NL Industries(NL) - 2024 Q1 - Quarterly Report

Part I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents NL Industries' unaudited condensed consolidated financial statements, showing a Q1 2024 net income turnaround driven by equity earnings from Kronos and marketable securities, despite slightly decreased assets and sales Condensed Consolidated Balance Sheets | Metric | Dec 31, 2023 (in thousands) | Mar 31, 2024 (in thousands) | Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | | Total Assets | $576,662 | $568,816 | $(7,846) | | Total Liabilities | $184,900 | $178,732 | $(6,168) | | Total Equity | $391,762 | $390,084 | $(1,678) | | Cash and cash equivalents | $111,522 | $138,257 | $26,735 | | Marketable securities (current) | $53,149 | $29,662 | $(23,487) | | Investment in Kronos Worldwide, Inc. | $247,582 | $237,221 | $(10,361) | Condensed Consolidated Statements of Operations | Metric | Q1 2023 (in thousands) | Q1 2024 (in thousands) | Change (YoY) | | :------------------------------------- | :--------------------- | :--------------------- | :----------- | | Net sales | $41,151 | $37,971 | $(3,180) | | Gross margin | $12,704 | $9,667 | $(3,037) | | Income from operations | $4,197 | $1,356 | $(2,841) | | Equity in earnings (losses) of Kronos | $(4,637) | $2,476 | $7,113 | | Marketable equity securities | $(5,498) | $2,383 | $7,881 | | Net income (loss) | $(5,939) | $7,315 | $13,254 | | Net income (loss) attributable to NL stockholders | $(6,716) | $6,839 | $13,555 | | Basic and diluted net income (loss) per share | $(0.14) | $0.14 | $0.28 | Condensed Consolidated Statements of Comprehensive Income (Loss) | Metric | Q1 2023 (in thousands) | Q1 2024 (in thousands) | Change (YoY) | | :------------------------------------------------ | :--------------------- | :--------------------- | :----------- | | Net income (loss) | $(5,939) | $7,315 | $13,254 | | Total other comprehensive loss, net | $(1,381) | $(4,620) | $(3,239) | | Comprehensive income (loss) | $(7,320) | $2,695 | $10,015 | | Comprehensive income (loss) attributable to NL stockholders | $(8,093) | $2,220 | $10,313 | Condensed Consolidated Statements of Equity | Metric | Dec 31, 2023 (in thousands) | Mar 31, 2024 (in thousands) | Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | | Total NL stockholders' equity | $369,812 | $368,126 | $(1,686) | | Noncontrolling interest in subsidiary | $21,950 | $21,958 | $8 | | Total equity | $391,762 | $390,084 | $(1,678) | | Retained earnings (Dec 31, 2023 to Mar 31, 2024) | $284,462 | $287,395 | $2,933 | | Accumulated other comprehensive loss (Dec 31, 2023 to Mar 31, 2024) | $(219,621) | $(224,240) | $(4,619) | | Dividends paid - $.08 per share (Q1 2024) | N/A | $(3,906) | N/A | Condensed Consolidated Statements of Cash Flows | Metric | Q1 2023 (in thousands) | Q1 2024 (in thousands) | Change (YoY) | | :------------------------------------ | :--------------------- | :--------------------- | :----------- | | Net cash provided by operating activities | $7,278 | $6,744 | $(534) | | Net cash provided by (used in) investing activities | $(24,094) | $24,495 | $48,589 | | Net cash used in financing activities | $(3,805) | $(4,373) | $(568) | | Cash and cash equivalents and restricted cash - net change | $(20,621) | $26,866 | $47,487 | | Balance at end of period | $76,881 | $168,248 | $91,367 | Notes to Condensed Consolidated Financial Statements - NL Industries, Inc. is primarily a holding company, with Valhi, Inc. holding approximately 83% of its common stock. NL also owns approximately 31% of Kronos Worldwide, Inc. and has a majority-owned subsidiary, CompX International Inc.