 2021and average TiO 2 selling prices increased 16% throughout 2022 in response to our Chemicals Segment rising production costs.

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

The following table shows our Chemicals Segment’s capacity utilization rates during 2021 and 2022.

Our Chemicals Segment’s TiO 2 production volumes were higher in 2021 as compared to 2020 to meet higher customer demand in 2021.

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

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

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

Production Capacity Utilization Rates

First quarter

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Fourth quarter

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

In addition to the impact of higher sales volumes and higher average selling prices, we estimate that changes in currency exchange rates (primarily the euro) increased our Chemicals Segment’s net sales by approximately $43 million, or 3%, as compared to 2020.

TiO 2 selling prices will increase or decrease generally as a result of competitive market pressures, changes in the relative level of supply and demand as well as changes in raw material and other manufacturing costs.

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

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

In addition to the impact of lower sales volumes and lower average selling prices, we estimate that changes in currency exchange rates (primarily the euro) increased our Chemicals Segment’s net sales by approximately $9 million, or 1%, as compared to 2019.

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

We estimate that changes in currency exchange rates (primarily the euro) decreased our Chemicals Segment’s net sales by approximately $106 million, or 5% in 2022 as compared to 2021.

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

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

Cost of Sales and Gross Margin – Cost of sales increased $203.5 million, or 16%, in 2021 compared to 2020 due to a 6% increase in sales volumes and higher production costs of approximately $69 million (including higher cost for raw materials and energy) and the effects of currency exchange rate fluctuations (primarily the Canadian dollar).

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

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

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

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

Cost of Sales and Gross Margin – Cost of sales increased $45.7 million, or 3%, in 2022 compared to 2021 primarily due to the net effects of higher production costs of approximately $285 million (including higher costs for raw materials and energy), a 15% decrease in sales volumes and changes in currency exchange rates.

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

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

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

Our Chemicals Segment’s gross margin as a percentage of net sales in 2022 decreased primarily due to the net effect of higher average TiO 2 selling prices, lower production and sales volumes, higher production costs and fluctuations in currency exchange rates.

Cost of sales increased $203.5 million, or 16%, in 2021 compared to 2020 due to a 6% increase in sales volumes and higher production costs of approximately $69 million (including higher cost for raw materials and energy) and the effects of currency exchange rate fluctuations (primarily the Canadian dollar).

Our Chemicals Segment’s cost of sales as a percentage of net sales decreased to 77% in 2021 compared to 79% in 2020 primarily due to the favorable effects of higher average TiO 2 selling prices and increased coverage of fixed costs from higher production, partially offset by higher production costs (including higher raw material and energy costs) as well as the effects of fluctuations in currency exchange rates, as discussed below.

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

Cost of sales decreased $55.8 million, or 4%, in 2020 compared to 2019 due to the net effect of a 6% decrease in sales volumes, higher raw materials and other production costs of approximately $6 million (including higher cost for third-party feedstock and other raw materials) and currency exchange rate fluctuations.

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

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

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

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

Operating Income – Our Chemicals Segment’s operating income increased by $74.3 million, from $126.5 million in 2020 to $200.8 million in 2021.

Operating income as a percentage of net sales was 10% in 2021 compared to 8% in 2020.

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

We estimate that changes in currency exchange rates decreased our Chemicals Segment’s operating income by approximately $13 million in 2021 as compared to 2020 as discussed in the Currency Exchange Rates section below.

Our Chemicals Segment’s operating income decreased by $33.6 million, from $160.1 million in 2019 to $126.5 million in 2020.

Operating Income – Our Chemicals Segment’s operating income decreased by $26.2 million, from $200.8 million in 2021 to $174.6 million in 2022.

Operating income as a percentage of net sales was 9% in 2022 compared to 10% in 2021.

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

Our Chemicals Segment experienced an operating loss of $15.3 million in the fourth quarter of 2022 compared to operating income of $55.4 million in the fourth quarter of 2021.

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

See Note 13 to our Consolidated Financial Statements.

We estimate that changes in currency exchange rates increased our Chemicals Segment’s operating income by approximately $23 million in 2022 as compared to 2021 as discussed in the Currency Exchange Rates section below.

Our Chemicals Segment’s operating income was also minimally impacted by the effects of Hurricane Laura which temporarily halted production at LPC on August 24, 2020.

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

Our Chemicals Segment’s operating income increased by $74.3 million, from $126.5 million in 2020 to $200.8 million in 2021.

Operating income as a percentage of net sales was 10% in 2021 compared to 8% in 2020.

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

Our Chemicals Segment’s operating income in 2020 was minimally impacted by the effects of Hurricane Laura which temporarily halted production at LPC on August 24, 2020 with resumption of operations on September 25, 2020.

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

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

Our Chemicals Segment’s 2020 operating income includes immaterial costs related to Hurricane Laura, primarily costs to relocate inventory and modify shipping schedules in order to maintain service levels to customers following the hurricane.

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

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

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

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

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

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

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

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

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

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

Our Chemicals Segment’s operating income is net of amortization of purchase accounting adjustments made in conjunction with our acquisitions of interests in NL and Kronos.

As a result, we recognize additional depreciation expense above the amounts Kronos reports separately, substantially all of which is included within cost of sales.

We recognized

additional depreciation expense of $2.2 million in 2019, $3.8 million in 2020 and $1.5 million in 2021, which reduced our reported Chemicals Segment’s operating income as compared to amounts reported by Kronos.

We recognized additional depreciation expense of $3.8 million in 2020, $1.5 million in 2021 and $1.3 million in 2022, which reduced our reported Chemicals Segment’s operating income as compared to amounts reported by Kronos.

Currency Exchange Rates – Our Chemicals Segment has substantial operations and assets located outside the United States (primarily in Germany, Belgium, Norway and Canada).

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

Impact of changes in currency exchange rates - 2021 vs.

Impact of changes in currency exchange rates

Year ended December 31, 2022 vs December 31, 2021

gains/(losses)

Total currency

Transaction gains/(losses) recognized

Transaction gains recognized

(In millions)

Operating income

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

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

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

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

dollars in 2022 as compared to 2021.

The weakening of the U.S.

The strengthening of the U.S.

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

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

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

● Higher net currency transaction gains of approximately $10 million primarily caused by relative changes in currency exchange rates at each applicable balance sheet date between the U.S.

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operations, and

● Approximately $19 million from net currency translation losses primarily caused by a weakening of the U.S.

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

dollars in 2021 as compared to 2020, partially offset by net currency translation gains primarily caused by a weakening of the U.S.

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

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

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

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

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

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

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

dollars in 2022 as compared to 2021.

Impact of changes in currency exchange rates - 2021 vs.

gains/(losses)

Total currency

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dollars in 2021 as compared to 2020.

The strengthening of the U.S.

The weakening of the U.S.

dollar relative to the Canadian dollar and the Norwegian krone in 2021 did not have a significant effect on the reported amount of net sales, as a substantial portion of the sales generated by our Chemicals Segment’s Canadian and Norwegian operations are denominated in the U.S.

