VALHI, INC. RESULTS OF OPERATIONS
Business Overview
We are primarily a holding company. We operate through our wholly-owned and majority-owned subsidiaries, including NL Industries, Inc., Kronos Worldwide, Inc., CompX International, Inc.,Tremont LLC ,Basic Management, Inc. ("BMI") and theLandWell Company ("LandWell").Kronos (NYSE: KRO),NL (NYSE:NL ) and CompX (NYSE American: CIX) each file periodic reports with theSEC .
We have three consolidated reportable operating segments:
Chemicals - Our Chemicals Segment is operated through our majority control of
Kronos. Kronos is a leading global producer and marketer of value-added TiO2.
TiO2 is used to impart whiteness, brightness, opacity and durability to a wide
? variety of products, including paints, plastics, paper, fibers and ceramics.
Additionally, TiO2 is a critical component of everyday applications, such as
coatings, plastics and paper, as well as many specialty products such as inks,
cosmetics and pharmaceuticals.
Component Products - We operate in the component products industry through our
majority control of CompX. CompX is a leading manufacturer of security products
used in the postal, recreational transportation, office and institutional
? furniture, cabinetry, tool storage, healthcare and a variety of other
industries. CompX is also a leading manufacturer of wake enhancements systems,
stainless steel exhaust systems, gauges, throttle controls, trim tabs and
related hardware and accessories for the recreational marine.
and development through our majority control of BMI and LandWell. BMI owns real
? property in
provides utility services to certain industrial and municipal customers.
LandWell is engaged in efforts to develop certain land holdings for commercial,
industrial and residential purposes in
Income from Continuing Operations Overview
Year Ended
We reported net income from continuing operations attributable to
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Our net income from continuing operations attributable to
? lower operating income from our Chemicals Segment in 2022 compared to 2021;
lower operating income from our
in 2022 compared to 2021 including aggregate charges of
?
impairment of certain fixed assets and the bankruptcy filing of BWC in 2022;
and
? recognition of a gain on sales of land not used in our operations of
million in 2021.
Our diluted income from continuing operations per share in 2022 includes:
aggregate charges of
including
? fixed assets, primarily recognized in the second quarter, and
loss on the deconsolidation of BWC and
related to an intercompany receivable with BWC, both recognized in the third
quarter;
? income of
recognized in the third and fourth quarters;
a gain of
? arising from Hurricane Laura in 2020 at our Chemicals Segment recognized in the
third quarter; and
? income of
reimbursement recognized in the second quarter.
Our diluted income from continuing operations per share in 2021 includes:
? a gain of
recognized in the second and third quarters; and
? income of
recognized in the first and fourth quarters.
Year Ended
We reported net income from continuing operations attributable to
Our net income from continuing operations attributable to
? higher operating income from all of our segments in 2021 compared to 2020;
? recognition of a gain on sales of land not used in our operations of
million in 2021; and
? income from infrastructure reimbursement of
Our diluted income from continuing operations per share in 2021 includes:
? a gain of
recognized in the second and third quarters; and
? income of
recognized in the first and fourth quarters.
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Our diluted income from continuing operations per share in 2020 includes:
? income of
reimbursement recognized in the first quarter;
? a gain of
related to a prior land sale; and
? a gain of
claim at our Chemicals Segment recognized in the first quarter.
We discuss these amounts more fully below.
Current Forecast for 2023 -
We currently expect consolidated operating income for 2023 to be consistent as compared to 2022 primarily due to the net effects of:
higher operating income from our
? in 2023 due to the aggregate
related to BWC noted above which will not recur and higher expected
infrastructure reimbursements;
lower operating income from our Chemicals Segment in 2023 as the favorable
? impact of higher expected average TiO2 selling prices is not expected to offset
the negative impact of higher manufacturing costs; and
? lower operating income from our Component Products Segment in 2023 as marine
sales are expected to normalize below 2022 record levels.
Our expectations for our future operating results are based upon a number of factors beyond our control, including worldwide growth of gross domestic product, competition in the marketplace, continued operation of competitors, technological advances, worldwide production capacity and the consequences arising directly or indirectly out of the COVID-19 pandemic. If actual developments differ from our expectations, our results of operations could
be
unfavorably affected.
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Segment Operating Results - 2022 Compared to 2021 and 2021 Compared to 2020
Chemicals -
We consider TiO2 to be a "quality of life" product, with demand affected by gross domestic product, or GDP, and overall economic conditions in our markets located in various regions of the world. Over the long-term, we expect demand for TiO2 will grow by 2% to 3% per year, consistent with our expectations for the long-term growth in GDP. However, even if our Chemicals Segment and its competitors maintain consistent shares of the worldwide market, demand for TiO2 in any interim or annual period may not change in the same proportion as the change in GDP, in part due to relative changes in the TiO2 inventory levels of our Chemicals Segment's customers. We believe our Chemicals Segments' customers' inventory levels are influenced in part by their expectation for future changes in TiO2 selling prices as well as their expectation for future availability of product. Although certain of our Chemicals Segment's TiO2 grades are considered specialty pigments, the majority of its grades and substantially all of its production are considered commodity pigment products with price and availability being the most significant competitive factors along with product quality and customer and technical support services.
The factors having the most impact on our Chemicals Segment's reported operating results are:
? TiO2 selling prices,
? TiO2 sales and production volumes,
? Manufacturing costs, particularly raw materials such as third-party feedstock,
maintenance and energy-related expenses, and
Currency exchange rates (particularly the exchange rate for the
? relative to the euro, the Norwegian krone and the Canadian dollar and the euro
relative to the Norwegian krone).
Our Chemicals Segment's key performance indicators are its TiO2 average selling
prices, its TiO2 sales and production volumes and the cost of
titanium-containing feedstock purchased from third parties. TiO2 selling prices
generally follow industry trends and selling prices will increase or decrease
generally as a result of competitive market pressures.
Years ended December 31, % Change
2020 2021 2022 2020-21 2021-22
(Dollars in millions)
Net sales $ 1,638.8 $ 1,939.4 $ 1,930.2 18 % - %
Cost of sales 1,291.0 1,494.5 1,540.2 16 3
Gross margin $ 347.8 $ 444.9 $ 390.0 28 (12)
Operating income $ 126.5 $ 200.8 $ 174.6 59 (13)
Percent of net sales:
Cost of sales 79 % 77 % 80 %
Gross margin 21 23 20
Operating income 8 10 9
TiO2 operating statistics:
Sales volumes* 531 563 481 6 % (15) %
Production volumes* 517 545 492 5 % (10) %
Percent change in TiO2 net sales:
TiO2 product pricing 8 % 21 %
TiO2 sales volumes 6 (15)
TiO2 product mix/other 1 (1)Changes in currency exchange rates
3 (5)
Total 18 % - %
* Thousands of metric tons
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Industry Conditions and 2022 Overview - Our Chemicals Segment started 2022 with average TiO2 selling prices 16% higher than at the beginning of 2021and average TiO2 selling prices increased 16% throughout 2022 in response to our Chemicals Segment rising production costs. Overall, our Chemicals Segment sales volumes declined in 2022 compared to 2021 primarily due to demand contraction in its European and export markets, particularly in the third and fourth quarters. The following table shows our Chemicals Segment's capacity utilization rates during 2021 and 2022. Throughout most of 2021 and continuing into the first quarter of 2022, our Chemicals Segment's production facilities operated at full practical capacity. Due to the decreased demand in its European and export markets along with increased production costs, particularly energy costs inEurope , our Chemicals Segment curtailed production in the third and fourth quarters of 2022 at certain of its European facilities to align its production and inventory levels to anticipated near-term customer demand. Production Capacity Utilization Rates 2021 2022 First quarter 97% 100% Second quarter 100% 95% Third quarter 100% 93% Fourth quarter 100% 65% Overall 100% 89%
Net Sales - Chemicals Segment's net sales in 2022 were consistent with net sales in 2021 primarily due to the net effects of a 21% increase in average TiO2 selling prices (which increased net sales by approximately$407 million ) and a 15% decrease in sales volumes (which decreased net sales by approximately$291 million ). We estimate that changes in currency exchange rates (primarily the euro) decreased our Chemicals Segment's net sales by approximately$106 million , or 5% in 2022 as compared to 2021. 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. Our Chemicals Segment's sales volumes decreased 15% in 2022 as compared to 2021 primarily due to lower demand in its European and export markets which our Chemicals Segment began experiencing towards the end of the second quarter and which accelerated during the third and fourth quarters of 2022. Sales volumes were 40% lower in the fourth quarter of 2022 as compared to the fourth quarter of 2021. Our Chemicals Segment also experienced lower sales volumes in its North American market in the second half of 2022, although to a lesser extent than the declines in its European and export markets. Our Chemicals Segment's net sales increased$300.6 million , or 18%, in 2021 compared to 2020, primarily due to an 8% increase in average TiO2 selling prices (which increased net sales by approximately$131 million ) and a 6% increase in sales volumes (which increased net sales by approximately$98 million ). In addition to the impact of higher sales volumes and higher average selling prices, we estimate that changes in currency exchange rates (primarily the euro) increased our Chemicals Segment's net sales by approximately$43 million , or 3%, as compared to 2020. Our Chemicals Segment's sales volumes increased 6% in 2021 as compared to 2020 due to higher demand in its European, North American and Latin American markets, with a significant portion of the increase occurring in the second and third quarters as a result of the impact of the COVID-19 pandemic on the comparable periods in 2020. Cost of Sales and Gross Margin - Cost of sales increased$45.7 million , or 3%, in 2022 compared to 2021 primarily due to the net effects of higher production costs of approximately$285 million (including higher costs for raw materials and energy), a 15% decrease in sales volumes and changes in currency exchange rates. Our Chemicals Segment's cost of sales as a percentage of net sales increased to 80% in 2022 compared to 77% in 2021 due to the impact of higher production costs, including higher raw material and energy costs partially offset by the favorable effects of higher average TiO2 selling prices. In addition, our Chemicals Segment's cost of sales in 2022 includes approximately$26 million of unabsorbed fixed production and other manufacturing costs associated with production curtailments at certain of its European facilities throughout the fourth quarter. -40- Gross margin as a percentage of net sales decreased to 20% in 2022 compared to 23% in 2021. Our Chemicals Segment's gross margin as a percentage of net sales in 2022 