NL Industries 10Q 2023 Q2 Quarterly report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-640

NL INDUSTRIES, INC.

(Exact name of Registrant as specified in its charter)

New Jersey

13-5267260

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

5430 LBJ Freeway, Suite 1700

Dallas, Texas 75240-2620

(Address of principal executive offices)

Registrant’s telephone number, including area code: (972) 233-1700

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock	NL	NYSE

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

Number of shares of the registrant’s common stock, $.125 par value per share, outstanding on July 28, 2023 48,833,484.

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NL INDUSTRIES, INC. AND SUBSIDIARIES

INDEX

		Page number
Part I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets - December 31, 2022; June 30, 2023 (unaudited)	3

	Condensed Consolidated Statements of Operations (unaudited) - Three and six months ended June 30, 2022 and 2023	5

	Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) - Three and six months ended June 30, 2022 and 2023	6

	Condensed Consolidated Statements of Equity (unaudited) - Three and six months ended June 30, 2022 and 2023	7

	Condensed Consolidated Statements of Cash Flows (unaudited) - Six months ended June 30, 2022 and 2023	8

	Notes to Condensed Consolidated Financial Statements (unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	34

Item 4.	Controls and Procedures	34

Part II.	OTHER INFORMATION	34

Item 1.	Legal Proceedings	34

Item 1A.	Risk Factors	35

Item 6.	Exhibits	35

Items 2, 3, 4 and 5 of Part II are omitted because there is no information to report.

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NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)


	December 31,		June 30,
	2022		2023
			(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	68,868	$	58,523
Restricted cash and cash equivalents		2,864		2,913
Marketable securities		70,164		95,716
Accounts and other receivables, net		17,870		15,081
Receivables from affiliates		636		601
Inventories, net		31,290		33,765
Prepaid expenses and other		2,276		1,774

Total current assets		193,968		208,373

Other assets:
Restricted cash and cash equivalents		25,770		25,938
Note receivable from affiliate		13,200		12,200
Marketable securities		26,350		15,391
Investment in Kronos Worldwide, Inc.		292,206		268,469
Goodwill		27,156		27,156
Other assets, net		2,523		1,771

Total other assets		387,205		350,925

Property and equipment:
Land		5,390		5,390
Buildings		23,181		23,181
Equipment		74,113		74,525
Construction in progress		722		434
		103,406		103,530
Less accumulated depreciation		74,712		76,407

Net property and equipment		28,694		27,123

Total assets	$	609,867	$	586,421

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NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In thousands)


	December 31,		June 30,
	2022		2023
			(unaudited)
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	3,537	$	5,224
Accrued litigation settlement		11,830		11,943
Accrued and other current liabilities		13,393		9,671
Accrued environmental remediation and related costs		2,627		1,850
Payables to affiliates		665		650

Total current liabilities		32,052		29,338

Noncurrent liabilities:
Long-term debt from affiliate		500		500
Accrued environmental remediation and related costs		89,731		89,509
Long-term litigation settlement		27,427		27,688
Deferred income taxes		50,119		43,682
Accrued pension costs		3,012		2,754
Other		4,279		4,176

Total noncurrent liabilities		175,068		168,309

Equity:
NL stockholders' equity:
Common stock		6,101		6,103
Additional paid-in capital		298,598		298,868
Retained earnings		300,442		283,784
Accumulated other comprehensive loss		(222,991)		(221,098)

Total NL stockholders' equity		382,150		367,657

Noncontrolling interest in subsidiary		20,597		21,117

Total equity		402,747		388,774

Total liabilities and equity	$	609,867	$	586,421

Commitments and contingencies (Notes 12 and 14)

See accompanying notes to Condensed Consolidated Financial Statements.

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NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)


	Three months ended				Six months ended
	June 30,				June 30,
	2022		2023		2022		2023

	(unaudited)
Net sales	$	41,675	$	36,616	$	83,725	$	77,767
Cost of sales		28,046		26,343		58,016		54,790

Gross margin		13,629		10,273		25,709		22,977

Selling, general and administrative expense		5,884		5,906		11,658		11,570
Corporate expense		3,540		2,946		5,976		5,789

Income from operations		4,205		1,421		8,075		5,618

Equity in earnings (losses) of Kronos Worldwide, Inc.		13,991		(2,516)		31,524		(7,153)

Other income (expense):
Interest and dividend income		567		2,145		876		4,110
Marketable equity securities		19,200		(5,461)		19,871		(10,959)
Loss on pension plan termination		—		(4,911)		—		(4,911)
Other components of net periodic pension and OPEB cost		(223)		(370)		(446)		(716)
Interest expense		(248)		(199)		(494)		(398)

Income (loss) before income taxes		37,492		(9,891)		59,406		(14,409)

Income tax expense (benefit)		6,435		(7,300)		9,140		(5,879)

Net income (loss)		31,057		(2,591)		50,266		(8,530)
Noncontrolling interest in net income of subsidiary		805		517		1,457		1,294

Net income (loss) attributable to NL stockholders	$	30,252	$	(3,108)	$	48,809	$	(9,824)

Amounts attributable to NL stockholders:
Basic and diluted net income (loss) per share	$	.62	$	(.06)	$	1.00	$	(.20)

Weighted average shares used in the calculation of net income per share		48,809		48,824		48,806		48,820

See accompanying notes to Condensed Consolidated Financial Statements.

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NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)


	Three months ended				Six months ended
	June 30,				June 30,
	2022		2023		2022		2023

	(unaudited)
Net income (loss)	$	31,057	$	(2,591)	$	50,266	$	(8,530)

Other comprehensive income (loss), net of tax:
Currency translation		(8,741)		(1,219)		(7,161)		(2,885)
Defined benefit pension plans		856		4,676		1,729		5,069
Marketable debt securities		—		(121)		—		(169)
Other postretirement benefit plans		(63)		(58)		(131)		(118)

Total other comprehensive income (loss), net		(7,948)		3,278		(5,563)		1,897

Comprehensive income (loss)		23,109		687		44,703		(6,633)
Comprehensive income attributable to noncontrolling interest		805		525		1,457		1,298

Comprehensive income (loss) attributable to NL stockholders	$	22,304	$	162	$	43,246	$	(7,931)

See accompanying notes to Condensed Consolidated Financial Statements.

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NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(In thousands)


	Three months ended June 30, 2022 and 2023 (unaudited)
							Accumulated
			Additional				other		Noncontrolling
	Common		paid-in		Retained		comprehensive		interest in		Total
	stock		capital		earnings		loss		subsidiary		equity

Balance at March 31, 2022	$	6,100	$	300,210	$	312,492	$	(238,371)	$	22,747	$	403,178
Net income		—		—		30,252		—		805		31,057
Other comprehensive loss, net of tax		—		—		—		(7,948)		—		(7,948)
Issuance of NL common stock		1		119		—		—		—		120
Dividends paid - $.07 per share		—		—		(3,417)		—		—		(3,417)
Dividends paid to noncontrolling interest		—		—		—		—		(406)		(406)
Other, net		—		(1,397)		—		—		(210)		(1,607)

Balance at June 30, 2022	$	6,101	$	298,932	$	339,327	$	(246,319)	$	22,936	$	420,977

Balance at March 31, 2023	$	6,101	$	298,252	$	290,309	$	(224,368)	$	20,982	$	391,276
Net income (loss)		—		—		(3,108)		—		517		(2,591)
Other comprehensive income, net of tax		—		—		—		3,270		8		3,278
Issuance of NL common stock		2		98		—		—		—		100
Dividends paid - $.07 per share		—		—		(3,417)		—				(3,417)
Dividends paid to noncontrolling interest		—		—		—		—		(390)		(390)
Other, net		—		518		—		—		—		518

Balance at June 30, 2023	$	6,103	$	298,868	$	283,784	$	(221,098)	$	21,117	$	388,774


	Six months ended June 30, 2022 and 2023 (unaudited)
							Accumulated
			Additional				other		Noncontrolling
	Common		paid-in		Retained		comprehensive		interest in		Total
	stock		capital		earnings		loss		subsidiary		equity

Balance at December 31, 2021	$	6,100	$	299,775	$	297,351	$	(240,756)	$	22,501	$	384,971
Net income		—		—		48,809		—		1,457		50,266
Other comprehensive loss, net of tax		—		—		—		(5,563)		—		(5,563)
Issuance of NL common stock		1		119		—		—		—		120
Dividends paid - $.14 per share		—		—		(6,833)		—		—		(6,833)
Dividends paid to noncontrolling interest		—		—		—		—		(812)		(812)
Other, net		—		(962)		—		—		(210)		(1,172)

Balance at June 30, 2022	$	6,101	$	298,932	$	339,327	$	(246,319)	$	22,936	$	420,977

Balance at December 31, 2022	$	6,101	$	298,598	$	300,442	$	(222,991)	$	20,597	$	402,747
Net income (loss)		—		—		(9,824)		—		1,294		(8,530)
Other comprehensive income, net of tax		—		—		—		1,893		4		1,897
Issuance of NL common stock		2		98		—		—		—		100
Dividends paid - $.14 per share		—		—		(6,834)		—		—		(6,834)
Dividends paid to noncontrolling interest		—		—		—		—		(778)		(778)
Other, net		—		172		—		—		—		172

Balance at June 30, 2023	$	6,103	$	298,868	$	283,784	$	(221,098)	$	21,117	$	388,774

See accompanying notes to Condensed Consolidated Financial Statements.