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

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

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

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

dollar and the euro, Canadian dollar and the Norwegian krone, and between the euro and the Norwegian krone, which causes increases or decreases, as applicable, in U.S.

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operations, and

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

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

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

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

Outlook – Based on current market conditions, we expect global demand for consumer products, including those of our Chemicals Segment’s customers, to remain strong throughout 2022.

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

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

Thus far our Chemicals Segment’s operations team has been able to manage through these disruptions with minimal impact on its operations;

however, our Chemicals Segment expects these challenges to continue for the foreseeable future.

Our Chemicals Segment experienced increases in its feedstock costs in 2021 (primarily in the second half of 2021) and we expect feedstock costs to continue to increase in 2022 as compared to the average 2021 costs.

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

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

As a result of rising costs and continued strong customer demand, we expect selling prices for TiO 2 will continue to rise in 2022, which we expect to mitigate increases in our Chemicals Segment’s distribution, raw material, energy and other production costs.

We expect our Chemicals Segment’s 2022 sales and operating income will be higher than in 2021;

however, increasing costs will continue to challenge margins.

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

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

As noted above, our Chemicals Segment has experienced global supply chain disruptions, including disruptions related to COVID-19, and future impacts

of COVID-19 on its operations will depend on, among other things, any future disruption in its operations or its suppliers’ operations, or related possible shipping delays, and the timing and effectiveness of the global measures deployed to fight COVID-19 and its variants, all of which remain uncertain and cannot be predicted.

● Approximately $19 million from net currency translation losses primarily caused by a weakening of the U.S.

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

dollars in 2021 as compared to 2020, partially offset by net currency translation gains primarily caused by a weakening of the U.S.

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

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

dollars in 2021 as compared to 2020.

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

This weakness continued through the fourth quarter.

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

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

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

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

Our Chemicals Segment is experiencing continued weak demand in North America in the first quarter of 2023.

Our Chemicals Segment expects customer demand to gradually return during the first half of the year particularly in Europe and export markets.

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

Our Chemicals Segment’s selling prices have remained stable at the beginning of 2023;

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

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

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

The long-term outlook for the TiO 2 industry remains very positive,

and the steps we are taking in the near term are intended to preserve our Chemicals Segment global market share and position its business to profitably grow in the future.

Our expectations for the TiO 2 industry and our Chemicals Segment operations are based on a number of factors outside our control.

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

Component Products –

Our Component Products Segment’s operating income was negatively impacted by the COVID-19 pandemic in 2020, primarily in the second and third quarters, which significantly impacts operating income comparisons for the comparative periods.

Our Component Products Segment reported operating income of $25.4 million in 2022 compared to operating income of $20.5 million in 2021 and $11.8 million in 2020.

The increase in operating income in 2022 over 2021 is primarily due to higher marine components sales and to a lesser extent higher security products sales.

Our Components Products Segment’s operating income was negatively impacted by the COVID-19 pandemic in 2020, primarily in the second and third quarters, which significantly impacts operating income comparisons for the comparative periods.

Beginning in the third quarter of 2020 and continuing through 2021, our Component Products Segment’s sales volumes generally improved at both security products and marine components reporting units and the increase in operating income in 2021 over 2020 primarily resulted from the higher sales volumes.

The decrease in operating income in 2020 over 2019 is primarily due to the decline in net sales and gross margin due to reduced demand resulting from the COVID-19 pandemic during 2020.

Our Component Products Segment’s product offerings consist of a large number of products that have a wide variation in selling price and manufacturing cost, which results in certain practical limitations on our ability to quantify the impact of changes in individual product sales quantities and selling prices on our net sales, cost of sales and gross margin.

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Operating income

Net Sales – Our Component Products Segment’s net sales increased approximately $26.3 million in 2021 compared to 2020 primarily due to higher sales at both the security products and marine components reporting units, particularly in the second quarter of 2021, as many of our Component Products Segment’s customers were temporarily closed or reduced production during the second quarter of 2020 due to government ordered closures or reduced demand resulting from the COVID-19 pandemic.

Net Sales – Our Component Products Segment’s net sales increased $25.8 million in 2022 compared to 2021 due to higher marine component sales primarily to the towboat market and, to a lesser extent, higher security products sales across a variety of markets.

Marine components net sales increased $16.4 million, or 46%, in 2022 as compared to 2021.

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

Security products net sales increased $9.4 million, or 9%, in 2022 as compared to 2021.

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

Our Component Products Segment’s net sales increased $26.3 million in 2021 compared to 2020 primarily due to higher sales at both the security products and marine components reporting units, particularly in the second quarter of 2021, as many of our Component Products Segment’s customers were temporarily closed or reduced production during the second quarter of 2020 due to government ordered closures or reduced demand resulting from the COVID-19 pandemic.

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

Marine components net sales increased $9.1 million, or 34%, in 2021 as compared to 2020 primarily due to increased sales of $7.2 million to several original equipment boat manufactures in the towboat market.

Security products sales generally improved since third quarter of 2020 but did not recover to pre-pandemic levels until the second quarter of 2021 when sales improved in markets that had been slower to recover from the COVID-19 pandemic, particularly sales to distributors and the office furniture market.

Relative to prior year, sales increased $17.2 million, or 20%, primarily due to $7.2 million higher sales to the government security market, $4.9 million higher sales to the transportation market and $2.0 million higher sales to distribution customers.

Our Component Products Segment’s net sales decreased approximately $9.7 million in 2020 compared to 2019 primarily due to lower security products sales as certain security products market segments were slower to recover from the negative impact of the COVID-19 pandemic, primarily in the second and third quarters, including transportation which had $4.4 million lower sales than 2019, distribution customers which were $2.5 million lower than 2019, and office furniture which was $1.8 million lower than 2019.

Lower security product sales were slightly offset by higher marine

component sales mainly to the towboat market which increased $2.9 million, primarily for wake enhancement systems and surf pipes to an original equipment boat manufacturer, predominantly in the second half of the year.

Relative changes in selling prices did not have a material impact on net sales comparisons.

Cost of Sales and Gross Margin – Our Component Products Segment’s cost of sales increased in 2022 compared to 2021 primarily due to the effects of higher sales, as well as increased production costs at both security products and marine components.

Our Component Products Segment’s gross margin as a percentage of net sales decreased over the same period primarily due to the decrease in the security products gross margin percentage.

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

Marine components gross margin as a percentage of net sales increased slightly in 2022 compared to 2021 with increased sales due to price increases and surcharges more than offsetting higher production costs, as well as increased coverage of cost of sales from higher sales.

Our Component Products Segment’s cost of sales increased in 2021 compared to 2020 primarily due to the effects of higher sales, as well as increased production costs at both security products and marine components.

Our Component Products Segment’s gross margin as a percentage of net sales increased over the same period due to the increase in the security products gross margin percentage partially offset by the decrease in the marine components gross margin percentage.

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

Our Component Products Segment’s cost of sales decreased in 2020 compared to 2019 primarily due to the net effects of lower sales for the security products and higher cost for security products inventory produced during the second and third quarters and sold in the last half of the year.