[22][23][25] - The company's noncurrent marketable securities include an investment in Valhi, Inc. common stock, valued at $20.577 million at March 31, 2024, up from $18.194 million at December 31, 2023[29][30] - NL owned approximately 35.2 million shares of Kronos common stock, with an aggregate market value of $415.6 million at March 31, 2024, an increase from $350.1 million at December 31, 2023[32] | Metric | Q1 2023 (in thousands) | Q1 2024 (in thousands) | Change (YoY) | | :-------------------- | :--------------------- | :--------------------- | :----------- | | Security Products Net Sales | $27,342 | $29,887 | $2,545 | | Marine Components Net Sales | $13,809 | $8,084 | $(5,725) | | Total Net Sales | $41,151 | $37,971 | $(3,180) | - The company is involved in significant lead pigment litigation, with two annual installment payments remaining for the Santa Clara global settlement agreement ($12.0 million due in September 2024 and $16.7 million for the final installment due in September 2025). The company believes it has substantial defenses and has not accrued liability for other pending lead pigment cases[47][49][51] - Accrued environmental remediation and related costs totaled $90.947 million at March 31, 2024, with a reasonably possible upper range of approximately $118 million for estimable sites. There are approximately five sites for which costs cannot be reasonably estimated yet[62][63] - The FASB issued ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Income Taxes), requiring additional disclosures. ASU 2023-07 is effective for NL's 2024 Annual Report and Q1 2025 interim reporting, while ASU 2023-09 is effective for its 2025 Annual Report[70][71] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations NL Industries' Q1 2024 net income significantly increased, driven by marketable equity securities gains and Kronos' equity earnings, despite lower CompX operating income. The company maintains strong liquidity, supported by affiliate dividends and credit facilities - Net income attributable to NL stockholders increased significantly from a loss of $6.7 million in Q1 2023 to a gain of $6.8 million in Q1 2024[78] - This improvement was driven by an unrealized gain on marketable equity securities and a positive swing in equity in earnings from Kronos, partially offset by lower income from CompX operations[83] | Metric | Q1 2023 (in millions) | Q1 2024 (in millions) | Change (YoY) | | :------------------------------------- | :-------------------- | :-------------------- | :----------- | | Equity in earnings (losses) of Kronos | $(4.6) | $2.5 | $7.1 | | Marketable equity securities unrealized gain (loss) | $(5.5) | $2.4 | $7.9 | | Interest and dividend income | $2.0 | $2.6 | $0.6 | | Metric | Q1 2023 (in millions) | Q1 2024 (in millions) | Change (YoY) | | :-------------------- | :-------------------- | :-------------------- | :----------- | | CompX Income from operations | $7.0 | $3.7 | $(3.3) | | Corporate expense | $(2.8) | $(2.4) | $0.4 | | Total Income from operations | $4.2 | $1.3 | $(2.9) | Business overview - NL is a holding company with a majority-owned subsidiary, CompX International Inc., and a 31% non-controlling interest in Kronos Worldwide, Inc.[72][74] - CompX manufactures mechanical and electronic cabinet locks (Security Products) and wake enhancement systems, exhaust systems, gauges, and related hardware for recreational marine (Marine Components)[73] - Kronos is a leading global producer and marketer of titanium dioxide pigments (TiO2) used in paints, plastics, and paper[74] Forward-looking information - Forward-looking statements are subject to substantial risks and uncertainties that could significantly impact expected results[75] - Key risk factors include future supply and demand, business cyclicality (e.g., Kronos' TiO2 operations), raw material and operating costs, global economic and political conditions, operating interruptions, technology disruptions, competitive pressures, currency fluctuations, and pending litigation (lead pigment and environmental matters)[75][77] Results of operations | Metric | Q1 2023 (in millions) | Q1 2024 (in millions) | Change (YoY) | | :-------------------- | :-------------------- | :-------------------- | :----------- | | Net sales | $41.2 | $38.0 | $(3.2) | | Cost of sales | $28.5 | $28.3 | $(0.2) | | Gross margin | $12.7 | $9.7 | $(3.0) | | Income from operations | $7.0 | $3.7 | $(3.3) | | Gross margin % | 31% | 25% | -6% | | Income from operations % | 17% | 10% | -7% | - The decrease in income from operations was primarily due to lower Marine Components sales and gross margin[84] - Operating costs and expenses increased by $0.3 million due to higher employee salaries and benefits at Security