NL Industries, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; unaudited. NL is primarily a holding company: it consolidates majority-owned CompX International, a components manufacturer, and accounts for its approximately 31% interest in Kronos Worldwide, a TiO2 producer, using the equity method. Valhi owned approximately 83% of NL.
Financial results
Amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2022 periods.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $36.6 | $41.7 | $77.8 | $83.7 |
| Gross margin | $10.3 | $13.6 | $23.0 | $25.7 |
| Gross margin as % of sales | 28% | 33% | 30% | 31% |
| Income from operations | $1.4 | $4.2 | $5.6 | $8.1 |
| Equity in Kronos earnings (losses) | $(2.5) | $14.0 | $(7.2) | $31.5 |
| Net income (loss) attributable to NL stockholders | $(3.1) | $30.3 | $(9.8) | $48.8 |
| Basic and diluted EPS | $(0.06) | $0.62 | $(0.20) | $1.00 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $20.9 | $13.6 |
Sales fell 12% in Q2 and 7% in the first half. NL’s operating income fell 66% in Q2 and 30% in the first half. Lower CompX sales and margins contributed, but the larger swing in reported earnings also reflected Kronos losses versus prior-year earnings and unrealized losses on NL’s Valhi equity securities (Q2 loss $5.4 million; first-half loss $10.9 million, versus gains of $19.2 million and $19.9 million, respectively, in 2022).
- CompX: Q2 sales were $36.6 million, down 12%; operating income was $4.4 million, down 44%. First-half sales were $77.8 million, down 7%; operating income was $11.4 million, down 19%. Security Products weakness reflected lower government-security demand, including nonrecurring prior-year customer sales. Marine Components faced reduced towboat sales.
- Kronos: Q2 sales fell 22% to $443.2 million and it recorded an operating loss of $6.7 million, compared with operating income of $65.2 million in Q2 2022. First-half sales fell 23% to $869.5 million and it recorded an operating loss of $25.0 million, versus income of $148.5 million. NL’s share of Kronos’ first-half results was a $7.2 million loss.
- Special item and tax: NL recorded a $4.9 million noncash loss on terminating and buying out its U.K. pension plan in Q2, equivalent to a net-of-tax loss of $0.08 per share. NL reported income tax benefits of $7.3 million in Q2 and $5.9 million in the first half, versus expenses in the prior-year periods.
- Cash flow and liquidity: First-half operating cash flow was $20.9 million, compared with $13.6 million. Investing activities used $23.4 million, including net purchases of marketable securities; financing activities used $7.6 million, primarily dividends. Cash and restricted cash declined by $10.1 million to $87.4 million. Management reported $183.1 million of aggregate restricted and unrestricted cash, cash equivalents and current marketable securities at June 30; it also held Valhi shares worth $15.4 million and Kronos shares worth $307.5 million.
- Debt: NL had $0.5 million outstanding on its $50 million affiliate revolving facility, with $49.5 million available; NL and Kronos reported covenant compliance. CompX had no debt. Kronos had no borrowings under its $225 million global revolver, which was fully available, but separately reported $432.4 million of long-term debt.
- Other balance-sheet items: Total assets were $586.4 million, down from $609.9 million at year-end 2022; total equity was $388.8 million. Environmental remediation liabilities totaled $91.4 million, including $89.5 million noncurrent. The board declared dividends of $0.07 per NL share in each of Q1 and Q2.
Outlook, risks and contingencies
- No specific NL earnings guidance was provided. CompX expected lower 2023 operating income at both reporting units than in 2022. It anticipated continued weak order rates, including through Q3, and challenging Security Products margins as higher-cost inventory moved through cost of sales. Marine demand faced towboat-market weakness, higher interest rates and reduced boat-manufacturer production schedules.
- Kronos expected lower full-year 2023 operating results than in 2022. It reported reduced demand, production at 70% of practical capacity in the first half versus 98% a year earlier, and higher production costs and unabsorbed fixed costs. Management saw some pockets of strengthening demand but expected near-term demand below historical norms; pricing pressure, higher-cost inventory and economic uncertainty remained concerns.
- NL expected sufficient liquidity for short-term obligations through June 30, 2024, based on operating expectations and available resources. It expected CompX capital expenditures of approximately $2.7 million in 2023. NL also estimated 2023 dividends from subsidiaries and affiliates of approximately $38 million, dependent on their payments and current dividend rates.
- Environmental remediation accruals covered approximately 33 sites; the estimated upper end of reasonably possible costs was approximately $118 million, including the $91 million accrued. NL could not estimate a range for about five sites. Costs, timing and allocation among potentially responsible parties remain uncertain.
- NL said pending lead-pigment cases were not probable losses and were not reasonably estimable; it had not accrued for those cases. However, resolution could materially affect earnings, financial condition or liquidity. The Santa Clara settlement had three annual installments remaining: $12.0 million for each of the next two and $16.7 million for the final installment, with funds already on deposit intended to cover the final payment.
- In July 2023, after the reporting date, a California court found NL and other defendants liable on limited issues in a Department of Toxic Substances Control case; allocation and damages remained undecided. Pennsylvania county lead-paint claims were ordered dismissed, but the counties sought state supreme court review. Another case continued only on claims relating to a $400,000 EPA settlement payment.
- Other disclosed risks include market and currency volatility, interest rates, commodity and energy costs, demand and supply-chain uncertainty, litigation and environmental obligations, and dependence on dividends from subsidiaries and affiliates. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether the California liability finding leads to material damages or a change in NL’s assessment of lead-pigment litigation exposure.
- Environmental remediation developments, especially at sites with unestimable costs, and whether the $118 million estimated upper range changes.
- CompX order trends, the planned Security Products inventory build and shipments, and the trajectory of towboat demand and margins.
- Kronos’ demand recovery, pricing, production utilization, input costs and high-cost inventory effects, which are central to NL’s equity-method results.
- How investment-price changes in Valhi securities and results at Kronos affect NL’s reported earnings, and whether affiliate dividends and available liquidity meet parent-level needs.