decreased primarily due to the net effect of higher average TiO2 selling prices, lower production and sales volumes, higher production costs and fluctuations in currency exchange rates. Cost of sales increased$203.5 million , or 16%, in 2021 compared to 2020 due to a 6% increase in sales volumes and higher production costs of approximately$69 million (including higher cost for raw materials and energy) and the effects of currency exchange rate fluctuations (primarily the Canadian dollar). Our Chemicals Segment's cost of sales as a percentage of net sales decreased to 77% in 2021 compared to 79% in 2020 primarily due to the favorable effects of higher average TiO2 selling prices and increased coverage of fixed costs from higher production, partially offset by higher production costs (including higher raw material and energy costs) as well as the effects of fluctuations in currency exchange rates, as discussed below. Gross margin as a percentage of net sales increased to 23% in 2021 compared to 21% in 2020. Our Chemicals Segment's gross margin as a percentage of net sales in 2021 increased primarily due to the net effect of higher average TiO2 selling prices, higher production and sales volumes, higher production costs and fluctuations in currency exchange rates. Operating Income - Our Chemicals Segment's operating income decreased by$26.2 million , from$200.8 million in 2021 to$174.6 million in 2022. Operating income as a percentage of net sales was 9% in 2022 compared to 10% in 2021. This decrease was driven by the lower gross margin discussed above for the comparable periods. Our Chemicals Segment experienced an operating loss of$15.3 million in the fourth quarter of 2022 compared to operating income of$55.4 million in the fourth quarter of 2021. Our Chemicals Segment also recognized a gain of$2.7 million in 2022 related to cash received from the settlement of a business interruption insurance claim related to Hurricane Laura. See Note 13 to our Consolidated Financial Statements. We estimate that changes in currency exchange rates increased our Chemicals Segment's operating income by approximately$23 million in 2022 as compared to 2021 as discussed in the Currency Exchange Rates section below. Our Chemicals Segment's operating income increased by$74.3 million , from$126.5 million in 2020 to$200.8 million in 2021. Operating income as a percentage of net sales was 10% in 2021 compared to 8% in 2020. This increase was driven by the higher gross margin discussed above for the comparable periods. We estimate that changes in currency exchange rates decreased our Chemicals Segment's operating income by approximately$13 million in 2021 as compared to 2020 as discussed in the Currency Exchange Rates section below. Our Chemicals Segment's operating income in 2020 was minimally impacted by the effects of Hurricane Laura which temporarily halted production at LPC onAugust 24, 2020 with resumption of operations onSeptember 25, 2020 . LPC believes insurance (subject to applicable deductibles) will cover a majority of its losses, including those related to property damage and the disruption of its operations. Our Chemicals Segment believes insurance (subject to applicable deductibles) will cover a majority of its losses from the hurricane, including property damage, business interruption losses related to its share of LPC's lost production and other costs resulting from the disruption of operations. As ofDecember 31, 2021 , our Chemicals Segment had not yet recognized any insurance recoveries because the ultimate disposition of its portion of the business interruption claim was not yet determinable; however, as ofDecember 31, 2021 LPC had received a portion of the proceeds related to its property damage claim. OnOctober 9, 2020 Hurricane Delta caused an additional temporary halt to production at the LPC facility. Damages resulting fromHurricane Delta were not as severe and production activities were resumed within five days from the time of initial shutdown prior to landfall of the hurricane. Similar to Hurricane Laura, losses determined to be incurred by LPC and our Chemicals Segment as a result ofHurricane Delta are expected to be recoverable from insurance (subject to applicable deductibles). Our Chemicals Segment's operating income is net of amortization of purchase accounting adjustments made in conjunction with our acquisitions of interests inNL and Kronos. As a result, we recognize additional depreciation expense above the amounts Kronos reports separately, substantially all of which is included within cost of sales. We recognized additional depreciation expense of$3.8 million in 2020,$1.5 million in 2021 and$1.3 million in 2022, which reduced our reported Chemicals Segment's operating income as compared to amounts reported by Kronos. -41- Currency Exchange Rates - Our Chemicals Segment has substantial operations and assets located outsidethe United States (primarily inGermany ,Belgium ,Norway andCanada ). The majority of our Chemicals Segment's sales from non-U.S. operations are denominated in currencies other than theU.S. dollar, principally the euro, other major European currencies and the Canadian dollar. A portion of our Chemicals Segment's sales generated from its non-U.S. operations is denominated in theU.S. dollar (and consequently our Chemicals Segment's non-U.S. operations will generally holdU.S. dollars from time to time). Certain raw materials used in all our Chemicals Segment's production facilities, primarily titanium-containing feedstocks, are purchased primarily inU.S. dollars, while labor and other production and administrative costs are incurred primarily in local currencies. Consequently, the translatedU.S. dollar value of our Chemicals Segment's 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, our non-U.S. operations also generate currency transaction gains and losses which primarily relate to (i) the difference between the currency exchange rates in effect when non-local currency sales or operating costs (primarilyU.S. dollar denominated) are initially accrued and when such amounts are settled with the non-local currency and (ii) changes in currency exchange rates during time periods when our Chemicals Segment's non-U.S. operations are holding non-local currency (primarilyU.S. dollars). Overall, we estimate that fluctuations in currency exchange rates had the following effects on our Chemicals Segment's sales and operating income for the periods indicated. Impact of changes in currency exchange rates Year ended December 31, 2022 vs December 31, 2021 Translation gains/(losses) Total currency Transaction gains recognized impact of impact 2021 2022 Change rate changes 2022 vs 2021 (In millions) Impact on: Net sales $ - $ - $ - $ (106) $ (106) Operating income 2 12 10 13 23 The$106 million decrease in net sales (translation losses) was caused primarily by a strengthening of theU.S. dollar relative to the euro, as euro-denominated sales were translated into fewerU.S. dollars in 2022 as compared to 2021. The strengthening of theU.S. dollar relative to the Canadian dollar and the Norwegian krone in 2022 did not have a significant effect on the reported amount of net sales, as a substantial portion of the sales generated by our Chemicals Segment's Canadian and Norwegian operations are denominated in theU.S. dollar.
The
Higher net currency transaction gains of approximately
caused by relative changes in currency exchange rates at each applicable
balance sheet date between the
? the Norwegian krone, and between the euro and the Norwegian krone, which causes
increases or decreases, as applicable, in
and payables and
operations, and in Norwegian krone denominated receivables and payables held by
our Chemicals Segment's non-
Approximately
by a strengthening of the
Norwegian krone, as local currency-denominated operating costs were translated
into fewer
? currency translation losses primarily caused by a strengthening of the
dollar relative to the euro as the negative effects of the stronger
on euro-denominated sales more than offset the favorable effects of
euro-denominated operating costs being translated into fewer
2022 as compared to 2021.
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Impact of changes in currency exchange rates - 2021 vs. 2020
Translation
gains/(losses) Total currency
Transaction gains/(losses) recognized impact of impact
2020 2021 Change rate changes 2021 vs. 2020
(In millions)
Impact on:
Net sales $ - $ - $ - $ 43 $ 43
Operating income (4) 2 6 (19) (13)
The $43 million increase in net sales (translation gain) was caused primarily by
a weakening of the U.S. dollar relative to the euro, as euro-denominated sales
were translated into more U.S. dollars in 2021 as compared to 2020. The
weakening of the U.S. dollar relative to the Canadian dollar and the Norwegian
krone in 2021 did not have a significant effect on the reported amount of net
sales, as a substantial portion of the sales generated by our Chemicals
Segment's Canadian and Norwegian operations are denominated in the U.S. dollar.
The
Higher net currency transaction gains of approximately
caused by relative changes in currency exchange rates at each applicable
balance sheet date between the
? the Norwegian krone, and between the euro and the Norwegian krone, which causes
increases or decreases, as applicable, in
and payables and
operations, and in Norwegian krone denominated receivables and payables held by
our Chemicals Segment's non-
Approximately
by a weakening of the
krone, as local currency-denominated operating costs were translated into more
? translation gains primarily caused by a weakening of the
to the euro as the positive effects of the weaker
euro-denominated sales more than offset the unfavorable effects of
euro-denominated operating costs being translated into more
2021 as compared to 2020.
Outlook - As previously reported, late in the third quarter of 2022, demand inEurope and the export markets began to rapidly deteriorate as many of our Chemicals Segment's customers in those regions reduced their production rates in response to economic conditions and geopolitical uncertainties. This weakness continued through the fourth quarter. In addition, in the second half of 2022 our Chemicals Segment experienced rapidly rising costs particularly inEurope , led by natural gas, electricity and certain key raw materials. In response to this decline in demand coupled with increased production costs, our Chemicals Segment implemented production curtailments at certain of its European facilities throughout the fourth quarter to manage inventory levels. Our Chemicals Segment also experienced declining demand inNorth America in the late second half of 2022, but to a lesser extent than its European and export markets. At the beginning of 2023 our Chemicals Segment began to see pockets of improving demand inEurope and certain export markets bolstered by customer inventory replenishment after significant destocking in the fourth quarter of 2022. Our Chemicals Segment is experiencing continued weak demand inNorth America in the first quarter of 2023. Our Chemicals Segment expects customer demand to gradually return during the first half of the year particularly inEurope and export markets. Accordingly, at the beginning of 2023, our Chemicals Segment began a measured ramp up of production with the expectation of operating its facilities at full practical capacity by the end of the second quarter of 2023. Our Chemicals Segment's selling prices have remained stable at the beginning of 2023; however, our Chemicals Segment expects selling prices to rise throughout the last three quarters of 2023 in response to higher production costs. Based on the net effects of these factors, our Chemicals Segment expects to report lower operating results for the full year of 2023 as compared to 2022.
Our Chemicals Segment will continue to monitor current and anticipated near-term customer demand levels and will align its production and inventories accordingly. The long-term outlook for the TiO2 industry remains very positive,
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and the steps we are taking in the near term are intended to preserve our Chemicals Segment global market share and position its business to profitably grow in the future.
