Business context and reporting period
NL Industries, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. NL is primarily a holding company: it consolidates majority-owned CompX International, a component-products manufacturer, and accounts for its approximately 30% interest in Kronos Worldwide, a titanium dioxide (TiO₂) producer, using the equity method. Unless indicated otherwise, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $36.3 | $23.8 | $72.2 | $56.1 |
| Gross margin | $11.3; 31.2% | $7.4; 30.9% | $22.3; 31.0% | $17.8; 31.7% |
| Income from operations | $2.9 | $0.0 | $6.9 | $2.5 |
| Net income attributable to NL stockholders | $12.7 | $4.6 | $26.0 | $6.5 |
| Basic and diluted EPS | $0.26 | $0.09 | $0.53 | $0.13 |
| Cash provided by operating activities | Not provided by quarter | Not provided by quarter | $13.6 | $12.1 |
- Sales are CompX sales; NL’s reported earnings also include equity in Kronos earnings and changes in the value of marketable securities. Q2 CompX sales rose 52% and first-half sales rose 29% year over year, primarily on higher volumes as markets recovered from COVID-19 disruptions.
- CompX operating income increased to $5.8 million in Q2 from $2.4 million and to $11.6 million for the first half from $7.4 million. Its first-half gross margin percentage declined to 31% from 32%, reflecting Security Products mix and higher production costs.
- Equity in Kronos earnings was $7.8 million in Q2 versus $5.7 million, and $13.8 million for the first half versus $13.9 million. Kronos first-half net income was $45.3 million, compared with $45.6 million.
- Unrealized gains on marketable equity securities were $4.5 million in Q2 2021 versus a $2.2 million loss, and $10.9 million for the first half versus a $14.3 million loss. NL attributed much of the year-over-year increase in its earnings to these valuation changes.
- Operating cash flow increased to $13.6 million in the first half. Capital expenditures were $1.6 million. NL paid $5.9 million in dividends, up from $3.9 million, after increasing its quarterly dividend to $0.06 per share.
- At June 30, cash, cash equivalents and restricted cash totaled $173.5 million, including $28.2 million of restricted cash. Current assets were $186.6 million and current liabilities $27.5 million. NL had $0.5 million outstanding under its affiliate credit facility, with $49.5 million available; CompX had no debt outstanding. NL reported covenant compliance.
- Environmental remediation liabilities totaled $92.9 million, including $2.3 million current and $90.7 million noncurrent. Total liabilities were $216.8 million and total equity was $358.6 million at June 30.
Material changes versus prior period
- NL stockholder net income increased to $12.7 million for Q2 and $26.0 million for the first half, versus $4.6 million and $6.5 million, respectively, in 2020. The improvement reflects CompX’s operating recovery and, especially, more favorable marketable-securities valuation changes; Q2 Kronos equity earnings also increased.
- CompX demand recovered from pandemic-related weakness. Marine Components sales exceeded pre-pandemic levels from Q3 2020 onward; Security Products recovered to pre-pandemic levels in Q2 2021.
- Cash and restricted cash increased from $165.3 million at year-end 2020 to $173.5 million. NL’s investment in Valhi shares rose in carrying value from $18.2 million to $29.1 million, reflecting market price gains.
- NL’s quarterly dividend rose from $0.04 per share in 2020 to $0.06 in 2021. CompX increased its regular quarterly dividend from $0.10 to $0.20 per share in March 2021.
Outlook, risks and contingencies
- Management expected CompX demand to remain strong through the rest of 2021 and projected higher full-year sales and operating income than in 2020. It cautioned that labor shortages, supply-chain delays, raw-material, labor and shipping cost increases could pressure margins; the effect of CompX’s price increases was uncertain.
- Kronos expected strong demand, higher sales and production volumes, and higher 2021 sales and operating income than in 2020, supported by higher TiO₂ prices and volumes. Rising raw-material, energy and logistics costs and currency movements were expected to challenge margins. NL stated its equity earnings from Kronos were expected to be higher in 2021 than in 2020.
- NL expected 2021 net general corporate expenses to exceed 2020, primarily due to anticipated litigation and environmental remediation costs. The filing identifies COVID-19 impacts, cyclicality, supply constraints, input costs, foreign exchange, and the ability of subsidiaries and affiliates to pay dividends as significant uncertainties.
- NL reported approximately $93 million accrued for about 32 environmental sites; the upper end of the reasonably possible cost range for estimable sites was approximately $113 million, including amounts accrued. Costs at five sites could not then be reasonably estimated, and actual costs could exceed recorded accruals.
- For the Santa Clara lead-pigment settlement, five annual installment payments remained: $12.0 million for each of the next four installments and $16.7 million for the final installment. NL said other pending lead-pigment cases generally were not accrued because liability was not considered probable and could not be reasonably estimated; an adverse outcome could materially affect earnings, financial condition and liquidity.
- NL expected sufficient liquidity for short-term obligations through June 30, 2022, based on current expectations. Future dividends remain discretionary. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether CompX’s demand and pricing actions offset ongoing labor, raw-material and logistics cost inflation.
- How much NL’s earnings depend on volatile unrealized gains or losses in Valhi securities, separate from operating performance and Kronos equity earnings.
- Progress and potential cost changes for environmental remediation, including the five sites without estimable ranges and the Santa Clara settlement payment schedule.
- Whether Kronos and CompX sustain the demand and cash distributions underpinning NL’s liquidity and dividend capacity.
- That NL’s reported cash total includes restricted funds, and that its stated debt availability is under an affiliate facility.