NL Industries, Inc. — Form 10-Q for the quarter ended June 30, 2020
Entity note: The supplied filing is for NL Industries, Inc. (NYSE: NL), not an issuer named NLI Holdings, Inc. The summary below follows the filing.
Business context and reporting period
NL is primarily a holding company. It consolidates majority-owned CompX International, which makes security and marine components, and accounts for its approximately 30% interest in titanium dioxide producer Kronos Worldwide using the equity method. The filing presents unaudited results for the three and six months ended June 30, 2020, compared with 2019. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $23.8 | $33.7 | $56.1 | $64.9 |
| Gross margin | $7.4; 31% | $10.9; 32% | $17.8; 32% | $20.6; 32% |
| Income (loss) from operations | $0.014 | $(12.9) | $2.5 | $(10.4) |
| Net income | $4.9 | $6.6 | $7.4 | $22.3 |
| Net income attributable to NL stockholders | $4.6; $0.09/share | $5.9; $0.12/share | $6.5; $0.13/share | $21.1; $0.43/share |
| Equity in Kronos earnings | $5.7 | $8.9 | $13.9 | $18.2 |
| Operating cash flow | Not presented separately for the quarter | Not presented separately for the quarter | $12.1 | $19.2 |
At June 30, 2020, total assets were $546.5 million and equity was $326.5 million. Cash and cash equivalents were $134.3 million; total cash, cash equivalents and restricted cash were $162.5 million. Current assets were $171.6 million versus current liabilities of $26.3 million. NL had $0.5 million outstanding on its $50 million affiliate revolver, with $49.5 million available, and reported compliance with its covenants. CompX had no outstanding debt. NL paid $3.9 million in dividends in the first half ($0.08 per share).
Material changes versus the prior comparable period
- Sales fell 29% in Q2 and 14% for the first half, primarily from reduced customer demand and postponed orders amid COVID-19. CompX operating income declined 58% in Q2 to $2.4 million and 25% for the first half to $7.4 million.
- NL’s Kronos equity earnings fell 37% in Q2 and 24% for the first half. Kronos reported lower sales volumes, with COVID-related demand contraction; its first-half sales declined 12% and net income declined from $59.8 million to $45.6 million.
- NL’s marketable-equity-securities results swung from gains of $9.4 million in Q2 2019 and $14.9 million in the first half of 2019 to losses of $2.2 million and $14.3 million, respectively, in 2020. NL’s Valhi share investment was valued at $12.6 million at June 30, down from $26.9 million at year-end 2019.
- First-half operating cash flow declined to $12.1 million from $19.2 million, including lower insurance recoveries and lower CompX operating income. Inventory increased to $21.8 million from $18.3 million at year-end, reflecting a deliberate build; days in inventory rose to 121 from 81 at June 30, 2019.
- Reported earnings comparisons are affected by 2019 one-time items: a $19.6 million litigation settlement expense and higher insurance recoveries. No litigation settlement expense was recorded in 2020.
Outlook, risks, contingencies and unusual items
- Management expected CompX revenue and operating income for 2020 to be below 2019, while noting that the impact beyond Q2 depended on uncertain customer demand, customer recovery and potential operational or supplier disruptions. CompX reduced production staffing to anticipated second-half demand and expected inventory to decline as production adjusted.
- Kronos expected sales volumes and earnings for the remainder of 2020 to remain below prior periods because of COVID-19-related economic weakness. NL noted that its own future results were exposed to the pandemic’s uncertain duration and effects.
- NL accrued $93.8 million for environmental remediation and related matters at approximately 32 sites. The estimated upper end of reasonably possible costs for sites where a range could be estimated was approximately $115 million; costs at about five additional sites could not then be reasonably estimated.
- Lead-pigment litigation remains a contingency. The Santa Clara matter was settled and dismissed in 2019, with NL’s payments scheduled in installments; NL states that other pending lead-pigment claims are not considered probable or reasonably estimable. New claims or adverse outcomes could materially affect earnings, financial condition and liquidity.
- Management expected approximately $2.0 million of defined-benefit pension contributions in 2020. No formal numerical earnings guidance was provided.
- NL reported effective disclosure controls as of June 30, 2020 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended issuer: the supplied 10-Q identifies NL Industries, Inc., rather than NLI Holdings, Inc.
- Track the pace of recovery in CompX customer orders and whether elevated inventory converts to sales and cash.
- Monitor Kronos demand, selling prices, costs and dividends, which influence NL’s equity-method earnings and parent liquidity.
- Review movements in the Valhi investment’s market value and the resulting earnings volatility.
- Follow environmental remediation estimates, lead-pigment litigation and settlement payment obligations for possible changes to accruals or cash needs.
- Assess whether NL’s cash and affiliate borrowing capacity remain sufficient as operating cash flow and affiliate distributions evolve.