Our expectations for the TiO2 industry and our Chemicals Segment operations are based on a number of factors outside our control. As noted above, our Chemicals Segment has experienced global market disruptions including high energy costs and availability concerns and future impacts on its operations will depend on, among other things, future energy costs and availability and the impact economic conditions and geopolitical events have on its operations or its customers' and suppliers' operations, all of which remain uncertain and cannot be predicted.
Component Products -
Our Component Products Segment reported operating income of$25.4 million in 2022 compared to operating income of$20.5 million in 2021 and$11.8 million in 2020. The increase in operating income in 2022 over 2021 is primarily due to higher marine components sales and to a lesser extent higher security products sales. Our Components Products Segment's operating income was negatively impacted by the COVID-19 pandemic in 2020, primarily in the second and third quarters, which significantly impacts operating income comparisons for the comparative periods. Beginning in the third quarter of 2020 and continuing through 2021, our Component Products Segment's sales volumes generally improved at both security products and marine components reporting units and the increase in operating income in 2021 over 2020 primarily resulted from the higher sales volumes. Our Component Products Segment's product offerings consist of a large number of products that have a wide variation in selling price and manufacturing cost, which results in certain practical limitations on our ability to quantify the impact of changes in individual product sales quantities and selling prices on our net sales, cost of sales and gross margin. In addition, small variations in period-to-period net sales, cost of sales and gross margin can result from changes in the relative mix of our products sold. The key performance indicator for our Component Products Segment is operating income margins. Years ended December 31, % Change 2020 2021 2022 2020-21 2021-22 (Dollars in millions) Net sales: Security products$ 87.9 $ 105.1 $ 114.5 20 % 9 % Marine components 26.6 35.7 52.1 34 46 Total net sales 114.5 140.8 166.6 23 18 Cost of sales 81.7 98.1 117.8 20 20 Gross margin$ 32.8 $ 42.7 $ 48.8 30 14 Operating income$ 11.8 $ 20.5 $ 25.4 74 24 Percent of net sales: Cost of sales 71 % 70 % 71 % Gross margin 29 30 29 Operating income 10 15 15Net Sales - Our Component Products Segment's net sales increased$25.8 million in 2022 compared to 2021 due to higher marine component sales primarily to the towboat market and, to a lesser extent, higher security products sales across a variety of markets. Marine components net sales increased$16.4 million , or 46%, in 2022 as compared to 2021. Relative to prior year, marine component sales were$11.5 million higher to the towboat market (primarily to original equipment boat manufacturers),$2.1 million higher to the engine builder market and$2.0 million higher to the industrial market. Security products net sales increased$9.4 million , or 9%, in 2022 as compared to 2021. Relative to prior year, security products sales were$3.8 million higher to the government security market,$1.8 million higher to the office furniture market,$1.5 million higher to distributors,$1.0 million higher to the tool storage market and$.9 million higher to the gas station security market. -44- Our Component Products Segment's net sales increased$26.3 million in 2021 compared to 2020 primarily due to higher sales at both the security products and marine components reporting units, particularly in the second quarter of 2021, as many of our Component Products Segment's customers were temporarily closed or reduced production during the second quarter of 2020 due to government ordered closures or reduced demand resulting from the COVID-19 pandemic. Beginning in the third quarter of 2020 and continuing through 2021, marine components sales exceeded pre-pandemic levels. Marine components net sales increased$9.1 million , or 34%, in 2021 as compared to 2020 primarily due to increased sales of$7.2 million to several original equipment boat manufacturers in the towboat market. Security products sales generally improved since third quarter of 2020 but did not recover to pre-pandemic levels until the second quarter of 2021 when sales improved in markets that had been slower to recover from the COVID-19 pandemic, particularly sales to distributors and the office furniture market. Relative to prior year, sales increased$17.2 million , or 20%, primarily due to$7.2 million higher sales to the government security market,$4.9 million higher sales to the transportation market and$2.0 million higher sales to distribution customers. Cost of Sales and Gross Margin - Our Component Products Segment's cost of sales increased in 2022 compared to 2021 primarily due to the effects of higher sales, as well as increased production costs at both security products and marine components. Our Component Products Segment's gross margin as a percentage of net sales decreased over the same period primarily due to the decrease in the security products gross margin percentage. Security products gross margin as a percentage of net sales for 2022 decreased as compared to 2021 primarily due to higher cost of sales, most significantly in the third and fourth quarters of 2022, as price increases and surcharges did not fully offset higher cost inventory sold in the latter half of the year. Marine components gross margin as a percentage of net sales increased slightly in 2022 compared to 2021 with increased sales due to price increases and surcharges more than offsetting higher production costs, as well as increased coverage of cost of sales from higher sales. Our Component Products Segment's cost of sales increased in 2021 compared to 2020 primarily due to the effects of higher sales, as well as increased production costs at both security products and marine components. Our Component Products Segment's gross margin as a percentage of net sales increased over the same period due to the increase in the security products gross margin percentage partially offset by the decrease in the marine components gross margin percentage. Security products gross margin as a percentage of net sales for 2021 increased as compared to 2020 due to increased coverage of fixed costs from higher sales, partially offset by higher production costs including increased raw materials costs across a variety of commodities and component inputs, higher shipping costs, and increased labor costs primarily due to higher overtime costs and increased headcount. Marine components gross margin as a percentage of net sales decreased in 2021 compared to 2020 as increased coverage of fixed costs from higher sales were more than offset by higher production costs including raw materials costs (primarily stainless steel), higher shipping costs and increased labor costs resulting from higher overtime costs and increased headcount. Operating Income - Our Component Products Segment operating income increased in 2022 compared to 2021. Operating margin increased in 2022 compared to 2021 primarily due to the factors impacting net sales, cost of sales and gross margin discussed above. Operating costs and expenses consist primarily of sales and administrative-related personnel costs, sales commissions and advertising expenses directly related to product sales and administrative costs relating to business unit and corporate management activities, as well as gains and losses on disposal of property and equipment. Operating costs and expenses increased$1.2 million in 2022 compared to 2021 predominantly due to higher salary and employment related costs. Our Component Products Segment operating income increased in 2021 compared to 2020. Operating margin increased in 2021 compared to 2020 primarily due to the factors impacting net sales, cost of sales and gross margin discussed above. Operating costs and expenses increased$1.2 million in 2021 compared to 2020 primarily due to higher salary and benefits costs. General - Our Component Products Segment's profitability primarily depends on its ability to utilize its production capacity effectively, which is affected by, among other things, the demand for its products and its ability to control manufacturing costs, primarily comprised of labor costs and materials. The materials used in our Component Products Segment's products consist of purchased components and raw materials some of which are subject to fluctuations in the commodity markets such as zinc, brass and stainless steel. Total material costs represented approximately 47% of our Component Products Segment's cost of sales in 2022, with commodity-related raw materials representing -45- approximately 17% of our Component Products Segment's cost of sales. Prices for the primary commodity-related raw materials used in the manufacture of its locking mechanisms, primarily zinc and brass, generally increased throughout 2021 and the first half of 2022. Prices began to stabilize in the latter half of 2022, although at elevated levels. The prices for stainless steel, the primary raw material used for the manufacture of marine exhaust headers and pipes and wake enhancement systems, experienced significant volatility during 2021 and 2022. Based on current economic conditions, we expect the prices for our Component Products Segment's primary commodity-related raw materials including zinc, brass, stainless steel and other manufacturing materials in 2023 to be relatively stable, although at the elevated levels our Component Products Segment experienced in the second half of 2022.
Our Component Products Segment occasionally enters into short-term commodity-related raw material supply arrangements to mitigate the impact of future increases in commodity related raw material costs. See Item 1 - "Business - Component Products Segment - CompX International, Inc. - Raw Materials."
Outlook - While our Component Products Segment continued to experience strong demand at both its reporting units during the fourth quarter of 2022, the order rate and backlog at both reporting units began to soften late in the fourth quarter. Our Component Products Segment operated its manufacturing facilities at elevated production rates throughout 2022 in line with the strong demand and it continues to monitor demand levels and will adjust production rates accordingly. While labor markets continue to be competitive in each of the regions in which our Component Products Segment operates and labor costs continue to rise, our Component Products Segment has been able to achieve and maintain more balanced staffing levels aligned with current and forecasted demand, particularly at its marine components reporting unit. Our Component Products Segment continues to face shortages related to certain electronic components; however, its supply chains are generally stable and recently transportation and logistical delays have been minimal. Our Component Products Segment expects gross margins at its security products reporting unit will continue to be challenged during 2023 as higher cost inventory continues to work its way through cost of sales and anticipated reduced demand may limit its ability to implement further price increases. While our Component Products Segment expects its marine components net sales to remain strong during the first quarter, it expects net sales will decline as compared to 2022 as marine market demand is being challenged by higher interest rates and several original equipment boat manufacturers, including certain of its customers, have publicly announced reduced production schedules in 2023 compared to 2022. Our Component Products Segment currently expects its marine components reporting unit gross margins as a percentage of net sales in 2023 to be comparable to 2022. Based on the softening demand and general economic conditions inNorth America , our Component Products Segment currently expects to report lower net sales and operating income at both reporting units during 2023 compared to 2022. Our Component Products Segment is focused on managing inventory levels to support anticipated lower demand in 2023. With raw materials and other components more readily available, our Component Products Segment believes it will be able to achieve additional operating efficiencies during the year although the extent and impact of such efficiencies is not yet known. Our Component Products Segment's expectations for its operations and the markets it serves are based on a number of factors outside its control. As noted above, there continue to be some global and domestic supply chain challenges and any future impacts on operations will depend on, among other things, any future disruption in our Component Products Segment's operations or its suppliers' operations, the impact of economic conditions and geopolitical events on demand for its products or its customers' and suppliers' operations, all of which remain uncertain and cannot be predicted. -46-
Years ended December 31,
2020 2021 2022
(In millions)
Net sales:
Land sales $ 87.0 $ 207.8 $ 120.9
Water delivery sales 7.6 6.8 3.6
Utility and other 1.8 1.6 1.2
Total net sales 96.4 216.2 125.7
Cost of sales 64.9 123.6 74.1
Gross margin $ 31.5 $ 92.6 $ 51.6
Operating income $ 47.8 $ 97.3 $ 39.4
General - Our Real Estate Management and Development Segment consists of BMI and
LandWell. BMI provides certain utility services, among other things, to an
industrial park located in Henderson, Nevada , and prior to BWC's bankruptcy
filing on September 10, 2022 was responsible for the delivery of water to the
City of Henderson and various other users through a water delivery system owned
and operated by BWC. LandWell is actively engaged in efforts to develop certain
real estate in Henderson, Nevada including approximately 2,100 acres zoned for
residential/planned community purposes and approximately 400 acres zoned for
commercial and light industrial use.