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

This negatively impacted our Component Products Segment’s gross margin and operating income margin as this higher cost inventory was sold during the last half of 2020.

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

Operating Income – Our Component Products Segment operating income increased in 2022 compared to 2021.

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Operating costs and expenses consist primarily of sales and administrative-related personnel costs, sales commissions and advertising expenses directly related to product sales and administrative costs relating to business unit and corporate management activities, as well as gains and losses on disposal of property and equipment.

Operating costs and expenses increased $1.2 million in 2022 compared to 2021 predominantly due to higher salary and employment related costs.

Our Component Products Segment operating income increased in 2021 compared to 2020.

Operating margin increased in 2021 compared to 2020 primarily due to the factors impacting net sales, cost of sales and gross margin discussed above.

Operating costs and expenses increased $1.2 million in 2021 compared to 2020 primarily due to higher salary and benefits costs.

Our Component Products Segment operating income decreased in 2020 compared to 2019.

Operating margin decreased in 2020 compared to 2019 primarily due to the factors impacting net sales, cost of sales and gross margin discussed above.

Operating costs and expenses decreased $.3 million in 2020 compared to 2019.

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

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

Total material costs represented approximately 44% of our Component Products Segment’s cost of sales in 2021, with commodity-related raw materials accounting for approximately 16% of our Component Products Segment’s cost of sales.

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

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

Based on current economic conditions, we expect the prices for our Component Products Segment’s primary commodity-related raw materials and other manufacturing materials to be volatile during 2022.

Total material costs represented approximately 47% of our Component Products Segment’s cost of sales in 2022, with commodity-related raw materials representing

approximately 17% of our Component Products Segment’s cost of sales.

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

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

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

Based on current economic conditions, we expect the prices for our Component Products Segment’s primary commodity-related raw materials including zinc, brass, stainless steel and other manufacturing materials in 2023 to be relatively stable, although at the elevated levels our Component Products Segment experienced in the second half of 2022.

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

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– Raw Materials.”

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

Throughout 2021, our Component Products Segment experienced strong demand at both its security products and marine components reporting units.

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

Based on current market conditions, our Component Products Segment expects demand levels to remain strong in 2022 and we expect to report increased net sales and operating income in 2022 compared to 2021.

Our Component Products Segment’s supply chains remain intact, although the current global and domestic supply chain disruptions continue to present challenges in sourcing certain raw materials due to increased lead times, availability shortages and transportation and logistics delays.

Thus far our Component Products Segment has been able to manage through these disruptions with minimal impact on its operations.

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

In response, our Component Products Segment implemented price increases and surcharges;

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

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

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

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

While labor markets continue to be competitive in each of the regions in which our Component Products Segment operates and labor costs continue to rise, our Component Products Segment has been able to achieve and maintain more balanced staffing levels aligned with current and forecasted demand, particularly at its marine components reporting unit.

Our Component Products Segment continues to face shortages related to certain electronic components;

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

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

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

Our Component Products Segment currently expects its marine components reporting unit gross margins as a percentage of net sales in 2023 to be comparable to 2022.

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

Our Component Products Segment is focused on managing inventory levels to support anticipated lower demand in 2023.

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

Our Component Products Segment’s expectations for its operations and the markets it serves are based on a number of factors outside its control.

As noted above, there are global and domestic supply chain challenges and any future impacts of the COVID-19 pandemic on operations will depend on, among other things, any future disruption in our Component Products Segment’s operations or its suppliers’ operations, demand for its products and the timing and effectiveness of the global measures deployed to fight COVID-19, all of which remain uncertain and cannot be predicted.

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

Real Estate Management and Development –

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General – Our Real Estate Management and Development Segment consists of BMI and LandWell.

BMI provides utility services, among other things, to an industrial park located in Henderson, Nevada, and is responsible for the delivery of water to the City of Henderson and various other users through a water distribution system owned by BMI.

BMI provides certain utility services, among other things, to an industrial park located in Henderson, Nevada, and prior to BWC’s bankruptcy filing on September 10, 2022 was responsible for the delivery of water to the City of Henderson and various other users through a water delivery system owned and operated by BWC.

LandWell is actively engaged in efforts to develop certain real estate in Henderson, Nevada including approximately 2,100 acres zoned for residential/planned community purposes and approximately 400 acres zoned for commercial and light industrial use.

Beginning in December 2013 and through the end of 2021, LandWell has closed or entered into escrow on approximately 1,700 acres of the residential/planned community and approximately 70 acres zoned for commercial and light industrial use.

LandWell began marketing land for sale in the residential/planned community in December 2013 and at December 31, 2022 approximately 90 saleable acres remain.

LandWell has been actively marketing and selling the land zoned for commercial and light industrial use and at December 31, 2022 approximately 20 saleable acres remain.

Contracts for land sales are negotiated on an individual basis and sales terms and prices will vary based on such factors as location (including location within a planned community), expected development work, and individual buyer needs.

Although land may be under contract, we do not recognize revenue until we have satisfied the criteria for

revenue recognition set forth in ASC Topic 606.

Although land may be under contract, we do not recognize revenue until we have satisfied the criteria for revenue recognition set forth in ASC Topic 606.

In some instances, we will receive cash proceeds at the time the contract closes and record deferred revenue for some or all of the cash amount received, with such deferred revenue being recognized in subsequent periods.

We expect substantially all of the land in the residential/planned community will be sold by the end of 2022;

Substantially all of the land in the residential/planned community has been sold;

however, we expect the development work to take three to five years to complete.

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Cost of sales related to land sales revenues was $69.7 million in 2022 compared to $117.0 million in 2021.

Land sales revenue decreased substantially in 2022 primarily due to two land parcels with no post-closing obligations that closed during the fourth quarter of 2021 for $70 million which were immediately recognized as revenue.

Excluding these two parcels that closed in 2021, land sales declined 12% in 2022 primarily due to a decrease in acreage sold and the relative timing of development spending.

Substantially all of the land sales revenue we recognized in 2022 was under the cost-based inputs method of revenue recognition for acreage sold in prior years and to a lesser extent current year land sales.

In 2021 land sales were heavily weighted towards the end of the year.

Land sales revenue in the fourth quarter of 2022 was $20.0 million compared to $150.8 million in the fourth quarter of 2021, including approximately $70 million noted above.

Included in operating income was income related to the tax increment reimbursement note receivables of $15.2 million and $15.3 million in 2022 and 2021, respectively.

See Note 7 to our Consolidated Financial Statements.

We recognized $207.8 million in revenues on land sales during 2021 compared to $87.0 million in 2020.

Cost of sales related to land sales revenues was $117.0 million in 2021 compared to $57.9 million in 2020.

Land sales revenue increased in 2021 as compared to 2020 primarily due to an increase in the amount of acreage sold, increased selling price per acre sold and an increase in infrastructure development spending.

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We returned to more normalized infrastructure development spending late in 2020 and continued to increase infrastructure development spending throughout 2021.

Typically land sales have been heavily weighted towards the end of the year.