Products[87] CompX International Inc. Security Products | Metric | Q1 2023 (in millions) | Q1 2024 (in millions) | Change (YoY) | | :-------------------- | :-------------------- | :-------------------- | :----------- | | Net sales | $27.4 | $29.9 | $2.5 | | Gross margin | $8.5 | $8.8 | $0.3 | | Operating income | $5.4 | $5.5 | $0.1 | | Gross margin % | 31% | 29% | -2% | | Operating income margin % | 20% | 18% | -2% | - Sales increased primarily due to $1.8 million higher sales to the government security market[91] Marine Components | Metric | Q1 2023 (in millions) | Q1 2024 (in millions) | Change (YoY) | | :-------------------- | :-------------------- | :-------------------- | :----------- | | Net sales | $13.8 | $8.1 | $(5.7) | | Gross margin | $4.2 | $0.9 | $(3.3) | | Operating income | $3.3 | $0.0 | $(3.3) | | Gross margin % | 31% | 11% | -20% | | Operating income margin % | 24% | 0% | -24% | - Sales decreased by $4.3 million to the towboat market, $0.7 million to the industrial market, $0.3 million to the engine builder market, and $0.3 million to distributors[92] - Gross margin percentage decreased primarily due to higher cost inventory produced in Q4 2023 (due to lower production volumes) and decreased coverage of fixed overhead on lower sales[92] Outlook - CompX expects Security Products sales in 2024 to be lower than 2023, with comparable gross margin but declining operating income margin due to limited pricing power and reduced coverage of SG&A costs[95] - Marine Components net sales for 2024 are expected to be lower than 2023 due to anticipated further decline in the towboat market, leading to lower gross and operating income margins[95] - CompX is aligning Marine Components inventory balances with current demand, expecting completion by mid-2024, after elevated balances at the end of 2023[95] General corporate and other items | Metric | Q1 2023 (in millions) | Q1 2024 (in millions) | Change (YoY) | | :------------------------------------- | :-------------------- | :-------------------- | :----------- | | Corporate expenses | $2.8 | $2.4 | $(0.4) | | Litigation fees and related costs | $1.4 | $0.7 | $(0.7) | | Environmental remediation and related costs | $0.0 | $0.2 | $0.2 | | Interest and dividend income | $2.0 | $2.6 | $0.6 | | Marketable equity securities (unrealized gain/loss) | $(5.5) | $2.4 | $7.9 | | Income tax expense | $1.4 | $1.0 | $(0.4) | - The effective tax rate attributable to equity in earnings of Kronos was negative 10.6% in Q1 2024 (vs. negative 28.7% in Q1 2023) due to nontaxable dividends from Kronos and anticipated higher full-year earnings for Kronos in 2024[102][103] Equity in earnings (losses) of Kronos Worldwide, Inc. | Metric | Q1 2023 (in millions) | Q1 2024 (in millions) | Change (YoY) | | :------------------------------------- | :-------------------- | :-------------------- | :----------- | | Net sales | $426.3 | $478.8 | $52.5 | | Gross margin | $30.8 | $71.5 | $40.7 | | Income (loss) from operations | $(18.3) | $19.5 | $37.8 | | Net income (loss) | $(15.2) | $8.1 | $23.3 | | Equity in earnings (losses) of Kronos | $(4.6) | $2.5 | $7.1 | | Cost of sales % of net sales | 93% | 85% | -8% | | Income (loss) from operations % of net sales | -4% | 4% | +8% | | Metric | Q1 2023 (in thousands of metric tons) | Q1 2024 (in thousands of metric tons) | Change (YoY) | | :-------------------- | :------------------------------------ | :------------------------------------ | :----------- | | TiO2 Sales volumes | 102 | 130 | 28% | | TiO2 Production volumes | 105 | 121 | 15% | Current industry conditions - TiO2 demand improved in Q1 2024 across all major markets, though still below historical levels[107] - Kronos' production facility utilization increased to 87% in Q1 2024 from 76% in Q1 2023 due to increased demand and more favorable production costs[108] - Average TiO2 selling prices in Q1 2024 were 11% lower than Q1 2023 and declined 2% during Q1 2024[107] - Cost of sales per metric ton of TiO2 sold significantly decreased due to lower feedstock costs and reduced unabsorbed fixed costs[109] - Kronos plans to close its sulfate process line in Varennes, Canada, by Q3 2024, expecting a $2 million charge for