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NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


	Six months ended
	June 30,
	2022		2023

	(unaudited)
Cash flows from operating activities:
Net income (loss)	$	50,266	$	(8,530)
Depreciation and amortization		1,956		2,009
Deferred income taxes		9,099		(5,957)
Equity in (earnings) losses of Kronos Worldwide, Inc.		(31,524)		7,153
Dividends received from Kronos Worldwide, Inc.		13,384		13,384
Marketable equity securities		(19,871)		10,959
Loss on pension plan termination		—		4,911
Benefit plan expense greater than cash funding		278		355
Noncash interest income		—		(1,839)
Noncash interest expense		480		374
Other, net		(32)		199
Change in assets and liabilities:
Accounts and other receivables, net		(1,995)		2,787
Inventories, net		(7,735)		(2,585)
Prepaid expenses and other		(1,249)		508
Accounts payable and accrued liabilities		663		(1,777)
Accounts with affiliates		(115)		622
Accrued environmental remediation and related costs		96		(999)
Other noncurrent assets and liabilities, net		(76)		(646)
Net cash provided by operating activities		13,625		20,928

Cash flows from investing activities:
Capital expenditures		(2,215)		(478)
Marketable securities:
Purchases		—		(49,966)
Proceeds from maturities		—		26,000
Note receivable from affiliate:
Collections		12,400		14,700
Loans		(10,300)		(13,700)
Other, net		150		—
Net cash provided by (used in) investing activities		35		(23,444)

Cash flows from financing activities:
Dividends paid		(6,833)		(6,834)
Subsidiary treasury stock acquired		(1,744)		—
Dividends paid to noncontrolling interests in subsidiary		(812)		(778)
Other, net		(16)		—
Net cash used in financing activities		(9,405)		(7,612)

Cash and cash equivalents and restricted cash and cash equivalents - net change from:
Operating, investing and financing activities		4,255		(10,128)
Balance at beginning of year		175,242		97,502

Balance at end of period	$	179,497	$	87,374

Supplemental disclosures - cash paid (received) for:
Interest	$	14	$	24
Income taxes, net		164		(570)

See accompanying notes to Condensed Consolidated Financial Statements.

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NL INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

Note 1 – Organization and basis of presentation:

Organization – At June 30, 2023, Valhi, Inc. (NYSE: VHI) held approximately 83% of our outstanding common stock and a wholly-owned subsidiary of Contran Corporation held approximately 91% of Valhi’s outstanding common stock. A majority of Contran’s outstanding voting stock is held directly by Lisa K. Simmons and various family trusts established for the benefit of Ms. Simmons, Thomas C. Connelly (the husband of Ms. Simmons’ late sister) and their children and for which Ms. Simmons or Mr. Connelly, as applicable, serve as trustee (collectively, the “Other Trusts”). With respect to the Other Trusts for which Mr. Connelly serves as trustee, he is required to vote the shares of Contran voting stock held by such trusts in the same manner as Ms. Simmons. Such voting rights of Ms. Simmons last through April 22, 2030 and are personal to Ms. Simmons. The remainder of Contran’s outstanding voting stock is held by another trust (the “Family Trust”), which was established for the benefit of Ms. Simmons and her late sister and their children and for which a third-party financial institution serves as trustee. Consequently, at June 30, 2023 Ms. Simmons and the Family Trust may be deemed to control Contran, and therefore may be deemed to indirectly control the wholly-owned subsidiary of Contran, Valhi and us.

Basis of presentation – Consolidated in this Quarterly Report are the results of our majority-owned subsidiary, CompX International Inc. We also own approximately 31% of Kronos Worldwide, Inc. (Kronos). CompX (NYSE American: CIX) and Kronos (NYSE: KRO) each file periodic reports with the Securities and Exchange Commission (SEC).

The unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report have been prepared on the same basis as the audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2022 that we filed with the SEC on March 8, 2023 (the “2022 Annual Report”). In our opinion, we have made all necessary adjustments (which include only normal recurring adjustments) in order to state fairly, in all material respects, our consolidated financial position, results of operations and cash flows as of the dates and for the periods presented. We have condensed the Consolidated Balance Sheet at December 31, 2022 contained in this Quarterly Report as compared to our audited Consolidated Financial Statements at that date, and we have omitted certain information and footnote disclosures (including those related to the Consolidated Balance Sheet at December 31, 2022) normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). Our results of operations for the interim periods ended June 30, 2023 may not be indicative of our operating results for the full year. The Condensed Consolidated Financial Statements contained in this Quarterly Report should be read in conjunction with our 2022 Consolidated Financial Statements contained in our 2022 Annual Report.

Unless otherwise indicated, references in this report to “NL,” “we,” “us” or “our” refer to NL Industries, Inc. and its subsidiaries and affiliate, Kronos, taken as a whole.

Note 2 – Accounts and other receivables, net:


	December 31,		June 30,
	2022		2023

	(In thousands)
Trade receivables - CompX	$	17,910	$	15,114
Other receivables		30		37
Allowance for doubtful accounts		(70)		(70)
Total	$	17,870	$	15,081

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Note 3 – Inventories, net:


	December 31,		June 30,
	2022		2023

	(In thousands)
Raw materials	$	6,245	$	6,548
Work in process		19,983		22,024
Finished products		5,062		5,193
Total	$	31,290	$	33,765

Note 4 – Marketable securities:

Our marketable securities consist of investments in debt and equity securities. Our current marketable securities are debt securities invested in U.S. government treasuries and are classified as available-for-sale. The fair value of our marketable debt securities are determined using Level 2 inputs because although these securities are traded, in many cases the market is not active and the period-end valuation is generally based on the last trade of the period, which may be several days prior to the end of the period. We accumulate unrealized gains and losses on marketable debt securities as part of accumulated other comprehensive income (loss), net of related deferred income taxes.

Our noncurrent marketable securities are equity securities and consist of our investment in the publicly-traded shares of our immediate parent company Valhi, Inc. Our shares of Valhi common stock are accounted for as available-for-sale securities, which are carried at fair value using quoted market prices in active markets and represent a Level 1 input within the fair value hierarchy, as defined by ASC Topic 820, Fair Value Measurements and Disclosures. We record any unrealized gains or losses on the securities in other income (expense), net on our Condensed Consolidated Statements of Operations.


	Fair value			Cost or
	measurement	Market		amortized		Unrealized
	level	value		cost		gain (loss), net

		(In thousands)
December 31, 2022
Current assets
Fixed income securities	2	$	70,164	$	70,226		(62)
Noncurrent assets
Valhi common stock	1	$	26,350	$	24,347	$	2,003

June 30, 2023
Current assets
Fixed income securities	2	$	95,716	$	96,032	$	(316)
Noncurrent assets
Valhi common stock	1	$	15,391	$	24,347	$	(8,956)

At December 31, 2022 and June 30, 2023, we held approximately 1.2 million shares of common stock of our immediate parent company, Valhi, Inc. At December 31, 2022 and June 30, 2023, the quoted per share market price of Valhi common stock was $22.00 and $12.85, respectively.

The Valhi common stock we own is subject to restrictions on resale pursuant to certain provisions of the SEC Rule 144. In addition, as a majority-owned subsidiary of Valhi, we cannot vote our shares of Valhi common stock under Delaware General Corporation Law, but we receive dividends from Valhi on these shares, when declared and paid.

