NL Industries, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; financial statements are unaudited. Unless stated otherwise, amounts below are in millions of U.S. dollars. NL is primarily a holding company: it consolidates majority-owned CompX, a components manufacturer, and accounts for its approximately 31% investment in Kronos Worldwide, a TiO₂ producer, using the equity method.
Financial performance
| Metric | Q3 2021 | Q3 2022 | Nine months 2021 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $34.6 | $42.9 | $106.7 | $126.6 |
| Gross margin | $10.9 | $11.9 | $33.3 | $37.6 |
| Gross margin as % of sales | 31.6% | 27.8% | 31.2% | 29.7% |
| Income from operations | $2.3 | $3.2 | $9.1 | $11.3 |
| Net income (loss) attributable to NL stockholders | $10.3 | $(8.9) | $36.3 | $39.9 |
| Basic and diluted earnings (loss) per share | $0.21 | $(0.18) | $0.74 | $0.82 |
Q3 sales increased 24% year over year, primarily reflecting stronger CompX sales. NL’s Q3 net loss was chiefly driven by a $24.2 million unrealized loss on its Valhi marketable securities and lower equity earnings from Kronos ($6.4 million versus $10.9 million). CompX operating income improved to $6.0 million from $5.1 million. For the first nine months, higher Kronos equity earnings ($37.9 million versus $24.7 million) and CompX operating income ($20.0 million versus $16.7 million) contributed to higher NL net income, partly offset by the change in marketable-securities results.
CompX sales rose 19% year to date; Marine Components sales grew 45%, while Security Products sales grew 10%. CompX’s Q3 gross margin declined to 28% from 32%, mainly due to Security Products’ higher cost inventory and costs that price increases did not fully recover. NL’s results also reflect its investment in Kronos: Kronos reported Q3 sales down 8% and operating income down 46%, but nine-month sales up 10% and operating income up 33% year over year.
Cash, liquidity, debt and distributions
- Cash, cash equivalents and restricted cash totaled $156.2 million at September 30, 2022, down from $175.2 million at year-end 2021. Unrestricted cash and cash equivalents were $128.0 million. Current assets were $186.0 million and current liabilities $32.0 million.
- Nine-month operating cash flow was $12.7 million, compared with $10.3 million in 2021. Investing activities provided $1.3 million; financing activities used $33.0 million, including $27.3 million of dividends. The net change in cash and restricted cash was a decrease of $19.0 million.
- NL had $0.5 million outstanding on its $50 million affiliate revolving facility, with $49.5 million available; the facility rate was 8.125% at quarter-end. NL reported covenant compliance. CompX had no borrowings. Kronos, an equity-method investee, had no borrowings on its global revolver and approximately $207 million available.
- NL’s Kronos shares had a quoted market value of $328.9 million; its Valhi shares were valued at $30.1 million. The carrying value of the Kronos investment was $268.3 million. These values are distinct from NL’s consolidated cash and debt.
- NL paid $27.3 million of dividends in the first nine months, including a $0.35-per-share special dividend. Future dividends are discretionary. CompX’s expected 2022 capital expenditures were $4.7 million; $3.0 million had been spent in the first nine months.
Outlook, risks and unusual items
- CompX: Management expected full-year 2022 net sales and operating income to exceed 2021 at both reporting units. Security Products margins were expected to remain pressured as higher-cost inventory flowed through cost of sales. Marine Components demand remained strong, and price increases were expected to support Q4 margins comparable to 2021. Supply-chain, labor, shipping and elevated raw-material costs remained risks.
- Kronos: Management expected near-term sales volumes and operating results to be adversely affected by weakening demand and elevated costs. Demand softness accelerated in Europe and export markets; Kronos announced Q4 production curtailments at two European facilities. Management described the longer-term industry outlook as positive, while noting uncertainty around energy costs, demand and geopolitical conditions.
- Contingencies: NL accrued $92.5 million for environmental remediation and related matters across approximately 32 sites. The estimated upper end of reasonably possible costs for sites where costs could be estimated was approximately $107 million, including accrued amounts; costs at about five sites could not then be reasonably estimated. NL cautioned that additional liabilities could materially affect results, financial condition or liquidity.
- NL reported no accrual for pending lead-pigment litigation it considers not probable or reasonably estimable. The Santa Clara settlement has three annual installments remaining: $12.0 million for each of the next two and $16.7 million for the final installment; restricted cash is committed toward the final payment. In October 2022, after quarter-end, a court found NL and other defendants not liable for lead contamination in residential neighborhoods around a former smelter; proceedings continue concerning the former smelter property and adjacent industrial area.
- Q3 2022 results included $0.01 per share of income related to Kronos’s business-interruption insurance claim arising from Hurricane Laura. Currency translation contributed to a $13.4 million nine-month other comprehensive loss. NL said it did not expect the Inflation Reduction Act to materially affect its tax provision.
Important facts for investors to verify
- Whether CompX can sustain sales growth and recover higher material, labor and logistics costs, particularly in Security Products.
- How worsening TiO₂ demand, production curtailments and cost trends affect Kronos and, consequently, NL’s equity earnings and dividend receipts.
- The market-price sensitivity of NL’s Valhi securities and Kronos investment, and the effect of future changes on reported earnings and carrying values.
- Environmental remediation estimates, unquantified sites, lead-pigment litigation and the timing and funding of settlement installments.
- Cash availability and dividend sustainability, including reliance on subsidiary and affiliate distributions and the discretionary nature of future NL dividends.