10-K: NL Industries 2023 Annual Report: Holding Company Navigates Market Volatility

NL Industries reports a net loss for 2023, impacted by challenges in its chemicals segment and a pension plan termination, while its component products business remains stable.

Summary

• NL Industries, a holding company, reported a net loss of $2.3 million for 2023, a significant decrease from the $33.8 million profit in 2022 and $51.2 million in 2021.
• The company operates in the component products industry through CompX International Inc. and has a noncontrolling interest in the chemicals industry through Kronos Worldwide, Inc.
• The decrease in earnings is primarily attributed to a $15 million loss from Kronos, compared to a $31.9 million profit in 2022, and a $4.9 million non-cash loss from the termination of a UK pension plan.
• CompX International Inc. reported stable income from operations at $25.4 million, with a slight decrease in net sales to $161.3 million.
• Kronos Worldwide, Inc. experienced a 14% decrease in net sales to $1.67 billion and a loss from operations of $56 million, due to reduced demand and pricing pressures in the TiO2 market.
• The company expects higher net income in 2024, driven by improved performance from Kronos, partially offset by lower expected income from CompX and higher litigation costs.

Sentiment

Score: 4

Explanation: The document presents a mixed picture with a net loss for the year, but also some positive aspects in the component products segment and a positive outlook for 2024. The overall tone is cautious due to the challenges in the chemicals segment and the competitive environment.

Positives

• CompX International Inc. maintained a stable income from operations of $25.4 million.
• CompX's Security Products segment saw a 6% increase in net sales, reaching $121.2 million.
• CompX's Marine Components segment saw an increase in gross margin as a percentage of sales due to lower raw material costs.
• NL Industries expects higher net income in 2024, primarily due to improved performance from Kronos.
• Kronos sales volumes were 29% higher in the fourth quarter of 2023 as compared to the fourth quarter of 2022 due to strengthening demand for TiO2 in its primary markets of Europe and North America.

Negatives

• NL Industries reported a net loss of $2.3 million in 2023.
• Kronos Worldwide, Inc. experienced a $15 million loss in 2023.
• The company incurred a $4.9 million non-cash loss due to the termination of its UK pension plan.
• Kronos' TiO2 sales volumes decreased by 13% in 2023.
• Kronos' average TiO2 selling prices declined by 4% in 2023.
• CompX's Marine Components segment saw a 23% decrease in net sales.

Risks

• The TiO2 industry is cyclical and highly competitive, which can lead to price pressures and reduced earnings for Kronos.
• CompX operates in mature and competitive markets, requiring continuous cost reductions and product innovation.
• Higher costs or unavailability of raw materials could negatively impact financial results for both CompX and Kronos.
• The company is dependent on distributions from its subsidiaries and affiliate, which could be impacted by various factors.
• Kronos has a significant amount of debt, which could impair its financial condition.
• The company could incur significant costs related to legal and environmental matters.
• Technology failures or cybersecurity breaches could have a material adverse effect on operations.
• Physical impacts of climate change could have a material adverse effect on Kronos or CompXs costs and operations.

Future Outlook

NL Industries expects higher net income in 2024, primarily due to improved performance from Kronos, partially offset by lower expected income from CompX and higher litigation costs. Kronos expects improved demand and lower production costs in 2024, leading to higher operating results. CompX expects lower sales in both its Security Products and Marine Components segments in 2024.

Management Comments

• CompX expects Security Products sales in 2024 will be lower than 2023 as the sluggishness it observed across a variety of the markets Security Products served during 2023 will continue with customers expressing uncertainty regarding sustained consumer demand.
• CompX expects Marine Components net sales in 2024 to also be lower as compared to 2023 because it believes demand in the towboat market will further decline, and expected increases in sales to the industrial and center console boat markets will not fully offset reduced towboat demand.
• Kronos expects consumer demand to improve in 2024, and it believes customer destocking of TiO2 is largely complete and customer inventories are historically low.
• Kronos believes the steps it took during 2023 to preserve its liquidity while maintaining global market share has positioned its business to capitalize on its expectations for improved demand in 2024.

Industry Context

The report highlights the cyclical nature of the TiO2 industry, with demand and pricing significantly impacted by global economic conditions. The competitive landscape in both the component products and TiO2 markets is also emphasized, with the company facing pressure from both domestic and international competitors. The report also notes the impact of global events on supply chains and demand.

Comparison to Industry Standards

• The report notes that the top five TiO2 producers account for approximately 52% of the world's production capacity, indicating a concentrated market.
• Kronos believes it is the leading seller of TiO2 in several countries, including Germany, and is one of the top five producers of TiO2 in the world.
• The report mentions that Chemours has approximately one-half of total North American TiO2 production capacity, making it Kronos' principal North American competitor.
• The report notes that LB Group Co. Ltd. plans to add an additional 200,000 tons of chloride capacity, indicating a potential increase in competition.
• The report also mentions that several of Kronos' competitors have recently closed or announced plans to close facilities or otherwise reduce capacity, including Chemours which closed its Taiwan facility with an estimated 160,000 tons of chloride process capacity in 2023 and Venator which announced plans in 2024 to close its Duisburg, Germany facility with an estimated 50,000 tons of sulphate process capacity.

Corporate Governance

Legal Proceedings

• The company is involved in various legal proceedings related to lead pigment litigation, environmental matters, and other claims.
• The company has entered into a settlement agreement in the Santa Clara lead pigment case, with payments scheduled through 2025.
• The company is involved in various environmental litigation and administrative proceedings related to former operations.
• The company is involved in various lawsuits alleging personal injuries as a result of occupational exposure primarily to products manufactured by our former operations containing asbestos, silica and/or mixed dust.

Related Party Transactions

• The company has various transactions with related parties, including loans, service agreements, and insurance arrangements.
• The company has a revolving credit facility with Valhi, Inc.
• The company has intercorporate service agreements with Contran Corporation.
• The company participates in a shared insurance program with Contran and its affiliates.

Stakeholder Impact

• Shareholders may be concerned about the net loss in 2023 and the challenges in the chemicals segment.
• Employees may be affected by workforce reductions and changes in production levels.
• Customers may experience changes in pricing and product availability due to market conditions.
• Suppliers may be impacted by changes in production and raw material demand.
• Creditors may be concerned about the company's debt levels and ability to generate cash flow.

Next Steps

• The company will continue to monitor customer demand and adjust production rates accordingly.
• The company will focus on cost reduction initiatives and process improvements.
• The company will continue to evaluate potential acquisitions and strategic opportunities.
• The company will continue to seek insurance recoveries for litigation costs.

Key Dates

Keywords

NL Industries, CompX International, Kronos Worldwide, TiO2, component products, titanium dioxide, financial results, net loss, market volatility, pension plan, raw materials, legal proceedings, environmental matters