Typically land sales have been heavily weighted towards the end

In the fourth quarter of 2021, land sales revenue was $150.8 million including approximately $70 million related to two parcels as compared to land sales revenue of $70.2 million in the fourth quarter of 2020, including approximately $55 million related to a single parcel.

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Operating income in 2021 also includes $15.3 million of income related to the recognition of tax increment reimbursement note receivables compared to $19.1 million of such income in 2020, as discussed in Note 7 to our Consolidated Financial Statements.

We recognized $87.0 million in revenues on land sales during 2020 compared to $33.5 million in 2019.

Cost of sales related to land sales revenues was $57.9 million in 2020 compared to $24.5 million in 2019.

As discussed above, during the fourth quarter of 2020, our Real Estate Management and Development Segment closed on a single parcel for proceeds of approximately $55 million.

The contract for this parcel contained no post-closing obligations therefore we recognized the full $55 million in revenue in 2020.

Substantially all of the revenue we recognized in 2019 was under the cost-based inputs method of revenue recognition.

Excluding the fourth quarter 2020 land sale noted above, land sales revenues decreased in 2020 as compared to 2019 primarily due to lower land development spending.

Operating income in 2020 also includes $19.1 million of income related to the recognition of tax increment reimbursement note receivables compared to $8.8 million of such income in 2019, as discussed in Note 7 to our Consolidated Financial Statements.

The remainder of net sales and cost of sales related to this segment primarily relates to water delivery fees and expenses.

We deliver water to several customers under long-term contracts.

Water delivery sales were lower in 2021 due to the timing of water delivery to our largest customer.

Outlook – As a result of the COVID-19 pandemic, early in the second quarter of 2020 LandWell began receiving requests from some residential builders to delay or cancel closing on certain parcels in escrow and, as a result, LandWell began delaying or curtailing infrastructure development activities where possible to align with land sales levels and residential builder output.

In the second half of 2020 and through 2021, land sales activities increased to a record pace, including increases in both the number of acres closed and entered into escrow.

LandWell is focused on developing the land it manages, primarily to residential builders, for the residential/planned community in Henderson.

As noted above, if current land sales in escrow close as scheduled, we expect substantially all of the land in the residential/planned community will be sold by the end of 2022.

Because we recognize revenue over time using cost-based inputs, we expect to continue to recognize revenue on land previously sold over the development period, currently expected to take three to five years.

At December 31, 2021 we have deferred revenue of $200.6 million related to previously closed land sales.

As noted above, we cannot guarantee land held in escrow will close as currently scheduled because builders can generally cancel without financial penalty until shortly before scheduled closing.

In addition, under LandWell’s development agreement with the City of Henderson, the issuance of a specified number of housing permits requires LandWell to complete certain large infrastructure projects.

LandWell began construction on several of these community-wide large projects in late 2021 with the bulk of such construction continuing into 2022 and, as a result, we expect land development costs to increase during 2022.

Because these costs relate to the entirety of the residential/planned community, these costs are not part of the cost-based inputs used to recognize revenue

and therefore this spending will not correlate to revenue recognition.

This spending is expected to be eligible for tax increment reimbursement.

BMI provides certain utility services, among other things, to an industrial park located in Henderson, Nevada and prior to BWC’s bankruptcy filing on September 10, 2022 was responsible for the delivery of water to the City of Henderson and various other users under long-term contracts through a water delivery system owned and operated by BWC.

BWC’s water delivery system operated on Lake Mead in Nevada.

Due to the Western drought, water levels in Lake Mead have been declining for much of the last twenty years.

As a result of water release curtailments upstream of Lake Mead which began late in the second quarter, Lake Mead water levels have dropped precipitously to historically low levels.

On June 30, 2022 BWC was no longer able to pump water without the risk of damaging the system and consequently ceased operations at its water intake facility to best preserve the system.

Current estimates of Lake Mead water levels do not indicate lake levels will be sufficient to enable BWC to resume pumping water for the foreseeable future.

We considered BWC’s inability to pump water from Lake Mead to be a triggering event under the ASC 360 Property, Plant, and Equipment , which caused us to evaluate the water system fixed assets for impairment.

Because BWC was unable to deliver water under its current contracts and therefore unable to generate revenue, we determined the water system’s assets were fully impaired except to the extent certain equipment had alternative use outside of BWC’s operations, in which case those assets were written down to estimated salvage value.

The $16.4 million impairment charge primarily recognized in the second quarter of 2022 represents the write down of the book value to the estimated salvage value of the assets.

Without the ability to pump and deliver water to its customers, BWC’s operating expenses exceeded its revenues, and on September 10, 2022 BWC and its subsidiaries voluntarily filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the District of Nevada.

Because BWC has filed for bankruptcy protection, we and BMI can no longer affirmatively assert we control BWC and, as such, in accordance with ASC 810, Consolidation, we deconsolidated BWC as of the date of the bankruptcy filing and recognized a loss of $2.0 million in the third quarter of 2022 on the deconsolidation.

In addition, BMI had an outstanding intercompany accounts receivable balance with BWC on the date of the bankruptcy filing, and we recognized $1.3 million of bad debt expense to fully reserve this balance during the third quarter of 2022.

Operating income comparisons between 2022 and 2021 are affected by the aggregate $19.7 million in charges related to BWC recognized in 2022.

See Notes 2 and 9 to our Consolidated Financial Statements.

Outlook – LandWell is focused on developing the land it manages, primarily to residential builders, for the residential/planned community in Henderson.

At December 31, 2022, substantially all of the land in the residential/planned community had been sold with approximately 90 saleable acres remaining.

While we expect to sell the remaining acres over the next one to three years, due to the current economic conditions, we are unsure of the timing of any sales that may occur.

At December 31, 2022 we have deferred revenue of $123.0 million related to land sales closed in 2022 and prior years.

Because we recognize revenue over time using cost-based inputs, we will continue to recognize revenue on land previously sold over the development period, although we have already received substantially all the cash proceeds related to these sales.

We currently expect to take three to five years to complete our post-closing obligations.

Any delays or curtailments in infrastructure development related to post-closing obligation activities will lower the amount of revenue we recognize on previously closed land sales.

In addition, delays or curtailments in eligible infrastructure development activities will also delay LandWell’s ability to submit completed costs to the City of Henderson for approval of additional tax increment reimbursement note receivables.

Throughout the COVID-19 pandemic, BMI has continued to provide utility and water delivery services to its customers without interruption.

Our Real Estate Management and Development management team remains focused on protecting the health and safety of our employees and contractors including enhanced health and safety protocols.

Under LandWell’s development agreement with the City of Henderson, the issuance of a specified number of housing permits requires LandWell to complete certain large infrastructure projects.

LandWell began construction on several of these community-wide large projects in late 2021 with the construction expected to continue for the next three to five years.

We expect these land development costs in 2023 to be consistent with 2022.

Because these large projects relate to the entirety of the residential/planned community, the costs associated with these large projects are not part of the cost-based inputs used to recognize revenue and therefore this spending will not correlate to revenue recognition.

