# NLI Holdings, Inc.: Form 10-Q for the period ended Sep 30, 2023

- Company: [NLI Holdings, Inc.](/companies/nl.md) (CIK 72162)
- Form: 10-Q
- Filed: 2023-11-02
- Accepted by EDGAR: Nov 2, 2023, 16:20 ET
- Period: 2023-09-30
- Accession: 0001558370-23-017430
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/72162/000155837023017430/nl-20230930x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/72162/000155837023017430/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $40.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $118.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $27.7m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2023-01-01 to 2023-09-30 | $82.5m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-07-01 to 2023-09-30 | $12.6m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-01-01 to 2023-09-30 | $35.6m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2023-07-01 to 2023-09-30 | $6.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2023-01-01 to 2023-09-30 | $17.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | $3.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | $9.3m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $202.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $600.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | −$965.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | −$6.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | −$69.0k | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | −$9.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.00 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $0.00 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.00 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | −$0.20 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 48,833,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 48,824,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $15.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $564.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2023-01-01 to 2023-09-30 | $10.3m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2023-09-30 | $65.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $206.1m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $570.5m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $30.0m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2023-09-30 | $364.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 71,432 characters.

### RESULTS OF OPERATIONS:

### Business overview

We are primarily a holding company. We operate in the component products industry through our majority-owned subsidiary, CompX International Inc. We also own a non-controlling interest in Kronos Worldwide, Inc. Both CompX (NYSE American: CIX ) and Kronos (NYSE: KRO) file periodic reports with the Securities and Exchange Commission (SEC).

CompX is a leading manufacturer of engineered components utilized in a variety of applications and industries. Through its Security Products operations, CompX manufactures mechanical and electronic cabinet locks and other locking mechanisms used in postal, recreational transportation, office and institutional furniture, cabinetry, tool storage and healthcare applications. CompX also manufactures wake enhancement systems, stainless steel exhaust systems, gauges, throttle controls, trim tabs and related hardware and accessories for the recreational marine and other industries through its Marine Components operations.

We account for our approximate 31% non-controlling interest in Kronos by the equity method. Kronos is a leading global producer and marketer of value-added titanium dioxide pigments (TiO2). TiO2 is used for a variety of manufacturing applications including paints, plastics, paper and other industrial and specialty products.

### Forward-looking information

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Statements in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking in nature and represent management’s beliefs and assumptions based on currently available information. Statements in this report including, but not limited to, statements found in Item 2 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are forward-looking statements that represent our management’s beliefs and assumptions based on currently available information. In some cases you can identify forward-looking statements by the use of words such as “believes,” “intends,” “may,” “should,” “could,” “anticipates,” “expects” or comparable terminology, or by discussions of strategies or trends. Although we believe the expectations reflected in forward-looking statements are reasonable, we do not know if these expectations will be correct. Such statements by their nature involve substantial risks and uncertainties that could significantly impact expected results. Actual future results could differ materially from those predicted. The factors that could cause our actual future results to differ materially from those described herein are the risks and uncertainties discussed in this Quarterly Report and those described from time to time in our other filings with the SEC including, but are not limited to, the following:

- Future supply and demand for our products
- The extent of the dependence of certain of our businesses on certain market sectors
- The cyclicality of our businesses (such as Kronos’ TiO2 operations)
- Customer and producer inventory levels
- Unexpected or earlier-than-expected industry capacity expansion (such as the TiO2 industry)
- Changes in raw material and other operating costs (such as energy, ore, zinc, aluminum, steel and brass costs) and our ability to pass those costs on to our customers or offset them with reductions in other operating costs
- Changes in the availability of raw materials (such as ore)
- General global economic and political conditions that harm the worldwide economy, disrupt our supply chain, increase material and energy costs or reduce demand or perceived demand for Kronos’ TiO2 and our products or impair our ability to operate our facilities (including changes in the level of gross domestic product in various regions of the world, natural disasters, terrorist acts, global conflicts and public health crises such as COVID-19)
- Operating interruptions (including, but not limited to, labor disputes, leaks, natural disasters, fires, explosions, unscheduled or unplanned downtime, transportation interruptions, cyber-attacks, certain regional and world events or economic conditions and public health crises such as COVID-19)
- Competitive products and substitute products
- Price and product competition from low-cost manufacturing sources (such as China)
- Customer and competitor strategies
- Potential consolidation of Kronos’ competitors
- Potential consolidation of Kronos’ customers
- The impact of pricing and production decisions
- Competitive technology positions
- Our ability to protect or defend intellectual property rights
- Potential difficulties in integrating future acquisitions
- Potential difficulties in upgrading or implementing accounting and manufacturing software systems
- The introduction of trade barriers or trade disputes
- Fluctuations in currency exchange rates (such as changes in the exchange rate between the U.S. dollar and each of the euro, the Norwegian krone and the Canadian dollar and between the euro and the Norwegian krone), or possible disruptions to our business resulting from uncertainties associated with the euro or other currencies
- Decisions to sell operating assets other than in the ordinary course of business
- Kronos’ ability to renew or refinance credit facilities
- Increases in interest rates
- Our ability to maintain sufficient liquidity
- The timing and amounts of insurance recoveries
- The ability of our subsidiaries or affiliates to pay us dividends
- Uncertainties associated with CompX’s development of new products and product features
- The ultimate outcome of income tax audits, tax settlement initiatives or other tax matters, including future tax reform
- Our ability to utilize income tax attributes or changes in income tax rates related to such attributes, the benefits of which may or may not have been recognized under the more-likely-than-not recognition criteria
- Environmental matters (such as those requiring compliance with emission and discharge standards for existing and new facilities or new developments regarding environmental remediation or decommissioning obligations at sites related to our former operations)
- Government laws and regulations and possible changes therein (such as changes in government regulations which might impose various obligations on former manufacturers of lead pigment and lead-based paint, including us, with respect to asserted health concerns associated with the use of such products), including new environmental health and safety or other regulations (such as those seeking to limit or classify TiO2 or its use)
- The ultimate resolution of pending litigation (such as our lead pigment and environmental matters)
- Possible future litigation.

Should one or more of these risks materialize (or if the consequences of such a development worsen), or should the underlying assumptions prove incorrect, actual results could differ materially from those currently forecasted or expected. We disclaim any intention or obligation to update or revise any forward-looking statement whether as a result of changes in information, future events or otherwise.

### Results of operations

### Net income (loss) overview

### Quarter ended September 30, 2023 compared to the quarter ended September 30, 2022

Our net loss attributable to NL stockholders was $.1 million, or nil per share, in the third quarter of 2023 compared to a net loss attributable to NL stockholders of $8.9 million, or $.18 per share, in the third quarter of 2022. As more fully described below, the decrease in our net loss attributable to NL stockholders from 2022 to 2023 is primarily due to the net effects of:

- an unrealized gain in the relative value of marketable equity securities of $.4 million in 2023 compared to an unrealized loss of $24.2 million in 2022;
- equity in losses of Kronos of $6.2 million in 2023 compared to equity in earnings of $6.4 million in 2022;
- higher income from operations attributable to CompX of $6.6 million in 2023 compared to $6.0 million in 2022; and
- higher interest and dividend income of $2.4 million in 2023 compared to $1.1 million in 2022.

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

### Nine months ended September 30, 2023 compared to nine months ended September 30, 2022

Our net loss attributable to NL stockholders was $9.9 million, or $.20 per share, in the first nine months of 2023 compared to net income attributable to NL stockholders of $39.9 million, or $.82 per share, in the first nine months of 2022. As more fully described below, the decrease in our earnings attributable to NL stockholders from 2022 to 2023 is primarily due to:

- equity in losses of Kronos of $13.4 million in 2023 compared to equity in earnings of $37.9 million in 2022;
- an unrealized loss in the relative value of marketable equity securities of $10.5 million in 2023 compared to an unrealized loss of $4.3 million in 2022;
- a non-cash loss on the termination of our U.K. pension plan of $4.9 million in 2023;
- higher interest and dividend income of $6.5 million in 2023 compared to $2.0 million in 2022; and
- lower income from operations attributable to CompX of $18.0 million in 2023 compared to $20.0 million in 2022.

