NL Industries(NL) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements of NL Industries, Inc. and its subsidiaries for the periods ended June 30, 2023, including balance sheets, statements of operations, comprehensive income (loss), equity, and cash flows, along with detailed notes explaining significant accounts and transactions Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (In thousands) | ASSETS | Dec 31, 2022 | Jun 30, 2023 (unaudited) | | :--------------------------------- | :----------- | :----------------------- | | Cash and cash equivalents | $68,868 | $58,523 | | Marketable securities (current) | $70,164 | $95,716 | | Total current assets | $193,968 | $208,373 | | Investment in Kronos Worldwide, Inc. | $292,206 | $268,469 | | Total assets | $609,867 | $586,421 | | LIABILITIES AND EQUITY | | | | Total current liabilities | $32,052 | $29,338 | | Total noncurrent liabilities | $175,068 | $168,309 | | Total NL stockholders' equity | $382,150 | $367,657 | | Total liabilities and equity | $609,867 | $586,421 | - Total assets decreased by $23.4 million from $609.9 million at December 31, 2022, to $586.4 million at June 30, 2023, primarily due to a decrease in the investment in Kronos Worldwide, Inc. and cash and cash equivalents[9] - Total NL stockholders' equity decreased by $14.5 million from $382.2 million at December 31, 2022, to $367.7 million at June 30, 2023[11] Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (In thousands, except per share data) | Metric | 3 Months Ended Jun 30, 2022 | 3 Months Ended Jun 30, 2023 | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2023 | | :--------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net sales | $41,675 | $36,616 | $83,725 | $77,767 | | Gross margin | $13,629 | $10,273 | $25,709 | $22,977 | | Income from operations | $4,205 | $1,421 | $8,075 | $5,618 | | Equity in earnings (losses) of Kronos Worldwide, Inc. | $13,991 | $(2,516) | $31,524 | $(7,153) | | Net income (loss) attributable to NL stockholders | $30,252 | $(3,108) | $48,809 | $(9,824) | | Basic and diluted net income (loss) per share | $0.62 | $(0.06) | $1.00 | $(0.20) | - Net sales decreased by 12.1% for the three months ended June 30, 2023, and by 7.1% for the six months ended June 30, 2023, compared to the same periods in 2022[13] - The company reported a net loss attributable to NL stockholders of $3.1 million ($.06 per share) for Q2 2023, a significant decline from net income of $30.3 million ($.62 per share) in Q2 2022[13][82] - Equity in earnings from Kronos Worldwide, Inc. shifted from a gain of $14.0 million in Q2 2022 to a loss of $2.5 million in Q2 2023, significantly impacting overall profitability[13][87] Condensed Consolidated Statements of Comprehensive Income (Loss) Condensed Consolidated Statements of Comprehensive Income (Loss) (In thousands) | Metric | 3 Months Ended Jun 30, 2022 | 3 Months Ended Jun 30, 2023 | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2023 | | :------------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) | $31,057 | $(2,591) | $50,266 | $(8,530) | | Total other comprehensive income (loss), net | $(7,948) | $3,278 | $(5,563) | $1,897 | | Comprehensive income (loss) attributable to NL stockholders | $22,304 | $162 | $43,246 | $(7,931) | - Comprehensive income attributable to NL stockholders decreased significantly from $22.3 million in Q2 2022 to $0.2 million in Q2 2023, and from $43.2 million in H1 2022 to a loss of $7.9 million in H1 2023[16] - Other comprehensive income (loss) improved from a loss of $7.9 million in Q2 2022 to a gain of $3.3 million in Q2 2023, primarily driven by defined benefit pension plans[16] Condensed Consolidated Statements of Equity Changes in NL Stockholders' Equity (In thousands) | Equity Component | Balance at Dec 31, 2022 | Net Income (Loss) H1 2023 | Other Comprehensive Income H1 2023 | Dividends Paid H1 2023 | Balance at Jun 30, 2023 | | :-------------------------- | :---------------------- | :------------------------ | :--------------------------------- | :--------------------- | :---------------------- | | Common stock | $6,101 | — | — | — | $6,103 | | Additional paid-in capital | $298,598 | — | — | — | $298,868 | | Retained earnings | $300,442 | $(9,824) | — | $(6,834) | $283,784 | | Accumulated other comprehensive loss | $(222,991) | — | $1,893 | — | $(221,098) | | Total NL