However, this spending is expected to be eligible for tax increment reimbursement and delays or curtailments in eligible infrastructure development activities will also delay LandWell’s ability to submit completed costs to the City of Henderson for approval of additional tax increment reimbursement note receivables.

As noted above, BWC filed for Chapter 11 bankruptcy protection on September 10, 2022.

BWC is operating under court protection, and a portion of BWC’s water delivery system is still operating with water provided by the regional water authority in order to continue to provide water to its industrial customers for an interim period.

We cannot predict the timing or the outcome of the bankruptcy reorganization, and we may incur additional costs before the bankruptcy proceedings are concluded.

General Corporate Items, Interest Expense, Income Taxes, Noncontrolling Interest and Related Party Transactions

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Insurance recoveries include amounts NL received from these insurance carriers.

NL received insurance recoveries of $5.1 million in 2019 primarily related to a settlement NL reached with one of its insurance carriers in which they agreed to reimburse NL for a portion of NL’s past and future litigation defense costs.

In addition, Kronos recognized $1.5 million of insurance recoveries in 2020 related to a property damage claim.

See Note 13 to our Consolidated Financial Statements.

The agreements with certain of NL’s insurance carriers also include reimbursement for a portion of its future litigation defense costs.

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See Note 18 to our Consolidated Financial Statements.

Gain on Land Sales – In the third quarter of 2019 we sold one parcel of land not used in our operating activities.

In 2021, we sold two parcels of land (including one parcel in the second quarter and one parcel in the third quarter) not used in our operating activities.

See Note 13 to our Consolidated Financial Statements.

Gain on Sale of Business – In the fourth quarter of 2019, NL sold its insurance and risk management business for proceeds of $3.25 million and recognized a pre-tax gain of $3.0 million on the sale.

See Note 13 to our Consolidated Financial Statements.

Litigation Settlement Expense – We recognized a pre-tax litigation settlement expense of $19.3 million in the second quarter of 2019 related to NL’s lead pigment litigation in California.

Gain on Land Sales – In 2021, we sold two parcels of land (including one parcel in the second quarter and one parcel in the third quarter) not used in our operating activities.

See Note 13 to our Consolidated Financial Statements.

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As discussed in Note 16 to our Consolidated Financial Statements, we account for our proportional interest in these shares of our common stock as treasury stock, at Kronos’ and NL’s historical cost basis.

The remaining portion of these shares of our common stock, which are attributable to the noncontrolling interest of Kronos and NL, are reflected in our consolidated balance sheet at fair value.

The remaining portion of these shares of our common stock, which are attributable to the noncontrolling interest of Kronos and NL, are reflected in our Consolidated Balance Sheets at fair value.

Any unrealized gains or losses on the shares of our common stock attributable to the noncontrolling interest of Kronos and NL are recognized in the determination of each of Kronos and NL’s respective net income or loss.

Under the principles of consolidation, we eliminate any gains or losses associated with our common stock to the extent of our proportional ownership interest in each subsidiary.

The $3.3 million gain in 2021, the $1.7 million loss in 2020 and the $.2 million loss in 2019 recognized in our Consolidated Financial Statements represent the unrealized gain (loss) in respect of these shares during such periods attributable to the noncontrolling interest of Kronos and NL.

Other General Corporate Items – Corporate expenses of $34.7 million in 2021 were comparable to $34.3 million in 2020.

The $1.6 million loss in 2022, the $3.3 million gain in 2021 and the $1.7 million loss in 2020 recognized in our Consolidated Financial Statements represent the unrealized gain (loss) in respect of these shares during such periods attributable to the noncontrolling interest of Kronos and NL.

Other General Corporate Items – Corporate expenses were 5% higher at $36.6 million in 2022 compared to $34.7 million in 2021 due primarily to higher litigation and related costs in 2022.

Included in corporate expense are:

● litigation and related costs at NL of $1.9 million in each of 2021 and 2020;

● litigation and related costs at NL of $4.2 million in 2022 and $1.9 million in 2021;

● environmental remediation and related costs of $1.7 million in 2022 compared to $1.6 million in 2021.

Corporate expenses were 9% lower at $34.3 million in 2020 compared to $37.5 million in 2019 primarily due to lower litigation and related costs partially offset by higher environmental remediation and related costs.

Corporate expenses of $34.7 million in 2021 were comparable to $34.3 million in 2020.

Included in corporate expense are:

● litigation and related costs at NL of $1.9 million in 2020 compared to $4.0 million in 2019;

● litigation and related costs at NL of $1.9 million in each of 2021 and 2020;

● environmental remediation and related costs of $1.6 million in 2021 compared to $.7 million in 2020.

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See Note 18 to our Consolidated Financial Statements.

Interest Expense – Interest expense decreased to $32.5 million in 2021 from $36.2 million in 2020 primarily due to lower average debt levels in 2021.

Interest expense decreased to $36.2 million in 2020 from $40.8 million in 2019 primarily due to lower average debt levels and lower average interest rates on variable-rate indebtedness in 2020.

We expect interest expense will be lower in 2022 as compared to 2021 primarily due to lower average balances of outstanding borrowings.

See Note 19 to our Consolidated Financial Statements.

Provision for Income Taxes – We recognized income tax expense of $60.1 million in 2021 compared to income tax expense of $15.9 million in 2020.

Interest Expense – Interest expense decreased to $27.9 million in 2022 from $32.5 million in 2021 primarily due to lower average debt levels and the effects of changes in currency exchange rates somewhat offset by higher interest rates on variable-rate indebtedness in 2022.

Interest expense decreased to $32.5 million in 2021 from $36.2 million in 2020 primarily due to lower average debt levels in 2021.

We expect interest expense will be higher in 2023 as compared to 2022 primarily as lower average debt balances will be more than offset by higher average interest rates on variable–rate indebtedness.

Provision for Income Taxes – We recognized income tax expense of $33.8 million in 2022 compared to $60.1 million in 2021.

The decrease is primarily due to lower earnings in 2022 and the jurisdictional mix of such earnings.

We recognized income tax expense of $60.1 million in 2021 compared to $15.9 million in 2020.

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

We recognized income tax expense of $15.9 million in 2020 compared to income tax expense of $26.5 million in 2019.

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

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

In addition, we recognized a non-cash deferred income tax expense of $4.7 million related to the revaluation of our net deferred income tax asset in Germany resulting from a decrease in the German trade tax rate.

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

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However, in 2022 our consolidated effective income tax rate is lower than the U.S.

federal statutory rate of 21% due to the effect of a tax benefit relating to the release of a portion of our valuation allowance associated with the 2022 utilization of a portion of our business interest expense carryforwards.

Also, in 2020 our consolidated effective income tax rate is lower than the U.S.

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

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See Note 3 to our Consolidated Financial Statements.

Noncontrolling Interest in Net Income of Subsidiaries – Noncontrolling interest in operations of subsidiaries increased from 2020 to 2021 primarily due to higher operating income from all of our segments and increased from 2019 to 2020 primarily due to higher operating income at BMI and LandWell.

