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 theSecurities 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 theSEC 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 asChina ) 19 Table of Contents
? 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
? 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. 20 Table of Contents Results of operations Net income (loss) overview
Quarter ended
Our net loss attributable to
As more fully described below, the decrease in our earnings per share
attributable to
? equity in losses of Kronos in 2023 of
earnings of
? an unrealized loss in the relative value of marketable equity securities of
? higher income from operations attributable to CompX of
compared to
? higher interest and dividend income of
million in 2022.
Our net loss attributable toNL stockholders for the first three months of 2023 includes income of$.01 per share due to Kronos' recognition of a pre-tax insurance settlement gain related to a business interruption insurance claim arising from Hurricane Laura in 2020.
Income from operations
The following table shows the components of our income from operations.
Three months ended March 31, % 2022 2023 Change (In millions) CompX$ 6.3 $ 7.0 12 % Corporate expense (2.4) (2.8) 17 Income from operations$ 3.9 $ 4.2 8
CompX is our component products business and corporate expense relates to
The following table shows the components of our income (loss) before income taxes exclusive of our income from operations.
Three months ended March 31, % 2022 2023 Change (In millions)
Equity in earnings (losses) of Kronos$ 17.5 $ (4.6) (126) % Marketable equity securities unrealized gain (loss) .7 (5.5)
(919)
Other components of net periodic pension and OPEB cost (.2) (.4) 55 Interest and dividend income .3 2.0 536 Interest expense (.3) (.2) (19) 21 Table of Contents CompX International Inc. In the first quarter of 2023 CompX's operating income increased to$7.0 million compared to$6.3 million in the first quarter of 2022. The increase in operating income in the first quarter of 2023 compared to 2022 is due to higher Marine Compents sales and gross margins which more than offset lower Security Products sales. Three months ended March 31, % 2022 2023 Change (In millions) Net sales$ 42.1 $ 41.2 (2) % Cost of sales 30.0 28.5 (5) Gross margin 12.1 12.7 5 Operating costs and expenses 5.8 5.7 (2) Income from operations$ 6.3 $ 7.0 12 Percentage of net sales: Cost of sales 71 % 69 % Gross margin 29 31 Operating costs and expenses 14 14 Income from operations 15 17
Net sales - Net sales decreased
Cost of sales and gross margin - Cost of sales as a percentage of sales decreased 2% in the first quarter of 2023 compared to the same period in 2022. As a result, gross margin as a percentage of sales increased over the same period. Gross margin percentage increased in the first quarter of 2023 compared to the same period in 2022 primarily due to higher gross margin at Marine Components. 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 first quarter of 2023 were comparable to the same period in 2022. Income from operations - As a percentage of net sales, income from operations for the first quarter of 2023 increased compared to the same period of 2022 and was primarily impacted by the factors impacting sales, cost of sales, gross
margin and operating costs. See discussion of reporting units below. 22 Table of Contents 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. Three months ended March 31, % 2022 2023 Change (In millions) Security Products: Net sales$ 29.6 $ 27.4 (8) % Cost of sales 20.5 18.9 (8) Gross margin 9.1 8.5 (7) Operating costs and expenses 3.1 3.1 1 Operating income$ 6.0 $ 5.4 (10) Gross margin 31 % 31 % Operating income margin 20 20 Security Products - Security Products net sales decreased 8% in the first quarter of 2023 compared to the same period last year. Relative to the first quarter of 2022, sales were$1.8 million lower to the government security market and$.5 million lower to the healthcare industry market. Gross margin and operating income as a percentage of net sales for the first quarter of 2023 were comparable with the first quarter of 2022. Three months ended March 31, % 2022 2023 Change (In millions) Marine Components: Net sales$ 12.5 $ 13.8 11 % Cost of sales 9.5 9.6 1 Gross margin 3.0 4.2 41 Operating costs and expenses 1.0 .9 (7) Operating income$ 2.0 $ 3.3 65 Gross margin 24 % 31 % Operating income margin 16 24
Marine Components - Marine Components net sales increased 11% in the first quarter of 2023 compared to the same period last year. Relative to the first quarter of 2022, sales were$1.2 million higher to the industrial market,$.3 million higher to distributors and$.3 million higher to dealers, partially offset by$.9 million lower sales to the towboat market. Gross margin as a percentage of sales increased in the first quarter of 2023 compared to the same period last year primarily due to more favorable product mix and, to a lesser extent, increased selling prices and surcharges and increased production efficiencies. Operating income as a percentage of net sales increased in the first quarter of 2023 compared to the first quarter of 2022 due to the factors impacting gross margin and increased coverage