Note 5 – Investment in Kronos Worldwide, Inc.:

At December 31, 2022 and June 30, 2023, we owned approximately 35.2 million shares of Kronos common stock. At June 30, 2023, the quoted market price of Kronos’ common stock was $8.73 per share, or an aggregate market value of $307.5 million. At December 31, 2022, the quoted market price was $9.40 per share, or an aggregate market value of $331.1 million.

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The change in the carrying value of our investment in Kronos during the first six months of 2023 is summarized below.


	Amount
	(In millions)
Balance at the beginning of the period	$	292.2
Equity in loss of Kronos		(7.1)
Dividends received from Kronos		(13.4)
Equity in Kronos' other comprehensive income (loss):
Currency translation		(3.8)
Defined benefit pension plans		.5
Other		.1
Balance at the end of the period	$	268.5

Selected financial information of Kronos is summarized below:


	December 31,		June 30,
	2022		2023

	(In millions)
Current assets	$	1,242.2	$	1,055.7
Property and equipment, net		484.5		489.3
Investment in TiO₂ joint venture		112.9		121.2
Other noncurrent assets		94.8		112.6
Total assets	$	1,934.4	$	1,778.8

Current liabilities	$	326.7	$	260.6
Long-term debt		424.1		432.4
Accrued pension costs		128.6		126.9
Other noncurrent liabilities		97.8		82.4
Stockholders’ equity		957.2		876.5
Total liabilities and stockholders’ equity	$	1,934.4	$	1,778.8

Three months ended

Six months ended

June 30,

2022

2023

2022

2023

(In millions)

Net sales

565.3

443.2

1,128.2

869.5

Cost of sales

444.8

399.1

858.4

794.6

Income (loss) from operations

65.2

(6.7)

148.5

(25.0)

Income tax expense (benefit)

14.8

(4.1)

33.1

(11.0)

Net income (loss)

45.9

(8.2)

103.4

(23.4)

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Note 6 – Other assets, net:


	December 31,		June 30,
	2022		2023

	(In thousands)
Pension asset	$	1,105	$	—
Other		1,418		1,771
Total	$	2,523	$	1,771

See Note 11 regarding the termination and buy-out of our United Kingdom (U.K.) pension plan.

Note 7 – Accrued and other current liabilities:


	December 31,		June 30,
	2022		2023

	(In thousands)
Employee benefits	$	11,023	$	7,792
Other		2,370		1,879
Total	$	13,393	$	9,671

Note 8 – Long-term debt:

During the first six months of 2023, our wholly-owned subsidiary, NLKW Holding, LLC had no borrowings or repayments under its $50 million secured revolving credit facility with Valhi. At June 30, 2023, $.5 million was outstanding and $49.5 million was available for future borrowing under this facility. Outstanding borrowings bear interest at the prime rate plus 1.875% per annum, and the average interest rate for the six months ended June 30, 2023 was 9.80%. The interest rate under this facility as of June 30, 2023 was 10.13%. We are in compliance with all covenants at June 30, 2023.

Note 9 – Other noncurrent liabilities:


	December 31,		June 30,
	2022		2023

	(In thousands)
Reserve for uncertain tax positions	$	2,714	$	2,714
OPEB		637		604
Insurance claims and expenses		625		553
Other		303		305
Total	$	4,279	$	4,176

Note 10 – Revenue recognition:

The following table disaggregates our net sales by reporting unit, which are the categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.


	Three months ended				Six months ended
	June 30,				June 30,
	2022		2023		2022		2023

	(In thousands)
Net sales:
Security Products	$	28,837	$	25,672	$	58,418	$	53,014
Marine Components		12,838		10,944		25,307		24,753
Total	$	41,675	$	36,616	$	83,725	$	77,767

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Note 11 – Employee benefit plans:

The components of net periodic defined benefit pension cost are presented in the table below.


	Three months ended				Six months ended
	June 30,				June 30,
	2022		2023		2022		2023

	(In thousands)
Interest cost	$	297	$	412	$	594	$	862
Expected return on plan assets		(392)		(352)		(784)		(766)
Recognized actuarial losses		373		358		746		716
Total	$	278	$	418	$	556	$	812

We currently expect our 2023 contributions to our defined benefit pension plans to be approximately $1.2 million.

We previously maintained a defined benefit pension plan in the U.K. related to a former disposed U.K. business unit. In accordance with applicable U.K. pension regulations, we entered into an agreement in March 2021 for the bulk annuity purchase, or “buy-in”, with a specialist insurer of defined benefit pension plans. Following the buy-in, individual policies replaced the bulk annuity policy in a “buy-out” which was completed as of May 1, 2023. The buy-out was completed with existing plan funds. At the completion of the buy-out, the assets and liabilities of the U.K. pension plan were removed from our Consolidated Financial Statements and a non-cash pension plan termination loss of $4.9 million was recognized in the second quarter of 2023.

Note 12 – Income taxes:


	Three months ended				Six months ended
	June 30,				June 30,
	2022		2023		2022		2023

	(In thousands)
Expected tax expense (benefit), at U.S. federal statutory income tax rate of 21%	$	7,873	$	(2,077)	$	12,475	$	(3,026)
Rate differences on equity in earnings (losses) of Kronos, net of dividends		(1,449)		(5,146)		(3,363)		(2,841)
U.S. state income taxes and other, net		11		(77)		28		(12)
Income tax expense (benefit)	$	6,435	$	(7,300)	$	9,140	$	(5,879)

Comprehensive provision for income taxes allocable to:
Net income (loss)	$	6,435	$	(7,300)	$	9,140	$	(5,879)
Additional paid-in capital		9		110		125		18
Other comprehensive income (loss):
Currency translation		(2,323)		(371)		(1,903)		(814)
Pension plans		228		295		460		399
Other		(17)		(50)		(35)		(84)
Total	$	4,332	$	(7,316)	$	7,787	$	(6,360)

In accordance with GAAP, we recognize deferred income taxes on our undistributed equity in earnings (losses) of Kronos. Because we and Kronos are part of the same U.S. federal income tax group, any dividends we receive from Kronos are nontaxable to us. Accordingly, we do not recognize and we are not required to pay income taxes on dividends from Kronos. We received aggregate dividends from Kronos of $13.4 million in each of the first six months of 2022 and 2023. The amounts shown in the above table of our income tax rate reconciliation for rate differences on equity in earnings (losses) of Kronos, net of dividends, represent the income tax benefit associated with the nontaxable dividends we received from Kronos compared to the amount of deferred income taxes we recognized on our equity in earnings (losses) of Kronos.

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Note 13 – Stockholders’ equity:

Accumulated other comprehensive loss - Changes in accumulated other comprehensive loss attributable to NL stockholders, including amounts resulting from our investment in Kronos Worldwide (see Note 5), are presented in the table below.


	Three months ended				Six months ended
	June 30,				June 30,
	2022		2023		2022		2023

	(In thousands)
Accumulated other comprehensive loss, (net of tax and noncontrolling interest):
Currency translation:
Balance at beginning of period	$	(169,655)	$	(179,857)	$	(171,235)	$	(178,191)
Other comprehensive loss		(8,741)		(1,219)		(7,161)		(2,885)
Balance at end of period	$	(178,396)	$	(181,076)	$	(178,396)	$	(181,076)

Defined benefit pension plans:
Balance at beginning of period	$	(67,595)	$	(43,464)	$	(68,468)	$	(43,857)
Other comprehensive income -
Amortization of prior service cost and net losses included in net periodic pension cost		856		534		1,729		927
Plan settlement		—		4,142		—		4,142
Balance at end of period	$	(66,739)	$	(38,788)	$	(66,739)	$	(38,788)

OPEB plans and other:
Balance at beginning of period	$	(1,121)	$	(953)	$	(1,053)	$	(893)
Other comprehensive loss -
Amortization of net gain included in net periodic OPEB cost		(63)		(58)		(131)		(118)
Balance at end of period	$	(1,184)	$	(1,011)	$	(1,184)	$	(1,011)

Marketable debt securities:
Balance at beginning of period	$	—	$	(94)	$	—	$	(50)
Other comprehensive loss - unrealized loss arising during the period		—		(129)		—		(173)
Balance at end of period	$	—	$	(223)	$	—	$	(223)

Total accumulated other comprehensive loss:
Balance at beginning of period	$	(238,371)	$	(224,368)	$	(240,756)	$	(222,991)
Other comprehensive income (loss)		(7,948)		3,270		(5,563)		1,893
Balance at end of period	$	(246,319)	$	(221,098)	$	(246,319)	$	(221,098)

See Note 11 for amounts related to our defined benefit pension plans.

