NL Industries, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; financial statements are unaudited. Amounts below are in U.S. dollars. The filing identifies the registrant as NL Industries, Inc. NL operates CompX International, its majority-owned component-products business, and accounts for its approximately 31% interest in Kronos Worldwide under the equity method.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Net sales | $41.2 million | $42.1 million; down 2% |
| Gross margin | $12.7 million; 30.9% of sales | $12.1 million; 28.7% of sales |
| Income from operations | $4.2 million | $3.9 million; up 8% |
| Net income (loss) attributable to NL stockholders | $(6.7) million; $(0.14) per share | $18.6 million; $0.38 per share |
| Operating cash flow | $7.3 million | $3.0 million |
- CompX generated $7.0 million of operating income, compared with $6.3 million. Its gross margin increased to 31% from 29%, and its operating margin rose to 17% from 15%.
- Cash, cash equivalents and restricted cash totaled $76.9 million at March 31, 2023, down from $97.5 million at year-end 2022. Including current marketable securities, the filing reports $172.6 million in aggregate cash, restricted cash and current securities. Current marketable securities were $95.7 million.
- Cash and restricted cash declined by $20.6 million in the quarter. Investing activities used $24.1 million, including $32.8 million of marketable-security purchases and $8.0 million of maturities. Capital expenditures were $0.3 million; dividends paid were $3.4 million.
- NL had $0.5 million outstanding under its affiliate revolving facility, with $49.5 million available; CompX had no borrowings. The filing reports compliance with NL’s covenants. Kronos, an equity-method investee, had $433.5 million of long-term debt and its $225 million revolver was undrawn; Kronos also reported covenant compliance.
- NL reported $91.5 million of accrued environmental remediation and related costs, including $1.9 million current and $89.6 million noncurrent. Total liabilities were $202.7 million and total equity was $391.3 million at quarter-end.
Material changes and drivers
- NL’s results swung from profit to loss primarily because its equity-method share of Kronos changed from $17.5 million of earnings to a $4.6 million loss, and NL recorded a $5.5 million unrealized loss on marketable equity securities versus a $0.7 million gain a year earlier.
- CompX results improved despite slightly lower sales. Security Products sales declined 8%, reflecting lower government-security and healthcare sales. Marine Components sales increased 11%, with operating income up 65% on stronger sales, favorable product mix, pricing and production efficiencies.
- Kronos’ Q1 sales fell 24% to $426.3 million and its net loss was $15.2 million, compared with net income of $57.5 million. TiO2 sales volumes fell 29%; higher average selling prices partly offset the decline. Higher production costs and reduced production drove cost of sales to 93% of sales, versus 73% a year earlier. NL’s reported loss includes approximately $0.01 per share attributable to a Kronos insurance-settlement gain.
- NL received $6.7 million in Kronos dividends in both comparison periods. NL’s interest and dividend income increased to $2.0 million from $0.3 million, while corporate expense increased to $2.8 million from $2.4 million, primarily reflecting higher litigation costs.
Outlook, risks and contingencies
- CompX expects lower net sales and operating income at both reporting units in 2023 than in 2022. Management cited continued soft demand, depleted Marine Components backlog, declining Security Products orders and higher interest rates affecting marine demand. CompX expects lower orders to continue through Q2; higher-cost inventory may pressure Security Products margins. CompX expects Marine Components’ full-year gross-margin percentage to be comparable to 2022.
- Kronos expects lower full-year operating results than in 2022, despite expecting selling prices to rise as demand recovers. It planned to continue reduced production at certain facilities in Q2 to align output with demand and inventory. Management cited weak customer demand, elevated production costs and uncertainty around energy costs and economic conditions.
- NL expects 2023 general corporate expenses to be higher than 2022, primarily due to litigation costs. Management expects sufficient liquidity for obligations through March 31, 2024, based on its operating expectations; it cautions that materially different developments could adversely affect liquidity. The board’s future dividend decisions remain discretionary.
- Environmental remediation estimates remain uncertain: NL accrued about $92 million for approximately 33 sites; the upper end of reasonably possible costs for sites with estimable ranges was approximately $118 million. Costs for about five sites could not be reasonably estimated. Lead-pigment litigation remains pending; NL reported no accrual for those cases because it did not consider loss probable or reasonably estimable. Three annual Santa Clara settlement installments remain: $12.0 million for each of the next two and $16.7 million for the final installment, which is expected to be funded from restricted cash on deposit.
- Other principal risks include cyclicality and demand for TiO2, raw-material and energy costs, supply interruptions, foreign-exchange movements, interest rates, environmental obligations, litigation outcomes and the timing or availability of insurance recoveries. Management stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Investor verification points
- Track Kronos volumes, pricing, production rates and costs: its weak results were a major driver of NL’s quarterly loss.
- Monitor CompX order trends and margins, especially continued softness in Security Products and the outlook for Marine Components.
- Review environmental accruals, unestimable sites, lead-pigment proceedings and funding of the remaining settlement installments.
- Reconcile liquidity and cash availability, including restricted funds, securities, affiliate financing and the dependence of parent-level obligations on subsidiary and affiliate distributions.