LandWell began marketing land for sale in the residential/planned community in
December 2013 and at December 31, 2022 approximately 90 saleable acres remain.
LandWell has been actively marketing and selling the land zoned for commercial
and light industrial use and at December 31, 2022 approximately 20 saleable
acres remain. Contracts for land sales are negotiated on an individual basis and
sales terms and prices will vary based on such factors as location (including
location within a planned community), expected development work, and individual
buyer needs. Although land may be under contract, we do not recognize revenue
until we have satisfied the criteria for revenue recognition set forth in ASC
Topic 606. In some instances, we will receive cash proceeds at the time the
contract closes and record deferred revenue for some or all of the cash amount
received, with such deferred revenue being recognized in subsequent periods.
Substantially all of the land in the residential/planned community has been
sold; however, we expect the development work to take three to five years to
complete.
Net Sales and Operating Income - Substantially all of the net sales from our
Real Estate Management and Development segment in 2022 consisted of revenues
from land sales. We recognized $120.9 million in revenues on land sales during
2022 compared to $207.8 million in 2021. Cost of sales related to land sales
revenues was $69.7 million in 2022 compared to $117.0 million in 2021. Land
sales revenue decreased substantially in 2022 primarily due to two land parcels
with no post-closing obligations that closed during the fourth quarter of 2021
for $70 million which were immediately recognized as revenue. Excluding these
two parcels that closed in 2021, land sales declined 12% in 2022 primarily due
to a decrease in acreage sold and the relative timing of development spending.
Substantially all of the land sales revenue we recognized in 2022 was under the
cost-based inputs method of revenue recognition for acreage sold in prior years
and to a lesser extent current year land sales. In 2021 land sales were heavily
weighted towards the end of the year. Land sales revenue in the fourth quarter
of 2022 was $20.0 million compared to $150.8 million in the fourth quarter of
2021, including approximately $70 million noted above. Included in operating
income was income related to the tax increment reimbursement note receivables of
$15.2 million and $15.3 million in 2022 and 2021, respectively. See Note 7 to
our Consolidated Financial Statements.
We recognized $207.8 million in revenues on land sales during 2021 compared to
$87.0 million in 2020. Cost of sales related to land sales revenues was $117.0
million in 2021 compared to $57.9 million in 2020. Land sales revenue increased
in 2021 as compared to 2020 primarily due to an increase in the amount of
acreage sold, increased selling price per acre sold and an increase in
infrastructure development spending. As noted above, land sales are generally
recognized over time using cost-based inputs and in the second quarter of 2020,
in an effort to conserve resources in response to the pandemic, we reduced
infrastructure development spending to only those expenditures necessary to
fulfill our contractual obligations. We returned to more normalized
infrastructure development spending late in 2020 and continued to increase
infrastructure development spending throughout 2021. Typically land sales have
been heavily weighted towards the end
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of the year. In the fourth quarter of 2021, land sales revenue was $150.8
million including approximately $70 million related to two parcels as compared
to land sales revenue of $70.2 million in the fourth quarter of 2020, including
approximately $55 million related to a single parcel. The contracts for these
parcels contained no post-closing obligations therefore we recognized the full
$70 million and $55 million in revenue in the fourth quarters of 2021 and 2020,
respectively. Operating income in 2021 also includes $15.3 million of income
related to the recognition of tax increment reimbursement note receivables
compared to $19.1 million of such income in 2020, as discussed in Note 7 to our
Consolidated Financial Statements.
The remainder of net sales and cost of sales related to this segment primarily
relates to water delivery fees and expenses. BMI provides certain utility
services, among other things, to an industrial park located in Henderson, Nevada
and prior to BWC's bankruptcy filing on September 10, 2022 was responsible for
the delivery of water to the City of Henderson and various other users under
long-term contracts through a water delivery system owned and operated by BWC.
BWC's water delivery system operated on Lake Mead in Nevada . Due to the
Western drought, water levels in Lake Mead have been declining for much of the
last twenty years. As a result of water release curtailments upstream of Lake
Mead which began late in the second quarter, Lake Mead water levels have dropped
precipitously to historically low levels. On June 30, 2022 BWC was no longer
able to pump water without the risk of damaging the system and consequently
ceased operations at its water intake facility to best preserve the system.
Current estimates of Lake Mead water levels do not indicate lake levels will be
sufficient to enable BWC to resume pumping water for the foreseeable future. We
considered BWC's inability to pump water from Lake Mead to be a triggering event
under the ASC 360 Property, Plant, and Equipment, which caused us to evaluate
the water system fixed assets for impairment. Because BWC was unable to deliver
water under its current contracts and therefore unable to generate revenue, we
determined the water system's assets were fully impaired except to the extent
certain equipment had alternative use outside of BWC's operations, in which case
those assets were written down to estimated salvage value. The $16.4 million
impairment charge primarily recognized in the second quarter of 2022 represents
the write down of the book value to the estimated salvage value of the assets.
Without the ability to pump and deliver water to its customers, BWC's operating
expenses exceeded its revenues, and on September 10, 2022 BWC and its
subsidiaries voluntarily filed for Chapter 11 bankruptcy protection in the
United States Bankruptcy Court for the District of Nevada . Because BWC has filed
for bankruptcy protection, we and BMI can no longer affirmatively assert we
control BWC and, as such, in accordance with ASC 810, Consolidation, we
deconsolidated BWC as of the date of the bankruptcy filing and recognized a loss
of $2.0 million in the third quarter of 2022 on the deconsolidation. In
addition, BMI had an outstanding intercompany accounts receivable balance with
BWC on the date of the bankruptcy filing, and we recognized $1.3 million of bad
debt expense to fully reserve this balance during the third quarter of 2022.
Operating income comparisons between 2022 and 2021 are affected by the aggregate
$19.7 million in charges related to BWC recognized in 2022. See Notes 2 and 9
to our Consolidated Financial Statements.
Outlook - LandWell is focused on developing the land it manages, primarily to
residential builders, for the residential/planned community in Henderson . At
December 31, 2022 , substantially all of the land in the residential/planned
community had been sold with approximately 90 saleable acres remaining. While we
expect to sell the remaining acres over the next one to three years, due to the
current economic conditions, we are unsure of the timing of any sales that may
occur. At December 31, 2022 we have deferred revenue of $123.0 million related
to land sales closed in 2022 and prior years. Because we recognize revenue over
time using cost-based inputs, we will continue to recognize revenue on land
previously sold over the development period, although we have already received
substantially all the cash proceeds related to these sales. We currently expect
to take three to five years to complete our post-closing obligations. Any delays
or curtailments in infrastructure development related to post-closing obligation
activities will lower the amount of revenue we recognize on previously closed
land sales. Under LandWell's development agreement with the City of Henderson ,
the issuance of a specified number of housing permits requires LandWell to
complete certain large infrastructure projects. LandWell began construction on
several of these community-wide large projects in late 2021 with the
construction expected to continue for the next three to five years. We expect
these land development costs in 2023 to be consistent with 2022. Because these
large projects relate to the entirety of the residential/planned community, the
costs associated with these large projects are not part of the cost-based inputs
used to recognize revenue and therefore this spending will not correlate to
revenue recognition. However, this spending is expected to be eligible for tax
increment reimbursement and delays or curtailments in eligible infrastructure
development activities will also delay LandWell's ability to submit completed
costs to the City of Henderson for approval of additional tax increment
reimbursement note receivables.
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As noted above, BWC filed for Chapter 11 bankruptcy protection on September 10,
2022 . BWC is operating under court protection, and a portion of BWC's water
delivery system is still operating with water provided by the regional water
authority in order to continue to provide water to its industrial customers for
an interim period. We cannot predict the timing or the outcome of the bankruptcy
reorganization, and we may incur additional costs before the bankruptcy
proceedings are concluded.
General Corporate Items, Interest Expense, Income Taxes, Noncontrolling Interest and Related Party Transactions
Insurance Recoveries -
The agreements with certain ofNL's insurance carriers also include reimbursement for a portion of its future litigation defense costs. We are not able to determine how much we will ultimately recover from these carriers for defense costs incurred byNL because of certain issues that arise regarding which defense costs qualify for reimbursement. Accordingly, these insurance recoveries are recognized when the receipt is probable and the amount is determinable. See Note 18 to our Consolidated Financial Statements.
Gain on Land Sales - In 2021, we sold two parcels of land (including one parcel in the second quarter and one parcel in the third quarter) not used in our operating activities. See Note 13 to our Consolidated Financial Statements.
Other Components of Net Periodic Pension and OPEB Expense - We recognized other components of net periodic pension and OPEB expense of$13.9 million in 2022,$17.0 million in 2021 and$20.1 million in 2020. The change in expense is primarily due to pension costs as a result of actuarial amortizations and expected returns on plan assets. See Note 11 to our Consolidated Financial Statements. Changes in the Market Value of Valhi Common Stock held by Subsidiaries - Our subsidiaries Kronos andNL hold shares of our common stock. As discussed in Note 16 to our Consolidated Financial Statements, we account for our proportional interest in these shares of our common stock as treasury stock, at Kronos' andNL's historical cost basis. The remaining portion of these shares of our common stock, which are attributable to the noncontrolling interest of Kronos andNL , are reflected in our Consolidated Balance Sheets at fair value. Any unrealized gains or losses on the shares of our common stock attributable to the noncontrolling interest of Kronos andNL are recognized in the determination of each of Kronos andNL's respective net income or loss. Under the principles of consolidation, we eliminate any gains or losses associated with our common stock to the extent of our proportional ownership interest in each subsidiary. The$1.6 million loss in 2022, the$3.3 million gain in 2021 and the$1.7 million loss in 2020 recognized in our Consolidated Financial Statements represent the unrealized gain (loss) in respect of these shares during such periods attributable to the noncontrolling interest of Kronos andNL .