workforce reductions and approximately $15 million in non-cash charges related to the closure[111] Net sales - Net sales increased by $52.5 million (12%) in Q1 2024 compared to Q1 2023[112] - This increase was primarily due to a 28% increase in sales volumes (contributing approximately $119 million), partially offset by an 11% decrease in average TiO2 selling prices (decreasing net sales by approximately $47 million)[112] - Changes in currency exchange rates (primarily the euro) increased net sales by approximately $4 million[112] Cost of sales and gross margin - Cost of sales increased by $11.8 million (3%) in Q1 2024, driven by higher sales and production volumes[114] - Production costs decreased by approximately $64 million, primarily due to lower energy and raw material costs[114] - Unabsorbed fixed production costs decreased by $10 million, from $22 million in Q1 2023 to $12 million in Q1 2024[114] - Cost of sales as a percentage of net sales improved to 85% (from 93%), and gross margin as a percentage of net sales increased to 15% (from 7%)[115][118] Selling, general and administrative expense - SG&A expense increased by $1.0 million (2%) in Q1 2024, mainly due to variable costs from higher sales volumes[119] - SG&A as a percentage of net sales decreased to 11% in Q1 2024 from 12% in Q1 2023[119] Income (loss) from operations - Income from operations increased by $37.8 million, from a loss of $18.3 million in Q1 2023 to an income of $19.5 million in Q1 2024[120] - Q1 2023 included a $1.7 million gain from a business interruption insurance claim settlement[120] Other non-operating income (expense) - Unrealized gain on marketable equity securities was $0.3 million in Q1 2024, compared to a $0.7 million loss in Q1 2023[121] - Interest expense increased by $5.0 million due to a debt exchange in February 2024, involving new 9.50% Senior Secured Notes and an 11.5% subordinated term loan[121] - A $1.5 million charge for the write-off of deferred financing costs was included in Q1 2024 interest expense[121] Income tax expense (benefit) - Income tax expense was $3.5 million in Q1 2024, compared to a $6.9 million benefit in Q1 2023, driven by higher earnings and jurisdictional mix[122] - Kronos' consolidated effective income tax rate in Q1 2024 was lower than the U.S. federal statutory rate of 21% due to lower earnings and tax benefits from losses in certain high-tax jurisdictions[122] - The OECD's Pillar Two initiative is not anticipated to have a material impact on Kronos' financial statements based on currently enacted legislation[123] Effects of currency exchange rates - Currency exchange rate fluctuations increased Kronos' net sales by $4 million in Q1 2024, mainly due to a weakening U.S. dollar relative to the euro[127][129] - The impact of currency exchange rates on Kronos' income from operations was nominal[130] - Kronos' non-U.S. operations generate currency transaction gains and losses from differences in exchange rates between accrual and settlement of non-local currency transactions and holding non-local currency[125] Outlook - Kronos expects sales volumes in 2024 to exceed 2023 levels due to improved customer demand across all major markets[131] - Production rates are expected to be higher than comparable periods in 2023, and implemented TiO2 selling price increases are aimed at achieving historical margin levels[131] - Gross margins are expected to improve as higher-cost inventory from late 2023 is replaced with lower-cost inventory produced in 2024, coupled with realized price increases and cost reduction efforts[132] - Overall, Kronos expects higher operating results for the full year 2024 compared to 2023 due to improved demand, higher selling prices, and lower production costs[132] Liquidity and Capital Resources | Metric | Q1 2023 (in millions) | Q1 2024 (in millions) | Change (YoY) | | :------------------------------------ | :-------------------- | :-------------------- | :----------- | | Net cash provided by operating activities | $7.3 | $6.7 | $(0.6) | | Net cash provided by (used in) investing activities | $(24.1) | $24.5 | $48.6 | | Net cash used in financing activities | $(3.8) | $4.4 | $(0.6) | - At March 