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

- a loss of $.08 per share, net of tax, due to the termination of our U.K. pension plan, and
- income of $.01 per share, net of tax, due to Kronos’ recognition of a pre-tax insurance settlement gain related to a business interruption insurance claim arising from Hurricane Laura in 2020.

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

### Income from operations

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

*(In millions)*

*(In millions)*

| ​ ​ ​ ​ | ​ ​ ​ | ​ ​ Three months ended September 30, 2022 | ​ | ​ ​ 2023 | ​ ​% ​ | ​ ​ ​ Change ​ ​ | ​ ​ ​ | ​ ​ Nine months ended September 30,% 2022 | ​ | ​ ​ 2023 | ​ ​ ​ ​ Change ​ ​ ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: | --- | ---: | ---: |
| CompX | ​ | $6.0 | ​ | **$6.6** | ​ | 11% | ​ | $20.0 | **​** | **$18.0** | (10)% |
| Corporate expense | ​ | ​ (2.8) | ​ | **​** **(2.9)** | ​ | 6 ​ | ​ | (8.7) | **​** | **(8.7)** | — |
| Income from operations | ​ | $3.2 | ​ | **$3.7** | ​ | 14 ​ | ​ | $11.3 | **​** | **$9.3** | (18) ​ |

CompX is our component products business and corporate expense relates to NL. Each of these items is further discussed below.

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

*(In millions)*

*(In millions)*

| ​ ​ ​ ​ | ​ ​ ​ | ​ ​ Three months ended September 30,% 2022 | ​ | ​ ​ 2023 | ​ ​ | ​ ​ Change ​ | ​ ​ ​ | ​ ​ Nine months ended September 30,% 2022 | ​ | ​ ​ 2023 | ​ ​ | ​ ​ Change ​ |
| --- | --- | ---: | --- | --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Equity in earnings (losses) of Kronos | ​ | $6.4 | **​** | **$(6.2)** |  | (197)% | **​** | $37.9 | **​** | **$(13.4)** |  | (135)% |
| Marketable equity securities unrealized gain (loss) | ​ | (24.2) | **​** | **.4** |  | (102) ​ | **​** | (4.3) | **​** | **(10.5)** |  | 143 ​ |
| Loss on pension plan termination | ​ | ​ — | **​** | **​** **—** | **​** | — ​ | **​** | ​ — | **​** | **​** **(4.9)** | **​** | n.m. ​ |
| Other components of net periodic pension and OPEB cost | ​ | (.2) | **​** | **(.4)** |  | 71 ​ | **​** | (.7) | **​** | **(1.1)** |  | 64 ​ |
| Interest and dividend income | ​ | 1.1 | **​** | **2.4** |  | 117 ​ | **​** | 2.0 | **​** | **6.5** |  | 230 ​ |
| Interest expense | ​ | (.2) | **​** | **(.2)** |  | (20) ​ | **​** | (.7) | **​** | **(.6)** |  | (19) ​ |

n.m. not meaningful

### CompX International Inc.

In the third quarter of 2023 CompX’s income from operations increased to $6.6 million compared to $6.0 million in the third quarter of 2022 due to higher Security Products sales and improved gross margin percentages at both reporting units, partially offset by lower Marine Components sales. Income from operations for the first nine months of 2023 decreased to $18.0 million compared to $20.0 million in the first nine months of 2022 primarily due to lower Marine Components sales and, to a lesser extent, lower Security Products sales somewhat offset by an improvement in Marine Components gross margin percentage.

*(In millions)*

*(In millions)*

| ​ ​ ​ ​ | ​ ​ | ​ ​ ​ Three months ended September 30,% 2022 ​ | ​ ​ ​ 2023 ​ | ​ ​ ​ Change ​ ​ ​ | ​ ​ ​ | ​ ​ ​ Nine months ended September 30, 2022 | ​ ​ ​ ​% 2023 ​ | ​ ​ ​ Change ​ ​ ​ |
| --- | --- | --- | --- | --- | --- | ---: | ---: | ---: |
| Net sales | ​ | $42.9 ​ | **$40.3** ​ | (6)% | **​** | $126.6 **​** | **$118.1** | (7)% |
| Cost of sales | ​ | ​ 30.9 ​ | ​ **27.7** ​ | (10) | **​** | 88.9 **​** | **82.5** | (7) |
| Gross margin | ​ | ​ 12.0 ​ | ​ **12.6** ​ | 6 | **​** | 37.7 **​** | **35.6** | (5) |
| Operating costs and expenses | ​ | ​ 6.0 ​ | ​ **6.0** ​ | 1 | **​** | 17.7 **​** | **17.6** | — |
| Income from operations | ​ | $6.0 ​ | **$6.6** ​ | 11 | **​** | $20.0 **​** | **$18.0** | (10) |
| ​ | ​ | ​ ​ ​ | ​ **​** ​ | ​ ​ | ​ | ​ ​ ​ | ​ ​ ​ | **​** ​ |
| Percentage of net sales: | ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ | ​ | ​ ​ ​ | ​ ​ ​ | ​ |
| Cost of sales | ​ | ​ 72% | ​ **69%** | ​ ​ | ​ | 70% | **70%** |  |
| Gross margin | ​ | ​ 28 ​ | ​ **31** ​ | ​ | **​** | 30 **​** | **30** |  |
| Operating costs and expenses | ​ | ​ 14 ​ | ​ **15** ​ | ​ | **​** | 14 **​** | **15** ​ |  |
| Income from operations | ​ | ​ 14 ​ | ​ **16** ​ | ​ | **​** | 16 **​** | **15** | ​ ​ |

***Net sales –*** Net sales decreased $2.6 million and $8.5 million in the third quarter and in the first nine months of 2023, respectively, compared to the same periods in 2022 due to lower Marine Components sales primarily to the towboat market, partially offset by higher Security Products sales in the third quarter of 2023. See discussion of reporting units below.

***Cost of sales and gross margin –*** Cost of sales as a percentage of sales decreased 3% in the third quarter and was relatively flat for the first nine months of 2023, compared to the same periods in 2022. As a result, gross margin as a percentage of sales increased in the third quarter of 2023 and remained relatively consistent for the first nine months of 2023. Gross margin percentage increased in the third quarter compared to the same period in 2022 primarily due to higher gross margin percentages at both Security Products and Marine Components during the quarter. See discussion of reporting units below.

***Operating costs and expenses –*** Operating costs and expenses consist primarily of sales and administrative-related personnel costs, sales commissions and advertising expenses directly related to product sales and administrative costs relating to business unit and corporate management activities, as well as any gains and losses on property and equipment. Operating costs and expenses for the third quarter and for the first nine months of 2023 were comparable to the same periods in 2022. Operating costs and expenses as a percentage of net sales increased for the third quarter and the first nine months of 2023 due to decreased coverage of operating costs and expenses as a result of lower sales.

***Income from operations –*** As a percentage of net sales, income from operations for the third quarter and first nine months compared to the same periods of 2022 were primarily impacted by the factors impacting sales, cost of sales, gross margin and operating costs. See discussion of reporting units below.

### Results by reporting unit

The key performance indicator for CompX’s reporting units is the level of their income from operations (see discussion below). Reporting unit results exclude CompX corporate expenses.