Other General Corporate Items - Corporate expenses were 5% higher at
? litigation and related costs at
2021; and
? environmental remediation and related costs of
Corporate expenses of
? litigation and related costs at
and
? environmental remediation and related costs of
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 and higher environmental remediation and related costs.
-49-
The level of our litigation and related expenses 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 18
to our 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 and related costs are difficult to
assess and estimate, and it is possible that actual costs for environmental
remediation and related costs will exceed accrued amounts or that costs will be
incurred in the future for sites in which we cannot currently estimate the
liability. If these events occur in 2023, our corporate expense could be higher
than we currently estimate. In addition, we adjust our accruals for
environmental remediation and related costs as further information becomes
available to us or as circumstances change. Such further information or changed
circumstances could result in an increase or reduction in our accrued
environmental remediation and related costs. See Note 18 to our Consolidated
Financial Statements.
Interest Expense - Interest expense decreased to $27.9 million in 2022 from
$32.5 million in 2021 primarily due to lower average debt levels and the effects
of changes in currency exchange rates somewhat offset by higher interest rates
on variable-rate indebtedness in 2022. Interest expense decreased to $32.5
million in 2021 from $36.2 million in 2020 primarily due to lower average debt
levels in 2021.
We expect interest expense will be higher in 2023 as compared to 2022 primarily as lower average debt balances will be more than offset by higher average interest rates on variable-rate indebtedness.
Provision for Income Taxes - We recognized income tax expense of$33.8 million in 2022 compared to$60.1 million in 2021. The decrease is primarily due to lower earnings in 2022 and the jurisdictional mix of such earnings. We recognized income tax expense of$60.1 million in 2021 compared to$15.9 million in 2020. The increase is primarily due to higher earnings in 2021 and the jurisdictional mix of such earnings. Our earnings are subject to income tax in variousU.S. and non-U.S. jurisdictions. Generally, our consolidated effective income tax rate is higher than theU.S. federal statutory tax rate of 21% primarily because the income tax rates applicable to the pre-tax earnings (losses) of our non-U.S. operations are generally higher than the income tax rates applicable to ourU.S. operations. However, in 2022 our consolidated effective income tax rate is lower than theU.S. federal statutory rate of 21% due to the effect of a tax benefit relating to the release of a portion of our valuation allowance associated with the 2022 utilization of a portion of our business interest expense carryforwards. Also, in 2020 our consolidated effective income tax rate is lower than theU.S. federal statutory rate of 21% due to the effect of lower earnings and tax benefits associated with losses incurred in certain high tax jurisdictions. Our consolidated effective income tax rate in 2023 is expected to be higher than theU.S. federal statutory rate of 21% because the income tax rates applicable to the earnings (losses) of our non-U.S. operations will be higher than the income tax rates applicable to ourU.S. operations due to the expected mix of earnings. See Note 14 to our Consolidated Financial Statements for more information about our 2022 income tax items, including a tabular reconciliation of our statutory tax expense to our actual tax expense. Discontinued Operations - OnJanuary 26, 2018 , we completed the sale of our former Waste Management Segment toJFL-WCS Partners, LLC , an entity sponsored by certain investment affiliates ofJ.F. Lehman & Company , for consideration consisting of the assumption of all of the Waste Management Segment's third-party indebtedness and other liabilities. We recognized a pre-tax gain of approximately$4.9 million in the fourth quarter of 2020 related to proceeds received fromJFL Partners in final settlement of an earn-out provision in the sale agreement. Amounts related to our former Waste Management Segment are classified as part of discontinued operations. See Note 3 to our Consolidated Financial Statements. Noncontrolling Interest in Net Income of Subsidiaries - Noncontrolling interest in operations of subsidiaries decreased from 2021 to 2022 primarily due to lower operating income at BMI and LandWell. Noncontrolling interest in operations of subsidiaries increased from 2020 to 2021 primarily due to higher operating income from all of our segments. -50-
Related Party Transactions - We are a party to certain transactions with related parties. See Note 17 to our Consolidated Financial Statements.
Foreign Operations
We have substantial operations located outsidethe United States , principally our Chemicals Segment's operations inEurope andCanada . The functional currency of these operations is the local currency. As a result, the reported amount of our assets and liabilities related to these foreign operations will fluctuate based upon changes in currency exchange rates. AtDecember 31, 2022 , we had substantial net assets denominated in the euro, Canadian dollar and Norwegian krone.
Critical accounting policies and estimates
Our significant accounting policies are more fully described in Note 1 to our Consolidated Financial Statements. Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted inthe United States of America , or GAAP, which requires management to make estimates, judgments and assumptions that we believe are reasonable based on our historical experience, observance of known trends in our Company and industry as a whole and information available from outside sources. Our estimates affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results may differ significantly from those initial estimates. We believe the most critical accounting policies and estimates involving significant judgment primarily relate to goodwill, long-lived assets, revenue recognized over time using cost-based inputs, defined benefit pension plans, income taxes and litigation and environmental liabilities.Goodwill - Our net goodwill totaled$379.7 million atDecember 31, 2022 primarily resulting from our various step acquisitions of Kronos andNL (which occurred before the implementation of the current accounting standards related to noncontrolling interest) and to a lesser extent CompX's purchase of various businesses. In accordance with the applicable accounting standards for goodwill, we do not amortize goodwill. We perform a goodwill impairment test annually in the third quarter of each year.Goodwill is also evaluated for impairment at other times whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. An entity may first assess qualitative factors to determine whether it is necessary to complete the quantitative impairment test using a more-likely-than-not criteria. If an entity believes it is more-likely-than-not the fair value of a reporting unit is greater than its carrying value, including goodwill, the quantitative impairment test can be bypassed. Alternatively, an entity has an unconditional option to bypass the qualitative assessment and proceed directly to performing the quantitative impairment test. When performing a qualitative assessment considerable management judgment is necessary to evaluate the qualitative impact of events and circumstances on the fair value of a reporting unit. Events and circumstances considered in our impairment evaluations, such as historical profits and stability of the markets served, are consistent with factors utilized with our internal projections and operating plan. However, future events and circumstances could result in materially different findings which could result in the recognition of a material goodwill impairment. Evaluations of possible impairment utilizing the quantitative impairment test require us to estimate, among other factors: forecasts of future operating results, revenue growth, operating margin, tax rates, capital expenditures, depreciation, working capital, weighted average cost of capital, long-term growth rates, risk premiums, terminal values, and fair values of our reporting units and assets. The goodwill impairment test is subject to uncertainties arising from such events as changes in competitive conditions, the current general economic environment, material changes in growth rate assumptions that could positively or negatively impact anticipated future operating conditions and cash flows, changes in the discount rate, and the impact of strategic decisions. If any of these factors were to materially change such change may require revaluation of our goodwill. Changes in estimates or the application of alternative assumptions could produce significantly different results. -51- A reporting unit can be a segment or an operating division based on the operations of the segment. For example, our Chemicals Segment produces a globally coordinated homogeneous product whereas our Component Products Segment operates as two distinct reporting units. If the fair value of the reporting unit is less than its book value, the goodwill is written down to estimated fair value. For our Chemicals Segment, we use Level 1 inputs of publicly traded market prices to compare the book value to assess impairment. We also consider control premiums when assessing fair value. When we performed our annual goodwill impairment test in the third quarter of 2022 for our Chemicals Segment goodwill, we concluded there was no impairment of such goodwill. However, future events and circumstances could change (i.e. a significant decline in quoted market prices) and result in a materially different finding which could result in the recognition of a material impairment with respect to such goodwill. Substantially all of the goodwill for our Component Products Segment relates to its security products reporting unit. In 2022, we used the qualitative assessment for our annual impairment test and determined it was not necessary to perform the quantitative goodwill impairment test, as we concluded it is more-likely-than-not that the fair value of the security products reporting unit exceeded its carrying amount. Long-lived assets - The net book value of our property and equipment totaled$523.8 million atDecember 31, 2022 . We assess property and equipment for impairment only when circumstances indicate an impairment may exist. Our determination is based upon, among other things, our estimates of the amount of future net cash flows to be generated by the long-lived asset (Level 3 inputs) and our estimates of the current fair value of the asset. Significant judgment is required in estimating such cash flows. Adverse changes in such estimates of future net cash flows or estimates of fair value could result in an inability to recover the carrying value of the long-lived asset, thereby possibly requiring an impairment charge to be recognized in the future. We do not assess our property and equipment for impairment unless certain impairment indicators are present. Due to the Western drought, water levels inLake Mead have been declining for much of the last twenty years. As a result of water release curtailments upstream ofLake Mead which began late in the second quarter,Lake Mead water levels have dropped precipitously to historically low levels. OnJune 30, 2022 BWC was no longer able to pump water without the risk of damaging the system and consequently ceased operations at its water intake facility to best preserve the system. Current estimates ofLake Mead water levels do not indicate lake levels will be sufficient to enable BWC to resume pumping water for the foreseeable future. We considered BWC's inability to pump water fromLake Mead to be a triggering event under the ASC 360 Property, Plant, and Equipment, which caused us to evaluate the water system fixed assets for impairment. Because BWC was unable to deliver water under its current contracts and therefore unable to generate revenue, we determined the water system's assets were fully impaired except to the extent certain equipment had alternative use outside of BWC's operations, in which case those assets were written down to estimated salvage value. The$16.4 million impairment charge primarily recognized in the second quarter of 2022 represents the write down of the book value to the estimated salvage value of the assets. See Note 2 to our Consolidated Financial Statements. Other than the$16.4 million fixed asset impairment discussed above, we did not evaluate any other long-lived assets for impairment during 2022 because no such impairment indicators were present. Revenue recognized over time using cost-based inputs - Certain real estate land sales by ourReal Estate Management and Development Segment (generally land sales associated with our residential/planned community) require us to complete property development and improvements after title passes to the buyer and we have received all or a substantial portion of the selling price. Generally, all of the land sales associated with the residential/planned community have been recognized over time using cost-based inputs of accounting in accordance with ASC 606. Under such method, revenues and profits are recognized in the same proportion of our progress towards completion of our contractual obligations, with our progress measured by costs incurred as a percentage of total costs estimated to be incurred. Such costs incurred and total estimated costs include amounts specifically identifiable with the parcels sold as well as certain development costs for the entire residential/planned community which are allocated to the parcels sold under applicable GAAP. Estimates of total costs expected to be incurred require significant management judgment, and the amount of revenue and profits that have been recognized to date are subject to revisions throughout the development period. The -52-
impact on the amount of revenue recognized resulting from any future change in the estimate of total costs estimated to be incurred would be accounted for prospectively in accordance with GAAP.
