NL Industries, Inc. — FY2017 Form 10-K
Reporting period: Year ended December 31, 2017. The filing identifies the registrant as NL Industries, Inc.; the request metadata names NLI Holdings, Inc. NL is primarily a holding company, consolidating its 87%-owned CompX component-products subsidiary and accounting for its 30% Kronos Worldwide interest under the equity method.
Financial performance and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $112.0 million | $108.9 million |
| Income from operations | $0.9 million | Loss of $1.0 million |
| Equity in Kronos earnings | $107.8 million | $13.2 million |
| Net income attributable to NL stockholders | $116.1 million; $2.38 per share | $15.3 million; $0.31 per share |
| Net cash from operating activities | $18.6 million | $27.7 million |
| Cash, cash equivalents and restricted cash | $102.9 million | $98.2 million |
| Total assets | $551.6 million | $385.0 million |
| NL debt | $0.5 million | $0.5 million |
- Sales represent primarily CompX, not Kronos: Kronos is equity-accounted. CompX sales rose 3%, while operating income fell 2%. Its gross margin was 31% of sales, compared with 32% in 2016.
- Kronos reported sales of $1.729 billion, up 27%; operating income of $330.4 million, versus $81.1 million; and net income of $354.5 million, versus $43.3 million. Higher TiO2 prices and volumes drove the improvement. Kronos’s 2017 operating margin was 19%, versus 6%.
- NL’s operating cash flow declined $9.1 million, reflecting higher environmental payments, taxes and working-capital use, partly offset by higher interest and dividend income. Capital expenditures were $2.8 million. Investing cash outflow was $13.6 million, including net lending to Valhi.
- NL’s current and noncurrent liabilities included approximately $111.9 million of accrued environmental remediation costs. NL also held 35.2 million Kronos shares, with a reported market value of $907.6 million at year-end, and $88.7 million of Valhi shares.
- Kronos had approximately $474.5 million of consolidated debt. This is debt of the equity-method investee, not NL’s consolidated debt.
Material changes and unusual items
- NL-attributable earnings increased sharply, driven mainly by the increase in Kronos equity earnings and a $37.5 million noncash tax benefit from the U.S. federal corporate tax-rate reduction.
- Kronos’s earnings included significant noncash tax benefits, notably reversal of German and Belgian deferred-tax valuation allowances; they were partly offset by a $76.2 million provisional repatriation-tax expense. These and other tax effects make 2017 earnings less indicative of recurring performance.
- NL operating cash flow fell despite higher net income, in part because the reported earnings include substantial equity-method and noncash tax items. NL received $21.1 million of Kronos dividends, unchanged from 2016.
- NL’s environmental accrual decreased from $116.7 million to $111.9 million after $8.1 million of net payments and $3.4 million of expense additions. The company estimated an upper end of approximately $154 million for reasonably estimable remediation costs, including the accrued amount; costs at five sites could not be estimated.
Outlook, risks and contingencies
- NL expects 2018 net income attributable to its stockholders to be lower than 2017, primarily because Kronos equity earnings are expected to decline, litigation costs to rise, and, to a lesser extent, CompX operating income to be lower.
- Kronos expected 2018 sales and operating income to exceed 2017, mainly on higher selling prices, despite higher feedstock costs. It expected slightly lower production and sales volumes and lower net income, partly because 2017 included substantial tax benefits.
- NL stated it expected to have sufficient liquidity for short-term obligations. Year-end cash and restricted cash totaled $102.9 million; $49.5 million remained available under its $50 million affiliate revolving facility. Expected 2018 capital spending was approximately $3.8 million.
- In the Santa Clara lead-pigment litigation, an appellate court upheld liability but narrowed the abatement to pre-1951 homes and remanded the case to recalculate the fund. NL deemed a loss probable but said the amount or range could not be reasonably estimated; no accrual was recorded. Further proceedings and appeals could result in a material liability.
- Other principal risks include environmental remediation and litigation, dependence on distributions from subsidiaries and affiliates, TiO2 price and demand cyclicality, raw-material cost and supply risk, competition, foreign-exchange movements, Kronos leverage, and labor, operational and cybersecurity disruptions.
- NL reported effective disclosure controls and internal control over financial reporting. The auditor issued an unqualified opinion on the financial statements; its report did not express an opinion on internal-control effectiveness.
Investor verification priorities
- Review Kronos’s filings and NL’s equity-method accounting to assess the sustainability of 2017 earnings apart from tax benefits and other unusual items.
- Track the Santa Clara remand, any appeal, and the eventual abatement-fund estimate; verify how any resulting liability would be allocated to NL.
- Assess environmental accrual adequacy, the five sites with unestimable costs, and future cash-payment timing.
- Review Kronos debt, covenant compliance, refinancing capacity and feedstock commitments, alongside its expected 2018 pricing and cost assumptions.
- Monitor cash generation and affiliate transactions, including CompX’s loan to Valhi, and confirm the availability and terms of parent-level liquidity.