Business context and reporting period
NL Industries, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. NL is primarily a holding company: it consolidates majority-owned CompX International, a components manufacturer, and accounts for its approximately 30% interest in titanium dioxide producer Kronos Worldwide using the equity method. The request metadata says “NLI Holdings, Inc.”; the filing identifies the registrant as NL Industries, Inc.
Unless noted otherwise, financial amounts below are in millions of dollars. NL cautions that interim results may not indicate full-year results.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $37.1 | $35.7 | $110.2 | $105.8 |
| Gross margin | $10.2 | $8.5 | $29.7 | $27.1 |
| Operating income | $2.1 | $12.9 | $4.2 | $9.6 |
| Equity in Kronos earnings | $10.7 | $26.1 | $72.0 | $71.5 |
| Net income attributable to NL stockholders | $10.0 | $27.7 | $57.0 | $61.8 |
| EPS | $0.21 | $0.57 | $1.17 | $1.27 |
- Gross margin was approximately 27% of sales in Q3 and 27% year to date, versus approximately 24% and 26%, respectively, in 2011. Operating income was affected by substantial one-time items, including prior-year insurance recoveries.
- Operating cash flow was $9.4 million for the first nine months, down from $24.0 million. Investing activities provided $10.7 million, including $15.6 million received in the final closing of a New Jersey real estate settlement; financing used $23.1 million. Cash and cash equivalents declined to $8.8 million from $11.7 million at year-end; restricted cash was $6.6 million.
- At September 30, current assets were $60.7 million and current liabilities $40.7 million. Total debt was $33.2 million ($11.7 million current and $21.5 million long-term), down from $37.3 million at year-end. Total equity was $391.3 million.
- Marketable securities were $193.9 million, down from $311.4 million at year-end, largely reflecting lower quoted values. NL’s Kronos investment was carried at $339.4 million; its quoted market value was $526.2 million. Nine-month comprehensive loss attributable to NL stockholders was $16.9 million, mainly reflecting a $79.1 million after-tax marketable-securities adjustment.
- Environmental remediation liabilities totaled $49.5 million, including $6.6 million current. The filing reports an estimated reasonably possible cost range up to approximately $79 million, including accrued amounts.
Material changes versus comparable periods
- Q3 attributable net income fell to $10.0 million from $27.7 million. The principal factors included lower Kronos earnings (NL’s share $10.7 million versus $26.1 million) and lower insurance recoveries ($1.2 million versus $16.1 million), partly offset by improved CompX operating results.
- For the first nine months, attributable net income decreased to $57.0 million from $61.8 million. The 2012 period included a $15.0 million real-estate litigation settlement gain; 2011 included a $7.5 million CompX patent settlement gain and higher insurance recoveries. Higher environmental expense also weighed on 2012 results.
- CompX sales rose 4% for both Q3 and the nine-month period. Q3 operating income increased to $4.3 million from $1.5 million, including a $0.8 million reversal of contingent consideration. Nine-month operating income declined to $11.2 million from $13.4 million, chiefly because 2011 included the patent settlement gain.
- Kronos’ Q3 sales decreased 14% and operating income fell to $38.5 million from $156.6 million, reflecting lower sales volumes, higher raw-material costs and reduced production. Nine-month Kronos sales rose 5%, but operating income declined 11% to $358.5 million.
Outlook, risks and unusual items
- NL gave no consolidated earnings guidance. Management said customer demand remained uncertain and expected 2012 general corporate expense to exceed 2011, principally because of higher environmental remediation costs. It cited commodity-cost volatility, limited ability to pass cost increases to customers, currency exposure and dependence on subsidiary and affiliate distributions.
- Kronos expected full-year 2012 production at 80%–85% of attainable practical capacity, lower sales volumes than 2011, and fourth-quarter selling prices and operating income below the prior-year quarter. It expected 2012 cost per metric ton produced to rise approximately 45%–55% versus 2011, driven mainly by feedstock costs and unabsorbed fixed production costs.
- NL reported $15.4 million of cash, cash equivalents and restricted cash and stated it expected sufficient liquidity for short-term obligations. Valhi had agreed to provide up to $40 million on a revolving basis; $34.4 million was available at quarter-end, subject to Valhi’s discretion. CompX had $28.0 million available under its credit facility. NL, CompX and Kronos were in compliance with debt covenants at September 30.
- Lead-pigment litigation remains unresolved; NL accrued no liability because it said loss was not probable or reasonably estimable. It also accrued no amounts for asbestos-related cases, citing uncertainty and inability to estimate. These matters could still materially affect results, financial condition or liquidity if outcomes or estimates change.
- Environmental liabilities are subject to estimation uncertainty; approximately five sites had no estimable cost range. Tax audits and a Canadian tax reassessment involving Kronos are pending; Kronos estimated the cash liability in the latter matter at approximately $15.9 million if fully assessed and said it had adequate accruals.
- NL said disclosure controls were effective as of September 30, 2012, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported earnings and cash generation is recurring, given the real-estate settlement, insurance recoveries, prior-year patent gain and contingent-consideration reversal.
- Kronos’ fourth-quarter pricing, volumes, production rates and sharply higher expected unit costs, and the resulting effect on NL’s equity-method earnings and dividends.
- Whether CompX demand, product mix, healthcare ergonomics sales and cost savings can offset weak office-furniture demand and raw-material or currency pressures.
- The adequacy and timing of environmental accruals, including sites where costs cannot yet be estimated, and the potential outcomes of lead-pigment, asbestos and tax matters.
- NL’s access to cash and affiliate support, the availability and terms of borrowing facilities, and the capacity of subsidiaries and affiliates to continue dividends.