NL Industries, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. Filed March 6, 2024. NL is primarily a holding company: it consolidates its 87%-owned component-products subsidiary CompX and accounts for its 31%-owned TiO₂ producer Kronos under the equity method. Accordingly, Kronos’s sales are not included in NL’s consolidated net sales.
Financial performance and liquidity
| Metric | 2023 | 2022 |
|---|---|---|
| NL consolidated net sales | $161.3 million | $166.6 million |
| Gross margin | $49.2 million; 30.5% of sales | $48.8 million; 29.3% of sales |
| Income from operations | $14.1 million | $13.7 million |
| Equity in Kronos earnings (losses) | $(15.0) million | $31.9 million |
| Net income (loss) attributable to NL stockholders | $(2.3) million; $(0.05) per share | $33.8 million; $0.69 per share |
| Net cash from operating activities | $37.0 million | $26.9 million |
| Capital expenditures | $1.1 million | $3.7 million |
NL’s 2023 net loss reflected the swing to losses at Kronos, an $8.2 million unrealized loss on marketable equity securities, and a $4.9 million noncash loss on termination of NL’s U.K. pension plan. Higher interest and dividend income partly offset these items. NL reported $0.6 million of consolidated net income before $2.9 million attributable to noncontrolling interest.
At year-end, NL reported total assets of $576.7 million, total equity of $391.8 million and $0.5 million of debt outstanding under its affiliate facility. Balance-sheet cash and cash equivalents were $111.5 million; current marketable securities were $53.1 million. NL also reported current and noncurrent restricted cash. Management cited $194.5 million of aggregate cash, restricted cash and current marketable securities, a figure that includes restricted balances. NL had $49.5 million available under its $50 million Valhi revolving facility and said it expected to meet short-term obligations.
NL’s environmental remediation accrual was $91.1 million for approximately 33 sites; the upper end of the estimated range for sites with estimable costs was $118 million, including the accrual. NL’s balance sheet also included $27.9 million in current and long-term accrued litigation settlement liabilities.
Material changes and operating drivers
- CompX: Sales fell 3% to $161.3 million, while operating income was unchanged at $25.4 million. Security Products sales rose 6% to $121.2 million, helped by a government security pilot project; Marine Components sales fell 23% to $40.1 million as towboat demand weakened.
- Kronos: Sales declined 14% to $1.67 billion; it reported a $56.0 million operating loss and a $49.1 million net loss, versus operating income of $159.6 million and net income of $104.5 million in 2022. TiO₂ sales volumes declined 13%, average selling prices declined 4%, and production utilization fell to 72% from 89%. Lower volumes, price pressure, higher input costs and $96 million of unabsorbed fixed production costs weighed on results.
- NL received $26.8 million in Kronos dividends in 2023, unchanged from 2022, despite Kronos’s reported loss.
- NL’s operating cash flow rose $10.1 million year over year to $37.0 million. Cash and cash equivalents increased to $111.5 million from $68.9 million, while current marketable securities declined to $53.1 million from $70.2 million.
Outlook, risks and unusual items
- NL expects 2024 net income attributable to NL stockholders to exceed 2023, excluding potential changes in marketable equity values. Management cites expected higher Kronos equity earnings, partly offset by lower CompX operating income and higher litigation costs.
- Kronos expects 2024 sales volumes and operating results to improve, citing recovering demand, lower expected energy and input costs, and cost-reduction measures. It cautions that demand, pricing, energy costs and geopolitical developments remain uncertain.
- CompX expects lower 2024 sales in both businesses. Its 2023 Security Products pilot project has no additional orders currently, and management expects weaker towboat demand, lower marine margins and reduced operating leverage. Elevated Marine Components inventory is expected to align with demand by mid-2024.
- NL expects 2024 capital expenditures of approximately $3.0 million. It declared a first-quarter 2024 dividend of $0.08 per share. Future dividends remain discretionary.
- In February 2024, Kronos exchanged €325 million principal amount of 3.75% notes due 2025 for €276.2 million of new 9.50% secured notes due 2029 plus €50 million cash. It funded the cash payment with a $53.7 million unsecured subordinated term loan from Contran. This post-year-end refinancing raises Kronos’s financing cost and adds related-party debt.
- Key risks include cyclical TiO₂ demand and pricing, competition and low-cost imports, commodity and energy costs, dependence on distributions from subsidiaries and Kronos, Kronos leverage and refinancing, environmental and lead-pigment litigation exposure, and regulatory, currency, cyber and climate risks.
- NL has not accrued for pending lead-pigment cases because it does not consider liability probable or reasonably estimable. The filing describes an additional lead-pigment third-party complaint served in January 2024. Environmental costs at five sites could not currently be estimated. The auditor identified environmental remediation accruals as a critical audit matter; the financial statements received an unqualified audit opinion.
Important facts for investors to verify
- Whether Kronos’s demand recovery, pricing and cost improvements materialize, and how they affect NL’s equity-method results and dividend receipts.
- CompX’s exposure to the nonrecurring government pilot project and weakening recreational marine demand; monitor subsequent orders and inventory normalization.
- The availability of NL’s reported liquidity after excluding restricted cash, and the continuing availability and terms of affiliate credit facilities.
- Changes in the $91.1 million environmental accrual, the $118 million estimated upper range, and developments at the five sites with unestimable costs.
- Progress and cash payments under the lead-pigment settlement, pending litigation and insurance-recovery claims, including any material changes in estimated exposure.
- Kronos’s post-year-end refinancing terms, increased interest burden, debt covenant compliance and ability to meet contractual and supply commitments.