Other – During the second quarter of 2022, we purchased 2,000 shares of our common stock from Kronos for a nominal amount in a private transaction that was approved in advance by our independent directors. We cancelled these treasury shares and allocated their cost to common stock at par value and additional paid-in capital.

During the second quarter of 2022, CompX acquired 78,900 shares of its Class A common stock for an aggregate amount of approximately $1.7 million under prior repurchase authorizations. Of these shares, 70,000 shares were purchased in a market transaction, and 8,900 shares were purchased from two of its affiliates in two separate private transactions that were also approved in advance by CompX’s independent directors. At June 30, 2023, 523,647 shares were available for purchase under CompX’s prior repurchase authorizations.

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Note 14 – Commitments and contingencies:

General

We are involved in various environmental, contractual, product liability, patent (or intellectual property), employment and other claims and disputes incidental to our current and former businesses. At least quarterly our management discusses and evaluates the status of any pending litigation or claim to which we are a party or which has been asserted against us. The factors considered in such evaluation include, among other things, the nature of such pending cases and claims, the status of such pending cases and claims, the advice of legal counsel and our experience in similar cases and claims (if any). Based on such evaluation, we make a determination as to whether we believe (i) it is probable a loss has been incurred, and if so if the amount of such loss (or a range of loss) is reasonably estimable, or (ii) it is reasonably possible but not probable a loss has been incurred, and if so, if the amount of such loss (or a range of loss) is reasonably estimable, or (iii) the probability a loss has been incurred is remote.

Lead pigment litigation

Our former operations included the manufacture of lead pigments for use in paint and lead-based paint. We, other former manufacturers of lead pigments for use in paint and lead-based paint (together, the “former pigment manufacturers”), and the Lead Industries Association (LIA), which discontinued business operations in 2002, have been named as defendants in various legal proceedings seeking damages for personal injury, property damage and governmental expenditures allegedly caused by the use of lead-based paints. Certain of these actions have been filed by or on behalf of states, counties, cities or their public housing authorities and school districts, and certain others have been asserted as class actions. These lawsuits seek recovery under a variety of theories, including public and private nuisance, negligent product design, negligent failure to warn, strict liability, breach of warranty, conspiracy/concert of action, aiding and abetting, enterprise liability, market share or risk contribution liability, intentional tort, fraud and misrepresentation, violations of state consumer protection statutes, supplier negligence and similar claims.

The plaintiffs in these actions generally seek to impose on the defendants responsibility for lead paint abatement and health concerns associated with the use of lead-based paints, including damages for personal injury, contribution and/or indemnification for medical expenses, medical monitoring expenses and costs for educational programs. To the extent the plaintiffs seek compensatory or punitive damages in these actions, such damages are generally unspecified. In some cases, the damages are unspecified pursuant to the requirements of applicable state law. A number of cases are inactive or have been dismissed or withdrawn. Most of the remaining cases are in various pre-trial stages. Some are on appeal following dismissal or summary judgment rulings or a trial verdict in favor of either the defendants or the plaintiffs.

We believe these actions are without merit, and we intend to continue to deny all allegations of wrongdoing and liability and to defend against all actions vigorously. We do not believe it is probable we have incurred any liability with respect to pending lead pigment litigation cases to which we are a party, and with respect to all such lead pigment litigation cases to which we are a party, we believe liability to us that may result, if any, in this regard cannot be reasonably estimated, because:

●

we have never settled any of the market share, intentional tort, fraud, nuisance, supplier negligence, breach of warranty, conspiracy, misrepresentation, aiding and abetting, enterprise liability, or statutory cases (other than the Santa Clara case discussed below),

●

no final, non-appealable adverse judgments have ever been entered against us, and

●

we have never ultimately been found liable with respect to any such litigation matters, including over 100 cases over a thirty-year period for which we were previously a party and for which we have been dismissed without any finding of liability.

Accordingly, we have not accrued any amounts for any of the pending lead pigment and lead-based paint litigation cases filed by or on behalf of states, counties, cities or their public housing authorities and school districts, or those asserted as class actions. In addition, we have determined that liability to us which may result, if any, cannot be reasonably estimated at this time because there is no prior history of a loss of this nature on which an estimate could be made and there is no substantive information available upon which an estimate could be based.

In the terms of the County of Santa Clara v. Atlantic Richfield Company, et al. (Superior Court of the State of California, County of Santa Clara, Case No. 1-00-CV-788657) global settlement agreement, we have three annual installment payments remaining ($12.0 million for the next two installments and $16.7 million for the final installment). Our final installment will be made with funds already on deposit at the court, which are included in noncurrent restricted cash on our Condensed Consolidated Balance Sheets, that are committed to the settlement, including all accrued interest at the date of payment, with any remaining balance to be paid by us (and any amounts on deposit in excess of the final payment would be returned to us). See Note 16 to our 2022 Annual Report.

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New cases may continue to be filed against us. We do not know if we will incur liability in the future in respect to any of the pending or possible litigation in view of the inherent uncertainties involved in court and jury rulings. In the future, if new information regarding such matters becomes available to us (such as a final, non-appealable adverse verdict against us or otherwise ultimately being found liable with respect to such matters), at that time we would consider such information in evaluating any remaining cases then-pending against us as to whether it might then have become probable we have incurred liability with respect to these matters, and whether such liability, if any, could have become reasonably estimable. The resolution of any of these cases could result in the recognition of a loss contingency accrual that could have a material adverse impact on our net income for the interim or annual period during which such liability is recognized and a material adverse impact on our consolidated financial condition and liquidity.

Environmental matters and litigation

Our operations are governed by various environmental laws and regulations. Certain of our businesses are and have been engaged in the handling, manufacture or use of substances or compounds that may be considered toxic or hazardous within the meaning of applicable environmental laws and regulations. As with other companies engaged in similar businesses, certain of our past and current operations and products have the potential to cause environmental or other damage. We have implemented and continue to implement various policies and programs in an effort to minimize these risks. Our policy is to maintain compliance with applicable environmental laws and regulations at all of our plants and to strive to improve environmental performance. From time to time, we may be subject to environmental regulatory enforcement under U.S. statutes, the resolution of which typically involves the establishment of compliance programs. It is possible that future developments, such as stricter requirements of environmental laws and enforcement policies, could adversely affect our production, handling, use, storage, transportation, sale or disposal of such substances. We believe all of our facilities are in substantial compliance with applicable environmental laws.

Certain properties and facilities used in our former operations, including divested primary and secondary lead smelters and former mining locations, are the subject of civil litigation, administrative proceedings or investigations arising under federal and state environmental laws and common law. Additionally, in connection with past operating practices, we are currently involved as a defendant, potentially responsible party (PRP) or both, pursuant to the Comprehensive Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act (CERCLA), and similar state laws in various governmental and private actions associated with waste disposal sites, mining locations, and facilities that we or our predecessors, our subsidiaries or their predecessors currently or previously owned, operated or used, certain of which are on the United States Environmental Protection Agency’s (EPA) Superfund National Priorities List or similar state lists. These proceedings seek cleanup costs, damages for personal injury or property damage and/or damages for injury to natural resources. Certain of these proceedings involve claims for substantial amounts. Although we may be jointly and severally liable for these costs, in most cases we are only one of a number of PRPs who may also be jointly and severally liable, and among whom costs may be shared or allocated. In addition, we are occasionally named as a party in a number of personal injury lawsuits filed in various jurisdictions alleging claims related to environmental conditions alleged to have resulted from our operations.

Obligations associated with environmental remediation and related matters are difficult to assess and estimate for numerous reasons including the:

●

complexity and differing interpretations of governmental regulations,

●

number of PRPs and their ability or willingness to fund such allocation of costs,

●

financial capabilities of the PRPs and the allocation of costs among them,

●

solvency of other PRPs,

●

multiplicity of possible solutions,

●

number of years of investigatory, remedial and monitoring activity required,

●

uncertainty over the extent, if any, to which our former operations might have contributed to the conditions allegedly giving rise to such personal injury, property damage, natural resource and related claims, and

●

number of years between former operations and notice of claims and lack of information and documents about the former operations.

In addition, the imposition of more stringent standards or requirements under environmental laws or regulations, new developments or changes regarding site cleanup costs or the allocation of costs among PRPs, solvency of other PRPs, the results of future testing and analysis undertaken with respect to certain sites or a determination that we are potentially responsible for the release of hazardous substances at other sites, could cause our expenditures to exceed our current estimates. Actual costs could exceed accrued

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amounts or the upper end of the range for sites for which estimates have been made, and costs may be incurred for sites where no estimates presently can be made. Further, additional environmental and related matters may arise in the future. If we were to incur any future liability, this could have a material adverse effect on our consolidated financial statements, results of operations and liquidity.

