Business context and reporting period
NL Industries, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2015. NL is primarily a holding company: it consolidates majority-owned CompX International, a components manufacturer, and accounts for its 30% interest in Kronos Worldwide, a titanium dioxide (TiO2) producer, under the equity method. The filing’s financial statements are for NL Industries, Inc. and subsidiaries; the request metadata names NLI Holdings, Inc.
Financial performance and position
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q1 2014 | Q1 2015 |
|---|---|---|
| Net sales, primarily CompX | $25.8 | $27.9 |
| Gross margin | $7.7; 30% | $8.6; 31% |
| Income (loss) from operations | $(0.1) | $3.0 |
| Equity in Kronos earnings | $4.3 | $5.6 |
| Income tax expense (benefit) | $1.0 | $(1.4) |
| Net income attributable to NL stockholders | $3.8 | $10.0 |
| Basic and diluted earnings per share | $0.08 | $0.21 |
| Operating cash flow | $0.7 | $0.9 |
| Capital expenditures | $0.8 | $0.8 |
At March 31, 2015, cash and cash equivalents were $73.2 million and restricted cash was $4.8 million, totaling $78.0 million. NL and CompX had no debt outstanding. NL had a $40 million revolving borrowing facility from Valhi available, but any loan is at Valhi’s discretion. Environmental remediation liabilities totaled $109.8 million ($7.0 million current). Total assets were $482.3 million and total equity was $247.6 million.
Changes versus the prior comparable period
- Net sales increased 8%; CompX gross margin rose 11% and operating income rose 13% to $3.7 million. Security Products sales increased 7%, while Marine Components sales increased 15%; Marine Components moved from a small operating loss to $0.3 million of operating income, supported by higher volume and manufacturing efficiencies.
- NL’s operating result improved from a loss of $0.1 million to income of $3.0 million, primarily reflecting $3.1 million of insurance recoveries versus $0.8 million a year earlier and lower corporate expense.
- NL’s attributable net income rose to $10.0 million, including a $3.0 million non-cash tax benefit from releasing part of its uncertain-tax-position reserve and approximately $2.3 million more insurance recoveries. Management estimated these items contributed $0.06 and $0.04 per share, respectively.
- Kronos’ sales fell 13% to $365.1 million, but operating income increased 24% to $32.2 million and net income rose to $18.4 million. Lower average selling prices and currency translation weighed on sales; lower feedstock costs and higher volumes supported operating results. NL recognized $5.6 million of equity earnings.
- NL reported a $14.1 million other comprehensive loss, largely from $13.0 million of currency translation losses. Comprehensive loss attributable to NL stockholders was $4.1 million despite positive net income.
Outlook, commentary, risks and unusual items
- CompX anticipated continued strong product demand through 2015 but expected government-security demand to decline in the second half. Management expected full-year corporate expense below 2014, while noting litigation or environmental developments could raise costs.
- Kronos expected 2015 sales volumes to exceed 2014, but to operate below full capacity. It expected full-year operating income comparable to 2014 as higher volumes and moderating raw-material costs were expected to be largely offset by lower selling prices.
- The Santa Clara lead-pigment case has an adverse judgment against NL and two other defendants requiring an aggregate $1.15 billion for abatement. NL is appealing, considers the judgment unsupported, and has not accrued a loss because it does not consider a loss probable or reasonably estimable. The filing warns that an eventual liability could materially affect results, financial position and liquidity.
- Environmental remediation accruals were approximately $109.8 million for about 47 sites; the upper end of reasonably possible estimated costs was approximately $149 million, including the accrual. Costs at five additional sites could not be reasonably estimated.
- NL had 166 asbestos-related cases involving approximately 712 plaintiffs and reported no accrual, citing uncertainty and inability to estimate liability. It also disclosed tax examinations and disputes with former insurers; recoveries are not assured.
- NL stated it expected sufficient liquidity for short-term obligations through March 31, 2016, based on anticipated operating performance and cash demands. That assessment is subject to actual developments and the discretionary Valhi facility.
- The filing says interim results may not indicate full-year results. It identifies broad business, market, currency, financing, tax, environmental and litigation risks; it provides no formal earnings guidance for NL.
Important facts for investors to verify
- Follow the Santa Clara appeal and assess potential exposure, since the aggregate $1.15 billion judgment is unaccrued and could have a material impact.
- Monitor environmental remediation costs, particularly the $149 million estimated upper range and the five sites without estimable ranges.
- Distinguish recurring earnings from Q1’s tax-reserve release and insurance settlement proceeds.
- Track CompX demand, especially the expected second-half decline in government-security applications, and whether growth and margins persist.
- Track Kronos pricing, currency effects, feedstock costs and volumes against its expectation of 2015 operating income comparable to 2014.
- Confirm liquidity and parent-company cash access: the Valhi line is discretionary, and NL depends substantially on distributions from subsidiaries and affiliates.