*(In millions)*

*(In millions)*

| ​ ​ ​ ​ Security Products: | ​ ​ ​ | ​ ​ ​ Three months ended September 30, 2022 ​ | ​ ​ ​ ​% 2023 ​ ​ | ​ ​ ​ Change ​ ​ ​ | ​ ​ ​ | ​ ​ ​ Nine months ended September 30, 2022 ​ | ​ ​ ​ ​% 2023 ​ ​ | ​ ​ ​ Change ​ ​ ​ ​ ​ |
| --- | --- | ---: | ---: | ---: | --- | ---: | ---: | ---: |
| Net sales | ​ | $28.5 **​** | **$31.4** | 10% |  | $86.9 **​** | **$84.4** | (3)% |
| Cost of sales | ​ | 20.2 **​** | **21.4** | 5 |  | 59.6 **​** | **58.5** | (2) ​ |
| Gross margin | ​ | 8.3 **​** | **10.0** | 22 |  | 27.3 **​** | **25.9** | (5) |
| Operating costs and expenses | ​ | 3.4 **​** | **3.5** | 6 |  | 9.7 **​** | **9.9** | 3 |
| Operating income | ​ | $4.9 **​** | **$6.5** | 32 |  | $17.6 **​** | **$16.0** | (9) |
| ​ | ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ | ​ | ​ ​ ​ | ​ ​ ​ | ​ |
| Gross margin | ​ | 29% | **32%** | ​ | **​** | 31% | **31%** | ​ ​ |
| Operating income margin | ​ | 17 **​** | **21** |  |  | 20 **​** | **19** | ​ |

***Security Products –*** Security Products net sales increased 10% in the third quarter of 2023 compared to the same period in 2022. Relative to prior year, third quarter sales were $3.9 million higher to the government security market, partially offset by $.6 million lower sales to the office furniture market and $.4 million lower sales to the gas station security market. Security Products net sales decreased 3% in the first nine months of 2023 compared to the same period in 2022. Relative to prior year, sales for the first nine months were $1.4 million lower to the office furniture market, $1.1 million lower to the government security market, $.5 million lower to the gas station security market and $.4 million lower to the healthcare market, partially offset by $1.2 million higher sales to distributors.

Gross margin as a percentage of net sales increased for the third quarter of 2023 compared to the same period in 2022 primarily due to increased sales volumes and lower cost of sales percentage as a result of lower raw materials, shipping and overtime costs. Operating income as a percentage of net sales increased in the third quarter of 2023 compared to the same period in 2022 due to the factors impacting gross margin, partially offset by increased operating costs and expenses, including higher employee salaries and benefits of $.2 million. Gross margin as a percentage of net sales for the first nine months of 2023 was relatively flat compared to the same period in 2022 primarily due to effects of lower sales and decreased coverage of fixed costs as a result of lower sales, partially offset by the favorable increase in gross margin during the third quarter as discussed above. Operating income as a percentage of net sales decreased in the first nine months of 2023 compared to the same period in 2022 due to the factors impacting gross margin, as well as increased operating costs and expenses including higher employee salaries and benefits of $.2 million noted above.

*(In millions)*

*(In millions)*

| ​ ​ ​ ​ Marine Components: | ​ ​ ​ | ​ ​ ​ Three months ended September 30, 2022 ​ ​ ​ | ​ ​ ​ ​% 2023 ​ ​ ​ ​ | ​ ​ ​ Change ​ ​ ​ ​ ​ | ​ ​ ​ ​ | ​ ​ ​ Nine months ended September 30, 2022 ​ ​ ​ | ​ ​ ​ ​% 2023 ​ ​ ​ ​ | ​ ​ ​ Change ​ ​ ​ ​ |
| --- | --- | ---: | ---: | ---: | --- | ---: | ---: | ---: |
| Net sales | ​ | $14.4 **​** | **$8.9** ​ | (38)% | **​** | $39.7 **​** | **$33.7** ​ | (15)% |
| Cost of sales | ​ | 10.7 **​** | **6.3** | (40) | **​** | 29.3 **​** | **24.0** | (18) |
| Gross margin | ​ | 3.7 **​** | **2.6** | (30) | **​** | 10.4 **​** | **9.7** | (7) |
| Operating costs and expenses | ​ | 1.0 **​** | **.9** | (7) | **​** | 2.9 **​** | **2.7** | (6) |
| Operating income | ​ | $2.7 **​** | **$1.7** | (38) | **​** | $7.5 **​** | **$7.0** | (7) |
| ​ | ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ | ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ |
| Gross margin | ​ | 26% | **29%** | ​ | ​ | 26% | **29%** | ​ |
| Operating income margin | ​ | 19 **​** | **19** |  | **​** | 19 **​** | **21** |  |

***Marine Components –*** Marine Components net sales decreased 38% in the third quarter of 2023 compared to the same period in 2022. Relative to prior year, third quarter sales were $4.8 million lower to the towboat market and $.5 million lower to the engine builder market, partially offset by $.4 million higher sales to the center console boat market. Marine Components net sales decreased 15% in the first nine months of 2023 compared to the same period in 2022. Relative to prior year, sales for the first nine months were $7.7 million lower to the towboat market and $.8 million lower to the engine builder market, partially offset by $1.4 million higher sales to the industrial market, $.6 million higher sales to marine dealers and distributors and $.4 million higher sales to the center console boat market.

Gross margin as a percentage of sales increased in the third quarter and for the first nine months of 2023 compared to the same period in 2022 primarily due to lower raw material costs (primarily stainless steel and aluminum), lower shipping rates and lower labor costs from reduced employee overtime due to lower sales, partially offset by decreased coverage of fixed costs as a result of lower sales. Higher gross margin in the first quarter of 2023 also favorably impacted the nine-month comparative period. Operating income as a percentage of net sales in the third quarter of 2023 was comparable to the same period in 2022. Operating income as a percentage of net sales increased in the first nine months of 2023 compared to the same period in 2022 due to the factors impacting gross margin as well as reduced operating costs and expenses, including lower employee related administrative expenses of $.2 million.

***Outlook –*** During the third quarter, CompX benefited from increased sales to a customer in the government security market while demand in many of the other markets its Security Products reporting unit serves remained sluggish. At CompX’s Marine Components reporting unit, softening demand experienced in the first half of the year continued in the third quarter, primarily due to continued weakness in the towboat market. Labor markets have largely become favorable in each of the regions CompX operates, and material prices have either stabilized or, in the case of certain commodity raw materials, started to decline slightly. CompX’s supply chains are stable and transportation and logistical delays are minimal, and the long lead times related to certain electronic and specialty components it previously experienced have begun to ease. CompX has adjusted its labor force and production rates at its facilities to reflect the stability of its raw material supplies and near-term demand levels.

CompX expects its Security Products reporting unit will continue to benefit from increased sales to the government security market for the remainder of the year. CompX is in close contact with its key customers and believes reduced order rates will continue through the end of the year in many of the other Security Products markets. Overall, CompX expects the improved gross margins experienced by Security Products during the third quarter will continue in the fourth quarter as raw material costs have stabilized and higher cost inventory has worked its way through cost of sales. CompX expects its Marine Components reporting unit net sales for the remainder of the year will continue to be challenged compared to 2022, particularly in the towboat market, as marine demand faces strong headwinds due to higher interest rates and broader market weakness. Several original equipment boat manufacturers, including certain of CompX’s customers, have publicly announced reductions to production schedules for the remainder of 2023. CompX has been able to somewhat offset the towboat market sales declines with increased sales to industrial customers, but it does not expect increases in sales to the industrial market will fully offset weakened towboat demand. Overall, CompX expects Marine Components gross margin as a percentage of net sales for the full year of 2023 to be slightly favorable to 2022 primarily as a result of lower raw material costs. Despite increased sales to the government security market and higher gross margin percentage at both reporting units, due to broader market reduced demand, CompX expects to report slightly lower consolidated sales and operating income in 2023 compared to 2022. CompX is focused on managing inventory levels to align with anticipated near-term demand. With raw materials and other components more readily available, CompX believes it will be able to achieve additional operating efficiencies during the remainder of the year although the extent and impact of such efficiencies is not yet known.

CompX’s expectations for its operations and the markets it serves are based on a number of factors outside its control. As noted above, CompX has experienced some global and domestic supply chain challenges and any future impacts on its operations will depend on, among other things, any future disruption in its operations or its suppliers’ operations, the impact of economic conditions and geopolitical events on demand for its products or its customers’ and suppliers’ operations, all of which remain uncertain and cannot be predicted.

### General corporate and other items

***Corporate expense –*** Corporate expenses of $2.9 million in the third quarter of 2023 were comparable to the third quarter of 2022. Included in corporate expense in the third quarter of 2022 and 2023 are:

- litigation fees and related costs of $1.2 million in 2023 compared to $.9 million in 2022, and
- environmental remediation and related costs of $.3 million in 2023 compared to a benefit of $.1 million in 2022.

Corporate expenses of $8.7 million in the first nine months of 2023 were comparable to the first nine months of 2022. Included in corporate expense in the first nine months of 2022 and 2023 are:

- litigation fees and related costs of $3.7 million in 2023 compared to $2.7 million in 2022, and
- environmental remediation and related costs of $.4 million in each of 2023 and 2022.