We record liabilities related to environmental remediation and related matters (including costs associated with damages for personal injury or property damage and/or damages for injury to natural resources) when estimated future expenditures are probable and reasonably estimable. We adjust such accruals as further information becomes available to us or as circumstances change. Unless the amounts and timing of such estimated future expenditures are fixed and reasonably determinable, we generally do not discount estimated future expenditures to their present value due to the uncertainty of the timing of the payout. We recognize recoveries of costs from other parties, if any, as assets when their receipt is deemed probable.

We do not know and cannot estimate the exact time frame over which we will make payments for our accrued environmental and related costs. The timing of payments depends upon a number of factors, including but not limited to the timing of the actual remediation process; which in turn depends on factors outside of our control. At each balance sheet date, we estimate the amount of our accrued environmental and related costs which we expect to pay within the next twelve months, and we classify this estimate as a current liability. We classify the remaining accrued environmental costs as a noncurrent liability.

Changes in the accrued environmental remediation and related costs during the first six months of 2023 are as follows:


	Amount
	(In thousands)

Balance at the beginning of the period	$	92,358
Additions charged to expense, net		65
Payments, net		(1,064)
Balance at the end of the period	$	91,359

Amounts recognized in the Condensed Consolidated
Balance Sheet at the end of the period:
Current liability	$	1,850
Noncurrent liability		89,509
Balance at the end of the period	$	91,359

On a quarterly basis, we evaluate the potential range of our liability for environmental remediation and related costs at sites where we have been named as a PRP or defendant, including sites for which our wholly-owned environmental management subsidiary, NL Environmental Management Services, Inc. (EMS), has contractually assumed our obligations. At June 30, 2023, we had accrued approximately $91 million related to approximately 33 sites associated with remediation and related matters we believe are at the present time and/or in their current phase reasonably estimable. The upper end of the range of reasonably possible costs to us for remediation and related matters for which we believe it is possible to estimate costs is approximately $118 million, including the amount currently accrued. These accruals have not been discounted to present value.

We believe it is not reasonably possible to estimate the range of costs for certain sites. At June 30, 2023, there were approximately five sites for which we are not currently able to reasonably estimate a range of costs. For these sites, generally the investigation is in the early stages, and we are unable to determine whether or not we actually had any association with the site, the nature of our responsibility, if any, for the contamination at the site, if any, and the extent of contamination at and cost to remediate the site. The timing and availability of information on these sites is dependent on events outside of our control, such as when the party alleging liability provides information to us. At certain of these previously inactive sites, we have received general and special notices of liability from the EPA and/or state agencies alleging that we, sometimes with other PRPs, are liable for past and future costs of remediating environmental contamination allegedly caused by former operations. These notifications may assert that we, along with any other alleged PRPs, are liable for past and/or future clean-up costs. As further information becomes available to us for any of these sites, which would allow us to estimate a range of costs, we would at that time adjust our accruals. Any such adjustment could result in the recognition of an accrual that would have a material effect on our consolidated financial statements, results of operations and liquidity.

Insurance coverage claims

We are involved in certain legal proceedings with a number of our former insurance carriers regarding the nature and extent of the carriers’ obligations to us under insurance policies with respect to certain lead pigment lawsuits. The issue of whether insurance

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coverage for defense costs or indemnity or both will be found to exist for our lead pigment and asbestos litigation depends upon a variety of factors and we cannot assure you that such insurance coverage will be available.

We have agreements with certain of our former insurance carriers pursuant to which the carriers reimburse us for a portion of our future lead pigment litigation defense costs. We are not able to determine how much we will ultimately recover from these carriers for defense costs incurred by us because of certain issues that arise regarding which defense costs qualify for reimbursement. While we continue to seek additional insurance recoveries, we do not know if we will be successful in obtaining reimbursement for either defense costs or indemnity. Accordingly, we recognize insurance recoveries in income only when receipt of the recovery is probable and we are able to reasonably estimate the amount of the recovery.

For a complete discussion of certain litigation involving us and certain of our former insurance carriers, refer to our 2022 Annual Report.

Other litigation

In addition to the litigation described above, we and our affiliates are also involved in various other environmental, contractual, product liability, patent (or intellectual property), employment and other claims and disputes incidental to present and former businesses. In certain cases, we have insurance coverage for these items, although we do not expect additional material insurance coverage for environmental matters. We currently believe the disposition of all of these various other claims and disputes (including asbestos-related claims), individually and in the aggregate, should not have a material adverse effect on our consolidated financial position, results of operations or liquidity beyond the accruals already provided.

Note 15 – Financial instruments:

See Note 4 for information on how we determine fair value of our marketable securities.

The following table presents the financial instruments that are not carried at fair value but which require fair value disclosure:

December 31, 2022

June 30, 2023

Carrying

Fair

Carrying

Fair

amount

value

amount

value

(In thousands)

Cash, cash equivalents and restricted cash

97,502

87,374

Due to their near-term maturities, the carrying amounts of accounts receivable and accounts payable are considered equivalent to fair value.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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’ TiO₂operations)

●

Customer and producer inventory levels

●

Unexpected or earlier-than-expected industry capacity expansion (such as the TiO₂industry)

●

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)

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●

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.

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Results of operations

Net income (loss) overview

Quarter ended June 30, 2023 compared to the quarter ended June 30, 2022

Our net loss attributable to NL stockholders was $3.1 million, or $.06 per share, in the second quarter of 2023 compared to net income attributable to NL stockholders of $30.2 million, or $.62 per share, in the second quarter of 2022. As more fully described below, the decrease in our earnings attributable to NL stockholders from 2022 to 2023 is primarily due to the net effects of:

●

an unrealized loss in the relative value of marketable equity securities of $5.4 million in 2023 compared to an unrealized gain of $19.2 million in 2022;

●

equity in losses of Kronos of $2.6 million in 2023 compared to equity in earnings of $14.0 million in 2022;

●

a non-cash loss on the termination of our U.K. pension plan of $4.9 million in 2023;

●

lower income from operations attributable to CompX of $4.4 million in 2023 compared to $7.7 million in 2022; and

●

higher interest and dividend income of $2.1 million in 2023 compared to $.6 million in 2022.

Our net loss attributable to NL stockholders for the second quarter of 2023 includes a loss of $.08 per share, net of tax, due to the termination of our U.K. pension plan.

Six months ended June 30, 2023 compared to six months ended June 30, 2022

Our net loss attributable to NL stockholders was $9.8 million, or $.20 per share, in the first six months of 2023 compared to net income attributable to NL stockholders of $48.8 million, or $1.00 per share, in the first six 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:

●

an unrealized loss in the relative value of marketable equity securities of $10.9 million in 2023 compared to an unrealized gain of $19.9 million in 2022;

●

equity in losses of Kronos of $7.2 million in 2023 compared to equity in earnings of $31.5 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 $4.1 million in 2023 compared to $.9 million in 2022; and

●

lower income from operations attributable to CompX of $11.4 million in 2023 compared to $14.0 million in 2022.

Our 2023 net loss 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.

Income from operations

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


	Three months ended June 30,				%		Six months ended June 30,				%
	2022		2023		Change		2022		2023		Change

	(In millions)						(In millions)
CompX	$	7.7	$	4.4	(44)	%	$	14.0	$	11.4	(19)	%
Corporate expense		(3.5)		(3.0)	(17)			(5.9)		(5.8)	(3)
Income from operations	$	4.2	$	1.4	(66)		$	8.1	$	5.6	(30)

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

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


	Three months ended June 30,				%		Six months ended June 30,				%
	2022		2023		Change		2022		2023		Change

	(In millions)						(In millions)
Equity in earnings (losses) of Kronos	$	14.0	$	(2.6)	(118)	%	$	31.5	$	(7.2)	(123)	%
Marketable equity securities unrealized gain (loss)		19.2		(5.4)	(128)			19.9		(10.9)	(155)
Loss on pension plan termination		—		(4.9)	n.m.			—		(4.9)	n.m.
Other components of net periodic pension and OPEB cost		(.3)		(.3)	66			(.5)		(.7)	61
Interest and dividend income		.6		2.1	278			.9		4.1	369
Interest expense		(.2)		(.2)	(20)			(.5)		(.4)	(19)

n.m. not meaningful

CompX International Inc.