stockholders' equity | $382,150 | $(9,824) | $1,893 | $(6,834) | $367,657 | - NL stockholders' equity decreased by $14.5 million from $382.2 million at December 31, 2022, to $367.7 million at June 30, 2023, primarily due to a net loss of $9.8 million and dividends paid of $6.8 million[19][20] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (In thousands) | Cash Flow Activity | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2023 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $13,625 | $20,928 | | Net cash provided by (used in) investing activities | $35 | $(23,444) | | Net cash used in financing activities | $(9,405) | $(7,612) | | Net change in cash and cash equivalents and restricted cash | $4,255 | $(10,128) | | Balance at end of period | $179,497 | $87,374 | - Net cash provided by operating activities increased to $20.9 million in H1 2023 from $13.6 million in H1 2022, despite a net loss, driven by lower net cash used for changes in receivables, inventories, and payables[22][149] - Net cash used in investing activities significantly increased to $23.4 million in H1 2023 from $0.04 million provided in H1 2022, primarily due to $50.0 million in purchases of marketable securities, partially offset by proceeds from maturities and note collections[22][156] - Cash and cash equivalents and restricted cash decreased by $10.1 million in H1 2023, resulting in an end-of-period balance of $87.4 million[22] Notes to Condensed Consolidated Financial Statements Note 1 – Organization and basis of presentation - NL Industries, Inc. is primarily a holding company, with Valhi, Inc. holding approximately 83% of its common stock, consolidating its majority-owned subsidiary CompX International Inc., and holding approximately 31% of Kronos Worldwide, Inc[24][25] Note 2 – Accounts and other receivables, net Accounts and Other Receivables, Net (In thousands) | Category | Dec 31, 2022 | Jun 30, 2023 | | :-------------------------- | :----------- | :----------- | | Trade receivables - CompX | $17,910 | $15,114 | | Other receivables | $30 | $37 | | Allowance for doubtful accounts | $(70) | $(70) | | Total | $17,870 | $15,081 | - Total accounts and other receivables, net, decreased by $2.8 million from $17.9 million at December 31, 2022, to $15.1 million at June 30, 2023, primarily due to a reduction in CompX's trade receivables[28] Note 3 – Inventories, net Inventories, Net (In thousands) | Category | Dec 31, 2022 | Jun 30, 2023 | | :---------------- | :----------- | :----------- | | Raw materials | $6,245 | $6,548 | | Work in process | $19,983 | $22,024 | | Finished products | $5,062 | $5,193 | | Total | $31,290 | $33,765 | - Total inventories, net, increased by $2.5 million from $31.3 million at December 31, 2022, to $33.8 million at June 30, 2023, driven by increases in raw materials and work in process[29] Note 4 – Marketable securities - Current marketable securities are debt securities (U.S. government treasuries) classified as available-for-sale, with fair value determined using Level 2 inputs[30] - Noncurrent marketable securities are equity securities (Valhi, Inc. common stock) classified as available-for-sale, carried at fair value using Level 1 inputs[31] Marketable Securities Fair Value (In thousands) | Category | Dec 31, 2022 Market Value | Jun 30, 2023 Market Value | | :---------------------- | :------------------------ | :------------------------ | | Current assets (Fixed income) | $70,164 | $95,716 | | Noncurrent assets (Valhi common stock) | $26,350 | $15,391 | | Total Marketable Securities | $96,514 | $111,107 | - The market price of Valhi common stock held by NL decreased from $22.00 per share at December 31, 2022, to $12.85 per share at June 30, 2023, resulting in an unrealized loss[32] Note 5 – Investment in Kronos Worldwide, Inc. - NL owned approximately 35.2 million shares of Kronos common stock at June 30, 2023, with an aggregate market value of $307.5 million, down from $331.1 million at December 31, 2022[34] Change in Carrying Value of Investment in Kronos (In millions) | Item | Amount | | :-------------------------------------- | :----- | | Balance at beginning of period (Jan 1, 2023) | $292.2 | | Equity in loss of Kronos | $(7.1) | | Dividends received from Kronos | $(13.4) | | Equity in Kronos' other comprehensive income (loss) | $(3.2) | | Balance at end of period (Jun 30, 2023) | $268.5 | Kronos