The level of our litigation fees and related costs varies from period to period depending upon, among other things, the number of cases in which we are currently involved, the nature of such cases and the current stage of such cases (e.g. discovery, pre-trial motions, trial or appeal, if applicable). See Note 14 to our Condensed Consolidated Financial Statements. If our current expectations regarding the number of cases in which we expect to be involved during 2023 or the nature of such cases were to change, our corporate expenses could be higher than we currently estimate.

Obligations for environmental remediation costs are difficult to assess and estimate and it is possible that actual costs for environmental remediation will exceed accrued amounts or that costs will be incurred in the future for sites in which we cannot currently estimate our liability. If these events were to occur in 2023, our corporate expenses would be higher than we currently estimate. In addition, we adjust our environmental accruals as further information becomes available to us or as circumstances change. Such further information or changed circumstances could result in an increase in our accrued environmental costs. See Note 14 to our Condensed Consolidated Financial Statements.

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

***Interest and dividend income –*** Interest and dividend income increased in the third quarter and for the first nine months of 2023 compared to the same periods of 2022 primarily due to higher average interest rates and increased investment balances, somewhat offset by lower average balances on CompX’s revolving promissory notes receivable from Valhi. See Note 4 to our Condensed Consolidated Financial Statements.

***Marketable equity securities –*** We recognized an unrealized gain of $.4 million on the change in value of our marketable equity securities in the third quarter of 2023 compared to an unrealized loss of $24.2 million in the third quarter of 2022. We recognized an unrealized loss of $10.5 million on the change in value of our marketable equity securities in the first nine months of 2023 compared to an unrealized loss of $4.3 million in the first nine months of 2022. See Note 4 to our Condensed Consolidated Financial Statements.

***Income tax expense –*** We recognized an income tax benefit of $.9 million in the third quarter of 2023 compared to an income tax benefit of $5.5 million in the third quarter of 2022 and an income tax benefit of $6.8 million in the first nine months of 2023 compared to income tax expense of $3.6 million in the first nine months of 2022. In accordance with GAAP, we recognize deferred income taxes on our undistributed equity in earnings of Kronos. Because we and Kronos are part of the same U.S. federal income tax group, any dividends we receive from Kronos are nontaxable to us. Accordingly, we do not recognize and we are not required to pay income taxes on dividends from Kronos. Therefore, our full-year effective income tax rate will generally be lower than the U.S. federal statutory income tax rate in years during which we receive dividends from Kronos and recognize equity in earnings of Kronos. Conversely, our effective income tax rate will generally be higher than the U.S. federal statutory income tax rate in years during which we receive dividends from Kronos and recognize equity in losses of Kronos. During interim periods, our effective income tax rate may not necessarily correspond to the foregoing due to the application of accounting for income taxes in interim periods which requires us to base our effective rate on full year projections. We received dividends from Kronos of $20.1 million in each of the first nine months of 2022 and 2023.

Our effective tax rate attributable to our equity in earnings of Kronos, including the effect of the nontaxable dividends we received from Kronos, was 5% in the first nine months of 2022 compared to 50% in the first nine months of 2023. The increase in our effective rate from 2022 to 2023 is primarily attributable to Kronos’ anticipated lower full year earnings in 2023 as compared to 2022. See Note 12 to our Condensed Consolidated Financial Statements for more information about our 2023 income tax items, including a tabular reconciliation of our statutory tax expense to our actual expense.

***Noncontrolling interest –*** Noncontrolling interest in net income of CompX increased during the third quarter and the first nine months of 2023 compared to the same prior year periods. The noncontrolling interest we recognize in each period is directly related to the level of earnings at CompX for the period.

### Equity in earnings (losses) of Kronos Worldwide, Inc.

*(In millions)*

*(In millions)*

| ​ ​ ​ ​ | ​ ​ ​ | ​ ​ ​ Three months ended September 30, 2022 | ​ ​ ​ ​% 2023 ​ | ​ ​ ​ Change ​ ​ | ​ ​ ​ | ​ ​ ​ Nine months ended September 30, 2022 | ​ ​ ​ ​% 2023 ​ | ​ ​ ​ Change ​ ​ |
| --- | --- | --- | ---: | --- | --- | --- | ---: | --- |
| Net sales | ​ | $459.6 ​ | **$396.9** | (14)% | ​ | $1,587.8 ​ | **$1,266.4** | (20)% |
| Cost of sales | ​ | 375.6 ​ | **362.5** | (3) ​ | ​ | 1,234.0 ​ | **1,157.1** | (6) ​ |
| Gross margin | ​ | $84.0 ​ | **$34.4** | ​ | ​ | $353.8 ​ | **$109.3** | ​ |
| ​ | ​ | ​ ​ ​ | **​** **​** **​** | ​ ​ | ​ | ​ ​ ​ | **​** **​** **​** | ​ ​ |
| Income (loss) from operations | ​ | $30.8 ​ | **$(25.3)** | (182)% | ​ | $179.3 ​ | **$(50.3)** | (128)% |
| Interest and dividend income | ​ | ​ 1.4 ​ | **​** **1.5** **​** | ​ ​ | ​ | ​ 2.1 ​ | **​** **5.0** **​** | ​ ​ |
| Marketable equity securities unrealized gain (loss) | ​ | ​ (2.9) ​ | **​** **—** **​** | ​ ​ | ​ | ​ (.5) ​ | **​** **(1.3)** **​** | ​ ​ |
| Other components of net periodic pension and OPEB cost | ​ | ​ (2.9) ​ | **​** **(1.0)** **​** | ​ ​ | ​ | ​ (9.2) ​ | **​** **(4.1)** **​** | ​ ​ |
| Interest expense | ​ | (4.2) ​ | **(4.3)** | ​ | ​ | (13.0) ​ | **(12.8)** | ​ |
| Income (loss) before income taxes | ​ | 22.2 ​ | **(29.1)** |  | ​ | 158.7 ​ | **(63.5)** | ​ |
| Income tax expense (benefit) | ​ | 1.2 ​ | **(8.7)** |  | ​ | 34.3 ​ | **(19.7)** | ​ |
| Net income (loss) | ​ | $21.0 ​ | **$(20.4)** |  | ​ | $124.4 ​ | **$(43.8)** | ​ |
| ​ | ​ | ​ ​ ​ | **​** **​** **​** | ​ ​ | ​ | ​ ​ ​ | **​** **​** **​** | ​ ​ |
| Percentage of net sales: | ​ | ​ |  |  | ​ | ​ |  |  |
| Cost of sales | ​ | 82% | **91%** | ​ | ​ | 78% | **91%** | ​ |
| Income (loss) from operations | ​ | 7 ​ | **(6)** **​** | ​ | ​ | 11 ​ | **(4)** **​** | ​ |
| ​ | ​ | ​ ​ ​ | **​** **​** **​** | ​ ​ | ​ | ​ ​ ​ | **​** **​** **​** | ​ ​ |
| Equity in earnings (losses) of Kronos Worldwide, Inc. | ​ | $6.4 ​ | **$(6.2)** |  | ​ | $37.9 ​ | **$(13.4)** |  |
| ​ | ​ | ​ ​ ​ | **​** **​** **​** | ​ ​ | ​ | ​ ​ ​ | **​** **​** **​** | ​ ​ |
| TiO2 operating statistics: | ​ | ​ |  |  | ​ | ​ |  |  |
| Sales volumes\* | ​ | 113 ​ | **107** | (6)% | ​ | 399 ​ | **313** | (22)% |
| Production volumes\* | ​ | 131 ​ | **102** | (22) ​ | ​ | 401 ​ | **296** | (26) ​ |
| ​ | ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ | ​ | ​ ​ ​ | **​** **​** **​** | ​ ​ |
| Change in TiO2 net sales: | ​ | ​ |  |  | ​ | ​ |  |  |
| TiO2 sales volumes | ​ | ​ ​ ​ | ​ ​ ​ | (6)% | ​ | ​ ​ ​ | ​ ​ ​ | (22)% |
| TiO2 product pricing | ​ | ​ ​ | ​ ​ | (8) ​ | ​ | ​ ​ | ​ ​ | (2) ​ |
| TiO2 product mix/other | ​ | ​ ​ | ​ ​ | (3) ​ | ​ | ​ ​ | ​ ​ | 4 ​ |
| Changes in currency exchange rates | ​ | ​ ​ | ​ ​ | 3 ​ | ​ | ​ ​ | ​ ​ | — ​ |
| Total | ​ | ​ ​ | ​ ​ ​ | (14)% | ​ | ​ ​ | ​ ​ ​ | (20)% |

\* Thousands of metric tons

Kronos’ key performance indicators are its TiO2 average selling prices, its level of TiO2 sales and production volumes and the cost of its third-party feedstock. TiO2 selling prices generally follow industry trends and prices will increase or decrease generally as a result of competitive market pressures.