31, 2024, the company had $197.9 million in aggregate restricted and unrestricted cash, cash equivalents, and current marketable securities[148][149] - NL also held investments in Valhi common stock ($20.6 million market value) and Kronos common stock ($415.6 million market value) at March 31, 2024[150] - The company expects to have sufficient liquidity for short-term and long-term obligations, supported by a $50 million revolving credit facility with Valhi, of which $49.5 million was available at March 31, 2024[153] | Affiliate | Shares held (millions) | Quarterly Dividend Rate | Annual Expected Dividend (millions) | | :-------- | :--------------------- | :---------------------- | :---------------------------------- | | Kronos | 35.2 | $0.19 | $26.8 | | CompX | 10.8 | $0.30 | $12.9 | | Valhi | 1.2 | $0.08 | $0.4 | | Total | | | $40.1 | Consolidated cash flows - Net cash provided by operating activities decreased by $0.5 million to $6.7 million in Q1 2024[136] - Investing activities provided $24.5 million in Q1 2024, a significant increase from a $24.1 million use in Q1 2023, primarily due to $24.0 million in proceeds from U.S. treasury bill maturities[140] - Financing activities used $4.4 million in Q1 2024, up from $3.8 million in Q1 2023, mainly due to higher dividends paid ($0.08 per share in 2024 vs. $0.07 in 2023)[143] Operating activities - Net cash provided by operating activities was $6.7 million in Q1 2024, down from $7.3 million in Q1 2023[136] - Key factors for the decrease include lower income from CompX operations ($3.3 million) and higher interest income received ($0.9 million)[141] | Metric | Dec 31, 2023 | Mar 31, 2024 | Change | | :------------------ | :----------- | :----------- | :----- | | Days sales outstanding | 36 days | 42 days | +6 days | | Days in inventory | 95 days | 89 days | -6 days | Investing activities - Net cash provided by investing activities was $24.5 million in Q1 2024, compared to a net use of $24.1 million in Q1 2023[20] - Proceeds from U.S. treasury bill maturities totaled $24.0 million in Q1 2024 (vs. $8.0 million in Q1 2023)[140] - Capital expenditures remained stable at $0.3 million in both Q1 2024 and Q1 2023[139] Financing activities - Net cash used in financing activities increased to $4.373 million in Q1 2024 from $3.805 million in Q1 2023[20] - Dividends paid to NL stockholders increased from $0.07 per share in Q1 2023 to $0.08 per share in Q1 2024[143] Outstanding debt obligations - NLKW had $0.5 million outstanding and $49.5 million available under its $50 million secured revolving credit facility with Valhi at March 31, 2024[145] - Kronos had no outstanding borrowings on its $225 million global revolving credit facility, with full availability[146] - Kronos completed a debt exchange in February 2024, issuing €276.174 million of 9.50% Senior Secured Notes due March 2029 and a new $53.7 million subordinated term loan from Contran[146] - Both NL and Kronos are in compliance with all debt covenants[145][146] Future cash requirements - Primary liquidity sources are operating cash flows and credit facilities with affiliates[147] - At March 31, 2024, NL had $197.9 million in cash, cash equivalents, and current marketable securities, and expects sufficient liquidity for short-term and long-term obligations[148][149][153] - CompX expects $2.8 million in capital expenditures for 2024[154] | Affiliate | Annual Expected Dividend (millions) | | :-------- | :---------------------------------- | | Kronos | $26.8 | | CompX | $12.9 | | Valhi | $0.4 | | Total | $40.1 | Liquidity - Primary liquidity sources are cash flow from operating activities and credit facilities with affiliates[147] - At March 31, 2024, the company had $197.9 million in cash, cash equivalents, and current marketable securities, all held in the U.S.