NL Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020. Amounts are U.S. dollars; financial statement amounts are generally in millions unless noted. NL is primarily a holding company: it consolidates majority-owned CompX and accounts for its approximately 30% interest in Kronos Worldwide under the equity method. Accordingly, NL’s reported sales are CompX sales, not Kronos sales.
Business context and financial results
COVID-19 reduced demand for products of both CompX and Kronos, particularly in the second and third quarters. CompX makes security products and marine components; Kronos produces titanium dioxide (TiO₂) pigments.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales (CompX) | $28.4 | $29.7 | $84.5 | $94.6 |
| Gross margin | $7.3 | $9.5 | $25.1 | $30.0 |
| Gross margin percentage | 26% | 32% | 30% | 32% |
| Operating income (loss), consolidated | $(0.3) | $5.8 | $2.2 | $(4.6) |
| Equity in Kronos earnings | $2.5 | $5.5 | $16.3 | $23.6 |
| Net income (loss) attributable to NL shareholders | $3.9 | $(1.5) | $10.4 | $19.5 |
| Basic and diluted EPS | $0.08 | $(0.03) | $0.21 | $0.40 |
| Cash provided by operating activities | Not provided for the quarter | Not provided for the quarter | $9.2 | $17.4 |
Q3 earnings improved year over year largely because marketable securities contributed a $3.2 million gain versus a $15.3 million loss in Q3 2019. That benefit was partly offset by lower CompX operating income and lower Kronos equity earnings. For the first nine months, lower Kronos earnings, an $11.1 million securities loss, lower CompX operating income, and the absence of 2019 insurance recoveries and an excess-property gain outweighed the absence of 2019 litigation settlement expense.
Liquidity, debt, and financial position
- At September 30, 2020, cash, cash equivalents and restricted cash totaled $157.0 million, versus $157.9 million at December 31, 2019. Of the September balance, $65.1 million was held by CompX.
- Operating cash flow was $9.2 million for the first nine months, down from $17.4 million. Investing activities used $3.7 million and financing activities used $6.4 million, including $5.9 million of NL dividends paid.
- NL had $0.5 million outstanding on its $50 million affiliate revolving facility, leaving $49.5 million available; it reported covenant compliance. CompX had no debt outstanding. Kronos, an equity-method investee, had $465.9 million of long-term debt and reported covenant compliance.
- Total assets were $542.6 million and total equity was $332.0 million at September 30, 2020. NL’s investment in Kronos had a carrying value of $244.0 million and a quoted market value of $452.9 million.
- NL reported $28.4 million in current cash and cash equivalents, separately from restricted cash. Restricted cash totaled $28.2 million, current and noncurrent combined.
Material changes and management commentary
- CompX Q3 sales declined 4% year over year, while nine-month sales declined 11%. Security Products sales fell 9% in Q3 and 13% year to date, with transportation, distribution and office-furniture markets recovering slowly. Marine Components sales rose 15% in Q3, led by towboat demand, but were down 1% year to date.
- CompX’s Q3 operating income declined 51% to $2.1 million; nine-month operating income fell 33% to $9.5 million. Lower production in Q2 raised fixed cost per unit in inventory sold during Q3, pressuring margins.
- Kronos’ sales fell 5% in Q3 and 10% year to date. Lower sales volumes and TiO₂ selling prices contributed; Kronos’ operating income declined 42% in Q3 and 26% year to date. Its nine-month sales volumes fell 11% and production volumes fell 5%.
- Management said CompX sales began recovering in Q3 but remained generally below pre-pandemic levels. CompX expected lower 2020 revenue and operating income than in 2019, and expected operating income for the remainder of 2020 to remain below comparable prior-year periods. Security Products’ transportation, distribution and office-furniture markets were expected to remain slow to recover.
- Kronos expected lower sales volumes and earnings for the remainder of 2020 than in 2019. It reported approximately $348 million of cash and $231 million of available revolving-credit capacity at quarter end and said it could reduce inventory, defer capital spending and pursue other cost savings.
- NL said it expected sufficient liquidity for short-term obligations through September 30, 2021. Expected 2020 dividends from Kronos, CompX and Valhi totaled approximately $30.3 million, based on then-current holdings and dividend rates; future NL dividends remain discretionary.
Risks, contingencies, and unusual items
- COVID-19: The duration and economic effects of the pandemic, customer demand, operating disruptions and supply-chain conditions remained uncertain. CompX reported minimal supply-chain disruption; Kronos said its facilities remained operational and raw-material availability had not been adversely affected to date.
- Environmental matters: NL accrued $93.6 million for environmental remediation and related costs at about 32 sites. For estimable sites, the upper end of the reasonably possible cost range was approximately $114 million, including the accrual. NL could not estimate a range for five additional sites; actual costs could exceed current accruals.
- Lead-pigment litigation: NL had paid its $25 million initial payment and a $12 million September 2020 installment under the Santa Clara settlement. Balance-sheet current and long-term litigation settlement liabilities totaled approximately $60.9 million. NL said other pending lead-pigment cases were not probable or reasonably estimable, but future outcomes could materially affect earnings, financial condition or liquidity.
- Hurricanes: Hurricane Laura temporarily halted production at Kronos’ 50%-owned Louisiana Pigment Company joint venture from August 24 to September 25. Hurricane Delta caused another shutdown of about five days in October. Insurance was expected to cover most losses, subject to deductibles, but recoveries had not been recognized because claim amounts were not yet determinable.
- Marketable securities: NL’s Valhi share investment fell in quoted value from $26.9 million at year-end 2019 to $15.8 million at September 30, 2020, contributing to reported investment losses.
- NL said it had no material off-balance-sheet financing arrangements and no material changes in contractual obligations. Disclosure controls and procedures were assessed as effective; no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether CompX and Kronos demand, volumes and margins continued to recover after September 30, 2020, and how the pandemic affected subsequent results.
- The composition and availability of reported cash, including restricted cash, and the extent to which NL can access subsidiary or affiliate cash and dividends.
- Progress and estimated ultimate cost of environmental remediation, the Santa Clara settlement obligations, and any developments in other lead-pigment litigation.
- Insurance recoveries and costs arising from Hurricanes Laura and Delta, including the timing and amount of any claims recognized.
- Changes in Valhi and Kronos share values and the resulting effect on NL’s earnings and investment carrying values.