NL Industries, Inc. — Q1 2016 Form 10-Q
Filing-entity note: The request identifies NLI Holdings, Inc., but the filing is for NL Industries, Inc. The period ended March 31, 2016; the unaudited quarter is compared with Q1 2015. NL is primarily a holding company, consolidating CompX and accounting for its approximately 30% Kronos interest under the equity method.
Financial performance and liquidity
- Revenue and margins: Net sales were $27.1 million, down 2.9% from $27.9 million. Gross margin was $8.2 million (30.3% of sales), versus $8.6 million (30.7%). Operating loss was $2.2 million, compared with operating income of $3.0 million.
- Profit: NL stockholders recorded a net loss of $2.5 million, or $0.05 per share, versus net income of $10.0 million, or $0.21 per share. The change included a swing in Kronos equity results to a $1.2 million loss from $5.6 million earnings, lower insurance recoveries, higher environmental costs, and the absence of a prior-year tax-reserve release.
- Cash flow: Operating cash flow was $0.1 million, down from $0.9 million. Capital expenditures were $1.2 million; cash and cash equivalents declined $1.2 million to $95.2 million. Including restricted cash, cash totaled $100.2 million.
- Balance sheet and debt: Total assets were $347.6 million and equity was $164.4 million at quarter-end. NL and CompX had no outstanding debt. A $40 million revolving facility from Valhi was undrawn and available, but borrowing is at Valhi’s discretion.
- Other financial exposures: Environmental remediation liabilities totaled $115.7 million, including $11.4 million current. NL held marketable Valhi stock worth $17.0 million and a 30% Kronos investment carried at $138.5 million (Kronos shares’ quoted market value was $201.5 million).
Changes and operating trends
- CompX sales fell 3% to $27.1 million and operating income fell 9% to $3.4 million. Security Products sales declined 5%, partly because a 2015 government-customer order did not recur; Marine Components sales rose 13% on stronger waterski/wakeboard demand.
- Kronos reported Q1 sales of $318.4 million, down 13%, and a net loss of $3.8 million versus net income of $18.4 million. Lower TiO₂ pricing (down 14%) more than offset 5% higher sales volumes; Kronos’ operating result was a $0.3 million loss versus $32.2 million income.
- NL’s corporate expense increased to $5.7 million from $3.8 million, primarily reflecting $2.8 million of environmental remediation costs versus $0.1 million; litigation costs decreased to $0.9 million from $1.8 million. Insurance recoveries fell to $0.1 million from $3.1 million.
Outlook, risks and contingencies
- NL expects 2016 sales to be relatively comparable with 2015, excluding more than $5 million of prior-year sales to one government security customer that are not expected to recur. It expects full-year corporate expenses to be comparable with 2015, subject to litigation and environmental developments.
- Kronos expects higher 2016 sales and production volumes and lower per-ton costs, and anticipates higher operating income than in 2015. Price increases announced by Kronos and competitors depend on market conditions; weak TiO₂ pricing, competition, currency movements and global demand remain significant uncertainties.
- NL reported approximately $116 million accrued for about 42 environmental sites; the estimated upper end of reasonably possible costs for estimable sites was approximately $175 million, including accrued amounts. Costs for five other sites could not be reasonably estimated.
- NL is appealing the adverse 2014 California lead-pigment judgment imposing $1.15 billion of aggregate abatement funding on NL and two other defendants. NL has not accrued a loss, concluding loss was not probable and could not be reasonably estimated, but warns a future accrual could materially affect results, financial condition and liquidity.
- NL also faces asbestos-related claims and other litigation, tax examinations, and uncertainty over insurance recoveries. Management states it believes short-term liquidity is sufficient; this depends partly on expected affiliate distributions and access to the discretionary Valhi facility.
Most important facts for investors to verify
- Confirm the issuer identity: this is an NL Industries, Inc. filing, not a filing labeled NLI Holdings, Inc.
- Track the California lead-pigment appeal and any change in the likelihood or estimability of a loss.
- Monitor environmental accruals, site estimates, and cash remediation payments against the $115.7 million reserve and $175 million estimated upper range.
- Review Kronos’ TiO₂ pricing, volumes, cost trends and outlook, given its material effect on NL’s equity-method earnings and affiliate dividends.
- Assess cash generation and liquidity access, including CompX cash availability, affiliate dividends, and the discretionary nature of Valhi borrowing.