Noncontrolling Interest in Net Income of Subsidiaries – Noncontrolling interest in operations of subsidiaries decreased from 2021 to 2022 primarily due to lower operating income at BMI and LandWell.

Noncontrolling interest in operations of subsidiaries increased from 2020 to 2021 primarily due to higher operating income from all of our segments.

Related Party Transactions – We are a party to certain transactions with related parties.

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We perform a goodwill impairment test annually in the third quarter of each year.

Goodwill is also evaluated for impairment at other times whenever an event occurs or circumstances change that would more likely than not reduce the

fair value of a reporting unit below its carrying value.

Goodwill is also evaluated for impairment at other times whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.

An entity may first assess qualitative factors to determine whether it is necessary to complete the quantitative impairment test using a more-likely-than-not criteria.

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We do not assess our property and equipment for impairment unless certain impairment indicators are present.

We did not evaluate any long-lived assets for impairment during 2021 because no such impairment indicators were present.

Due to the Western drought, water levels in Lake Mead have been declining for much of the last twenty years.

As a result of water release curtailments upstream of Lake Mead which began late in the second quarter, Lake Mead water levels have dropped precipitously to historically low levels.

On June 30, 2022 BWC was no longer able to pump water without the risk of damaging the system and consequently ceased operations at its water intake facility to best preserve the system.

Current estimates of Lake Mead water levels do not indicate lake levels will be sufficient to enable BWC to resume pumping water for the foreseeable future.

The $16.4 million impairment charge primarily recognized in the second quarter of 2022 represents the write down of the book value to the estimated salvage value of the assets.

See Note 2 to our Consolidated Financial Statements.

Other than the $16.4 million fixed asset impairment discussed above, we did not evaluate any other long-lived assets for impairment during 2022 because no such impairment indicators were present.

Revenue recognized over time using cost-based inputs – Certain real estate land sales by our Real Estate Management and Development Segment (generally land sales associated with our residential/planned community) require us to complete property development and improvements after title passes to the buyer and we have received all or a substantial portion of the selling price.

Generally, all of the land sales associated with the residential/planned community have been recognized over time using cost-based inputs of accounting in accordance with ASC 606.

Under such method,

revenues and profits are recognized in the same proportion of our progress towards completion of our contractual obligations, with our progress measured by costs incurred as a percentage of total costs estimated to be incurred.

Under such method, revenues and profits are recognized in the same proportion of our progress towards completion of our contractual obligations, with our progress measured by costs incurred as a percentage of total costs estimated to be incurred.

Such costs incurred and total estimated costs include amounts specifically identifiable with the parcels sold as well as certain development costs for the entire residential/planned community which are allocated to the parcels sold under applicable GAAP.

Estimates of total costs expected to be incurred require significant management judgment, and the amount of revenue and profits that have been recognized to date are subject to revisions throughout the development period.

The impact on the amount of revenue recognized resulting from any future change in the estimate of total costs estimated to be incurred would be accounted for prospectively in accordance with GAAP.

impact on the amount of revenue recognized resulting from any future change in the estimate of total costs estimated to be incurred would be accounted for prospectively in accordance with GAAP.

Defined benefit pension plans – We maintain various defined benefit pension plans in the U.S., Europe and Canada.

See Note 11 to our Consolidated Financial Statements.

We recognized consolidated defined benefit pension plan expense of $29.6 million in 2019, $33.8 million in 2020 and $32.1 million on 2021.

We recognized consolidated defined benefit pension plan expense of $33.8 million in 2020, $32.1 million in 2021 and $25.4 million in 2022.

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

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These assumptions are principally the discount rate, the assumed long-term rate of return on plan assets, the fair value of plan assets and the assumed increase in future compensation levels.

We recognize the funded status of our defined benefit pension plans as either an asset (for overfunded plans) or a liability (for underfunded plans) in our Consolidated Balance Sheet.

We recognize the funded status of our defined benefit pension plans as either an asset (for overfunded plans) or a liability (for underfunded plans) in our Consolidated Balance Sheets.

The discount rates we use for determining defined benefit pension expense and the related pension obligations are based on current interest rates earned on long-term bonds that receive one of the two highest ratings given by recognized rating agencies in the applicable country where the defined benefit pension benefits are being paid.

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

At December 31, 2021, approximately 70%, 13%, 7% and 6% of the projected benefit obligations related to our plans in Germany, Canada, the U.S.

and Norway, respectively.

At December 31, 2022, approximately 64%, 15%, 8% and 8% of the projected benefit obligations related to our plans in Germany, Canada, Norway and the U.S., respectively.

We use several different discount rate assumptions in determining our consolidated defined benefit pension plan obligation and expense.

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Unlike the discount rate, which is adjusted each year based on changes in current long-term interest rates, the assumed long-term rate of return on plan assets will not necessarily change based upon the actual short-term performance of the plan assets in any given year.

Defined benefit pension expense each year is based upon the

assumed long-term rate of return on plan assets for each plan, the actual fair value of the plan assets as of the beginning of the year and an estimate of the amount of contributions to and distributions from the plan during the year.

Defined benefit pension expense each year is based upon the assumed long-term rate of return on plan assets for each plan, the actual fair value of the plan assets as of the beginning of the year and an estimate of the amount of contributions to and distributions from the plan during the year.

Differences between the expected return on plan assets for a given year and the actual return are deferred and amortized over future periods based either upon the expected average remaining service life of the active plan participants (for plans for which benefits are still being earned by active employees) or the average remaining life expectancy of the inactive participants (for plans for which benefits are not still being earned by active employees).

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However, if we had lowered the assumed discount rate by 25 basis points for all plans as of December 31, 2022, our aggregate projected benefit obligations would have increased by approximately $19 million at that date and our defined benefit pension expense would be expected to increase by approximately $.1 million during 2023.

Similarly, if we lowered the assumed long-term rate of return on plan assets by 25 basis points for all of our plans, our defined benefit pension expense would be expected to increase by approximately $1 million during 2022.

Similarly, if we

lowered the assumed long-term rate of return on plan assets by 25 basis points for all of our plans, our defined benefit pension expense would be expected to increase by approximately $1 million during 2023.

Income taxes – We operate globally through our Chemicals Segment and the calculation of our provision for income taxes and our deferred tax assets and liabilities involves the interpretation and application of complex tax laws and regulations in a multitude of jurisdictions across our Chemicals Segment’s global operations.

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If these events occur in 2023, our corporate expense could be higher than we currently estimate.

In addition, we adjust our accruals for environmental remediation and related costs (and potential range of our liabilities) as further information becomes available to us or as circumstances change which involves our judgment regarding current facts and circumstances for each site and is subject to various assumptions

and estimates.

Such further information or changed circumstances could result in an increase in our accrued environmental remediation and related costs.

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subsidiaries.

For example, during 2021, relative changes in currency exchange rates resulted in a $10.6 million decrease in the reported amount of our cash, cash equivalents and restricted cash compared to a $13.8 million increase in 2020 and a $2.3 million decrease in 2019.