In the second quarter of 2023 CompX’s income from operations decreased to $4.4 million compared to $7.7 million in the second quarter of 2022. CompX’s income from operations for the first six months of 2023 was $11.4 million compared to $14.0 million in the first six months of 2022. The decrease in operating income in the second quarter and first six months of 2023 compared to 2022 is primarily due to lower sales and gross margin in the second quarter of 2023 for both Security Products and Marine Components.


	Three months ended June 30,						%		Six months ended June 30,						%
	2022			2023			Change		2022			2023			Change

	(In millions)								(In millions)
Net sales	$	41.6		$	36.6		(12)	%	$	83.7		$	77.8		(7)	%
Cost of sales		28.0			26.3		(6)			58.0			54.8		(6)
Gross margin		13.6			10.3		(25)			25.7			23.0		(11)
Operating costs and expenses		5.9			5.9		—			11.7			11.6		—
Income from operations	$	7.7		$	4.4		(44)		$	14.0		$	11.4		(19)

Percentage of net sales:
Cost of sales		67	%		72	%				69	%		70	%
Gross margin		33			28					31			30
Operating costs and expenses		14			16					14			15
Income from operations		19			12					17			15

Net sales – Net sales decreased $5.0 million and $5.9 million in the second quarter and for the first six months of 2023, respectively, compared to the same periods in 2022 predominantly due to lower Security Products sales to the government security market and, to a lesser extent, lower Marine Components sales to the towboat market. See discussion of reporting units below.

Cost of sales and gross margin – Cost of sales as a percentage of sales increased 5% and 1% in the second quarter and for the first six months of 2023, respectively, compared to the same period in 2022. As a result, gross margin as a percentage of sales decreased over the same periods. Gross margin percentage decreased in the second quarter and for the first six months of 2023 compared to the same periods in 2022 primarily due to lower gross margin at Security Products and Marine Components for the second quarter of 2023. The decrease in gross margin percentage for the six-month comparative period was partially offset by higher gross margin at Marine Components in the first quarter of 2023. 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 second quarter of 2023 were comparable to the same period in 2022. Operating costs and expenses for the first six months of 2023 decreased slightly compared to the same period last year primarily due to reduced employee related administrative expenses at Marine Components. Operating costs and expenses as a percentage of net sales increased for the second quarter and the first six months of 2023 due to the effect of lower sales.

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Income from operations – As a percentage of net sales, income from operations for the second quarter and first six months of 2023 decreased compared to the same periods 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.

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 June 30,						%		Six months ended June 30,						%
	2022			2023			Change		2022			2023			Change

	(In millions)								(In millions)
Security Products:
Net sales	$	28.8		$	25.6		(11)	%	$	58.4		$	53.0		(9)	%
Cost of sales		18.9			18.2		(3)			39.4			37.1		(6)
Gross margin		9.9			7.4		(25)			19.0			15.9		(17)
Operating costs and expenses		3.2			3.3		2			6.3			6.4		1
Operating income	$	6.7		$	4.1		(39)		$	12.7		$	9.5		(25)

Gross margin		35	%		29	%				33	%		30	%
Operating income margin		23			16					22			18

Security Products – Security Products net sales decreased 11% in the second quarter of 2023 compared to the same period in 2022. Relative to prior year, second quarter sales were $3.2 million lower to the government security market (primarily due to non-recurring sales of $2.2 million to a single government security customer in the second quarter of 2022) and $.5 million lower to the office furniture market, partially offset by $1.0 million higher sales to distributors. Security Products net sales decreased 9% in the first six months of 2023 compared to the same period in 2022. Relative to prior year, sales for the first six months were $5.0 million lower to the government security market (primarily due to non-recurring sales of $3.6 million to a single government security customer which shipped in the first and second quarters of 2022), $.8 million lower to the office furniture market and $.5 million lower to the transportation market, partially offset by $1.1 million higher sales to distributors.

Gross margin and operating income as a percentage of net sales for the second quarter and the first six months of 2023 decreased as compared to the same periods in 2022 primarily due to effects of lower sales and decreased coverage of fixed costs and operating costs and expenses as a result of lower sales.


	Three months ended June 30,						%		Six months ended June 30,						%
	2022			2023			Change		2022			2023			Change

	(In millions)								(In millions)
Marine Components:
Net sales	$	12.8		$	11.0		(15)	%	$	25.3		$	24.8		(2)	%
Cost of sales		9.1			8.1		(12)			18.6			17.7		(5)
Gross margin		3.7			2.9		(22)			6.7			7.1		6
Operating costs and expenses		1.0			.9		(5)			2.0			1.8		(6)
Operating income	$	2.7		$	2.0		(29)		$	4.7		$	5.3		11

Gross margin		29	%		26	%				26	%		29	%
Operating income margin		21			18					19			21

Marine Components – Marine Components net sales decreased 15% in the second quarter of 2023 compared to the same period in 2022. Relative to prior year, second quarter sales were $2.0 million lower to the towboat market, partially offset by $.5 million higher sales to the industrial market. Marine Components net sales decreased 2% in the first six months of 2023 compared to the same period in 2022. Relative to prior year, sales for the first six months were $2.8 million lower to the towboat market, partially offset by $1.7 million higher sales to the industrial market and $.6 million higher sales to marine dealers and distributors.

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Gross margin as a percentage of sales decreased in the second quarter of 2023 compared to the same period in 2022 primarily due to lower sales and decreased coverage of fixed costs as a result of lower sales. Operating income as a percentage of net sales decreased in the second quarter of 2023 compared to the same period in 2022 due to the factors impacting gross margin partially offset by reduced operating costs and expenses, including lower employee related administrative expenses of $.1 million. For the first six months of 2023, gross margin as a percentage of net sales increased compared to the same period in 2022 as lower sales and gross margin in the second quarter of 2023 were more than offset by the favorable product mix and, to a lesser extent, increased selling prices and increased production efficiencies experienced in the first quarter of 2023. Operating income as a percentage of net sales increased in the first six 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 $.1 million.

Outlook – During the second quarter, CompX experienced an acceleration in the softening demand it began seeing in the fourth quarter of 2022 at both reporting units, particularly in its Marine Components reporting unit. CompX’s Marine Components reporting unit largely worked through its backlog, primarily related to the towboat market, and CompX’s Security Products reporting unit continued to experience declining order rates. During 2023, labor markets have become increasingly more 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, although it continues to face long lead times related to certain electronic and specialty 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 limits 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 third quarter. As expected, CompX’s Marine Components reporting unit net sales declined during the second quarter due to accelerating weakness in the towboat market. CompX expects net sales overall will be challenged compared to 2022 as marine demand faces strong headwinds due to higher interest rates and broader market weakness as several original equipment boat manufacturers, including certain of CompX’s customers, have publicly announced further reductions to production schedules in 2023 compared to 2022. 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 comparable to 2022 as the product mix experienced in the second quarter of 2023 is expected to be more indicative of the product mix for the remainder of the year. Based on the softening demand and general economic conditions in North America, CompX currently expects to report lower operating income at both reporting units in 2023 compared to 2022. CompX is focused on managing inventory levels to align with anticipated near-term demand. In this regard, CompX began a planned inventory build during the second quarter at its Security Products reporting unit to fulfill a purchase order received early in the second quarter that is expected to ship over the second half of the year. Absent this order, inventory balances would have declined at the end of the second quarter in line with current demand. 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 its customers’ or suppliers’ operations, all of which remain uncertain and cannot be predicted.

General corporate and other items

Corporate expense – Corporate expenses were $3.0 million in the second quarter of 2023, $.5 million lower than in the second quarter of 2022 primarily due to lower environmental remediation and related costs. Included in corporate expense in the second quarter of 2022 and 2023 are:

●

litigation fees and related costs of $1.1 million in 2023 compared to $1.2 million in 2022, and

●

environmental remediation and related costs of $.1 million in 2023 compared to $.4 million in 2022.

Corporate expenses were $5.8 million in the first six months of 2023, $.1 million lower than in the first six months of 2022 as lower environmental remediation and related costs and lower administrative expenses were almost fully offset by higher litigation fees and related costs. Included in corporate expense in the first six months of 2022 and 2023 are:

●

litigation fees and related costs of $2.5 million in 2023 compared to $1.8 million in 2022, and

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●

environmental remediation and related costs of $.1 million in 2023 compared to $.5 million in 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 second quarter and for the first six 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 loss of $5.4 million on the change in value of our marketable equity securities in the second quarter of 2023 compared to an unrealized gain of $19.2 million in the second quarter of 2022. We recognized an unrealized loss of $10.9 million on the change in value of our marketable equity securities in the first six months of 2023 compared to an unrealized gain of $19.9 million in the first six months of 2022. See Note 4 to our Condensed Consolidated Financial Statements.