of operating costs and expenses from higher sales. Outlook - The softening demand CompX began seeing in the fourth quarter of 2022 at both its reporting units continued during the first quarter of 2023. As a result, CompX's Marine Components reporting unit largely worked through its backlog in the first quarter, primarily related to the towboat market, and CompX's Security Products reporting unit continued to experience declining order rates. Entering into 2023, labor markets have become more favorable in each of the regions CompX operates and raw material prices have generally stabilized. CompX's supply chains are stable and transportation and logistical delays are minimal, although it continues to face shortages related to certain electronic components. CompX has adjusted production rates at its facilities to reflect the stability of its raw material supplies and near-term demand levels. Over the remainder of the year, CompX expects gross margins at its Security Products reporting unit will be challenged as higher cost inventory works its way through cost of sales and reduced demand may limit its ability to implement further price increases. CompX is in close contact with its key customers and believes reduced order rates will continue through the second quarter. As expected, CompX's Marine Components reporting unit net sales were strong during the first quarter but it expects net sales overall will decline as 23
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compared to 2022 as marine market demand is 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. Overall, CompX expects Marine Components gross margins as a percentage of net sales for the full year of 2023 to be comparable to 2022 as the favorable impact of product mix in the first quarter of 2023 is not expected for the remainder of the year. Based on the softening demand and general economic conditions inNorth America , CompX currently expects to report lower net sales and operating income at both its reporting units during 2023 compared to 2022. CompX is focused on managing inventory levels to support anticipated lower demand in 2023. With raw materials and other components more readily available, CompX believes it will be able to achieve additional operating efficiencies during the year although the extent and impact of such efficiencies is not yet known. CompX's expectations for its operations and the markets it serves are based on a number of factors outside its control. As noted above, there continue to be global and domestic supply chain challenges and any future impacts on CompX's operations will depend on, among other things, any future disruption in its operations or its suppliers' operations, the impact of economic conditions and geopolitical events on demand for its products or our customers' or suppliers' operations, all of which remain uncertain and cannot be predicted.
General corporate and other items
Corporate expense - Corporate expenses were$2.8 million in the first quarter of 2023,$.4 million higher than in the first quarter of 2022 primarily due to$.8 million higher litigation and related costs in 2023 somewhat offset by$.3 million lower administrative expenses. Included in corporate expense are:
? litigation fees and related costs of
compared to
? environmental remediation and related costs of nil in the first quarter of 2023
compared to costs of
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 first quarter of 2023 compared to the same period 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 loss of$5.5 million on the change in value of our marketable equity securities in the first quarter of 2023 compared to an unrealized gain of$.7 million in the first quarter of 2022. See Note 4 to our Condensed Consolidated Financial Statements. Income tax expense - We recognized income tax expense of$1.4 million in the first quarter of 2023 compared to$2.7 million in the first quarter 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 sameU.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 theU.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 theU.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 24 Table of Contents 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$6.7 million in each of the first three months of 2022 and 2023. Our effective tax rate attributable to our equity in earnings of Kronos, including the effect of the nontaxable dividends we received from Kronos, was 10.1% in the first three months of 2022 and a negative effective tax rate of 28.7% in the first three months 2023. The decrease in our effective rate from 2022 to 2023 is primarily attributable to Kronos' aniticipted lower full year earnings in 2023 as compared to 2022. See Note 12 to our Condensed Consolidated Financial Statements for more information about our 2022 income tax items, including a tabular reconciliation of our statutory tax expense to our actual expense. Noncontrolling interest - Noncontrolling interest in net income of CompX for the first quarter of 2023 was comparable to the first quarter of 2022. The noncontrolling interest we recognize in each period is directly related to the level of earnings at CompX for the period.
Equity in earnings (losses) of Kronos Worldwide, Inc.