Worldwide, Inc. Selected Financial Information (In millions) | Metric | 3 Months Ended Jun 30, 2022 | 3 Months Ended Jun 30, 2023 | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2023 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net sales | $565.3 | $443.2 | $1,128.2 | $869.5 | | Income (loss) from operations | $65.2 | $(6.7) | $148.5 | $(25.0) | | Net income (loss) | $45.9 | $(8.2) | $103.4 | $(23.4) | - Kronos' net sales decreased by 22% in Q2 2023 and 23% in H1 2023 compared to the same periods in 2022, primarily due to a significant decrease in sales volumes (26% in Q2, 28% in H1)[37][121][123] - Kronos reported an operating loss of $6.7 million in Q2 2023 and $25.0 million in H1 2023, a substantial decline from operating income in the prior year, mainly due to lower sales volumes and higher production costs[37][131][132] Note 6 – Other assets, net Other Assets, Net (In thousands) | Category | Dec 31, 2022 | Jun 30, 2023 | | :--------------- | :----------- | :----------- | | Pension asset | $1,105 | — | | Other | $1,418 | $1,771 | | Total | $2,523 | $1,771 | - The pension asset of $1.1 million at December 31, 2022, was eliminated by June 30, 2023, due to the termination and buy-out of the U.K. pension plan[38][46] Note 7 – Accrued and other current liabilities Accrued and Other Current Liabilities (In thousands) | Category | Dec 31, 2022 | Jun 30, 2023 | | :-------------- | :----------- | :----------- | | Employee benefits | $11,023 | $7,792 | | Other | $2,370 | $1,879 | | Total | $13,393 | $9,671 | - Accrued and other current liabilities decreased by $3.7 million from $13.4 million at December 31, 2022, to $9.7 million at June 30, 2023, primarily due to a reduction in employee benefits[39] Note 8 – Long-term debt - NLKW Holding, LLC had $0.5 million outstanding under its $50 million secured revolving credit facility with Valhi at June 30, 2023, with $49.5 million available for future borrowing, and an average interest rate for H1 2023 of 9.80%[40] Note 9 – Other noncurrent liabilities Other Noncurrent Liabilities (In thousands) | Category | Dec 31, 2022 | Jun 30, 2023 | | :-------------------------- | :----------- | :----------- | | Reserve for uncertain tax positions | $2,714 | $2,714 | | OPEB | $637 | $604 | | Insurance claims and expenses | $625 | $553 | | Other | $303 | $305 | | Total | $4,279 | $4,176 | - Total other noncurrent liabilities remained relatively stable, decreasing slightly from $4.3 million at December 31, 2022, to $4.2 million at June 30, 2023[41] Note 10 – Revenue recognition Net Sales by Reporting Unit (In thousands) | Reporting Unit | 3 Months Ended Jun 30, 2022 | 3 Months Ended Jun 30, 2023 | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2023 | | :--------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Security Products | $28,837 | $25,672 | $58,418 | $53,014 | | Marine Components | $12,838 | $10,944 | $25,307 | $24,753 | | Total | $41,675 | $36,616 | $83,725 | $77,767 | - Total net sales decreased by 12.1% in Q2 2023 and 7.1% in H1 2023, primarily driven by lower sales in both Security Products and Marine Components[43] Note 11 – Employee benefit plans Net Periodic Defined Benefit Pension Cost (In thousands) | Component | 3 Months Ended Jun 30, 2022 | 3 Months Ended Jun 30, 2023 | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2023 | | :------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Interest cost | $297 | $412 | $594 | $862 | | Expected return on plan assets | $(392) | $(352) | $(784) | $(766) | | Recognized actuarial losses | $373 | $358 | $746 | $716 | | Total | $278 | $418 | $556 | $812 | - A non-cash pension plan termination loss of $4.9 million was recognized in Q2 2023 due to the completion of the buy-out of the U.K. pension plan[46] Note 12 – Income taxes Income Tax Expense (Benefit) (In thousands) | Category | 3 Months Ended Jun 30, 2022 | 3 Months Ended Jun 30, 2023 | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2023 | | :------------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Expected tax expense (benefit) at U.S. federal statutory income tax rate of 21% | $7,873 | $(2,077) | $12,475 | $(3,026) | | Rate differences on equity in earnings (losses) of Kronos, net of dividends | $(1,449) | $(5,146) | $(3,363) | $(2,841) | | Income tax expense (benefit) | $6,435 | $(7,300) | $9,140 | $(5,879) | - The company