NL Industries, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; unaudited. Dollar amounts are in millions unless stated otherwise. NL is primarily a holding company, operating through majority-owned CompX and holding an approximately 31% equity-method interest in Kronos Worldwide.
Financial performance
| Metric | Q2 2021 | Q2 2022 | H1 2021 | H1 2022 |
|---|---|---|---|---|
| Net sales | $36.3 | $41.7 | $72.2 | $83.7 |
| Gross margin | $11.3 | $13.6 | $22.3 | $25.7 |
| Income from operations | $2.9 | $4.2 | $6.9 | $8.1 |
| Net income attributable to NL stockholders | $12.7 | $30.3 | $26.0 | $48.8 |
| Basic and diluted EPS | $0.26 | $0.62 | $0.53 | $1.00 |
- Q2 sales rose 15% year over year and H1 sales rose 16%. CompX sales increased on stronger Marine Components demand, particularly from the towboat market, as well as higher Security Products sales. CompX operating income increased 35% in Q2 and 21% in H1.
- NL’s equity in Kronos earnings increased to $14.0 million in Q2 and $31.5 million in H1, versus $7.8 million and $13.8 million, respectively, in 2021.
- Unrealized gains on marketable equity securities—shares of parent Valhi—were $19.2 million in Q2 and $19.9 million in H1, compared with $4.5 million and $10.9 million a year earlier. These fair-value gains materially contributed to reported earnings.
- Consolidated net income was $31.1 million in Q2 and $50.3 million in H1. Income tax expense was $6.4 million and $9.1 million, respectively.
Cash flow, balance sheet and liquidity
- H1 operating cash flow was $13.6 million, essentially unchanged from 2021. Capital expenditures were $2.2 million; investing cash flow was $0.04 million, and financing activities used $9.4 million, including $6.8 million of dividends.
- Cash, cash equivalents and restricted cash totaled $179.5 million at June 30, 2022, versus $175.2 million at year-end 2021. This included $151.2 million of unrestricted cash and $28.2 million of restricted cash.
- Total assets were $640.4 million and total equity was $421.0 million. NL had $0.5 million outstanding under its $50 million affiliate revolving facility, with $49.5 million available; the filing reports covenant compliance. CompX had no debt. Kronos had no borrowings on its $225 million revolver, which was fully available, and reported covenant compliance.
- NL’s current liabilities were $31.5 million. It also reported $93.0 million of accrued environmental remediation and related costs, including $2.8 million current and $90.3 million noncurrent.
- Inventory increased to $33.3 million from $25.6 million at year-end. NL reported 108 days of inventory at June 30, versus 96 days at December 31, 2021, reflecting timing and precautionary inventory for components with long lead times or availability issues.
Outlook, risks and contingencies
- CompX outlook: Management expected full-year 2022 sales and operating income to increase at both reporting units versus 2021. Demand remained strong overall, although Security Products had begun to see softer demand in transportation and distribution. Supply-chain constraints, labor, shipping and elevated material costs remained concerns; price increases and surcharges had so far helped recover higher costs, but future recovery was uncertain and margins could remain pressured.
- Kronos outlook: Kronos cited maintenance delays, raw-material availability constraints and possible weakening demand in some European and export residential-coatings markets. It expected feedstock costs to rise moderately and energy costs and logistics challenges to persist. Management described the long-term industry outlook as positive but noted uncertainty about second-half demand. NL provided no specific consolidated earnings or revenue guidance.
- NL expected 2022 general corporate expenses to exceed 2021, primarily due to higher litigation and environmental costs. H1 corporate expense was $5.9 million, including $1.8 million of litigation fees and related costs and $0.5 million of environmental costs.
- Environmental liabilities are uncertain: NL accrued approximately $93 million for about 33 sites; the upper end of estimated reasonably possible costs was approximately $118 million, including the accrued amount. Costs could exceed estimates, and the company could not estimate a range for about five sites.
- NL reported no accrual for pending lead-pigment and lead-based-paint litigation, stating it did not consider a loss probable and could not reasonably estimate potential liability. The Santa Clara settlement had four annual installments remaining: three of $12.0 million and a final $16.7 million installment, with funds already on deposit intended to cover the final installment.
- In June 2022, NJDEP advised NL that it was appropriate to resume investigating sediments adjacent to the former Sayreville site. NL agreed to resume the investigation; the court asked parties whether the related lawsuit should be dismissed given the changed circumstances.
Most important facts for investors to verify
- How much of earnings growth reflects recurring CompX and Kronos operating performance versus Valhi-share unrealized gains.
- Whether CompX can sustain demand, pass through elevated input and logistics costs, and deliver its full-year growth expectation.
- How Kronos demand, production constraints, energy and feedstock costs, and currency movements develop in the second half of 2022.
- Whether environmental remediation costs or lead-pigment litigation developments require additional accruals or affect liquidity; monitor the $93 million accrued environmental exposure and estimated range up to $118 million.
- The availability and flow of dividends from subsidiaries and affiliates, which are important to NL’s parent-level liquidity; future NL dividends remain discretionary.