For example, during 2022, relative changes in currency exchange rates resulted in a $5.1 million decrease in the reported amount of our cash, cash equivalents and restricted cash compared to a $10.6 million decrease in 2021 and a $13.8 million increase in 2020.

Cash flows from operating activities decreased to $34.9 million in 2022 from $459.7 million in 2021.

This $424.8 million decrease in cash provided by operations was primarily due to the net effect of the following items:

● consolidated operating income of $239.4 million in 2022, a decrease of $79.2 million compared to operating income of $318.6 million in 2021;

● changes in receivables, inventories, payables and accrued liabilities in 2022 used $92.7 million in net cash compared to $180.4 million in net cash provided in 2021, an increase in the amount of cash used of $273.1 million compared to 2021, primarily due to the relative changes in our inventories, receivables, prepaids, land held for development, payables and accruals;

● lower net cash paid for income taxes in 2022 of $22.2 million primarily due to decreased earnings;

● higher net contributions to our TiO 2 manufacturing joint venture in 2022 of $14.3 million.

Cash flows from operating activities increased to $459.7 million in 2021 from $152.2 million in 2020.

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● higher net distributions from our TiO 2 manufacturing joint venture in 2021 of $16.6 million.

Cash flows from operating activities decreased to $152.2 million in 2020 from $177.2 million in 2019.

This $25.0 million decrease in cash provided by operations was primarily due to the net effect of the following items:

● consolidated operating income of $186.1 million in 2020, a decline of $6.6 million compared to operating income of $192.7 million in 2019;

● changes in receivables, inventories, payables and accrued liabilities in 2020 used $33.5 million in net cash compared to $7.1 million in net cash used in 2019, an increase in the amount of cash used of $26.4 million compared to 2019, primarily due to the relative changes in our inventories, receivables, prepaids, land held for development, payables and accruals;

● lower net cash paid for income taxes in 2020 of $9.3 million due to the timing of tax payments.

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

● Kronos’ average days sales outstanding (“DSO”) decreased from December 31, 2021 to December 31, 2022, primarily due to the relative changes in the timing of collections.

● Kronos’ average days sales in inventory (“DSI”) decreased from December 31, 2020 to December 31, 2021 primarily due to lower inventory volumes attributable to sales volumes exceeding production volumes in 2021 compared to 2020 and due to supply disruptions and other transportation delays impacting the timing of raw material shipments (except for the fourth quarter of 2021 where production volumes exceeded sales volumes).

● CompX’s average DSO increased from December 31, 2020 to December 31, 2021 primarily as a result of the timing of sales and collections in the last month of 2021 as compared to 2020.

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

● Kronos’ average days sales in inventory (“DSI”) increased from December 31, 2021 to December 31, 2022 primarily due to higher inventory volumes attributable to production volumes exceeding sales volumes in 2022 compared to 2021 and due to supply disruptions and other transportation delays impacting the timing of raw material shipments at the end of 2021.

● CompX’s average DSO was generally consistent from December 31, 2021 to December 31, 2022 and is primarily impacted by the timing of sales and collections in the last month of the year.

● CompX’s average DSI increased from December 31, 2021 to December 31, 2022 due to increased inventories of certain components and raw materials that had longer lead times or for which CompX has experienced availability issues and from the timing of sales relative to the end of the fourth quarter, primarily at CompX’s security products reporting unit.

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

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(In millions)

Cash provided by operating activities:

Cash provided by (used in) operating activities:

Valhi exclusive of subsidiaries

NL exclusive of subsidiaries

Tremont exclusive of subsidiaries

Eliminations and other

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We disclose capital expenditures by our business segments in Note 2 to our Consolidated Financial Statements.

● we had net purchases of $70.7 million of marketable securities;

● $8.6 million of BWC’s cash, cash equivalents and restricted cash was removed as part of its deconsolidation in the third quarter (see Note 2 to our Consolidated Financial Statements).

During 2021 we:

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● had net proceeds of $.9 million of marketable securities.

During 2019 we:

● had proceeds from the sale of land not used in our operations of $4.6 million in the third quarter;

● had cash proceeds from the sale of NL’s insurance and risk management business of $2.9 million in the fourth quarter;

● received $2.6 million from an insurance settlement related to a property damage claim in the fourth quarter;

● had net purchases of $.6 million of marketable securities.

Financing Activities –

● we borrowed $.1 million and repaid $51.6 million on Valhi’s credit facility with Contran;

● we repaid $8.4 million on BWC’s loan from Western Alliance Bank (see Note 9 to our Consolidated Financial Statements);

● Kronos acquired 217,778 shares of its common stock for an aggregate purchase price of $2.3 million;

● CompX acquired 78,900 shares of its Class A common stock for an aggregate purchase price of $ 1.7 million.

● we repaid $97.8 million on Valhi’s credit facility with Contran and repaid $1.5 million under Tremont’s deferred payment obligation;

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● we repaid $11.6 million under Tremont’s promissory note payable and deferred payment obligation.

● we repaid a net $1.3 million on Valhi’s credit facility with Contran;

● Kronos acquired 264,992 shares of its common stock in market transactions for an aggregate purchase price of $3.1 million;

● we repaid $7.4 million under Tremont’s promissory note payable.

We paid aggregate cash dividends on our common stock of $27.1 million in 2019, $13.6 million in 2020 and $9.0 million in 2021.

We paid aggregate cash dividends on our common stock of $13.6 million in 2020 and $9.0 million in each of 2021 and 2022.

Distributions to noncontrolling interest in 2020, 2021 and 2022 are primarily comprised of:

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● Valhi’s $121.4 million outstanding on its $175 million amended credit facility with Contran which is due no earlier than December 31, 2024;

● €400 million aggregate outstanding on Kronos’ 3.75% Senior Secured Notes ($448.8 million carrying amount, net of unamortized debt issuance costs) due in September 2025;

● $15.9 million on BMI’s bank loan ($15.4 million carrying amount, net of debt issuance costs) due June 2032;

● €400 million aggregate outstanding on Kronos’ 3.75% Senior Secured Notes due in September 2025 (Senior Secured Notes), which had a $424.1 million carrying amount, net of unamortized debt issuance costs;

● $12.9 million on LandWell’s bank loan due April 2036;

● approximately $2.4 million of other indebtedness , primarily capital lease obligations.

● approximately $1.1 million of other indebtedness.

Certain of our credit facilities require the respective borrowers to maintain a number of covenants and restrictions which, among other things, restrict our ability to incur additional debt, incur liens, pay dividends or merge or consolidate with, or sell or transfer substantially all of our assets to, another entity, and contain other provisions and restrictive covenants customary in lending transactions of this type.

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In addition, certain credit agreements could result in the acceleration of all or a portion of the indebtedness following a sale of assets outside the ordinary course of business.

On April 20, 2021, Kronos entered a new $225 million global revolving credit facility (“Global Revolver”) which matures in April 2026.

Kronos had no outstanding borrowings on its $225 million global revolving credit facility (“Global Revolver”) at December 31, 2022 and approximately $211 million was available for borrowings thereunder.

