NL Industries, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; comparisons are with the same 2022 periods. The filing is for NL Industries, Inc. (NYSE: NL), not an entity named “NLI Holdings, Inc.” NL is primarily a holding company: it consolidates CompX International, a component-products business, and accounts for its approximately 31% interest in Kronos Worldwide using the equity method. Dollar amounts below are in millions unless stated otherwise.
Financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $40.4 | $42.9 | $118.1 | $126.6 |
| Gross margin | $12.6 (31.3%) | $11.9 (27.8%) | $35.6 (30.1%) | $37.6 (29.7%) |
| Income from operations | $3.7 | $3.2 | $9.3 | $11.3 |
| Net income (loss) attributable to NL stockholders | $(0.1); approximately $0.00/share | $(8.9); $(0.18)/share | $(9.9); $(0.20)/share | $39.9; $0.82/share |
| Operating cash flow | Not separately reported for the quarter | Not separately reported for the quarter | $15.5 | $12.7 |
Sales are generated by CompX. Q3 sales fell 6% year over year, while gross margin percentage improved; nine-month sales declined 7% and operating income fell 18%. The nine-month attributable loss contrasts with prior-year income, largely reflecting Kronos equity losses versus earnings, a larger unrealized loss on Valhi shares, the U.K. pension-plan termination charge, and lower CompX operating income. Q3’s improved attributable result principally reflects the comparison with the prior-year $24.2 million unrealized loss on marketable equity securities; Kronos equity results turned from earnings of $6.4 million to losses of $6.2 million.
Business performance and material changes
- CompX: Q3 operating income increased to $6.6 million from $6.0 million; nine-month operating income decreased to $18.0 million from $20.0 million. Security Products sales rose 10% in Q3 but fell 3% year to date. Marine Components sales declined 38% in Q3 and 15% year to date, primarily due to weakness in the towboat market.
- Kronos: NL recorded equity losses of $13.4 million for the first nine months, compared with equity earnings of $37.9 million in 2022. Kronos’s own nine-month sales declined 20%, and it reported an operating loss of $50.3 million versus operating income of $179.3 million. Demand, selling prices and volumes weakened; production capacity utilization was 71% versus 96% a year earlier.
- Investment values: NL’s Kronos investment carrying value declined to $255.2 million from $292.2 million at year-end 2022, reflecting equity losses and dividends, among other items. Its Valhi shareholding was valued at $15.9 million at September 30, down from $26.4 million at year-end.
- Unusual item: Completion of the U.K. pension-plan buy-out resulted in a noncash $4.9 million termination loss in Q2 2023, included in nine-month results. Management says NL’s 2023 attributable loss per share includes an $0.08 after-tax pension charge and $0.01 after-tax income from Kronos’s Hurricane Laura insurance settlement.
Cash, debt and liquidity
- At September 30, NL reported $65.8 million of cash and equivalents, $2.9 million of current restricted cash, and $80.2 million of current marketable securities. Management separately reported $175.0 million of aggregate restricted and unrestricted cash, equivalents and current marketable securities, all held in the U.S.; the total includes noncurrent restricted cash.
- Operating cash flow was $15.5 million for the first nine months, up from $12.7 million. Investing activities used $6.7 million and financing activities used $11.4 million. NL paid $10.3 million in dividends during the period, or $0.21 per share.
- NL had $0.5 million outstanding on its $50 million affiliate revolving facility, leaving $49.5 million available. CompX had no debt. Kronos had no borrowings on its $225 million revolver and reported the full facility available. NL and Kronos reported compliance with their debt covenants.
- NL’s current assets were $206.1 million versus current liabilities of $30.0 million. Environmental remediation liabilities totaled $91.2 million, including $1.8 million current and $89.4 million noncurrent.
Outlook, risks and contingencies
CompX expects slightly lower 2023 consolidated sales and operating income than in 2022. Management anticipates continued strength in government-security sales, weaker demand in other Security Products markets, and continued Marine Components pressure—particularly in towboats. It expects improved Security Products margins to continue in Q4 and full-year Marine Components gross margin percentage to be slightly favorable to 2022.
Kronos expects lower 2023 operating results than in 2022 and says near-term demand is likely to remain below historical norms. It is curtailing production and reducing costs; it expects a $6 million Q4 workforce-reduction charge affecting approximately 100 people, with most related cash payments expected by Q1 2024. Kronos expects lower input costs and cost-saving actions to support improved margins in 2024, but timing of a demand recovery is uncertain.
- Lead-pigment litigation: NL says it does not believe a loss is probable for pending lead-paint cases and has not accrued for them; potential exposure is not reasonably estimable. The Santa Clara settlement has two annual installments remaining: $12.0 million and $16.7 million; funds on deposit are intended to cover the final installment.
- Environmental exposure: NL accrued approximately $91 million for about 32 sites; the estimated upper end of reasonably possible costs for estimable sites is approximately $118 million, including the accrual. Costs for about five sites cannot currently be estimated. The company warns actual costs could exceed accruals and affect results or liquidity.
- Other proceedings: In August 2023, a California court found NL and other defendants liable for certain contamination costs at a former smelter property and nearby disposal area; the recoverable amount and NL’s share remain undetermined. In October, an appeal was allowed in the Atlantic Richfield litigation.
- Other risks include cyclical TiO2 demand and pricing, competition from low-cost imports, raw-material and energy costs, foreign exchange, interest rates, supply disruptions, environmental regulation, insurance recoveries, and reliance on dividends from subsidiaries and affiliates. NL says it expects sufficient liquidity for near- and long-term obligations, subject to actual results and developments.
Important facts for investors to verify
- Track Kronos demand, pricing, utilization, cost reductions and the expected Q4 workforce charge, given the substantial effect of its results on NL.
- Monitor Marine Components’ towboat exposure and whether CompX meets its outlook for 2023 sales and operating income.
- Review environmental remediation estimates, the unquantified California liability, lead-pigment litigation developments and settlement-payment funding.
- Confirm liquidity composition, affiliate-facility availability, dividend receipts and future dividend decisions; NL’s parent-level obligations depend substantially on distributions from subsidiaries and affiliates.
- Assess valuation changes in NL’s Kronos and Valhi investments, which can materially affect reported earnings and equity.