Defined benefit pension plans - We maintain various defined benefit pension plans in theU.S. ,Europe andCanada . See Note 11 to our Consolidated Financial Statements. We recognized consolidated defined benefit pension plan expense of$33.8 million in 2020,$32.1 million in 2021 and$25.4 million in 2022. The amount of funding requirements for these defined benefit pension plans is generally based upon applicable regulations (such as ERISA in theU.S. ) and will generally differ from pension expense for financial reporting purposes. We made contributions to all of our defined benefit pension plans of$18.4 million in 2020,$20.3 million in 2021 and$16.6 million in 2022. Under defined benefit pension plan accounting, defined benefit pension plan expense, pension assets and accrued pension costs are each recognized based on certain actuarial assumptions. These assumptions are principally the discount rate, the assumed long-term rate of return on plan assets, the fair value of plan assets and the assumed increase in future compensation levels. We recognize the funded status of our defined benefit pension plans as either an asset (for overfunded plans) or a liability (for underfunded plans) in our Consolidated Balance Sheets. The discount rates we use for determining defined benefit pension expense and the related pension obligations are based on current interest rates earned on long-term bonds that receive one of the two highest ratings given by recognized rating agencies in the applicable country where the defined benefit pension benefits are being paid. In addition, we receive third-party advice about appropriate discount rates and these advisors may in some cases use their own market indices. We adjust these discount rates as of eachDecember 31 valuation date to reflect then-current interest rates on such long-term bonds. We use these discount rates to determine the actuarial present value of the pension obligations as ofDecember 31 of that year. We also use these discount rates to determine the interest component of defined benefit pension expense for the following year. AtDecember 31, 2022 , approximately 64%, 15%, 8% and 8% of the projected benefit obligations related to our plans inGermany ,Canada ,Norway and theU.S. , respectively. We use several different discount rate assumptions in determining our consolidated defined benefit pension plan obligation and expense. This is because we maintain defined benefit pension plans in several different countries inEurope andNorth America and the interest rate environment differs from country to country. We used the following discount rates for our defined benefit pension plans:
Discount rates used for:
Obligations Obligations Obligations
at December 31, 2020 at December 31, 2021 at December 31, 2022
and expense in 2021 and expense in 2022 and expense in 2023
Kronos and NL Plans:
Germany .7% 1.2% 3.7%
Canada 2.4% 2.9% 5.1%
Norway 1.7% 1.9% 3.6%
U.S. 2.2% 2.6% 5.3%
The assumed long-term rate of return on plan assets represents the estimated
average rate of earnings expected to be earned on the funds invested or to be
invested in the plans' assets provided to fund the benefit payments inherent in
the projected benefit obligations. Unlike the discount rate, which is adjusted
each year based on changes in current long-term interest rates, the assumed
long-term rate of return on plan assets will not necessarily change based upon
the actual short-term performance of the plan assets in any given year. Defined
benefit pension expense each year is based upon the assumed long-term rate of
return on plan assets for each plan, the actual fair value of the plan assets as
of the beginning of the year and an estimate of the amount of contributions to
and distributions from the plan during the year. Differences between the
expected return on plan assets for a given year and the actual return are
deferred and amortized over future periods based either upon the expected
average remaining service life of the active plan participants (for plans for
which benefits are still being earned by active employees) or the average
remaining life expectancy of the inactive participants (for plans for which
benefits are not still being earned by active employees).
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At December 31, 2022 , the fair value of plan assets for all defined benefit
plans comprised $39.1 million related to U.S. plans and $390.5 million related
to non-U.S. plans. Substantially all of plan assets attributable to non-U.S.
plans related to plans maintained by Kronos, and approximately 70% and 30% of
the plan assets attributable to U.S. plans related to plans maintained by NL and
Kronos, respectively. At December 31, 2022 , approximately 54%, 20%, 11% and 9%
of the plan assets related to our plans in Germany , Canada , Norway and the U.S ,
respectively. We use several different long-term rates of return on plan asset
assumptions in determining our consolidated defined benefit pension plan
expense. This is because the plan assets in different countries are invested in
a different mix of investments and the long-term rates of return for different
investments differ from country to country.
In determining the expected long-term rate of return on plan asset assumptions,
we consider the long-term asset mix (e.g. equity vs. fixed income) for the
assets for each of our plans and the expected long-term rates of return for such
asset components. In addition, we receive third-party advice about appropriate
long-term rates of return. We regularly review our actual asset allocation for
each of our U.S. and non-U.S. plans and will periodically rebalance the
investments in each plan to more accurately reflect the targeted allocation when
considered appropriate.
The assumed long-term rates of return on plan assets used for purposes of determining net period pension cost for 2020, 2021 and 2022 were as follows:
2020 2021 2022
Kronos and NL plans:
Germany 1.0% 2.0% 2.0%
Canada 3.5% 3.1% 3.8%
Norway 4.0% 2.8% 3.0%
U.S. 4.5% 4.0% 4.0%
Our long-term rate of return on plan asset assumptions in 2023 used for purposes
of determining our 2023 defined benefit pension plan expense for
We follow ASC Topic 820, Fair Value Measurements and Disclosures, in determining the fair value of plan assets within our defined benefit pension plans. While we believe the valuation methods used to determine the fair value of plan assets are appropriate, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. To the extent that a plan's particular pension benefit formula calculates the pension benefit in whole or in part based upon future compensation levels, the projected benefit obligations and the pension expense will be based in part upon expected increases in future compensation levels. For all of our plans for which the benefit formula is so calculated, we generally base the assumed expected increase in future compensation levels upon average long-term inflation rates for the applicable country.
In addition to the actuarial assumptions discussed above, the amount of recognized defined benefit pension expense and the amount of net pension asset and net pension liability will vary based upon relative changes in currency exchange rates. See Note 11 to our Consolidated Financial Statements for additional discussion of actuarial assumptions used in determining defined benefit pension assets, liabilities and expenses.
Based on the actuarial assumptions described above and our current expectation for what actual average currency exchange rates will be during 2023, we expect our defined benefit pension expense will approximate$11 million in 2023. In comparison, we expect to be required to contribute approximately$18 million to such plans during 2023. As noted above, defined benefit pension expense and the amounts recognized as accrued pension costs are based upon the actuarial assumptions discussed above. We believe all of the actuarial assumptions used are reasonable and appropriate. However, if we had lowered the assumed discount rate by 25 basis points for all plans as ofDecember 31, 2022 , our aggregate projected benefit obligations would have increased by approximately$19 million at that date and our defined benefit pension expense would be expected to increase by approximately$.1 million during 2023. Similarly, if we -54- lowered the assumed long-term rate of return on plan assets by 25 basis points for all of our plans, our defined benefit pension expense would be expected to increase by approximately$1 million during 2023. Income taxes - We operate globally through our Chemicals Segment and the calculation of our provision for income taxes and our deferred tax assets and liabilities involves the interpretation and application of complex tax laws and regulations in a multitude of jurisdictions across our Chemicals Segment's global operations. Our effective tax rate is highly dependent upon the geographic distribution of our earnings or losses and the effects of tax laws and regulations in each tax-paying jurisdiction in which we operate. Significant judgments and estimates are required in determining our consolidated provision for income taxes due to the global nature of our Chemicals Segment's operations. Our provision for income taxes and deferred tax assets and liabilities reflect our best assessment of estimated current and future taxes to be paid, including the recognition and measurement of deferred tax assets and liabilities. We recognize deferred taxes for future tax effects of temporary differences between financial and income tax reporting. Deferred income tax assets and liabilities for each tax-paying jurisdiction in which we operate are netted and presented as either a noncurrent deferred income tax asset or liability, as applicable. We record a valuation allowance to reduce our deferred income tax assets to the amount that is believed to be realized under the more-likely-than-not recognition criteria. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance, it is possible that we may change our estimate of the amount of the deferred income tax assets that would more-likely-than-not be realized in the future, resulting in an adjustment to the deferred income tax asset valuation allowance that would either increase or decrease, as applicable, reported net income in the period such change in estimate was made. For example, atDecember 31, 2022 our Chemicals Segment has substantial net operating loss (NOL) carryforwards inGermany (the equivalent of$414 million for German corporate tax purposes) and inBelgium (the equivalent of$13 million for Belgian corporate tax purposes). AtDecember 31, 2022 , we have concluded that no deferred income tax asset valuation allowance is required to be recognized with respect to such carryforwards, principally because (i) such carryforwards have an indefinite carryforward period, (ii) we have utilized a portion of such carryforwards during the most recent three-year period and (iii) we currently expect to utilize the remainder of such carryforwards over the long term. However, prior to the complete utilization of such carryforwards, if we were to generate additional losses in our German or Belgian operations for an extended period of time, or if applicable law were to change such that the carryforward period was no longer indefinite, it is possible that we might conclude the benefit of such carryforwards would no longer meet the more-likely-than-not recognition criteria, at which point we would be required to recognize a valuation allowance against some or all of the then-remaining tax benefit associated with the carryforwards. Contingencies - We are involved in numerous legal and environmental actions in part due toNL's former involvement in the manufacture of lead-based products. We record accruals for these environmental, legal and other contingencies and commitments when such contingencies become probable, and amounts can be reasonably estimated. However, new information may become available to us, or circumstances (such as applicable laws and regulations) may change, thereby resulting in an increase or decrease in the amount we are required to accrue for such matters (and therefore a decrease or increase in our reported net income in the period of such change). AtDecember 31, 2022 we have recorded total accrued environmental liabilities of$97.3 million . Obligations for environmental remediation and related costs are difficult to assess, and it is possible that actual costs for environmental remediation and related costs will exceed accrued amounts or that costs will be incurred in the future for sites in which we cannot currently estimate the liability. If these events occur in 2023, our corporate expense could be higher than we currently estimate. In addition, we adjust our accruals for environmental remediation and related costs (and potential range of our liabilities) as further information becomes available to us or as circumstances change which involves our judgment regarding current facts and circumstances for each site and is subject to various assumptions and estimates. Such further information or changed circumstances could result in an increase in our accrued environmental remediation and related costs. See Note 18 to our Consolidated Financial Statements. -55-
LIQUIDITY AND CAPITAL RESOURCES
Consolidated Cash Flows
Operating Activities -
Trends in cash flows as a result of our operating income (excluding the impact of significant asset dispositions and relative changes in assets and liabilities) are generally similar to trends in our earnings. In addition to the impact of the operating, investing and financing cash flows discussed below, changes in the amount of cash, cash equivalents and restricted cash we report from year to year can be impacted by changes in currency exchange rates, since a portion of our cash, cash equivalents and restricted cash is held by our Chemicals Segment's non-U.S. subsidiaries. For example, during 2022, relative changes in currency exchange rates resulted in a$5.1 million decrease in the reported amount of our cash, cash equivalents and restricted cash compared to a$10.6 million decrease in 2021 and a$13.8 million increase in 2020.