### Current industry conditions

Kronos and the TiO2 industry are experiencing an extended period of significantly reduced demand across all major markets which is reflected in its sales volumes in both the third quarter and first nine months of 2023. Demand first began to fall in the third quarter of 2022 and although there has been some stabilization at this reduced level, overall demand remains below average historical levels. While Kronos started 2023 with average TiO2 selling prices 16% higher than at the beginning of 2022, this extended period of reduced demand has put downward pressure on its average TiO2 selling prices and, as a result, prices declined 9% during the first nine months of 2023. Kronos’ average TiO2 selling prices in the first nine months of 2023 were 2% lower than the average prices during the first nine months of 2022.

Kronos began curtailing production in the third quarter of 2022 at certain of its European facilities due to decreased demand and increased production costs. Thus far during 2023, Kronos has continued operating its production facilities at reduced rates to align production with expected customer demand. As a result, Kronos operated its production facilities at 71% of practical capacity utilization in the first nine months of 2023 compared to 96% of practical capacity utilization in the first nine months of 2022.

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

| ​ ​ ​ | ​ Production Capacity Utilization Rates 2022 | ​ ​ | ​ 2023 |
| --- | ---: | --- | ---: |
| First Quarter | 100% | ​ | 76% |
| Second Quarter | 95% | ​ | 64% |
| Third Quarter | 93% | ​ | 73% |

Due to significant increases in per metric ton production costs (primarily feedstock and unabsorbed fixed costs due to reduced operating rates), Kronos’ cost of sales per metric ton of TiO2 sold in the first nine months of 2023 was significantly higher as compared to the comparable periods in 2022 (excluding the effect of changes in currency exchange rates). Kronos’ cost of sales per metric ton of TiO2 sold in the third quarter of 2023 was comparable to the same period in 2022.

In response to this extended period of reduced demand Kronos has taken measures to reduce its operating costs and improve its long-term cost structure. As part of overall cost saving measures, during the third quarter of 2023 Kronos began implementing certain voluntary and involuntary workforce reductions. A substantial portion of Kronos’ workforce reductions are expected to be accomplished through voluntary programs, for which eligible workforce reduction costs are recognized at the time both the employee and employer are irrevocably committed to the terms of the separation. These workforce reductions will impact approximately 100 individuals. To date expenses related to these initiatives are not significant due to the early stages of the reductions; however, Kronos currently expects to recognize a $6 million charge in the fourth quarter of 2023 related to workforce reductions it will implement during the quarter, most of which is expected to be classified in selling, general and administrative expense. The majority of cash payments are also expected to be completed by the first quarter of 2024.

*Net sales –* Kronos’ net sales in the third quarter of 2023 decreased 14%, or $62.7 million, compared to the third quarter of 2022 primarily due to a 6% decrease in sales volumes (which decreased net sales by approximately $28 million) and an 8% decrease in average TiO2 selling prices (which decreased net sales by approximately $37 million). In addition to the impact of sales volumes and average TiO2 selling prices, Kronos estimates that changes in currency exchange rates (primarily the euro) increased its net sales by approximately $12 million in the third quarter of 2023 as compared to the third quarter of 2022. TiO2 selling prices will increase or decrease generally as a result of competitive market pressures, changes in the relative level of supply and demand as well as changes in raw material and other manufacturing costs.

Kronos’ sales volumes decreased 6% in the third quarter of 2023 as compared to the third quarter of 2022 due to lower overall demand across all major markets noted above. The lower overall demand Kronos began experiencing in the second half of 2022 and first half of 2023 has continued during the third quarter of 2023.

Kronos’ net sales in the first nine months of 2023 decreased 20%, or $321.4 million, compared to the first nine months of 2022 primarily due to a 22% decrease in sales volumes (which decreased net sales by approximately $349 million) and a 2% decrease in average TiO2 selling prices (which decreased net sales by approximately $32 million). Changes in product mix positively contributed to net sales, primarily due to higher average selling prices in Kronos’ complementary businesses which somewhat offset declines in TiO2 sales volumes. Changes in currency exchange rates had a nominal effect on the sales in the first nine months of 2023 as compared to the first nine months of 2022.

Kronos’ sales volumes decreased 22% in the first nine months of 2023 as compared to the first nine months of 2022 due to lower overall demand across all major markets noted above. The lower overall demand Kronos began experiencing in the second half of 2022 has continued during the first nine months of 2023.

*Cost of sales and gross margin –* Kronos’ cost of sales decreased $13.1 million, or 3%, in the third quarter of 2023 compared to the third quarter of 2022 due to the net effects of a 6% decrease in sales volumes, a 22% decrease in production volumes (which resulted in $20 million of unabsorbed fixed production costs) at certain of its manufacturing facilities to align inventory levels to anticipated near-term customer demand somewhat offset by lower production costs of approximately $10 million (primarily energy and raw materials). Kronos’ cost of sales as a percentage of net sales increased to 91% in the third quarter of 2023 compared to 82% in the same period of 2022 primarily due to the unfavorable effects of unabsorbed fixed production costs due to lower production volumes.

Gross margin as a percentage of net sales decreased to 9% in the third quarter of 2023 compared to 18% in the third quarter of 2022. As discussed and quantified above, Kronos’ gross margin as a percentage of net sales decreased primarily due to lower production and sales volumes, lower average TiO2 selling prices and changes in currency exchange rates.

Kronos’ cost of sales decreased $76.9 million, or 6%, in the first nine months of 2023 compared to the first nine months of 2022 due to the net effects of a 22% decrease in sales volumes, a 26% decrease in production volumes (which resulted in $74 million of unabsorbed fixed production costs) at certain of its manufacturing facilities to align inventory levels to anticipated near-term customer demand and higher production costs of approximately $90 million (primarily raw materials). Kronos’ cost of sales as a percentage of net sales increased to 91% in the first nine months of 2023 compared to 78% in the same period of 2022 primarily due to the unfavorable effects of higher production costs (primarily raw materials) and unabsorbed fixed production costs due to lower production volumes.

Gross margin as a percentage of net sales decreased to 9% in the first nine months of 2023 compared to 22% in the first nine months of 2022. As discussed and quantified above, Kronos’ gross margin as a percentage of net sales decreased primarily due to the net effect of higher production costs, lower production and sales volumes, lower average TiO2 selling prices and changes in currency exchange rates.

*Selling, general and administrative expense –* Kronos’ selling, general and administrative expense decreased $5.4 million, or 9%, in 2023 compared to 2022 primarily due to lower distribution costs related to lower overall sales volumes during the quarter. Selling, general and administrative expense as a percentage of net sales was comparable in the third quarters of 2023 and 2022 at approximately 13% of net sales.

Kronos’ selling, general and administrative expense decreased $26.7 million, or 15%, in the first nine months of 2023 compared to the same period in 2022 primarily due to lower distribution costs as a result of lower overall sales volumes. Selling, general and administrative expense as a percentage of net sales was comparable in the first nine months of 2023 and 2022 at approximately 12% of net sales.

*Income (loss) from operations –* Kronos had a loss from operations of $25.3 million in the third quarter of 2023 compared to income from operations of $30.8 million in the third quarter of 2022 as a result of the factors impacting gross margin discussed above. Kronos recognized a gain of $.3 million in the third quarter of 2023 and a gain of $2.7 million in the third quarter of 2022 related to cash received from the settlement of a business interruption insurance claim. Kronos estimates changes in currency exchange rates increased its loss from operations by approximately $10 million in the third quarter of 2023 as compared to the same period in 2022, as discussed in the Effects of currency exchange rates section below.

