NL Industries, Inc. — Q2 2011 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 30, 2011. NL is primarily a holding company: it consolidates majority-owned CompX, a component-products manufacturer, and accounts for its 30% interest in Kronos Worldwide, a titanium dioxide producer, under the equity method. The filing is by NL Industries, Inc.; the request metadata names NLI Holdings, Inc.
Key financial results
| Metric | Q2 2010 | Q2 2011 | Six months 2010 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $34.4 million | $35.2 million | $67.2 million | $70.0 million |
| Gross margin | $8.9 million (25.7%) | $9.8 million (27.9%) | $18.0 million (26.7%) | $18.5 million (26.4%) |
| Operating income (loss) | $0.5 million | $(9.0) million | $(16.4) million | $(3.3) million |
| Net income attributable to NL stockholders | $4.3 million | $16.9 million | $2.0 million | $34.1 million |
| EPS attributable to NL stockholders | $0.09 | $0.35 | $(0.01) | $0.70 |
| Operating cash flow | Not stated by quarter | $(7.0) million | $22.0 million |
Q2 operating loss reflected $12.3 million of corporate expense and other items, including increased environmental remediation costs. Earnings were supported by $27.1 million of equity income from Kronos in Q2 and $45.4 million for the first half. Kronos’ own first-half sales rose 37% to $957.9 million and operating income rose to $246.6 million, principally on higher TiO₂ selling prices.
Liquidity, debt and balance sheet
- At June 30, cash and cash equivalents were $7.0 million and restricted cash was $6.6 million, totaling $13.6 million. Unrestricted cash was down from $15.5 million at December 31, 2010.
- NL reported $56.7 million of total debt, including $11.0 million current maturities, compared with $74.5 million at year-end. Six-month financing cash outflow was $29.9 million, including $22.4 million of debt repayments and $12.2 million of dividends.
- Total assets were $709.2 million, up from $553.7 million; total equity was $379.3 million, up from $263.9 million. The increase in assets and equity included a substantial rise in the market value of available-for-sale Valhi and TIMET shares, with unrealized gains recorded in other comprehensive income.
- NL had a $15.0 million promissory note receivable and $47.2 million accrued environmental remediation and related costs. Valhi had agreed to lend NL up to $40 million, at its discretion; $1.0 million was outstanding at quarter-end.
- Management expected sufficient liquidity for short-term obligations through June 30, 2012. CompX and Kronos were reported in compliance with debt covenants at June 30.
Changes, outlook and material items
- Compared with Q2 2010, sales increased 2% and gross margin improved, while NL moved from slight operating income to an operating loss. Net income increased mainly because of higher Kronos earnings.
- For the first half, net income improved markedly versus 2010, when results included a $32.2 million litigation settlement expense and $18.3 million of insurance recoveries. 2011 included a $7.5 million CompX patent-litigation settlement gain, partly offset by higher environmental expense; results also reflect differing Kronos tax items across periods.
- Environmental remediation expense was $9.9 million in the first half of 2011, versus a $0.9 million credit in the first half of 2010. The environmental accrual increased to $47.2 million; the estimated upper end of reasonably possible costs for estimable matters was approximately $80 million. Costs for about five sites could not be estimated.
- CompX said customer orders were flat late in Q2 and the near-term direction of sales was uncertain. It cited raw-material cost increases of approximately 14%–22% versus the first half of 2010, competitive limits on passing costs through, and possible adverse currency effects. It expected consolidation and other efficiency initiatives to support productivity.
- Kronos expected strong TiO₂ demand, near-full production, further significant selling-price increases, and higher 2011 operating income than in comparable 2010 periods. It forecast 2011 production cost per metric ton to rise approximately 10%–15% versus 2010, with price increases expected to offset the increase. These expectations depend on market demand, competition, costs, currency and capacity developments.
- In July 2011, CompX borrowed approximately $5 million to fund an acquisition for approximately $5 million upfront, with up to $1.5 million additional contingent consideration. The filing said the acquisition’s pro forma effect was not material.
Risks, contingencies and governance
NL disclosed ongoing lead-pigment, asbestos-related and environmental litigation. It had not accrued amounts for pending lead-pigment cases or asbestos claims because liability was not considered probable or reasonably estimable; adverse outcomes or additional environmental obligations could materially affect earnings, financial condition or liquidity. NL also noted uncertain insurance recoveries, tax examinations, commodity and currency exposure, cyclicality and reliance on distributions from subsidiaries and affiliates. Management reported disclosure controls and procedures were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Kronos’ pricing, demand and near-capacity production outlook materialized, and how its earnings and dividends affected NL’s cash flow.
- Movement in environmental remediation accruals, the estimated exposure above accrued amounts, and developments at sites where costs remain unestimable.
- CompX’s order trends, raw-material cost recovery, currency impacts and performance after the facility consolidation and July acquisition.
- NL’s liquidity and debt repayment capacity, including reliance on affiliate distributions and Valhi financing available at Valhi’s discretion.
- Developments in lead-pigment, asbestos, insurance and tax matters that could change recognized liabilities or cash requirements.