NL Industries, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are with December 31, 2017. Dollar amounts below are in millions unless otherwise stated. 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.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Net sales | $28.4 | $29.9 | Down 5%; sales are principally CompX sales. |
| Gross margin | $9.5 | $9.7 | Down 2%; margin rate improved to about 33% from 32%. |
| Operating loss | $(2.8) | $(0.7) | Higher corporate expense more than offset CompX operating income. |
| Equity in Kronos earnings | $21.5 | $11.2 | Up 92%. |
| Income before tax | $18.1 | $10.9 | Improved, primarily reflecting higher Kronos earnings. |
| Net income attributable to NL stockholders | $14.2 | $8.4 | Basic and diluted EPS rose to $0.29 from $0.17. |
| Operating cash flow | $1.8 | $2.0 | Cash generation was modest despite higher net income. |
Cash, cash equivalents and restricted cash totaled $104.5 at March 31, 2018, versus $102.9 at year-end. Total assets were $574.9; total equity was $371.2. NL had $0.5 of debt outstanding under its $50 million Valhi revolving facility, with $49.5 available, and reported covenant compliance. CompX had no debt. NL’s current and noncurrent environmental liabilities totaled $115.8, up from $111.9 at year-end. Capital expenditures were $0.6 in the quarter.
Material changes and operating drivers
- CompX sales declined 5%. Security Products sales fell 8%, principally from lower government-customer and recreational-transportation demand. Marine Components sales rose 11%, benefiting from stronger demand, manufacturing efficiencies and improved fixed-cost leverage. CompX operating income was $4.4 versus $4.5.
- Kronos reported Q1 sales of $430.4, up 16%, and net income of $70.7 versus $36.8. Higher TiO₂ prices and favorable currency translation more than offset 13% lower sales volumes. NL’s share of Kronos earnings increased to $21.5.
- Corporate expense increased to $8.0 from $5.3, including litigation fees and related costs of $1.9 versus $0.6 and environmental remediation costs of $4.2 versus $3.0.
- NL recorded a $1.6 securities transaction loss as the fair value of its Valhi shares declined. A new accounting standard moved unrealized gains and losses on those equity securities from other comprehensive income to net income; adoption reclassified $46.1 from accumulated other comprehensive income to beginning retained earnings, without changing total equity.
- The U.S. federal corporate tax rate reduction to 21% was reflected in tax accounting. NL reported Q1 income tax expense of $3.3 versus $2.2. The filing says its 2017 Tax Act accounting remained subject to a measurement period through December 22, 2018.
Outlook, risks and contingencies
- CompX: Management expected full-year 2018 sales to meet or exceed 2017, based on growth in other Security Products markets and continued Marine Components growth. It expected government-customer sales comparable to 2017, with continued transportation-market softness. NL expected 2018 net general corporate expenses to be higher than in 2017, primarily from litigation costs.
- Kronos: Management expected 2018 sales and operating income above 2017, principally from higher average selling prices, partly offset by higher feedstock-ore costs. It anticipated somewhat lower production and sales volumes than 2017’s records and moderately higher cost per ton. Further price increases were possible, but not expected to match the scale of 2017 increases.
- Lead-pigment litigation: In the Santa Clara case, an appellate court upheld liability but limited the abatement order to pre-1951 homes and remanded for recalculation. The California Supreme Court declined review. NL considered a loss probable but said its amount or a reasonable range could not be estimated; no accrual was recorded. The original $1.15 billion aggregate order is not the current calculated liability. NL noted a future loss could materially affect results, financial position or liquidity.
- Environmental matters: NL accrued $115.8 for approximately 38 sites; the upper end of the estimated range was approximately $146, including the accrual. Costs at about five additional sites could not be reasonably estimated. Actual costs could exceed accruals or arise at sites not currently estimable.
- Other risks include TiO₂ and component-products demand and pricing, raw-material costs, currency movements, operating interruptions, tax matters, insurance recoveries and litigation. Management stated that it expected sufficient liquidity for short-term obligations, while noting that adverse developments could impair liquidity.
Investor facts to verify
- Whether CompX’s expected growth in Marine Components and other Security Products markets offsets continued transportation weakness and lower government demand.
- Whether Kronos sustains pricing and margins as lower volumes and higher ore costs affect results.
- Developments in the Santa Clara remand, any further appeals, and when NL can estimate and accrue a liability.
- Changes in environmental remediation estimates, particularly at the five sites for which costs were not estimable.
- NL’s corporate litigation costs, cash flows and reliance on dividends or other distributions from affiliates; also confirm the availability and terms of related-party credit and receivables.