recognized an income tax benefit of $7.3 million in Q2 2023 and $5.9 million in H1 2023, compared to income tax expenses in the prior year periods, primarily due to lower earnings and the impact of equity in losses of Kronos[47][112] - The effective tax rate attributable to equity in earnings of Kronos increased from 10.3% in H1 2022 to 60.7% in H1 2023, mainly due to Kronos' anticipated lower full-year earnings in 2023[113] Note 13 – Stockholders' equity Changes in Accumulated Other Comprehensive Loss (In thousands) | Component | Balance at Dec 31, 2022 | Other Comprehensive Income (Loss) H1 2023 | Balance at Jun 30, 2023 | | :-------------------------------- | :---------------------- | :---------------------------------------- | :---------------------- | | Currency translation | $(179,857) | $(1,219) | $(181,076) | | Defined benefit pension plans | $(43,464) | $4,676 | $(38,788) | | OPEB plans and other | $(953) | $(58) | $(1,011) | | Marketable debt securities | $(94) | $(129) | $(223) | | Total accumulated other comprehensive loss | $(224,368) | $3,270 | $(221,098) | - Accumulated other comprehensive loss decreased by $3.3 million in Q2 2023 and $1.9 million in H1 2023, primarily due to income from defined benefit pension plans, partially offset by currency translation losses[49] - CompX acquired 78,900 shares of its Class A common stock for approximately $1.7 million in Q2 2022 under repurchase authorizations[51] Note 14 – Commitments and contingencies General - The company is involved in various environmental, contractual, product liability, patent, employment, and other claims and disputes incidental to its current and former businesses, with management regularly evaluating their status[52] Lead pigment litigation - NL is a defendant in various lawsuits seeking damages for alleged harm from lead-based paints, but believes these actions are without merit and has not accrued any liability, as no final adverse judgments have been entered against it[53][55][56] - The company has three annual installment payments remaining for the Santa Clara lead pigment litigation settlement, with $12.0 million for the next two and $16.7 million for the final installment[57] Environmental matters and litigation - NL is involved in civil litigation and administrative proceedings under environmental laws (e.g., CERCLA) related to past operations, seeking cleanup costs and damages[61] - Accrued environmental remediation and related costs totaled $91.4 million at June 30, 2023, with an estimated upper range of reasonably possible costs at approximately $118 million[67] - For approximately five sites, the company is unable to reasonably estimate a range of costs due to early investigation stages and lack of information[68] Insurance coverage claims - NL is in legal proceedings with former insurance carriers regarding coverage for lead pigment and asbestos litigation defense costs and indemnity, but cannot assure such coverage will be available[69][70] - Insurance recoveries are recognized only when receipt is probable and the amount can be reasonably estimated[71] Other litigation - The company is involved in various other environmental, contractual, product liability, patent, employment, and other claims, but does not expect them to have a material adverse effect beyond existing accruals[73] Note 15 – Financial instruments Financial Instruments Not Carried at Fair Value (In thousands) | Instrument | Dec 31, 2022 Carrying Amount | Dec 31, 2022 Fair Value | Jun 30, 2023 Carrying Amount | Jun 30, 2023 Fair Value | | :-------------------------------------- | :---------------------------- | :---------------------- | :---------------------------- | :---------------------- | | Cash, cash equivalents and restricted cash | $97,502 | $97,502 | $87,374 | $87,374 | - The carrying amounts of accounts receivable and accounts payable are considered equivalent to fair value due to their near-term maturities[74] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance and condition for the three and six months ended June 30, 2023, discussing key drivers of results, segment performance, and liquidity, highlighting significant declines in net income and operating results primarily due to unrealized losses on marketable securities and equity in losses from Kronos Business overview - NL Industries, Inc. operates as a holding company, with primary