Three months ended March 31, % 2022 2023 Change (In millions) Net sales$ 562.9 $ 426.3 (24) % Cost of sales 413.6 395.5 (4) Gross margin$ 149.3 $ 30.8
Income (loss) from operations
(3.0) .4 Interest expense (4.5) (4.2)
Income (loss) before income taxes 75.8 (22.1) Income tax expense (benefit)
18.3 (6.9) Net income (loss)$ 57.5 $ (15.2) Percentage of net sales: Cost of sales 73 % 93 % Income (loss) from operations 15 (4)
Equity in earnings (losses) of
Kronos Worldwide, Inc.$ 17.5 $ (4.6) TiO2 operating statistics: Sales volumes* 144 102 (29) % Production volumes* 138 105 (24) Change in TiO2 net sales: TiO2 product pricing 4 % TiO2 sales volumes (29) TiO2 product mix/other 3 Changes in currency exchange rates (2) Total (24) % * 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 started 2023 with average TiO2 selling prices 16% higher than at the beginning of 2022 and Kronos' average TiO2 selling prices declined 4% during the first quarter of 2023. Despite this decline, Kronos' average TiO2 selling prices in the first quarter 25 Table of Contents
of 2023 were 4% higher than the average prices during the first quarter of 2022. Overall sales volumes declined in the first three months of 2023 compared to the first three months of 2022 due to reduced demand in all major markets. Kronos curtailed production in the third and fourth quarters of 2022 at certain of its European facilities due to decreased demand and increased production costs. During the first quarter of 2023 Kronos continued operating its production facilities at reduced rates to align production with customer demand. As a result, Kronos operated its production facilities at 76% of practical capacity utilization in the first three months of 2023 compared to full practical capacity utilization in the first three months of 2022.
Due to significant increases in production costs (primarily energy and feedstock), Kronos' cost of sales per metric ton of TiO2 sold in the first quarter of 2023 was significantly higher as compared to the comparable period in 2022 (excluding the effect of changes in currency exchange rates).
Net sales - Kronos' net sales in the first quarter of 2023 decreased 24%, or$136.6 million , compared to the first quarter of 2022 primarily due to a 29% decrease in sales volumes (which decreased net sales by approximately$163 million ) somewhat offset by a 4% increase in average TiO2 selling prices (which increased net sales by approximately$23 million ). Kronos estimates that changes in currency exchange rates (primarily the euro) decreased its net sales by approximately$11 million in the first quarter of 2023 as compared to the first 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 29% in the first quarter of 2023 as compared to the first quarter of 2022 due to lower demand which impacted all major markets. The lower overall demand Kronos began experiencing in the second half of 2022 has continued throughout the first quarter of 2023. Cost of sales and gross margin - Kronos' cost of sales as a percentage of net sales increased to 93% in the first quarter of 2023 compared to 73% in the same period of 2022 primarily due to higher production costs of approximately$81 million (primarily raw material and energy costs) and$22 million of unabsorbed fixed production costs Kronos recognized as a result of reducing production volumes at certain of its manufacturing facilities to align inventory levels to anticipated customer demand. Overall production volumes declined 24% over the first quarter of 2023. Gross margin as a percentage of net sales decreased to 7% in the first quarter of 2023 compared to 27% in the first quarter of 2022. As discussed and quantified above, Kronos' gross margin as a percentage of net sales decreased primarily due to higher production costs, lower production and sales volumes and changes in currency exchange rates, somewhat offset by higher average TiO2 selling prices. Selling, general and administrative expense - Kronos' selling, general and administrative expenses decreased$8.2 million , or 13%, in 2023 compared to 2022 primarily due to lower variable costs (primarily distribution costs) related to lower overall sales volumes. Selling, general and administrative expense as a percentage of net sales increased to 12% of net sales in 2023 compared to 11% in 2022 primarily due to the significant decrease in sales volumes in 2023. Income (loss) from operations - Kronos had a net loss from operations of$18.3 million in the first quarter of 2023 compared to income from operations of$83.3 million in the first quarter of 2022 as a result of the factors impacting gross margin discussed above. Kronos recognized a gain of$1.7 million in the first quarter of 2023 related to cash received from the settlement of a business interruption insurance claim. Kronos estimates changes in currency exchange rates decreased its loss from operations by approximately$19 million in the first quarter of 2023 as compared to the same period in 2022, as discussed in the Effects of currency exchange rates section below. Other non-operating income (expense) - Kronos recognized a loss of$.7 million on the change in market price of its marketable equity securities in the first quarter of 2023 compared to a gain of$.1 million in the first quarter of 2022. Other components of net periodic