Cash flows from operating activities decreased to
? consolidated operating income of
million compared to operating income of
changes in receivables, inventories, payables and accrued liabilities in 2022
used
? in 2021, an increase in the amount of cash used of
2021, primarily due to the relative changes in our inventories, receivables,
prepaids, land held for development, payables and accruals;
? lower net cash paid for income taxes in 2022 of
decreased earnings; and
? higher net contributions to our TiO2 manufacturing joint venture in 2022 of
Cash flows from operating activities increased to
? consolidated operating income of
changes in receivables, inventories, payables and accrued liabilities in 2021
provided
? in 2020, a decrease in the amount of cash used of
2020, primarily due to the relative changes in our inventories, receivables,
prepaids, land held for development, payables and accruals;
? higher net cash paid for income taxes in 2021 of
earnings; and
? higher net distributions from our TiO2 manufacturing joint venture in 2021 of
Changes in working capital were affected by accounts receivable and inventory changes, as shown below:
Kronos' average days sales outstanding ("DSO") decreased from
? to
collections.
Kronos' average days sales in inventory ("DSI") increased from
2021 to
? attributable to production volumes exceeding sales volumes in 2022 compared to
2021 and due to supply disruptions and other transportation delays impacting
the timing of raw material shipments at the end of 2021.
CompX's average DSO was generally consistent from
? 31, 2022 and is primarily impacted by the timing of sales and collections in
the last month of the year.
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CompX's average DSI increased from
to increased inventories of certain components and raw materials that had
? longer lead times or for which CompX has experienced availability issues and
from the timing of sales relative to the end of the fourth quarter, primarily
at CompX's security products reporting unit.
For comparative purposes, we have also provided comparable prior year numbers
below.
December 31, December 31, December 31,
2020 2021 2022
Kronos:
Days sales outstanding 68 days 65 days 64 days
Days sales in inventory 74 days 59 days 79 days
CompX:
Days sales outstanding 33 days 42 days 41 days
Days sales in inventory 75 days 96 days 99 days
We do not have complete access to the cash flows of our majority-owned
subsidiaries, due in part to limitations contained in certain credit agreements
of our subsidiaries and because we do not own 100% of these subsidiaries. A
detail of our consolidated cash flows from operating activities is presented in
the table below. Intercompany dividends have been eliminated.
Years ended December 31,
2020 2021 2022
(In millions)
Cash provided by (used in) operating activities:
Kronos $ 102.5 $ 206.5 $ 81.7
Valhi exclusive of subsidiaries 57.2 122.1
68.8
CompX 14.9 10.5 16.9
NL exclusive of subsidiaries 7.3 15.3 39.2Tremont exclusive of subsidiaries 36.7 58.8
12.7
BMI 39.0 59.7 12.1
LandWell 81.9 302.1 (22.0)
Eliminations and other (187.3) (315.3) (174.5)
Total $ 152.2 $ 459.7 $ 34.9
Investing Activities -
We disclose capital expenditures by our business segments in Note 2 to our Consolidated Financial Statements.
During 2022:
? we had net purchases of
? part of its deconsolidation in the third quarter (see Note 2 to our
Consolidated Financial Statements).
During 2021 we:
had net proceeds from the sale of land not used in our operations of
? million (including
third quarter); and
? had net proceeds of
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During 2020 we:
? had proceeds from the settlement of an earn-out provision related to the 2018
sale of our Waste Management Segment of
? had net proceeds of
Financing Activities - During 2022:
? we borrowed
with Contran;
? we repaid
our Consolidated Financial Statements);
? Kronos acquired 217,778 shares of its common stock for an aggregate purchase
price of
? CompX acquired 78,900 shares of its Class A common stock for an aggregate
purchase price of
During 2021:
? we repaid
million under Tremont's deferred payment obligation;
? CompX acquired 75,000 shares of its Class A common stock in market transactions
for an aggregate purchase price of
? Kronos acquired 14,409 shares of its common stock in market transactions for an
aggregate purchase price of
During 2020:
? we repaid
? Kronos acquired 122,489 shares of its common stock in market transactions for
an aggregate purchase price of
? we repaid
payment obligation.
We paid aggregate cash dividends on our common stock of$13.6 million in 2020 and$9.0 million in each of 2021 and 2022. Distributions to noncontrolling interest in 2020, 2021 and 2022 are primarily comprised of: CompX dividends paid to shareholders other thanNL ; Kronos dividends paid to shareholders other than us andNL , and BMI and LandWell dividends paid to shareholders other than us.
Outstanding Debt Obligations
At
?
with Contran which is due no earlier than
€400 million aggregate outstanding on Kronos' 3.75% Senior Secured Notes due in
?
amount, net of unamortized debt issuance costs;
?
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? approximately
Certain of our credit facilities require the respective borrowers to maintain a number of covenants and restrictions which, among other things, restrict our ability to incur additional debt, incur liens, pay dividends or merge or consolidate with, or sell or transfer substantially all of our assets to, another entity, and contain other provisions and restrictive covenants customary in lending transactions of this type. Certain of our 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, certain 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, certain credit agreements could result in the acceleration of all or a portion of the indebtedness following a sale of assets outside the ordinary course of business. Kronos had no outstanding borrowings on its$225 million global revolving credit facility ("Global Revolver") atDecember 31, 2022 and approximately$211 million was available for borrowings thereunder. Kronos' Senior Secured Notes and its Global Revolver contain a number of covenants and restrictions which, among other things, restrict its ability to incur or guarantee additional debt, incur liens, pay dividends or make other restricted payments, or merge or consolidate with, or sell or transfer substantially all of its assets to, another entity, and contain other provisions and restrictive covenants customary in lending transactions of these types. The terms of all of our debt instruments are discussed in Note 9 to our Consolidated Financial Statements. We are in compliance with all of our debt covenants atDecember 31, 2022 . We believe that we will be able to continue to comply with the financial covenants contained in our credit facilities through their maturity; however, if future operating results differ materially from our expectations we may be unable to maintain compliance.
Future Cash Requirements
Liquidity -
Our primary source of liquidity on an ongoing basis is our cash flows from
operating activities and borrowings under various lines of credit and notes. We
generally use these amounts to (i) fund capital expenditures, (ii) repay
short-term indebtedness incurred primarily for working capital purposes and
(iii) provide for the payment of dividends (including dividends paid to us by
our subsidiaries) or treasury stock purchases. From time-to-time we will incur
indebtedness, generally to (i) fund short-term working capital needs,
(ii) refinance existing indebtedness, (iii) make investments in marketable and
other securities (including the acquisition of securities issued by our
subsidiaries and affiliates) or (iv) fund major capital expenditures or the
acquisition of other assets outside the ordinary course of business.
Occasionally we sell assets outside the ordinary course of business, and we
generally use the proceeds to (i) repay existing indebtedness (including
indebtedness which may have been collateralized by the assets sold), (ii) make
investments in marketable and other securities, (iii) fund major capital
expenditures or the acquisition of other assets outside the ordinary course of
business or (iv) pay dividends.
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 the estimated sales value of those units. As a result of this
process, we have in the past sought, and may in the future seek, to raise
additional capital, refinance or restructure indebtedness, repurchase
indebtedness in the market or otherwise, modify our dividend policies, consider
the sale of our interests in our subsidiaries, affiliates, business units,
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. From time to time we and our subsidiaries may enter into intercompany
loans as a cash management tool. Such notes are structured as revolving demand
notes and pay and receive interest on terms we believe are more favorable than
current debt and investment market rates. The companies that borrow under these
notes have sufficient borrowing capacity to repay the notes at any time upon
demand. All of these notes and related interest expense and income are
eliminated in our Consolidated Financial Statements.
We periodically evaluate acquisitions of interests in or combinations with
companies (including our affiliates) that may or may not be engaged in
businesses related to our current businesses. We intend to consider such
acquisition activities in the future and, in connection with this activity, may
consider issuing additional equity securities and increasing indebtedness. From
time to time, we also evaluate the restructuring of ownership interests among
our respective subsidiaries and related companies.
-59-
We believe we will be able to comply with the financial covenants contained in
our credit facilities through their maturities; however, if future operating
results differ materially from our expectations we may be unable to maintain
compliance. 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 (defined as the twelve-month period ending
December 31, 2023 ) and long-term obligations (defined as the five-year period
ending December 31, 2027 ). In this regard, see the discussion above in
"Outstanding Debt Obligations." If actual developments differ from our
expectations, our liquidity could be adversely affected.