operations through its majority-owned subsidiary CompX International Inc. (component products) and a non-controlling 31% interest in Kronos Worldwide, Inc. (titanium dioxide pigments)[75][76][77] Forward-looking information - The report contains forward-looking statements subject to substantial risks and uncertainties, including future supply/demand, market cyclicality, raw material costs, global economic conditions, operating interruptions, competition, and regulatory changes[78][81] Results of operations Net income (loss) overview - Net loss attributable to NL stockholders was $3.1 million ($.06 per share) in Q2 2023, down from net income of $30.2 million ($.62 per share) in Q2 2022[82] - The decrease in earnings is primarily due to an unrealized loss on marketable equity securities ($5.4 million in 2023 vs. $19.2 million gain in 2022), equity in losses of Kronos ($2.6 million in 2023 vs. $14.0 million gain in 2022), and a $4.9 million non-cash loss on U.K. pension plan termination[87] Income from operations Income from Operations (In millions) | Segment | 3 Months Ended Jun 30, 2022 | 3 Months Ended Jun 30, 2023 | % Change | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2023 | % Change | | :------------------ | :-------------------------- | :-------------------------- | :--------- | :-------------------------- | :-------------------------- | :--------- | | CompX | $7.7 | $4.4 | (44)% | $14.0 | $11.4 | (19)% | | Corporate expense | $(3.5) | $(3.0) | (17)% | $(5.9) | $(5.8) | (3)% | | Total Income from operations | $4.2 | $1.4 | (66)% | $8.1 | $5.6 | (30)% | - Total income from operations decreased by 66% in Q2 2023 and 30% in H1 2023, primarily driven by a 44% decrease in CompX's operating income in Q2[86] CompX International Inc. CompX Financial Performance (In millions) | Metric | 3 Months Ended Jun 30, 2022 | 3 Months Ended Jun 30, 2023 | % Change | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2023 | % Change | | :------------------------ | :-------------------------- | :-------------------------- | :--------- | :-------------------------- | :-------------------------- | :--------- | | Net sales | $41.6 | $36.6 | (12)% | $83.7 | $77.8 | (7)% | | Gross margin | $13.6 | $10.3 | (25)% | $25.7 | $23.0 | (11)% | | Income from operations | $7.7 | $4.4 | (44)% | $14.0 | $11.4 | (19)% | | Gross margin % | 33% | 28% | | 31% | 30% | | | Operating income margin % | 19% | 12% | | 17% | 15% | | - CompX's operating income decreased by 44% in Q2 2023 and 19% in H1 2023, primarily due to lower sales and gross margin in both Security Products and Marine Components[91] Security Products Security Products Performance (In millions) | Metric | 3 Months Ended Jun 30, 2022 | 3 Months Ended Jun 30, 2023 | % Change | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2023 | % Change | | :------------------------ | :-------------------------- | :-------------------------- | :--------- | :-------------------------- | :-------------------------- | :--------- | | Net sales | $28.8 | $25.6 | (11)% | $58.4 | $53.0 | (9)% | | Operating income | $6.7 | $4.1 | (39)% | $12.7 | $9.5 | (25)% | | Gross margin % | 35% | 29% | | 33% | 30% | | | Operating income margin % | 23% | 16% | | 22% | 18% | | - Security Products net sales decreased 11% in Q2 2023 and 9% in H1 2023, mainly due to lower sales to the government security market (including non-recurring sales in 2022) and office furniture market[98] - Gross margin and operating income as a percentage of net sales decreased due to lower sales and reduced coverage of fixed costs[99] Marine Components Marine Components Performance (In millions) | Metric | 3 Months Ended Jun 30, 2022 | 3 Months Ended Jun 30, 2023 | % Change | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2023 | % Change | | :------------------------ | :-------------------------- | :-------------------------- | :--------- | :-------------------------- | :-------------------------- | :--------- | | Net sales | $12.8 | $11.0 | (15)% | $25.3 | $24.8 | (2)% | | Operating income | $2.7 | $2.0 | (29)% | $4.7 | $5.3 | 11% | | Gross margin % | 29% | 26% | | 26% | 29% | | | Operating income margin % | 21% | 18% | | 19% | 21% | | - Marine Components net sales decreased 15% in Q2 2023, primarily due to a $2.0 million decline in the towboat market, partially offset by higher industrial sales[100] - Operating income