pension and OPEB cost in the first quarter of 2023 decreased$2.3 million compared to the first quarter of 2022 primarily due to the net effects of higher discount rates impacting interest cost and previously unrecognized actuarial losses. Interest expense in the first quarter of 2023 decreased$.3 million compared to the first quarter of 2022 primarily due to the effects of the strengthening of theU.S. dollar relative to the euro (see discussion in the Effects of currency exchange rates section below). Income tax expense (benefit) - Kronos recognized an income tax benefit of$6.9 million in the first quarter of 2023 compared to income tax expense of$18.3 million in the first quarter of 2022. The difference is primarily due to lower earnings in the first quarter of 2023 and the jurisdictional mix of such earnings. Kronos' earnings are subject to income tax in variousU.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 itsU.S. operations. Kronos would generally expect its overall effective tax rate, excluding the effect of any increase 26
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or decrease in its deferred income tax asset valuation allowance or changes in
its reserve for uncertain tax positions, to be higher than the
Effects of currency exchange rates
Kronos has substantial operations and assets located outsidethe United States (primarily inGermany ,Belgium ,Norway andCanada ). The majority of Kronos' sales from non-U.S. operations are denominated in currencies other than theU.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 theU.S. dollar (and consequently Kronos' non-U.S. operations will generally holdU.S. dollars from time to time). Certain raw materials used in all Kronos' production facilities, primarily titanium-containing feedstocks, are purchased primarily inU.S. dollars, while labor and other production and administrative costs are incurred primarily in local currencies. Consequently, the translatedU.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 (primarilyU.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 (primarilyU.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 March 31, 2023 vs March 31, 2022 Translation gains (losses)- Total currency Transaction gains (losses) recognized impact of impact 2022 2023 Change rate changes 2023 vs 2022 (In millions) Impact on: Net sales $ - $ - $ - $ (11) $ (11)
Income (loss) from operations (2) 5 7 12 19 The$11 million decrease in net sales (translation losses) was caused primarily by a strengthening of theU.S. dollar relative to the euro, as Kronos' euro-denominated sales were translated into fewerU.S. dollars in 2023 as compared to 2022. The strengthening of theU.S. dollar relative to the Canadian dollar and the Norwegian krone in 2023 did not have a significant effect on Kronos' net sales, as a substantial portion of the sales generated by its Canadian and Norwegian operations is denominated in theU.S. dollar.
The
Higher net currency transaction gains of approximately
caused by relative changes in currency exchange rates at each applicable
balance sheet date between the
? the Norwegian krone, and between the euro and the Norwegian krone, which causes
increases or decreases, as applicable, in
and payables and
in Norwegian krone denominated receivables and payables held by Kronos' non-U.S. operations, and
Approximately
by a strengthening of the
Norwegian krone, as local currency-denominated operating costs were translated
into fewer
? translation gains primarily caused by a strengthening of the
relative to the euro as the negative effects of the stronger
euro-denominated sales were more than offset by the favorable effects of
euro-denominated operating costs being translated into fewer
2023 as compared to 2022. Outlook As previously reported, in the second half of 2022 Kronos' experienced weakening demand, particularly inEurope and export markets, along with rapidly rising costs for energy and certain key raw materials and, in response, Kronos implemented production curtailments at certain of its European facilities throughout the fourth quarter of 2022 to manage inventory levels. 27
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Although Kronos began to see pockets of improving demand in the first quarter of 2023, overall, Kronos continued to experience general economic weakness as customers operated at reduced production rates due to softer than expected sales and inventory right sizing. Kronos expects customer demand will gradually return throughout the year; however, based on current and expected near-term demand, Kronos will continue to operate certain of its facilities at reduced production rates during the second quarter to manage inventory levels. Kronos' selling prices have remained relatively stable during the first quarter of 2023, and it expects selling prices will rise throughout the remainder of 2023, improving margins as demand increases. Because of the sluggish demand recovery and higher production costs resulting from unfavorable fixed cost absorption at lowered production rates, Kronos expects to report lower operating results for the full year of 2023 as compared to 2022. Kronos will continue to monitor current and anticipated near-term customer demand levels and align its production and inventories accordingly. Kronos believes the long-term outlook