NL Industries, Inc. — FY 2022 Form 10-K
Reporting period: Year ended December 31, 2022; this is an annual filing, not a standalone fourth-quarter report. The request metadata names “NLI Holdings, Inc.,” but the filing identifies the registrant as NL Industries, Inc.
Business context
NL is primarily a holding company. It consolidates its 87%-owned component-products subsidiary, CompX International, and accounts for its 31% interest in titanium-dioxide producer Kronos Worldwide using the equity method. NL’s reported net sales therefore principally reflect CompX, while Kronos contributes equity-method earnings and dividends. Valhi owned approximately 83% of NL at year-end.
Financial performance and liquidity
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| NL net sales | $166.6 million | $140.8 million |
| Gross margin | $48.8 million; 29.3% of sales | $42.7 million; 30.3% of sales |
| Income from operations | $13.7 million | $10.5 million |
| Net income attributable to NL stockholders | $33.8 million; $0.69 per share | $51.2 million; $1.05 per share |
| Cash provided by operating activities | $26.9 million | $17.6 million |
| Capital expenditures | $3.7 million | $4.1 million |
- CompX sales rose 18%; operating income increased 24% to $25.4 million. Marine Components sales grew 46% to $52.1 million, while Security Products sales rose 9% to $114.5 million.
- NL’s lower attributable earnings reflected an $8.1 million unrealized loss on marketable equity securities versus a $16.2 million gain in 2021, and lower Kronos equity earnings ($31.9 million versus $34.3 million). Higher CompX operating income partly offset these effects.
- At December 31, NL reported total assets of $609.9 million, current assets of $194.0 million and current liabilities of $32.1 million. Cash and cash equivalents were $68.9 million; restricted cash totaled $28.6 million; current marketable debt securities were $70.2 million. The filing reports aggregate restricted and unrestricted cash, cash equivalents and current marketable securities of $167.7 million.
- NL had $0.5 million of borrowings under its affiliate facility; CompX had no debt. NL had $49.5 million available under its $50 million revolving facility with Valhi. Kronos, the equity-method investee, separately reported approximately $424 million of long-term debt.
- NL paid $0.63 per share in 2022, including a $0.35 special dividend. It declared a $0.07-per-share first-quarter 2023 dividend.
Kronos — material investee developments
- Kronos sales were $1.93 billion, essentially flat year over year; operating income fell 15% to $159.6 million and net income fell to $104.5 million from $112.9 million.
- TiO₂ sales volumes declined 15%, while average selling prices increased 21%. The stronger U.S. dollar reduced reported sales by an estimated $106 million. Fourth-quarter sales volumes were 40% below the prior-year quarter; Kronos recorded a $19.7 million fourth-quarter operating loss and reduced production, with fourth-quarter capacity utilization of 65%.
- NL’s carrying value of its Kronos investment was $292.2 million at year-end, while the market value of its 35.2 million shares was $331.1 million, down from $528.6 million at December 31, 2021.
Outlook, risks and contingencies
- NL expects 2023 net income attributable to NL stockholders to be lower than 2022, excluding possible changes in marketable equity values. Cited factors include lower expected CompX operating income and Kronos equity earnings, and higher litigation and environmental costs.
- CompX reported softening orders and backlog late in 2022 and expects lower 2023 sales and operating income at both business units. It expects Security Products margins to remain pressured by higher-cost inventory and reduced pricing flexibility; marine demand faces higher interest rates and customer production cuts.
- Kronos expects lower 2023 operating results despite anticipated demand recovery and higher selling prices later in the year. It cited weak demand, elevated energy and raw-material costs, geopolitical uncertainty and currency effects.
- NL accrued approximately $92.4 million for environmental remediation and related matters at about 33 sites. The estimated upper end of reasonably possible costs for estimable sites was approximately $119 million; about five additional sites had no reasonably estimable cost range. The auditor identified environmental remediation estimates as a critical audit matter.
- NL’s Santa Clara lead-pigment settlement requires total payments of $101.7 million. The initial $25 million and three $12 million installments had been paid through 2022; the balance-sheet settlement liability was about $39.3 million at year-end. NL did not accrue amounts for other pending lead-pigment cases, stating loss was not considered probable or reasonably estimable; adverse outcomes could materially affect earnings and liquidity.
- Other risks include Kronos’s leverage and substantial contractual commitments, volatile TiO₂ demand and prices, raw-material and energy costs, reliance on subsidiary and investee distributions, environmental regulation, legacy litigation, foreign-exchange movements, and cybersecurity and supply-chain disruptions. The EU’s TiO₂ suspected-carcinogen classification was annulled by the EU Court of Justice in November 2022.
Important facts for investors to verify
- Confirm the registrant identity and distinguish NL’s consolidated results from Kronos’s equity-method financial results.
- Review the assumptions and potential range behind the $92.4 million environmental accrual, including the sites for which estimates are unavailable.
- Track remaining Santa Clara settlement payments, restricted cash, and developments in other lead-pigment and environmental cases and insurance-recovery litigation.
- Assess whether CompX’s demand, margins and customer concentration, and Kronos’s volume, pricing, energy costs, debt and 2023 production recovery align with management’s outlook.
- Evaluate the sustainability of dividends and liquidity, noting that NL relies substantially on distributions from separately managed subsidiaries and affiliates.