Income tax expense – We recognized an income tax benefit of $7.3 million in the second quarter of 2023 compared to income tax expense of $6.4 million in the second quarter of 2022 and an income tax benefit of $5.9 million in the first half of 2023 compared to income tax expense of $9.1 million in the first half 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 $13.4 million in each of the first six 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 10.3% in the first six months of 2022 compared to 60.7% in the first six months of 2023. The increase in our effective rate from 2022 to 2023 is primarily attributable to Kronos’ aniticipated 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 decreased during the second quarter and the first six 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.

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


	Three months ended June 30,						%		Six months ended June 30,						%
	2022			2023			Change		2022			2023			Change

	(In millions)								(In millions)
Net sales	$	565.3		$	443.2		(22)	%	$	1,128.2		$	869.5		(23)	%
Cost of sales		444.8			399.1		(10)			858.4			794.6		(7)
Gross margin	$	120.5		$	44.1				$	269.8		$	74.9

Income (loss) from operations	$	65.2		$	(6.7)		(110)	%	$	148.5		$	(25.0)		(117)	%
Interest and dividend income		.6			1.5					.7			3.5
Marketable equity securities unrealized gain (loss)		2.3			(.6)					2.4			(1.3)
Other components of net periodic pension and OPEB cost		(3.1)			(2.2)					(6.3)			(3.1)
Interest expense		(4.3)			(4.3)					(8.8)			(8.5)
Income (loss) before income taxes		60.7			(12.3)					136.5			(34.4)
Income tax expense (benefit)		14.8			(4.1)					33.1			(11.0)
Net income (loss)	$	45.9		$	(8.2)				$	103.4		$	(23.4)

Percentage of net sales:
Cost of sales		79	%		90	%				76	%		91	%
Income (loss) from operations		11			(1)					13			(3)

Equity in earnings (losses) of Kronos Worldwide, Inc.	$	14.0		$	(2.6)				$	31.5		$	(7.2)

TiO₂ operating statistics:
Sales volumes*		142			104		(26)	%		286			206		(28)	%
Production volumes*		132			89		(33)			270			194		(28)

Change in TiO₂ net sales:
TiO2 sales volumes							(26)	%							(28)	%
TiO₂ product pricing							(2)								1
TiO₂ product mix/other							6								5
Changes in currency exchange rates							—								(1)
Total							(22)	%							(23)	%

* 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. TiO₂selling 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 but Kronos’ average TiO₂ selling prices declined 5% during the first six months of 2023. Despite this decline, Kronos’ average TiO₂ selling prices in the first six months of 2023 were 1% higher than the average prices during the first six months of 2022. Overall sales volumes declined in the first six months of 2023 compared to the first six 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. Thus far during 2023, Kronos has continued operating its production facilities at reduced rates to align production with customer demand. As a result, Kronos operated its production facilities at 70% of practical capacity utilization in the first six months of 2023 compared to 98% of practical capacity utilization in the first six months of 2022.

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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%

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

Net sales – Kronos’ net sales in the second quarter of 2023 decreased 22%, or $122.1 million, compared to the second quarter of 2022 primarily due to a 26% decrease in sales volumes (which decreased net sales by approximately $147 million) and a 2% decrease in average TiO₂selling prices (which decreased net sales by approximately $11 million). Changes in product mix positively contributed to net sales, primarily due to modest growth in Kronos’ complementary business which somewhat offset declines in TiO₂sales volumes. Changes in currency exchange rates had a nominal effect on Kronos’ net sales in the second quarter of 2023 as compared to the second 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 26% in the second quarter of 2023 as compared to the second quarter of 2022 due to lower overall demand across all major markets. The lower overall demand Kronos began experiencing in the second half of 2022 has continued during the second quarter of 2023.

Kronos’ net sales in the first six months of 2023 decreased 23%, or $258.7 million, compared to the first six months of 2022 primarily due to the net effects of a 28% decrease in sales volumes (which decreased net sales by approximately $316 million) and a 1% increase in average TiO₂ selling prices (which increased net sales by approximately $11 million). Changes in product mix positively contributed to net sales, primarily due to modest growth in Kronos’ complementary businesses which somewhat offset declines in TiO₂sales volumes. In addition to the impact of sales volumes, Kronos estimates that changes in currency exchange rates (primarily the euro) decreased its net sales by approximately $12 million in the first six months of 2023 as compared to the first six months of 2022.

Kronos’ sales volumes decreased 28% in the first six months of 2023 as compared to the first six months of 2022 due to lower overall demand across all major markets. The lower overall demand Kronos began experiencing in the second half of 2022 has continued during the first six months of 2023.

Cost of sales and gross margin – Kronos’ cost of sales decreased $45.7 million, or 10%, in the second quarter of 2023 compared to the second quarter of 2022 due to the net effects of a 26% decrease in sales volumes, a 33% decrease in production volumes, higher production costs of approximately $18 million (primarily raw materials and energy) and $22 million of unabsorbed fixed production costs recognized as a result of reduced production volumes at certain of its manufacturing facilities to align inventory levels to anticipated customer demand. Kronos’ cost of sales as a percentage of net sales increased to 90% in the second quarter of 2023 compared to 79% in the same period of 2022 primarily due to the unfavorable effects of higher production costs (primarily raw material, energy and unabsorbed fixed production costs due to lower production volumes).

Gross margin as a percentage of net sales decreased to 10% in the second quarter of 2023 compared to 21% in the second 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 lower average TiO₂ selling prices.

Kronos’ cost of sales decreased $63.8 million, or 7%, in the first six months of 2023 compared to the first six months of 2022 due to the net effects of a 28% decrease in sales volumes, a 28% decrease in production volumes, higher production costs of approximately $100 million (primarily raw materials and energy) and $54 million of unabsorbed fixed production costs recognized as a result of reduced production volumes at certain of its manufacturing facilities to align inventory levels to anticipated customer demand. Kronos’ cost of sales as a percentage of net sales increased to 91% in the first six months of 2023 compared to 76% in the same period of 2022 primarily due to the unfavorable effects of higher production costs (primarily raw material, energy and unabsorbed fixed production costs due to lower production volumes).

Gross margin as a percentage of net sales decreased to 9% in the first six months of 2023 compared to 24% in the first six months of 2022. As discussed and quantified above, Kronos’ gross margin as a percentage of net sales decreased primarily due to the significant decrease in sales volumes in 2023.

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Selling, general and administrative expense – Kronos’ selling, general and administrative expense decreased $13.1 million, or 21%, 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 second quarters of 2023 and 2022 at approximately 11% of net sales.

Kronos’ selling, general and administrative expense decreased $21.3 million, or 17%, in the first six 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 increased slightly in the first six months of 2023 compared to first six months of 2022.

Income (loss) from operations - Kronos had a loss from operations of $6.7 million in the second quarter of 2023 compared to income from operations of $65.2 million in the second quarter of 2022 as a result of the factors impacting gross margin discussed above. Kronos recognized a gain of $.5 million in the second 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 $2 million in the second 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 $25.0 million in the first six months of 2023 compared to income from operations of $148.5 million in the first six months of 2022 as a result of the factors impacting gross margin discussed above. Kronos recognized a gain of $2.2 million in the first six months of 2023 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 $21 million in the first six months of 2023 as compared to the same period in 2022, as further discussed below.

Other non-operating income (expense) - Kronos recognized an unrealized loss of $.6 million on the change in market price of its marketable equity securities in the second quarter of 2023 compared to an unrealized gain of $2.3 million in the second quarter of 2022. Other components of net periodic pension and OPEB cost in the second quarter of 2023 decreased $.9 million compared to the second quarter 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’ U.K. pension plan in the second quarter of 2023. Interest expense in the second quarter of 2023 was comparable to interest expense in the second 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 six months of 2023 compared to an unrealized gain of $2.4 million in the first six months of 2022. Other components of net periodic pension and OPEB cost in the first six months of 2023 decreased $3.2 million compared to the first six 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’ U.K. pension plan in the second quarter of 2023. Interest expense in the first six months of 2023 decreased $.3 million compared to the first six months of 2022 due to the effects of changes in currency exchange rates.