Kronos had a loss from operations of $50.3 million in the first nine months of 2023 compared to income from operations of $179.3 million in the first nine months of 2022 as a result of the factors impacting gross margin discussed above. Kronos recognized a gain of $2.5 million in the first nine months of 2023 and a gain of $2.7 million in the first nine months of 2022 related to cash received from the settlement of a business interruption insurance claim. Kronos estimates that changes in currency exchange rates decreased its loss from operations by approximately $11 million in the first nine months of 2023 as compared to the same period in 2022, as further discussed below.

*Other non-operating income (expense) –* There was no change in the relative market value of Kronos’ marketable equity securities in the third quarter of 2023. However, Kronos recognized an unrealized loss of $2.9 million in the third quarter of 2022 related to the change in market price of its marketable equity securities. Other components of net periodic pension and OPEB cost in the third quarter of 2023 decreased $1.9 million compared to the third quarter of 2022 primarily due to the net effects of higher discount rates impacting interest cost and previously unrecognized actuarial losses. Interest expense in the third quarter of 2023 was comparable to interest expense in the third quarter of 2022.

Kronos recognized an unrealized loss of $1.3 million on the change in value of its marketable equity securities in the first nine months of 2023 compared to an unrealized loss of $.5 million in the first nine months of 2022. Other components of net periodic pension and OPEB cost in the first nine months of 2023 decreased $5.1 million compared to the first nine months of 2022 primarily due to the net effects of higher discount rates impacting interest cost, previously unrecognized actuarial losses and $1.3 million in settlement costs related to the termination and buy-out of Kronos’ pension plan in the United Kingdom during the second quarter of 2023. Interest expense in the first nine months of 2023 was comparable to interest expense in the first nine months of 2022.

*Income tax expense (benefit)* - Kronos recognized an income tax benefit of $8.7 million in the third quarter of 2023 compared to income tax expense of $1.2 million in the third quarter of 2022. Kronos recognized an income tax benefit of $19.7 million in the first nine months of 2023 compared to income tax expense of $34.3 million in the first nine months of 2022. The difference is primarily due to lower earnings in the third quarter and first nine months of 2023 as compared to the same periods in 2022 and the jurisdictional mix of such earnings. Kronos’ earnings are subject to income tax in various U.S. and non-U.S. jurisdictions, and the income tax rates applicable to the pre-tax earnings (losses) of its non-U.S. operations are generally higher than the income tax rates applicable to its U.S. operations. Kronos would generally expect its overall effective tax rate, excluding the effect of any increase or decrease in its deferred income tax asset valuation allowance or changes in its reserve for uncertain tax positions, to be higher than the U.S. federal statutory tax rate of 21% primarily because of Kronos’ sizeable non-U.S. operations.

### Effects of currency exchange rates

Kronos has substantial operations and assets located outside the United States (primarily in Germany, Belgium, Norway and Canada). The majority of Kronos’ sales from non-U.S. operations are denominated in currencies other than the U.S. dollar, principally the euro, other major European currencies and the Canadian dollar. A portion of Kronos’ sales generated from its non-U.S. operations is denominated in the U.S. dollar (and consequently Kronos’ non-U.S. operations will generally hold U.S. dollars from time to time). Certain raw materials used in all Kronos production facilities, primarily titanium-containing feedstocks, are purchased primarily in U.S. dollars, while labor and other production and administrative costs are incurred primarily in local currencies. Consequently, the translated U.S. dollar value of Kronos’ non-U.S. sales and operating results are subject to currency exchange rate fluctuations which may favorably or unfavorably impact reported earnings and may affect the comparability of period-to-period operating results. In addition to the impact of the translation of sales and expenses over time, Kronos’ non-U.S. operations also generate currency transaction gains and losses which primarily relate to (i) the difference between the currency exchange rates in effect when non-local currency sales or operating costs (primarily U.S. dollar denominated) are initially accrued and when such amounts are settled with the non-local currency, and (ii) changes in currency exchange rates during time periods when Kronos’ non-U.S. operations are holding non-local currency (primarily U.S. dollars).

Overall, Kronos estimates that fluctuations in currency exchange rates had the following effects on its sales and income (loss) from operations for the periods indicated.

*Impact of changes in currency exchange rates*

*Three months ended September 30, 2023 vs September 30, 2022*

*(In millions)*

| ​ ​ ​ ​ ​ ​ Impact on: | ​ ​ ​ ​ ​ ​ | ​ ​ ​ ​ ​ ​ Transaction gains (losses) recognized 2022 ​ | ​ ​ ​ ​ | ​ ​ ​ ​ ​ 2023 ​ | ​ ​ ​ ​ | ​ ​ ​ ​ ​ Change ​ | ​ ​ ​ ​ ​ | ​ ​ Translation gains - impact of rate changes ​ | ​ ​ ​ ​ ​ | ​ ​ ​ Total currency impact 2023 vs 2022 ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Net sales | ​ | $— | ​ | $— | ​ | $— | ​ | $12 | ​ | $12 |
| Income (loss) from operations | ​ | 7 | ​ | (4) | ​ | (11) | ​ | 1 | ​ | (10) |

The $12 million increase in net sales (translation gains) was caused primarily by a weakening of the U.S. dollar relative to the euro, as Kronos’ euro-denominated sales were translated into more U.S. dollars in 2023 as compared to 2022. The strengthening of the U.S. dollar relative to the Canadian dollar and the Norwegian krone in 2023 did not have a significant effect on Kronos’ net sales, as a substantial portion of the sales generated by Kronos’ Canadian and Norwegian operations is denominated in the U.S. dollar.

The $10 million increase in loss from operations was comprised of the following:

- Lower net currency transaction gains of approximately $11 million primarily caused by relative changes in currency exchange rates at each applicable balance sheet date between the U.S. dollar and the euro, Canadian dollar and the Norwegian krone, and between the euro and the Norwegian krone, which causes increases or decreases, as applicable, in U.S. dollar-denominated receivables and payables and U.S. dollar currency held by Kronos’ non-U.S. operations, and in Norwegian krone denominated receivables and payables held by Kronos’ non-U.S. operations, and
- Approximately $1 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 2023 as compared to 2022. The effect of the weakening of the U.S. dollar relative to the euro was nominal in 2023 as compared to 2022.

*Impact of changes in currency exchange rates*

*Nine months ended September 30, 2023 vs September 30, 2022*

*(In millions)*

| ​ ​ ​ ​ ​ ​ Impact on: | ​ ​ ​ ​ ​ ​ | ​ ​ ​ ​ ​ ​ Transaction gains recognized 2022 ​ | ​ ​ ​ ​ | ​ ​ ​ ​ ​ 2023 ​ | ​ ​ ​ ​ | ​ ​ ​ ​ ​ Change ​ | ​ ​ ​ ​ ​ | ​ ​ Translation gains - impact of rate changes ​ | ​ ​ ​ ​ ​ | ​ ​ ​ Total currency impact 2023 vs 2022 ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Net sales | ​ | $— | ​ | $— | ​ | $— | ​ | $— | ​ | $— |
| Income (loss) from operations | ​ | 17 | ​ | 4 | ​ | ​ (13) | ​ | 24 | ​ | 11 |

|  |  |  |
| --- | --- | --- |
| ​ | ​ | ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ |
| ​ ​ | ​ | ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ |

The $11 million decrease in loss from operations was comprised of the following:

- Lower net currency transaction gains of approximately $13 million primarily caused by relative changes in currency exchange rates at each applicable balance sheet date between the U.S. dollar and the euro, Canadian dollar and the Norwegian krone, and between the euro and the Norwegian krone, which causes increases or decreases, as applicable, in U.S. dollar-denominated receivables and payables and U.S. dollar currency held by Kronos non-U.S. operations, and in Norwegian krone denominated receivables and payables held by its non-U.S. operations, and
- Approximately $24 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 2023 as compared to 2022. The effect of the weakening of the U.S. dollar relative to the euro was nominal in 2023 as compared to 2022.