for Marine Components increased by 11% in H1 2023, driven by favorable product mix, increased selling prices, and production efficiencies in Q1 2023, despite lower Q2 sales[101] Outlook (CompX) - CompX expects lower operating income at both reporting units in 2023 compared to 2022 due to softening demand, particularly in Marine Components, and challenges to gross margins at Security Products from higher cost inventory[103] - The company is managing inventory levels, with a planned build at Security Products for a large order expected to ship in H2 2023[103] General corporate and other items - Corporate expenses decreased by $0.5 million in Q2 2023 due to lower environmental remediation costs, but H1 2023 corporate expenses were comparable to H1 2022 due to higher litigation fees[105][106] - Interest and dividend income increased significantly in Q2 and H1 2023 due to higher average interest rates and increased investment balances[110] - An unrealized loss of $5.4 million on marketable equity securities was recognized in Q2 2023, compared to a $19.2 million gain in Q2 2022[111] - The company expects net general corporate expenses in 2023 to be higher than 2022, primarily due to higher expected litigation fees and related costs[109] Equity in earnings (losses) of Kronos Worldwide, Inc. Kronos Worldwide, Inc. Financial Performance (In millions, except metric tons) | Metric | 3 Months Ended Jun 30, 2022 | 3 Months Ended Jun 30, 2023 | % Change | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2023 | % Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :--------- | :-------------------------- | :-------------------------- | :--------- | | Net sales | $565.3 | $443.2 | (22)% | $1,128.2 | $869.5 | (23)% | | Income (loss) from operations | $65.2 | $(6.7) | (110)% | $148.5 | $(25.0) | (117)% | | Net income (loss) | $45.9 | $(8.2) | | $103.4 | $(23.4) | | | Sales volumes (K metric tons) | 142 | 104 | (26)% | 286 | 206 | (28)% | | Production volumes (K metric tons) | 132 | 89 | (33)% | 270 | 194 | (28)% | | Cost of sales % of net sales | 79% | 90% | | 76% | 91% | | | Income (loss) from operations % of net sales | 11% | (1)% | | 13% | (3)% | | Current industry conditions - Kronos' average TiO2 selling prices declined 5% in H1 2023, and overall sales volumes decreased due to reduced demand across all major markets[116] - Production facilities operated at 70% of practical capacity in H1 2023, down from 98% in H1 2022, to align with customer demand[118] - Cost of sales per metric ton of TiO2 sold was significantly higher in Q2 and H1 2023 due to increased production costs (energy, feedstock) and unabsorbed fixed costs from reduced operating rates[120] Net sales (Kronos) - Kronos' net sales decreased by 22% in Q2 2023 and 23% in H1 2023, primarily due to a 26% and 28% decrease in sales volumes, respectively, across all major markets[121][123][124] - Average TiO2 selling prices decreased by 2% in Q2 2023, contributing to the sales decline, while product mix positively contributed to net sales[121] Cost of sales and gross margin (Kronos) - Kronos' cost of sales decreased by 10% in Q2 2023 and 7% in H1 2023, but as a percentage of net sales, it increased to 90% and 91% respectively, due to higher production costs and unabsorbed fixed costs[125][127] - Gross margin as a percentage of net sales decreased to 10% in Q2 2023 (from 21% in Q2 2022) and 9% in H1 2023 (from 24% in H1 2022), primarily due to higher production costs, lower volumes, and lower selling prices[126][128] Selling, general and administrative expense (Kronos) - Kronos' SG&A expense decreased by 21% in Q2 2023 and 17% in H1 2023, primarily due to lower distribution costs resulting from reduced sales volumes[129][130] Income (loss) from operations (Kronos) - Kronos reported an operating loss of $6.7 million in Q2 2023 and $25.0 million in H1 2023, a significant decline from income in the prior year, mainly due to factors impacting gross margin[131][132] - A gain of $0.5 million in Q2 2023 and $2.2 million in H1 2023 was recognized from a business interruption insurance claim settlement[131][132] Other non-operating income (expense) (Kronos) - Kronos recognized an unrealized loss of $0.6 million on marketable equity securities in Q2 2023 (vs. $2.3 million gain in Q2 2022) and $1.3 million in H1 2023 (vs. $2.4 million gain in H1 2022)[133][134] - Other components