Income tax expense (benefit) - Kronos recognized an income tax benefit of $4.1 million in the second quarter of 2023 compared to income tax expense of $14.8 million in the second quarter of 2022. Kronos recognized an income tax benefit of $11.0 million in the first six months of 2023 compared to income tax expense of $33.1 million in the first six months of 2022. The difference is primarily due to lower earnings in the second quarter and first six 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

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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 June 30, 2023 vs June 30, 2022
							Translation
							gains (losses)-		Total currency
	Transaction gains recognized						impact of		impact
	2022		2023		Change		rate changes		2023 vs 2022

	(In millions)
Impact on:
Net sales	$	—	$	—	$	—	$	(1)	$	(1)
Income (loss) from operations		12		3		(9)		11		2

The $1 million decrease in net sales (translation losses) was caused primarily by a strengthening of the U.S. dollar relative to the euro, as Kronos’ euro-denominated sales were translated into fewer U.S. dollars in 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 $2 million decrease in loss from operations was comprised of the following:

●

Lower net currency transaction gains of approximately $9 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 $11 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.


Impact of changes in currency exchange rates
Six months ended June 30, 2023 vs June 30, 2022
							Translation
							gains (losses)-		Total currency
	Transaction gains recognized						impact of		impact
	2022		2023		Change		rate changes		2023 vs 2022

	(In millions)
Impact on:
Net sales	$	—	$	—	$	—	$	(12)	$	(12)
Income (loss) from operations		10		8		(2)		23		21

The $12 million decrease in net sales (translation losses) was caused primarily by a strengthening of the U.S. dollar relative to the euro, as Kronos’ euro-denominated sales were translated into fewer U.S. dollars in 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 its Canadian and Norwegian operations is denominated in the U.S. dollar.

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The $21 million decrease in loss from operations was comprised of the following:

●

Lower net currency transaction gains of approximately $2 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 $23 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 strengthening of the U.S. dollar relative to the euro was nominal in 2023 as compared to 2022.

Outlook

As noted above, customer demand in all of Kronos’ major markets remained sluggish throughout the second quarter of 2023 as many of its customers continue to be cautious in placing orders due to uncertain economic conditions exacerbated by ongoing downstream destocking. 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. These steps, along with the depletion of high-cost inventory created earlier in the cycle, have somewhat increased Kronos’s gross margins and improved operating cash flows in the second quarter.

Entering the second half of the year, Kronos believes customer destocking has run its course and Kronos is seeing pockets of strengthening demand, primarily in North America. However, Kronos expects near term demand will remain below historical norms. While Kronos’ selling prices have remained relatively stable throughout the first half of 2023, favorable pigment availability and minimal order lead times in the marketplace, along with low-cost imports from China, are leading to increased pricing pressure. 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 intitiatives, should begin to positively impact margins late in the year as Kronos expects higher cost inventories will continue to depress margins well into the third quarter. 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 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 Kronos is taking steps in the near term which are intended to preserve its competitive position and its 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 and other input costs and future impacts on its operations will depend on, among other things, future energy and other input costs along with 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 $20.9 million in the first six months of 2023 compared to $13.6 million in the first six months of 2022. The increase in cash provided by operating activities in the first six months of 2023 includes:

●

lower net cash used for relative changes in receivables, inventories, prepaids, payables and accrued liabilities in 2023 of $9.2 million;

●

lower income from operations from CompX in 2023 of $2.6 million; and

●

lower cash paid for taxes in 2023 of $.7 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

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subsidiaries.


	Six months ended
	June 30,
	2022		2023

	(In millions)
Net cash provided by operating activities:
CompX	$	1.5	$	9.8
NL Parent and wholly-owned subsidiaries		17.5		16.5
Eliminations		(5.4)		(5.4)
Total	$	13.6	$	20.9

Relative changes in working capital can have a significant effect on cash flows from operating activities. As shown below, average days sales outstanding decreased from December 31, 2022 to June 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 June 30, 2023 primarily due to higher inventory balances at both of CompX’s reporting units as a result of a planned inventory build for specific customer orders, most significantly at Security Products, which CompX expects to begin shipping in the third quarter of 2023. For comparative purposes, we have provided December 31, 2021 and June 30, 2022 numbers below.


	December 31,	June 30,	December 31,	June 30,
	2021	2022	2022	2023
Days sales outstanding	42 days	38 days	41 days	37 days
Days in inventory	96 days	108 days	99 days	117 days

Investing activities

Our capital expenditures, all of which relate to CompX, were $.5 million in the first six months of 2023 compared to $2.2 million in the first six months of 2022. During the first six months of 2023, Valhi repaid a net $1.0 million under the promissory note ($13.7 million of gross borrowings and $14.7 million of gross repayments). During the first six months of 2022, Valhi repaid a net $2.1 million under the promissory note ($10.3 million of gross borrowings and $12.4 million of gross repayments).

During the first six months of 2023, we had gross purchases of U.S. treasury marketable securities aggregating $50.0 million (of which $24.9 million relates to CompX) and received gross proceeds totaling $26.0 million related to U.S. treasury bill maturities (of which $12.0 million relates to CompX).

Financing activities

Our board of directors declared a quarterly dividend of $.07 per share in each of the first and second 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 six 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 June 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 June 30, 2023. See Note 8 to our Condensed Consolidated Financial Statements.

Kronos has no outstanding borrowings on its global revolving credit facility (Global Revolver) at June 30, 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

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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 June 30, 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).

At June 30, 2023, we had aggregate restricted and unrestricted cash, cash equivalents and current marketable securities of $183.1 million, all of which was held in the U.S. A detail by entity is presented in the table below.


	Amount
	(In millions)
CompX	$	64.8
NL Parent and wholly-owned subsidiaries		118.3
Total	$	183.1

In addition, at June 30, 2023 we owned approximately 1.2 million shares of Valhi common stock with an aggregate market value of $15.4 million. See Note 4 to our Condensed Consolidated Financial Statements. We also owned approximately 35.2 million shares of Kronos common stock at June 30, 2023 with an aggregate market value of $307.5 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 June 30, 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. At June 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 June 30, 2023 totaled $.1 million. CompX expects to spend $2.7 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.

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Repurchases of common stock

At June 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 June 30, 2023 and their current regular quarterly dividend rate, is presented in the table below.


	Shares held		Quarterly		Annual expected
	June 30, 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 six months of 2023.

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ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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.

ITEM 4.CONTROLS AND PROCEDURES

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In addition to the matters discussed below, refer to Note 14 to our Condensed Consolidated Financial Statements and our 2022 Annual Report.

California Department of Toxic Substances Control v. NL Industries, Inc., et al. In July 2023, following a trial on limited issues, the Court issued an order finding that the California Department of Toxic Substances Control had established the liability of NL and certain other defendants. The Court has not yet addressed allocation or damages, which will be determined in later proceedings.

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Pennsylvania Lead Paint Cases. In May 2023, the Pennsylvania Commonwealth Court issued a decision finding that the claims brought by the two county governments were inconsistent with Pennsylvania law and that both lawsuits should be dismissed. The county governments have asked the Pennsylvania Supreme Court to review the decision of the Commonwealth Court.

Atlantic Richfield, Co. v. NL Industries, Inc. In April 2023, the Court issued an order dismissing all claims seeking recovery of remediation costs incurred directly by Atlantic Richfield, Co., but allowed the lawsuit to continue solely with regard to Atlantic Richfield’s claims relating to a $400,000 settlement payment it made to EPA.

Item 1A. Risk Factors

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.

Item 6.Exhibits

10.1*	NL Industries, Inc. 2023 Non-Employee Director Stock Plan.

31.1	Certification

31.2	Certification

32.1	Certification

101.INS	Inline XBRL Instance – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH	Inline XBRL Taxonomy Extension Schema

101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase

101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase

101.LAB	Inline XBRL Taxonomy Extension Label Linkbase

101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase

104	Cover page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

__________________________

*Management contract, compensatory plan or arrangement; filed herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	NL INDUSTRIES, INC.
	(Registrant)




Date: August 2, 2023	/s/ Amy Allbach Samford
	Amy Allbach Samford
	(Executive Vice President and Chief Financial Officer, Principal Financial Officer)

Date: August 2, 2023	/s/ Amy E. Ruf
	Amy E. Ruf
	(Vice President and Controller,
	Principal Accounting Officer)

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NL Industries (NL) 10-Q2023 Q2 Quarterly report

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