[148][149] - NL also owned approximately 1.2 million shares of Valhi common stock ($20.6 million market value) and 35.2 million shares of Kronos common stock ($415.6 million market value)[150] - The company expects sufficient liquidity for short-term (12 months) and long-term (5 years) obligations, supported by a $50 million revolving loan from Valhi ($49.5 million available)[153] Capital expenditures - Firm purchase commitments for capital projects totaled $0.4 million at March 31, 2024[154] - CompX expects to spend $2.8 million on capital investments in 2024, mainly for customer demand and facility/technology maintenance[154] Repurchases of common stock - CompX had 523,647 shares available for repurchase under its stock repurchase program at March 31, 2024[155] Dividends - NL's long-term ability to meet parent company obligations depends on dividends from subsidiaries and affiliates[156] | Affiliate | Annual Expected Dividend (millions) | | :-------- | :---------------------------------- | | Kronos | $26.8 | | CompX | $12.9 | | Valhi | $0.4 | | Total | $40.1 | - The declaration and payment of future dividends are discretionary and depend on financial condition, cash requirements, and other factors[143] Investments in our subsidiaries and affiliates and other acquisitions - NL periodically evaluates acquisitions of interests in or combinations with companies, including related companies, and may issue additional equity or increase indebtedness for such activities[152][158] - The company also evaluates restructuring ownership interests among its subsidiaries and related companies[152][158] Commitments and contingencies - No material changes in contractual obligations since the 2023 Annual Report[159] - The company is subject to various commitments and contingencies, including legal proceedings related to lead pigment and environmental matters[160] - Proposed legislation that could impose civil liability based on market share or revive barred actions for lead pigment litigation could have a material adverse effect, though none has been enacted[160] Recent accounting pronouncements - Refer to Note 15 for details on recent accounting pronouncements, including ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Income Taxes)[161] Critical accounting policies and estimates - No changes in critical accounting policies during Q1 2024[162] - Refer to the 2023 Annual Report for a discussion of critical accounting policies[162] Item 3. Quantitative and Qualitative Disclosure About Market Risk The company is exposed to market risks related to currency exchange rates, interest rates, and equity security prices. There have been no material changes in these market risks since the 2023 Annual Report - The company is exposed to market risks including currency exchange rates, interest rates, and equity security prices[163] - No material changes in market risks since the 2023 Annual Report[163] Item 4. Controls and Procedures Disclosure controls and procedures were effective as of March 31, 2024, with no material changes to internal control over financial reporting, excluding equity method investees but including investment recording controls - Disclosure controls and procedures were evaluated as effective as of March 31, 2024, by the principal executive and financial officers[164] - No material changes to internal control over financial reporting occurred during Q1 2024[168] - The assessment of internal control over financial reporting excludes equity method investees and financial statement schedules but includes controls over recording investment amounts related to equity method investees[167] Part II. OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 13 of the Condensed Consolidated Financial Statements and the 2023 Annual Report for a discussion of legal proceedings - Refer to Note 13 to the Condensed Consolidated Financial Statements and the 2023 Annual Report for information on legal proceedings[170] Item 1A. Risk Factors This section refers to Part I, Item 1A, "Risk Factors," in the 2023 Annual Report for a discussion of business-related risk factors - Refer to Part I, Item 1A, "Risk Factors," in the 2023 Annual Report for a discussion of business-related risk factors[171] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications (31.1, 31.2, 32.1) and Inline XBRL documents - The report includes certifications (31.1, 31.2, 32.1) and Inline XBRL documents as exhibits[174] SIGNATURES - The report was signed on May 8, 2024, by Amy Allbach Samford (EVP & CFO) and Amy E. Ruf (VP & Controller)[176]