At
?
?
(1) Amounts available under this facility are at the sole discretion of Contran.
AtDecember 31, 2022 , we had an aggregate of$638.3 million of restricted and unrestricted cash, cash equivalents and marketable securities attributable to continuing operations. A detail by entity is presented in the table below.
Total Held outside
amount U.S.
(In millions)
Kronos $ 334.6 $ 148.8
CompX 59.9 -NL exclusive of its subsidiaries 107.8 - BMI 11.6 - Tremont exclusive of its subsidiaries 9.7 - LandWell 112.9 - Valhi exclusive of its subsidiaries 1.8 - Total cash and cash equivalents, restricted cash and marketable securities$ 638.3 $
148.8
Following the implementation of a territorial tax system under the 2017 Tax Act, repatriation of any cash and cash equivalents held by our non-U.S. subsidiaries would not be expected to result in any material income tax liability as a result of such repatriation.
Capital Expenditures and Other Investments -
We currently expect our aggregate capital expenditures for 2023 will be
approximately
?
the area of environmental compliance, protection and improvement; and
?
In addition, LandWell expects to spend approximately$63 million on land development costs during 2023, including$53 million contractually committed atDecember 31, 2022 . Land development costs are included in the determination of cash provided by operating activities. Capital spending for 2023 is expected to be funded through cash generated from operations or borrowing under our existing credit facilities. Planned capital expenditures in 2023 at Kronos and CompX will primarily be to maintain and improve our existing facilities and, as it relates to CompX, to address capability needs. In addition, Kronos' capital expenditures in the area of environmental compliance, protection and improvement include expenditures which are -60-
primarily focused on increased operating efficiency but also result in improved environmental protection, such as lower emissions from our manufacturing plants.
Repurchases of our Common Stock and Common Stock of our Subsidiaries -
We have in the past, and may in the future, make repurchases of our common stock in market or privately-negotiated transactions. AtDecember 31, 2022 , we had approximately .3 million shares of our common stock available for repurchase under the authorizations described in Note 16 to our Consolidated Financial Statements. AtDecember 31, 2022 , Kronos had approximately 1.3 million shares of its common stock available for repurchase under the authorization described in Note 3 to our Consolidated Financial Statements.
At
Dividends -
Because our operations are conducted primarily through subsidiaries and affiliates, our long-term ability to meet parent company level corporate obligations is largely dependent on the receipt of dividends or other distributions from our subsidiaries and affiliates. Kronos paid a regular dividend of$.19 per share in each quarter of 2022 for which we received$44.1 million . InFebruary 2023 the Kronos board of directors approved a regular quarterly dividend of$.19 per share. If Kronos were to pay its$.19 per share dividend in each quarter of 2023 based on the 58.0 million shares we held of Kronos common stock atDecember 31, 2022 , during 2023 we would receive aggregate regular dividends from Kronos of$44.1 million .NL paid a quarterly dividend of$.07 per share in 2022 for which we received$11.3 million .NL declared a special dividend of$.35 per share inAugust 2022 for which we received$14.1 million . InFebruary 2023 theNL board of directors approved a quarterly dividend of$.07 per share. IfNL were to pay its$.07 per share dividend in each quarter of 2023 based on the 40.4 million shares we held ofNL common stock atDecember 31, 2022 , during 2023 we would receive aggregate quarterly dividends fromNL of$11.3 million . BMI and LandWell pay cash dividends from time to time, but the timing and amount of such dividends are uncertain. In this regard, we received aggregate dividends from BMI and LandWell of$43.0 million in 2020,$74.8 million in 2021 and$16.6 million in 2022. We do not know if we will receive distributions from BMI and LandWell during 2023. All of our ownership interest in CompX is held through our ownership inNL , as such we do not receive any dividends from CompX. Instead any dividend paid by CompX is paid toNL .
Our subsidiaries have various credit agreements with unrelated third-party lenders which contain customary limitations on the payment of dividends, typically a percentage of net income or cash flow; however, these restrictions in the past have not significantly impacted their ability to pay dividends.
Investment 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 decision 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.
We generally do not guarantee any indebtedness or other obligations of our
subsidiaries or affiliates. See Note 17 to our Consolidated Financial
Statements. Our subsidiaries are not required to pay us dividends. If one or
more of our subsidiaries were unable to maintain its current level of dividends,
either due to restrictions contained in a credit agreement or to satisfy its
liabilities or otherwise, our ability to service our liabilities or to pay
dividends on our common stock could be adversely impacted. If this were to
occur, we might consider reducing or eliminating our dividends or selling
interests in subsidiaries or other assets. If we were required to liquidate
assets to generate funds to satisfy our liabilities, we may be required to sell
our subsidiaries' securities for less than what we believe is the long-term
value of such assets.
-61-
We have a $50 million revolving credit facility with a subsidiary of NL secured
with approximately 35.2 million shares of the common stock of Kronos
Worldwide, Inc. held by NL's subsidiary as collateral. Outstanding borrowings
under the credit facility bear interest at the prime rate plus 1.875% per annum,
payable quarterly, with all amounts due on the maturity date. In November 2022 ,
Valhi and the subsidiary of NL entered into a first amendment to the revolving
credit facility to extend the latest maturity date (and consequently the latest
borrowing date) from December 31, 2023 to December 31, 2030 . The related
collateral arrangements remained unchanged by this amendment. The maximum
principal amount which may be outstanding from time-to-time under the credit
facility is limited to 50% of the amount of the most recent closing price of the
Kronos stock. The credit facility contains a number of covenants and
restrictions which, among other things, restrict NL's subsidiary's ability to
incur additional debt, incur liens, and merge or consolidate with, or sell or
transfer substantially all of NL's subsidiary's assets to, another entity, and
require NL's subsidiary to maintain a minimum specified level of consolidated
net worth. Upon an event of default (as defined in the credit facility), Valhi
will be entitled to terminate its commitment to make further loans to NL's
subsidiary, declare the outstanding loans (with interest) immediately due and
payable, and exercise its rights with respect to the collateral under the loan
documents. Such collateral rights include, upon certain insolvency events with
respect to NL's subsidiary or NL , the right to purchase all of the Kronos common
stock at a purchase price equal to the aggregate market value, less amounts
owing to Valhi under the loan documents, and up to 50% of such purchase price
may be paid by Valhi in the form of an unsecured promissory note bearing
interest at the prime rate plus 2.75% per annum, payable quarterly, with all
amounts due no later than five years from the date of purchase, with the
remainder of such purchase price payable in cash at the date of purchase. We
also eliminate any such intercompany borrowings in our Consolidated Financial
Statements. There is $.5 million outstanding under this facility at December 31,
2022 .
We have an unsecured revolving demand promissory note with Kronos which, as
amended, provides for borrowings from Kronos of up to $25 million . We eliminate
any such intercompany borrowings in our Consolidated Financial Statements. The
facility, as amended, is due on demand, but in any event no earlier than
December 31, 2024 . There was no outstanding balance at December 31, 2022 . We had
no borrowings with Kronos in 2020, 2021 and 2022 and we could borrow the full
$25.0 million under our current intercompany facility with Kronos at December
31, 2022 . Kronos' obligation to loan us money under this note is at Kronos'
discretion.
We have an unsecured revolving demand promissory note with CompX which, as
amended, provides for borrowings from CompX of up to $25 million . We eliminate
these intercompany borrowings in our Consolidated Financial Statements. The
facility, as amended, is due on demand, but in any event no earlier than
December 31, 2024 . We had gross borrowings of $29.1 million and gross repayments
of $33.4 million with CompX for a total outstanding balance of $29.5 million at
December 31, 2020 . We had gross borrowings of $29.8 million and gross repayments
of $40.6 million with CompX for a total outstanding balance of $18.7 million at
December 31, 2021 . We had gross borrowings of $24.3 million and gross repayments
of $29.8 million with CompX for a total outstanding balance of $13.2 million at
December 31, 2022 . We could borrow an additional $11.8 million under our current
intercompany facility with CompX at December 31, 2022 . CompX's obligation to
loan us money under this note is at CompX's discretion.
Commitments and Contingencies
We are subject to certain commitments and contingencies, as more fully described in the Notes to our Consolidated Financial Statements and in this Management's Discussion and Analysis of Financial Condition and Results of Operations, including: ? certain income contingencies in variousU.S. and non-U.S. jurisdictions;
? certain environmental remediation matters involving
? certain litigation related to
lead pigment and lead-based paint; and
? certain other litigation to which we are a party.
In addition to those legal proceedings described in Note 18 to our Consolidated
Financial Statements, various legislation and administrative regulations have,
from time to time, been proposed that seek to (i) impose various obligations
-62-
on present and former manufacturers of lead pigment and lead-based paint
(including NL ) with respect to asserted health concerns associated with the use
of such products and (ii) effectively overturn court decisions in which NL and
other pigment manufacturers have been successful. Examples of such proposed
legislation include bills which would permit civil liability for damages on the
basis of market share, rather than requiring plaintiffs to prove that the
defendant's product caused the alleged damage, and bills which would revive
actions barred by the statute of limitations. 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.
As described in the Notes 7, 9 and 18 to our Consolidated Financial Statements,
we are a party to various debt, lease and other agreements which contractually
and unconditionally commit us to pay certain amounts in the future. Our
obligations related to the long-term supply contracts for the purchase of TiO2
feedstock are more fully described in Note 18 to our Consolidated Financial
Statements and above in "Business - Chemicals Segment - Kronos Worldwide, Inc. -
Raw Materials." CompX has purchase obligations of $17.7 million ($16.3 million
payable in 2023 and $1.4 million payable in 2024) which consist of open purchase
orders and contractual obligations, primarily commitments to purchase raw
materials and for capital projects in process at December 31, 2022 . The timing
and amount for purchase obligations are based on the contractual payment amount
and the contractual payment date for those commitments.
Recent Accounting Pronouncements
Not applicable.
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