### Outlook

Kronos’ customer demand remained weak during the third quarter of 2023 with demand in Europe remaining at historically low levels while North America and export markets showed signs of stabilizing. Kronos is taking necessary actions to align its production and inventories to forecasted demand levels and to reduce costs in line with the lower production rates including production curtailments and cost reduction initiatives noted above designed to improve its long-term cost structure. These steps, along with the depletion of high-cost inventory created earlier in the cycle, have somewhat increased gross margins and improved operating cash flows in the second and third quarters of the year. Kronos continues to focus on maintaining liquidity through this down cycle and it expects to maintain consistent cash balances and availability on its revolving credit facility for the foreseeable future.

While Kronos believes customer destocking is complete and customer inventories are historically low, its customers’ near-term outlook remains uncertain and, particularly in Europe, it expects production curtailments by certain customers during the fourth quarter in response to expected low downstream demand. Outside of Europe, demand levels have stabilized in many regions, primarily in North America as noted above, but at levels well below historical norms. During the third quarter Kronos’ selling prices came under increasing pressure, primarily due to low-cost imports from China impacting European and export pricing. Raw materials and certain other input costs have declined from the highs experienced since the second half of 2022 which, combined with internal cost reduction initiatives as noted above, have begun to positively impact margins as compared to earlier in the year when higher cost inventories depressed margins. Energy costs in Europe have generally stabilized after a period of market disruptions, although in early 2023, in order to provide cost certainty, Kronos entered into forward contracts for a portion of its energy needs in 2023 which in many cases are priced above current market rates. As these contracts expire later in 2023, Kronos expects its energy costs to be further reduced. Kronos also expects raw material and other input costs to continue to decline which, along with other cost reduction initiatives discussed above, will result in improved margins in 2024. Overall, due to the weaker than expected demand recovery and higher production costs, including unabsorbed fixed costs, Kronos expects to report lower operating results for the full year of 2023 as compared to 2022.

Kronos is uncertain as to when demand will improve, however, it expects near-term demand will remain below historical norms and it is managing production levels to end the year with commensurately low finished good inventory levels. Kronos believes the long-term outlook for its industry remains positive, and the steps Kronos is taking enable it to quickly adjust production rates while preserving its competitive position. Kronos is in close contact with its customers and will continue to monitor current and anticipated near-term customer demand levels and align its production and inventories accordingly.

Kronos’ expectations for the TiO2 industry and its operations are based on a number of factors outside its control. Kronos has experienced global market disruptions including high energy and other input costs and future impacts on its operations will depend on, among other things, competition from low-cost imports, future energy and other input costs and the effect economic conditions and geopolitical events have on its operations or its customers’ and suppliers’ operations, all of which remain uncertain and cannot be predicted.

### Liquidity and Capital Resources

### Consolidated cash flows

### Operating activities

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

Net cash provided by operating activities was $15.5 million in the first nine months of 2023 compared to $12.7 million in the first nine months of 2022. The increase in cash provided by operating activities in the first nine months of 2023 includes:

- lower net cash used for relative changes in receivables, inventories, prepaids, payables and accrued liabilities in 2023 of $3.8 million;
- lower income from operations from CompX in 2023 of $2.0 million; and
- lower cash paid for taxes in 2023 of $.8 million due to lower earnings and the relative timing of payments.

We do not have complete access to CompX’s cash flows in part because we do not own 100% of CompX. A detail of our consolidated cash flows from operating activities is presented in the table below. Intercompany dividends have been eliminated. The reference to NL Parent in the table below is a reference to NL Industries, Inc., as the parent company of CompX and our wholly-owned subsidiaries.

*(In millions)*

| ​ ​ ​ ​ ​ Net cash provided by operating activities: | ​ ​ ​ | ​ ​ Nine months ended September 30, 2022 ​ | ​ | ​ ​ 2023 ​ |
| --- | --- | ---: | --- | ---: |
| CompX | ​ | $8.1 | ​ | **$11.8** |
| NL Parent and wholly-owned subsidiaries | ​ | 31.5 | ​ | **11.8** |
| Eliminations | ​ | (26.9) | ​ | **(8.1)** |
| Total | ​ | $12.7 | ​ | **$15.5** |

Relative changes in working capital can have a significant effect on cash flows from operating activities. As shown below, average days sales outstanding increased from December 31, 2022 to September 30, 2023 primarily as a result of relative changes in the timing of sales and collections relative to the end of the quarter. Total average number of days in inventory increased from December 31, 2022 to September 30, 2023 primarily due to the increase at the Marine Components reporting unit due to lower sales and increased inventory balances as a result of prior orders of certain raw materials that had longer lead times that were delivered during the second and third quarters of 2023. Days in inventory for the Security Products reporting unit increased slightly due to the planned inventory build during the second quarter to fulfill a purchase order that began shipping during the third quarter and is expected to continue shipping through the end of the year. Absent this order, Security Products inventory balances would have declined at the end of the third quarter in line with current demand. For comparative purposes, we have provided December 31, 2021 and September 30, 2022 numbers below.

|  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ |
| ​ |  | **December 31,** |  | **September 30,** | **​** | **December 31,** | **​** | **September 30,** |
| ​ |  | **2021** |  | **2022** |  | **2022** |  | **2023** |
| Days sales outstanding |  | 42 days |  | 41 days |  | 41 days |  | 45 days |
| Days in inventory |  | 96 days |  | 98 days |  | 99 days |  | 112 days |

### Investing activities

Our capital expenditures, all of which relate to CompX, were $.6 million in the first nine months of 2023 compared to $3.0 million in the first nine months of 2022. During the first nine months of 2023, Valhi repaid a net $1.2 million under the promissory note ($20.7 million of gross borrowings and $21.9 million of gross repayments). During the first nine months of 2022, Valhi repaid a net $4.0 million under the promissory note ($17.1 million of gross borrowings and $21.1 million of gross repayments).

During the first nine months of 2023, we had gross purchases of U.S. treasury marketable securities aggregating $61.4 million (of which $36.3 million relates to CompX) and received gross proceeds totaling $54.0 million related to U.S. treasury bill maturities (of which $24.0 million relates to CompX).

### Financing activities

During the first nine months of 2023 and 2022, we paid aggregate quarterly dividends to NL stockholders of $.21 per share. Additionally, in August 2022 our board of directors declared a special dividend of $.35 per share ($17.1 million). The declaration and payment of future dividends, and the amount thereof, is discretionary and is dependent upon our financial condition, cash requirements, contractual obligations and restrictions and other factors deemed relevant by our board of directors. The amount and timing of past dividends is not necessarily indicative of the amount or timing of any future dividends which might be paid. There are currently no contractual restrictions on the amount of dividends which we may pay.

Cash flows from financing activities in the first nine months of each of 2022 and 2023 also include CompX dividends paid to its stockholders other than us. During the second quarter of 2022, CompX acquired 78,900 shares of its Class A common stock (8,900 shares from affiliates in two private transactions, and 70,000 shares in a single market transaction) for an aggregate purchase price of $1.7 million. See Note 13 to our Condensed Consolidated Financial Statements.

### Outstanding debt obligations

At September 30, 2023, NLKW had outstanding debt obligations of $.5 million under its secured revolving credit facility with Valhi, and CompX did not have any outstanding debt obligations. We are in compliance with all of the covenants contained in our secured revolving credit facility with Valhi at September 30, 2023. See Note 8 to our Condensed Consolidated Financial Statements.

Kronos has no outstanding borrowings at September 30, 2023 on its $225 million global revolving credit facility (Global Revolver). Availability under the Global Revolver is subject to a borrowing base calculation, as defined in the agreement, and at September 30, 2023 the full $225 million was available for borrowings. Kronos’ Senior Secured Notes and its Global Revolver contain a number of covenants and restrictions which, among other things, restrict Kronos’ ability to incur or guarantee additional debt, incur liens, pay dividends or make other restricted payments, or merge or consolidate with, or sell or transfer substantially all of its assets to, another entity, and contain other provisions and restrictive covenants customary in lending transactions of these types. Kronos’ credit agreements contain provisions which could result in the acceleration of indebtedness prior to their stated maturity for reasons other than defaults for failure to comply with typical financial or payment covenants. For example, the credit agreements allow the lender to accelerate the maturity of the indebtedness upon a change of control (as defined in the agreement) of the borrower. In addition, the credit agreements could result in the acceleration of all or a portion of the indebtedness following a sale of assets outside the ordinary course of business. Kronos was in compliance with all of its debt covenants at September 30, 2023. Kronos believes it will be able to maintain compliance with the financial covenants contained in its credit facility through its maturity.

