NL Industries, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; financial statements are unaudited. NL is primarily a holding company, operating through majority-owned CompX International and holding an approximately 31% equity-method interest in Kronos Worldwide. Valhi owned approximately 83% of NL. Amounts below are U.S. dollars.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $42.1 million | $35.9 million | +17% |
| Gross margin | $12.1 million; 28.7% of sales | $11.0 million; 30.7% of sales | +9% in dollars |
| Income from operations | $3.9 million | $4.0 million | -3% |
| Equity in Kronos earnings | $17.5 million | $6.0 million | +194% |
| Net income attributable to NL stockholders | $18.6 million | $13.3 million | +40% |
| Basic and diluted EPS | $0.38 | $0.27 | +$0.11 |
| Cash provided by operating activities | $3.0 million | $2.1 million | +$0.9 million |
CompX sales rose to $42.1 million, while production costs increased faster than sales, reducing gross margin as a percentage of sales. Higher Kronos equity earnings were the main driver of NL’s higher net income. NL’s unrealized gain on marketable equity securities was $0.7 million, versus $6.4 million a year earlier, partly offsetting that increase.
Liquidity, debt and capital
- Cash, cash equivalents and restricted cash totaled $173.3 million at March 31, 2022, including $145.1 million of unrestricted cash and $28.2 million of restricted cash. Cash and restricted cash combined were down $1.9 million from year-end.
- NL had $0.5 million outstanding under its $50 million Valhi revolving facility, with $49.5 million available; it reported compliance with covenants. CompX had no debt. Kronos had no borrowings on its $225 million revolver and reported covenant compliance.
- Investing activities used $1.1 million, including $1.7 million of capital expenditures. Financing activities used $3.8 million, including $3.4 million of NL dividends paid. NL’s quarterly dividend increased to $0.07 per share.
- NL’s Kronos investment had a $278.9 million carrying value and $546.6 million market value. Its Valhi shares had a $35.1 million market value.
Material changes and management outlook
- CompX: Sales increased 17%; operating income rose 8% to $6.3 million. Management expects strong demand and higher 2022 sales and operating income than in 2021. Labor shortages, supply-chain delays, and higher material, shipping and labor costs are pressuring margins; price increases and surcharges may not fully offset costs.
- Kronos: Sales rose 21% to $562.9 million and net income increased to $57.5 million. Higher TiO₂ pricing and volumes supported results, while higher feedstock, energy and other production costs and currency effects were headwinds. Kronos expects 2022 sales and operating income above 2021 levels, but says costs will continue to challenge margins. It anticipates strong demand, production at practical capacity and potentially lower full-year sales volumes than 2021 based on current inventory levels.
- NL gave no quantified parent-company earnings guidance. It expects net general corporate expenses in 2022 to exceed 2021, primarily due to litigation and environmental costs. Management expects sufficient liquidity for short-term obligations, subject to actual developments.
Risks, contingencies and unusual items
- Environmental remediation liabilities were $92.9 million, covering approximately 32 sites. The estimated upper end of reasonably possible costs for sites with estimable ranges was approximately $118 million, including accrued amounts; five additional sites had no reasonably estimable range. Actual costs could exceed accruals, and timing is uncertain.
- NL reported four remaining annual installments under the Santa Clara lead-pigment settlement: $12.0 million for each of the next three installments and $16.7 million for the final installment. It had no accrual for other pending lead-pigment litigation, which it considers not probable and not reasonably estimable; adverse outcomes could materially affect earnings, financial condition or liquidity.
- NL is pursuing insurance recoveries related to lead-pigment and asbestos litigation but cannot assure the availability or amount of recovery. In March 2022, an appellate court denied insurers’ interlocutory appeal and affirmed a trial-court finding that the insurers’ arguments did not bar coverage.
- Results are materially influenced by NL’s equity-method investment in Kronos and dividends from affiliates. Risks include TiO₂ market cyclicality, cost inflation, supply-chain disruption, currency movements, environmental obligations and litigation. Management cautions that interim results may not indicate full-year performance.
Important facts for investors to verify
- Whether CompX can maintain demand and pass through rising input, labor and logistics costs without further margin deterioration.
- Whether Kronos’s pricing and production outlook offsets higher feedstock and energy costs, currency headwinds and possible lower sales volumes.
- How environmental remediation estimates, the Santa Clara settlement installments and litigation insurance recoveries develop.
- Whether affiliate dividends and available credit remain sufficient to support NL’s parent-level obligations and dividend policy.