NL Industries, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited. NL is primarily a holding company, consolidating majority-owned CompX International and accounting for its approximately 31% interest in Kronos Worldwide using the equity method. Unless noted, amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 2024 | Q1 2023 / comparison |
|---|---|---|
| Net sales | $38.0 million | $41.2 million; down 8% |
| Gross margin | $9.7 million; 25% of sales | $12.7 million; 31% of sales |
| Income from operations | $1.4 million | $4.2 million; down 68% |
| Equity in Kronos earnings (losses) | $2.5 million | $(4.6) million |
| Net income (loss) attributable to NL stockholders | $6.8 million; $0.14 per share | $(6.7) million; $(0.14) per share |
| Income tax expense | $1.0 million | $1.4 million |
| Operating cash flow | $6.7 million | $7.3 million |
| Capital expenditures | $0.3 million | $0.3 million |
Cash, cash equivalents and restricted cash totaled $168.2 million at March 31, 2024. Including current marketable securities, NL reported $197.9 million in aggregate restricted and unrestricted cash, cash equivalents and current marketable securities. NL also held $20.6 million of Valhi stock and its Kronos investment had a reported carrying value of $237.2 million and market value of $415.6 million; these investments are not cash equivalents.
NL had $0.5 million outstanding under its affiliate revolving credit facility, with $49.5 million available, and reported compliance with its covenants. CompX had no outstanding debt. NL’s total liabilities included $90.9 million of accrued environmental remediation costs and $28.1 million of current and long-term litigation settlement liabilities. NL paid a quarterly dividend of $0.08 per share. Other comprehensive loss was $4.6 million, primarily reflecting currency translation losses.
Material changes and business drivers
- CompX sales fell 8% and operating income declined to $3.7 million from $7.0 million. Marine Components sales fell 41% to $8.1 million, mainly due to reduced towboat-market demand; its operating income was approximately zero. Security Products sales rose 9% to $29.9 million, including stronger government-security sales, but margin percentages declined.
- NL’s earnings improvement versus Q1 2023 was driven principally by the swing in Kronos equity results and a $2.4 million unrealized gain on marketable equity securities, compared with a $5.5 million loss a year earlier. These gains more than offset weaker CompX operating results.
- Kronos reported Q1 sales of $478.8 million, up 12%, and net income of $8.1 million versus a $15.2 million loss. Sales volumes rose 28%, while average TiO2 selling prices were 11% lower year over year. Higher volumes and lower production costs improved its operating results.
- NL’s operating cash flow decreased by $0.5 million year over year. Cash and restricted cash increased by $26.9 million during the quarter, with investing cash inflows including $24.0 million of Treasury maturities.
Outlook, risks and contingencies
- CompX expects 2024 Security Products sales to be below 2023, citing continued sluggishness and customer uncertainty; it expects gross margin broadly comparable to 2023 but lower operating income as a percentage of sales. It expects Marine Components sales and margin percentages to be lower, reflecting anticipated further towboat-market contraction and weakness in recreational marine. CompX said it had made progress reducing Marine Components inventory and expected alignment with current demand by mid-year.
- Kronos expects 2024 sales volumes and operating results to exceed 2023, based on improved but still below-historical demand, higher production, expected price increases and lower input costs. It cautioned that industry demand, pricing, energy and raw-material costs, economic conditions and geopolitical events remain uncertain.
- In February 2024, Kronos exchanged €325 million principal amount of 3.75% notes due 2025 for €276.174 million of 9.50% notes due 2029 plus €48.75 million cash consideration, and entered into a $53.7 million subordinated affiliate term loan at 11.5% due 2029. Kronos also had $426.9 million of long-term debt at quarter-end, no borrowings on its $225 million revolver, and reported covenant compliance.
- NL expects sufficient liquidity for its short- and long-term obligations, but its parent-level liquidity depends substantially on distributions from subsidiaries and affiliates. Its estimate of 2024 annual dividends from Kronos, CompX and Valhi was $40.1 million, based on current shareholdings and dividend rates; future dividends are not assured.
- Environmental remediation accruals were approximately $90.9 million across about 33 sites. NL estimated a reasonably possible upper range of approximately $118 million, including amounts accrued, and could not estimate costs for about five additional sites. Actual costs may exceed accruals or arise at sites for which no estimate is currently possible.
- NL has two remaining installments under the Santa Clara lead-paint settlement: $12.0 million due September 2024 and a final $16.7 million due September 2025. NL stated the final installment is expected to be funded from restricted cash already on deposit, with any shortfall paid by NL and any excess returned.
- NL continues to face lead-pigment, environmental, insurance-coverage and other litigation. It has not accrued amounts for pending lead-pigment cases because it does not consider a loss probable or reasonably estimable; an adverse development could materially affect results, financial condition or liquidity. NL said other claims, including asbestos-related matters, were not expected to have a material adverse effect beyond existing accruals.
- Kronos announced in April 2024 plans to close its Varennes, Canada sulfate process line. It expects approximately $2 million of workforce-reduction charges and about $15 million of noncash closure charges in Q2 and Q3 2024.
Important facts for investors to verify
- Whether CompX’s expected demand and margin declines, particularly in Marine Components, develop as management anticipates.
- Whether Kronos can sustain demand recovery and realize price increases sufficient to improve margins, while meeting obligations under its higher-cost refinancing.
- Environmental exposure beyond the $90.9 million accrued amount, including developments at the five sites for which costs are not estimable.
- Funding and timing of the September 2024 and September 2025 settlement installments, including the availability of restricted funds.
- Cash generation and parent-company liquidity, including actual affiliate dividend payments versus the $40.1 million annual estimate.