of net periodic pension and OPEB cost decreased in Q2 and H1 2023, partly due to higher discount rates and $1.3 million in settlement costs from the U.K. pension plan termination[133][134] Income tax expense (benefit) (Kronos) - Kronos recognized an income tax benefit of $4.1 million in Q2 2023 and $11.0 million in H1 2023, compared to expenses in prior periods, due to lower earnings and jurisdictional mix[135] Effects of currency exchange rates (Kronos) - Fluctuations in currency exchange rates had a nominal effect on Kronos' net sales in Q2 2023, but decreased net sales by $12 million in H1 2023, primarily due to a strengthening U.S. dollar against the euro[121][123][141][143] - Currency exchange rate fluctuations decreased Kronos' loss from operations by $2 million in Q2 2023 and $21 million in H1 2023, driven by lower net currency transaction gains and net currency translation gains from a strengthening U.S. dollar[131][132][142][149] Outlook (Kronos) - Kronos expects near-term demand to remain below historical norms, despite some pockets of strengthening demand, and anticipates lower operating results for the full year 2023 due to weaker demand recovery and higher production costs[145] - Increased pricing pressure is expected due to favorable pigment availability, minimal order lead times, and low-cost imports from China[145] Liquidity and Capital Resources Consolidated cash flows Operating activities - Net cash provided by operating activities increased to $20.9 million in H1 2023 from $13.6 million in H1 2022, primarily due to lower net cash used for relative changes in receivables, inventories, and payables[149] Net Cash Provided by Operating Activities (In millions) | Entity | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2023 | | :-------------------------------- | :-------------------------- | :-------------------------- | | CompX | $1.5 | $9.8 | | NL Parent and wholly-owned subsidiaries | $17.5 | $16.5 | | Eliminations | $(5.4) | $(5.4) | | Total | $13.6 | $20.9 | Working Capital Metrics | Metric | Dec 31, 2021 | Jun 30, 2022 | Dec 31, 2022 | Jun 30, 2023 | | :------------------ | :----------- | :----------- | :----------- | :----------- | | Days sales outstanding | 42 days | 38 days | 41 days | 37 days | | Days in inventory | 96 days | 108 days | 99 days | 117 days | - Days in inventory increased from 99 days at December 31, 2022, to 117 days at June 30, 2023, mainly due to a planned inventory build at Security Products for specific customer orders[153][154] Investing activities - Capital expenditures, all related to CompX, were $0.5 million in H1 2023, down from $2.2 million in H1 2022[155] - Net marketable securities activity in H1 2023 included $50.0 million in purchases and $26.0 million in proceeds from maturities, resulting in a net cash outflow[156] Financing activities - Dividends of $0.07 per share were declared quarterly in H1 2022 and H1 2023[157] - Cash flows from financing activities in H1 2023 included $6.8 million in dividends paid and $0.8 million in dividends paid to noncontrolling interests[22] Outstanding debt obligations - At June 30, 2023, NLKW had $0.5 million outstanding under its $50 million secured revolving credit facility with Valhi, with $49.5 million available[159] - Kronos had no outstanding borrowings on its $225 million global revolving credit facility at June 30, 2023, and was in compliance with all debt covenants[160][161] Future cash requirements Liquidity - At June 30, 2023, NL had $183.1 million in aggregate restricted and unrestricted cash, cash equivalents, and current marketable securities, all held in the U.S[163][164] - The company expects sufficient liquidity to meet short-term obligations, supported by its operating cash flows and a $50 million revolving loan facility with Valhi[167] Capital expenditures - Firm purchase commitments for capital projects totaled $0.1 million at June 30, 2023, and CompX expects to spend $2.7 million on capital investments in 2023[168] Repurchases of common stock - At June 30, 2023, CompX had 523,647 shares available for repurchase under its stock repurchase program[170] Dividends Expected Annual Dividends from Subsidiaries and Affiliates (In millions) | Entity | Shares held (Jun 30, 2023) | Quarterly Dividend Rate | Annual Expected Dividend | | :------- | :------------------------- | :---------------------- | :----------------------- | | Kronos | 35.2 | $0.19 | $26.8 | | CompX | 10.8 | $0.25 | $10.8 | | Valhi | 1.2 | $0.08 | $0.4 | | Total | | | $38.0 | - The company's long-term ability to meet parent company obligations depends on dividends from subsidiaries and affiliates, with $38.0 million in total annual expected dividends from Kronos, CompX, and Valhi[171][172] Investments in our subsidiaries and affiliates and other acquisitions - The company may purchase securities of subsidiaries, affiliates, or third parties, issue equity, or increase indebtedness for acquisitions, and may restructure ownership interests[173] Commitments and contingencies - No material changes in contractual obligations since the 2022 Annual Report, and the company remains subject to various legal proceedings and potential legislation regarding lead pigment and lead-based paint, which could materially affect financial position[174][175] Recent accounting pronouncements - No recent accounting pronouncements are applicable[176] Critical accounting policies and estimates - There have been no changes in critical accounting policies during the first six months of 2023[176] Item 3. Quantitative and Qualitative Disclosure About Market Risk This section discusses the company's exposure to market risks, including currency exchange rates, interest rates, and equity security prices, noting no material changes since the 2022 Annual Report - The company is exposed to market risks related to currency exchange rates, interest rates, and equity security prices, with no material changes reported since the 2022 Annual Report[177] Item 4. Controls and Procedures This section details the evaluation of the company's disclosure controls and procedures and internal control over financial reporting, concluding that disclosure controls are effective and noting no material changes to internal control over financial reporting Evaluation of disclosure controls and procedures - The President and CEO, and Executive Vice President and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2023[178] Internal control over financial reporting - Management is responsible for establishing and maintaining adequate internal control over financial reporting to ensure reliable financial reporting in accordance with GAAP[179] Other - The assessment of internal control over financial reporting excludes equity method investees and financial statement schedules required by Article 12 of Regulation S-X[180] Changes in internal control over financial reporting - No changes to internal control over financial reporting occurred during Q2 2023 that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[181] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section provides updates on specific legal proceedings, including a finding of liability in a California environmental case, a favorable decision in Pennsylvania lead paint cases, and a partial dismissal in an Atlantic Richfield Co. lawsuit California Department of Toxic Substances Control v. NL Industries, Inc., et al. - In July 2023, a court found NL and other defendants liable in a case brought by the California Department of Toxic Substances Control, with allocation and damages to be determined later[183][184] Pennsylvania Lead Paint Cases - In May 2023, the Pennsylvania Commonwealth Court dismissed claims brought by two county governments regarding lead paint, finding them inconsistent with state law, with the decision under review by the Pennsylvania Supreme Court[185] Atlantic Richfield, Co. v. NL Industries, Inc. - In April 2023, a court dismissed claims by Atlantic Richfield Co. seeking recovery of direct remediation costs, but allowed the lawsuit to continue for claims related to a $400,000 settlement payment to EPA[186] Item 1A. Risk Factors This section refers to the company's 2022 Annual Report for a comprehensive discussion of risk factors related to its businesses - For a discussion of risk factors, refer to Part I, Item 1A, 'Risk Factors,' in the company's 2022 Annual Report[187] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including the 2023 Non-Employee Director Stock Plan, certifications, and Inline XBRL documents - Exhibits include the NL Industries, Inc. 2023 Non-Employee Director Stock Plan, various certifications (31.1, 31.2, 32.1), and Inline XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[189]