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

The terms of all of our debt instruments (including the Global Revolver for which we have no outstanding borrowings at December 31, 2021) are discussed in Note 9 to our Consolidated Financial Statements.

The terms of all of our debt instruments are discussed in Note 9 to our Consolidated Financial Statements.

We are in compliance with all of our debt covenants at December 31, 2022.

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We periodically evaluate acquisitions of interests in or combinations with companies (including our affiliates) that may or may not be engaged in businesses related to our current businesses.

We intend to consider such acquisition

activities in the future and, in connection with this activity, may consider issuing additional equity securities and increasing indebtedness.

We intend to consider such acquisition activities in the future and, in connection with this activity, may consider issuing additional equity securities and increasing indebtedness.

From time to time, we also evaluate the restructuring of ownership interests among our respective subsidiaries and related companies.

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● $3 million by our Component Products Segment.

● $1 million by our Real Estate Management and Development Segment.

In addition, LandWell expects to spend approximately $63 million on land development costs during 2023, including $53 million contractually committed at December 31, 2022.

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Capital spending for 2023 is expected to be funded through cash generated from operations or borrowing under our existing credit facilities.

Planned capital expenditures in 2022 at Kronos and CompX will primarily be to maintain and improve the cost-effectiveness of our facilities and, as it relates to CompX, to increase capacity and address capability needs.

In addition, Kronos’ capital expenditures in the area of environmental compliance, protection and improvement include expenditures which are primarily focused on increased operating efficiency but also result in improved environmental protection, such as lower emissions from our manufacturing plants.

Planned capital expenditures in 2023 at Kronos and CompX will primarily be to maintain and improve our existing facilities and, as it relates to CompX, to address capability needs.

In addition, Kronos’ capital expenditures in the area of environmental compliance, protection and improvement include expenditures which are

primarily focused on increased operating efficiency but also result in improved environmental protection, such as lower emissions from our manufacturing plants.

Repurchases of our Common Stock and Common Stock of our Subsidiaries –

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In February 2023 the Kronos board of directors approved a regular quarterly dividend of $.19 per share.

If Kronos were to pay its $.19 per share dividend in each quarter of 2022 based on the 58.0 million shares we held of Kronos common stock at December 31, 2021, we would receive aggregate annual regular dividends from Kronos of $44.1 million.

NL paid a regular quarterly dividend of $.06 per share in 2021 for which we received $9.7 million.

In March 2022 the NL board of directors approved a quarterly dividend of $.07 per share.

If NL were to pay its $.07 per share dividend in each quarter of 2022 based on the 40.4 million shares we held of NL common stock at December 31, 2021, we would receive annual dividends from NL of $11.3 million.

If Kronos were to pay its $.19 per share dividend in each quarter of 2023 based on the 58.0 million shares we held of Kronos common stock at December 31, 2022, during 2023 we would receive aggregate regular dividends from Kronos of $44.1 million.

NL paid a quarterly dividend of $.07 per share in 2022 for which we received $11.3 million.

NL declared a special dividend of $.35 per share in August 2022 for which we received $14.1 million.

In February 2023 the NL board of directors approved a quarterly dividend of $.07 per share.

If NL were to pay its $.07 per share dividend in each quarter of 2023 based on the 40.4 million shares we held of NL common stock at December 31, 2022, during 2023 we would receive aggregate quarterly dividends from NL of $11.3 million.

BMI and LandWell pay cash dividends from time to time, but the timing and amount of such dividends are uncertain.

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If we were required to liquidate assets to generate funds to satisfy our liabilities, we may be required to sell our subsidiaries’ securities for less than what we believe is the long-term value of such assets.

Prior to 2019, we entered into a $50 million revolving credit facility with a subsidiary of NL secured with approximately 35.2 million shares of the common stock of Kronos Worldwide, Inc.

We have a $50 million revolving credit facility with a subsidiary of NL secured with approximately 35.2 million shares of the common stock of Kronos Worldwide, Inc.

held by NL’s subsidiary as collateral.

Outstanding borrowings under the credit facility bear interest at the prime rate plus 1.875% per annum, payable quarterly, with all amounts due on December 31, 2023.

Outstanding borrowings under the credit facility bear interest at the prime rate plus 1.875% per annum, payable quarterly, with all amounts due on the maturity date.

In November 2022, Valhi and the subsidiary of NL entered into a first amendment to the revolving credit facility to extend the latest maturity date (and consequently the latest borrowing date) from December 31, 2023 to December 31, 2030.

The related collateral arrangements remained unchanged by this amendment.

The maximum principal amount which may be outstanding from time-to-time under the credit facility is limited to 50% of the amount of the most recent closing price of the Kronos stock.

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There is $.5 million outstanding under this facility at December 31, 2022.

We eliminate any such intercompany borrowings in our Consolidated Financial Statements.

We have an unsecured revolving demand promissory note with Kronos which, as amended, provides for borrowings from Kronos of up to $25 million.

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The facility, as amended, is due on demand, but in any event no earlier than December 31, 2024.

We had gross borrowings of $16.6 million and gross repayments of $16.6 million with Kronos during 2019 and there was no outstanding balance at December 31, 2019.

There was no outstanding balance at December 31, 2022.

We had no borrowings with Kronos in 2020, 2021 and 2022 and we could borrow the full $25.0 million under our current intercompany facility with Kronos at December 31, 2022.

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● certain other litigation to which we are a party.

In addition to those legal proceedings described in Note 18 to our Consolidated Financial Statements, various legislation and administrative regulations have, from time to time, been proposed that seek to (i) impose various obligations on present and former manufacturers of lead pigment and lead-based paint (including NL) with respect to asserted health concerns associated with the use of such products and (ii) effectively overturn court decisions in which NL and other pigment manufacturers have been successful.

on present and former manufacturers of lead pigment and lead-based paint (including NL) with respect to asserted health concerns associated with the use of such products and (ii) effectively overturn court decisions in which NL and other pigment manufacturers have been successful.

Examples of such proposed legislation include bills which would permit civil liability for damages on the basis of market share, rather than requiring plaintiffs to prove that the defendant’s product caused the alleged damage, and bills which would revive actions barred by the statute of limitations.

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Our obligations related to the long-term supply contracts for the purchase of TiO 2 feedstock are more fully described in Note 18 to our Consolidated Financial Statements and above in “Business – Chemicals Segment – Kronos Worldwide, Inc.

– Raw Materials.” CompX has purchase obligations of $28.7 million ($28.1 million payable in 2022 and $.6 million payable in 2023) which consist of open purchase orders and contractual obligations, primarily commitments to purchase raw materials at December 31, 2021.

– Raw Materials.” CompX has purchase obligations of $17.7 million ($16.3 million payable in 2023 and $1.4 million payable in 2024) which consist of open purchase orders and contractual obligations, primarily commitments to purchase raw materials and for capital projects in process at December 31, 2022.

The timing and amount for purchase obligations are based on the contractual payment amount and the contractual payment date for those commitments.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis