NL Industries, Inc. Form 10-Q — quarter ended September 30, 2021
The supplied filing is for NL Industries, Inc. (NYSE: NL), not an entity identified as “NLI Holdings, Inc.” NL is primarily a holding company: it consolidates majority-owned CompX International, a component-products manufacturer, and accounts for its approximately 30% interest in Kronos Worldwide, a titanium dioxide producer, using the equity method. Financial figures below are in U.S. dollars; amounts are millions unless noted.
Financial results and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $34.6 | $28.4 | $106.7 | $84.5 |
| Gross margin | $10.9 | $7.3 | $33.3 | $25.1 |
| Income (loss) from operations | $2.3 | $(0.3) | $9.1 | $2.2 |
| Equity earnings of Kronos | $10.9 | $2.5 | $24.7 | $16.3 |
| Net income attributable to NL stockholders | $10.3 | $3.9 | $36.3 | $10.4 |
| Basic and diluted earnings per share | $0.21 | $0.08 | $0.74 | $0.21 |
- Consolidated gross margin was approximately 31.6% in Q3 2021 versus 25.8% a year earlier; for the nine months, approximately 31.2% versus 29.7%. Revenue is reported by CompX: Q3 Security Products sales were $25.8 million and Marine Components sales $8.7 million.
- CompX operating income rose to $5.1 million in Q3 from $2.1 million, and to $16.7 million for nine months from $9.5 million. Management attributed the improvement mainly to higher sales volumes and better fixed-cost absorption.
- Operating cash flow was $10.3 million for the first nine months, compared with $9.2 million. Capital expenditures were $2.3 million. Cash, cash equivalents and restricted cash totaled $170.4 million at September 30, 2021, versus $165.3 million at year-end 2020; $142.2 million was unrestricted cash and cash equivalents.
- NL had $0.5 million of affiliate debt outstanding and $49.5 million available under its $50 million Valhi revolver; CompX had no debt. NL reported compliance with its facility covenants. Current assets were $186.7 million and current liabilities $30.1 million.
- Environmental remediation liabilities totaled $93.0 million ($2.6 million current; $90.4 million noncurrent). Litigation settlement liabilities were $50.1 million in total ($11.8 million current; $38.3 million noncurrent).
- NL’s 35.2 million Kronos shares had a carrying value of $250.1 million but a quoted market value of $437.1 million at quarter-end. Its Valhi marketable securities were valued at $27.9 million. Changes in marketable securities’ value materially affected reported earnings.
Changes versus the prior comparable period
- Q3 sales grew 22%, while nine-month sales grew 26%. NL’s attributable net income increased to $10.3 million for Q3 and $36.3 million for nine months.
- CompX sales benefited from recovery from COVID-19-related demand weakness in 2020. For nine months, Security Products revenue increased 22% and Marine Components revenue 42% year over year.
- Kronos equity earnings rose to $10.9 million in Q3 from $2.5 million and to $24.7 million for nine months from $16.3 million. Kronos’ own nine-month sales increased 18%; higher sales volumes, pricing and currency translation contributed.
- Marketable securities produced a Q3 loss of $1.2 million versus a gain of $3.2 million; for nine months, a gain of $9.7 million versus a loss of $11.1 million. Nine-month tax expense was $5.5 million versus a tax benefit of $3.6 million in 2020.
- NL’s quarterly dividend increased from $0.04 per share in Q3 2020 to $0.06 in Q3 2021. Nine-month dividends paid were $8.8 million versus $5.9 million.
Outlook, risks and unusual items
- CompX expected strong demand and higher 2021 sales and operating income than in 2020. It cited tight labor markets, supply-chain delays, shortages and higher raw-material, shipping and labor costs; price increases and surcharges may not fully offset cost inflation, and higher-cost inventory was expected to pressure Q4 gross margins.
- Kronos expected 2021 sales and operating income above 2020, with strong demand and rising TiO2 prices, while noting continued supply-chain disruption and increasing raw-material, energy and shipping costs that could challenge margins.
- NL stated it expected sufficient liquidity for short-term obligations. It estimated 2021 net general corporate expenses would exceed 2020, primarily due to litigation and environmental costs. These are management expectations, not guarantees.
- NL paid $12.0 million in September 2021 under the Santa Clara lead-pigment settlement; four annual installments remained—three of $12.0 million and a final $16.7 million installment, with funds already on deposit intended to cover the final payment.
- Environmental costs remain uncertain: NL accrued approximately $93 million for about 32 sites; the upper end of the reasonably estimable cost range was approximately $112 million, including the accrual. Costs could exceed estimates, and five sites had no reasonably estimable range.
- NL disputed liability in other lead-pigment litigation and had not accrued amounts for those cases, apart from the Santa Clara settlement. The filing warns that future adverse outcomes could materially affect earnings, financial condition and liquidity. In October 2021, a court decertified the Lewis class and entered judgment for NL and the other defendants.
- Key risks include demand and pricing cycles, input-cost inflation, supply constraints, COVID-19 effects, foreign exchange movements, affiliate dividends, environmental remediation, litigation and insurance recoveries. NL reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer: the supplied 10-Q is filed by NL Industries, Inc., despite the request metadata naming NLI Holdings, Inc.
- Review CompX’s ability to staff production, source inputs and pass cost increases through to customers, and whether expected Q4 margin pressure occurred.
- Track Kronos results, TiO2 pricing and demand, currency effects, and the value and liquidity of NL’s Kronos and Valhi holdings.
- Monitor environmental accrual revisions, lead-pigment litigation developments, settlement payment timing and potential insurance recoveries.
- Assess parent-level liquidity and dependence on dividends from subsidiaries and affiliates; future NL dividends remain discretionary.