for its industry remains positive, and is taking steps in the near term which are intended to preserve its competitive position and future growth. Kronos' expectations for the TiO2 industry and its operations are based on a number of factors outside its control. As noted above, Kronos has experienced global market disruptions including high energy costs and availability concerns and future impacts on its operations will depend on, among other things, future energy costs and availability and the impact economic conditions and geopolitical events have on Kronos' 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$7.3 million in the first three months of 2023 compared to$3.0 million in the first three months of 2022. The increase in cash provided by operating activities in the first three months of 2023 includes:
? higher income from operations from CompX in 2023 of
? lower net cash used for relative changes in receivables, inventories, prepaids,
payables and accrued liabilities in 2023 of
We do not have complete access to CompX's cash flows in part because we do not own 100% of CompX. A detail of our consolidated cash flows from operating activities is presented in the table below. Intercompany dividends have been eliminated. The reference to NL Parent in the table below is a reference toNL Industries, Inc. , as the parent company of CompX and our wholly-owned subsidiaries. Three months ended March 31, 2022 2023 (In millions) Net cash provided by (used in) operating activities: CompX$ (2.2) $
3.1
NL Parent and wholly-owned subsidiaries 7.9
6.9 Eliminations (2.7) (2.7) Total$ 3.0 $ 7.3 Relative changes in working capital can have a significant effect on cash flows from operating activities. As shown below, average days sales outstanding is consistent fromDecember 31, 2022 toMarch 31, 2023 . Total average number of days in inventory decreased fromDecember 31, 2022 toMarch 31, 2023 due to sales growth at CompX's Marine Components reporting unit in the first 28
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quarter of 2023 somewhat offset by sales decline at CompX's Security Products reporting unit as well as lower inventory balances at both reporting units. For comparative purposes, we have providedDecember 31, 2021 andMarch 31, 2022
numbers below. December 31, March 31, December 31, March 31, 2021 2022 2022 2023 Days sales outstanding 42 days 38 days 41 days 41 days Days in inventory 96 days 85 days 99 days 97 days Investing activities
Our capital expenditures, all of which relate to CompX, were$.3 million in the first three months of 2023 compared to$1.7 million in the first three months of 2022. During the first three months of 2023, Valhi repaid a net$1.0 million under the promissory note ($6.8 million of gross borrowings and$7.8 million of gross repayments). During the first three months of 2022, Valhi repaid a net$.6 million under the promissory note ($7.1 million of gross borrowings and$7.7 million of gross repayments).
During the first quarter of 2023, we purchased marketable securities totaling
Financing activities
Our board of directors declared a quarterly dividend of$.07 per share in each of the first quarters of 2022 and 2023. The declaration and payment of future dividends, and the amount thereof, is discretionary and is dependent upon our financial condition, cash requirements, contractual obligations and restrictions and other factors deemed relevant by our board of 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 three months of each of 2022 and 2023 also include CompX dividends paid to its stockholders other than us.
Outstanding debt obligations
AtMarch 31, 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 atMarch 31, 2023 . See Note 8 to our Condensed Consolidated Financial Statements. Kronos has no outstanding borrowings on its global revolving credit facility (Global Revolver) atMarch 31, 2023 and the full$225 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 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 atMarch 31, 2023 . Kronos believes it will be able to maintain compliance with the financial covenants contained in its credit facilitiy 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). 29 Table of Contents
At
Amount (In millions) CompX $ 61.0 NL Parent and wholly-owned subsidiaries 111.6 Total $ 172.6 In addition, atMarch 31, 2023 we owned approximately 1.2 million shares of Valhi common stock with an aggregate market value of$20.9 million . See Note 4 to our Condensed Consolidated Financial Statements. We also owned approximately 35.2 million shares of Kronos common stock atMarch 31, 2023 with an aggregate market value of$324.4 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 endingMarch 31, 2024 ) 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$50 million on a revolving basis. AtMarch 31, 2023 , we had$.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
Repurchases of common stock
At
30 Table of Contents 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 ofMarch 31, 2023 and their current regular quarterly dividend rate, is presented in the table below. Shares held Quarterly Annual expected March 31, 2023 dividend rate dividend (In millions) (In millions) 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 three months of 2023.
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