### Future cash requirements

### Liquidity

Our primary source of liquidity on an ongoing basis is our cash flow from operating activities and credit facilities with affiliates as further discussed below. We generally use these amounts to fund capital expenditures (substantially all of which relate to CompX), pay ongoing environmental remediation and litigation costs and provide for the payment of dividends (if declared).

At September 30, 2023, we had aggregate restricted and unrestricted cash, cash equivalents and current marketable securities of $175.0 million, all of which was held in the U.S. A detail by entity is presented in the table below.

*(In millions)*

| ​ ​ ​ | ​ ​ ​ | ​ ​ Amount |
| --- | --- | ---: |
| CompX |  | **$64.4** |
| NL Parent and wholly-owned subsidiaries | ​ | **110.6** |
| Total | ​ | **$175.0** |

In addition, at September 30, 2023 we owned approximately 1.2 million shares of Valhi common stock with an aggregate market value of $15.9 million. See Note 4 to our Condensed Consolidated Financial Statements. We also owned approximately 35.2 million shares of Kronos common stock at September 30, 2023 with an aggregate market value of $272.9 million. See Note 5 to our Condensed Consolidated Financial Statements.

We routinely compare our liquidity requirements and alternative uses of capital against the estimated future cash flows we expect to receive from our subsidiaries and affiliates. As a result of this process, we have in the past and may in the future seek to raise additional capital, incur debt, repurchase indebtedness in the market or otherwise, modify our dividend policies, consider the sale of our interests in our subsidiaries, affiliates, business, marketable securities or other assets, or take a combination of these and other steps, to increase liquidity, reduce indebtedness and fund future activities. Such activities have in the past and may in the future involve related companies.

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

Based upon our expectations of our operating performance, and the anticipated demands on our cash resources we expect to have sufficient liquidity to meet our short-term obligations (defined as the twelve-month period ending September 30, 2024) and long-term obligations (defined as the five-year period ending September 30, 2028) including any amounts CompX might loan from time to time under the terms of its revolving loan to Valhi (which loans would be solely at CompX’s discretion). If actual developments differ materially from our expectations, our liquidity could be adversely affected. In this regard, Valhi has agreed to loan us up to $50 million on a revolving basis. At September 30, 2023, we had $.5 million in outstanding borrowings under this facility, and we had $49.5 million available for future borrowing. See Note 8 to our Condensed Consolidated Financial Statements.

### Capital expenditures

Firm purchase commitments for capital projects in process at September 30, 2023 totaled $.2 million. CompX expects to spend $2.0 million during 2023 on capital investments, primarily those expenditures required to meet CompX’s existing customer demand and to properly maintain its facilities and technology infrastructure.

### Repurchases of common stock

At September 30, 2023, CompX has 523,647 shares available for repurchase under a stock repurchase program authorized by its board of directors.

### Dividends

Because our operations are conducted primarily through subsidiaries and affiliates, our long-term ability to meet parent company-level corporate obligations is largely dependent on the receipt of dividends or other distributions from our subsidiaries and affiliates. A detail of annual dividends we expect to receive from our subsidiaries and affiliates in 2023, based on the number of shares of common stock of these affiliates we own as of September 30, 2023 and their current regular quarterly dividend rate, is presented in the table below.

*(In millions)*

*(In millions)*

| ​ ​ ​ ​ | ​ ​ | ​ Shares held September 30, 2023 | ​ | ​ ​ | ​ ​ Quarterly dividend rate ​ ​ | ​ ​ | ​ ​ Annual expected dividend ​ |
| --- | --- | --- | ---: | --- | --- | --- | ---: |
| Kronos |  | ​ | 35.2 | ​ | $.19 | ​ | $26.8 |
| CompX |  | ​ | 10.8 | ​ | .25 | ​ | 10.8 |
| Valhi |  | ​ | 1.2 | ​ | .08 | ​ | .4 |
| Total expected annual dividends | **​** | ​ | ​ | ​ |  | ​ | $38.0 |

### Investments in our subsidiaries and affiliates and other acquisitions

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

### Commitments and contingencies

There have been no material changes in our contractual obligations since we filed our 2022 Annual Report and we refer you to that report for a complete description of these commitments.

We are subject to certain commitments and contingencies, as more fully described in our 2022 Annual Report, or in Note 14 to our Condensed Consolidated Financial Statements or in Part II, Item 1 of this report, including certain legal proceedings. In addition to such legal proceedings, various legislation and administrative regulations have, from time to time, been proposed that seek to (i) impose various obligations on present and former manufacturers of lead pigment and lead-based paint (including us) with respect to asserted health concerns associated with the use of such products and (ii) effectively overturn court decisions in which we and other pigment manufacturers have been successful. Examples of such proposed legislation include bills which would permit civil liability for damages on the basis of market share, rather than requiring plaintiffs to prove that the defendant’s product caused the alleged damage and bills which would revive actions barred by the statute of limitations. While no legislation or regulations have been enacted to date that are expected to have a material adverse effect on our consolidated financial position, results of operations or liquidity, enactment of such legislation could have such an effect.

### Recent accounting pronouncements

Not applicable

### Critical accounting policies and estimates

For a discussion of our critical accounting policies, refer to Part I, — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2022 Annual Report. There have been no changes in our critical accounting policies during the first nine months of 2023.

## Market risk

As filed, 400 characters.

We are exposed to market risk, including currency exchange rates, interest rates and equity security prices. There have been no material changes in these market risks since we filed our 2022 Annual Report, and we refer you to Part I, Item 7A. – “Quantitative and Qualitative Disclosure about Market Risk” in our 2022 Annual Report. See also Note 15 to our Condensed Consolidated Financial Statements.

## Controls and procedures

As filed, 3,796 characters.

***Evaluation of disclosure controls and procedures –*** We maintain disclosure controls and procedures which, as defined in Exchange Act Rule 13a-15(e), means controls and other procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit to the SEC under the Securities Exchange Act of 1934, as amended (the Act), is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports we file or submit to the SEC under the Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions to be made regarding required disclosure. Each of Courtney J. Riley, our President and Chief Executive Officer and Amy Allbach Samford, our Executive Vice President and Chief Financial Officer, have evaluated the design and effectiveness of our disclosure controls and procedures as of September 30, 2023. Based upon their evaluation, these executive officers have concluded that our disclosure controls and procedures are effective as of the date of this evaluation.

***Internal control over financial reporting –*** Our management is responsible for establishing and maintaining adequate internal control over financial reporting which, as defined by Exchange Act Rule 13a-15(f) means a process designed by, or under the supervision of, our principal executive and principal financial officers, or persons performing similar functions, and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:

- Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect transactions and dispositions of our assets,
- Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are made only in accordance with authorizations of our management and directors, and
- Provide reasonable assurance regarding prevention or timely detection of an unauthorized acquisition, use or disposition of assets that could have a material effect on our Condensed Consolidated Financial Statements.

***Other –*** As permitted by the SEC, our assessment of internal control over financial reporting excludes (i) internal control over financial reporting of equity method investees and (ii) internal control over the preparation of any financial statement schedules which would be required by Article 12 of Regulation S-X. However, our assessment of internal control over financial reporting with respect to equity method investees did include controls over the recording of amounts related to our investment that are recorded in the consolidated financial statements, including controls over the selection of accounting methods for our investments, the recognition of equity method earnings and losses and the determination, valuation and recording of our investment account balances.

***Changes in internal control over financial reporting –*** There have been no changes to our internal control over financial reporting during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 139 characters.

For a discussion of the risk factors related to our businesses, please refer to Part I, Item 1A, “Risk Factors,” in our 2022 Annual Report.

Filed Nov 2, 2023.
Source: SEC EDGAR, the filing index for accession 0001558370-23-017430. Last ingested by Listed: Oct 29, 2026, 16:17 ET. No prices; not investment advice.