Business context and reporting period
NL Industries, Inc. filed this Form 10-K for the fiscal year ended December 31, 2012. The request identifies the company as NLI Holdings, Inc.; the filing itself is for NL Industries, Inc. NL is primarily a holding company, with an 87% interest in CompX International, a component-products manufacturer, and a 30% noncontrolling interest in Kronos Worldwide, a titanium dioxide (TiO₂) producer accounted for under the equity method. NL’s reported net sales principally reflect CompX; Kronos’s sales are not consolidated.
Financial performance and key metrics
| Metric | 2012 | 2011 |
|---|---|---|
| Net sales | $83.2 million | $79.8 million |
| CompX gross margin | $24.3 million; 29% of sales | $24.1 million; 30% of sales |
| CompX income from operations | $5.4 million | $6.4 million |
| Consolidated loss from operations | $8.1 million | $0.7 million |
| Equity in Kronos earnings | $66.4 million | $97.6 million |
| Income from continuing operations attributable to NL stockholders | $56.7 million; $1.16 per share | $78.1 million; $1.61 per share |
| Net income attributable to NL stockholders | $74.5 million; $1.53 per share | $81.7 million; $1.68 per share |
| Cash provided by operating activities | $18.0 million | $48.2 million |
| Cash provided by investing activities | $92.2 million | $9.8 million |
| Cash used in financing activities | $44.1 million | $61.5 million |
| Cash and cash equivalents, including restricted cash | $85.0 million | $15.0 million |
| NL consolidated debt | $18.5 million | $37.3 million |
| Total assets | $680.8 million | $761.2 million |
Fourth-quarter 2012 results: net sales were $19.3 million; income from continuing operations attributable to NL stockholders was $2.6 million ($0.05 per share); discontinued operations contributed $14.9 million ($0.31 per share); and total net income attributable to stockholders was $17.5 million ($0.36 per share).
Material changes versus the prior comparable period
- Annual net sales rose 4%, but CompX operating income fell 16%, reflecting higher costs and expenses; its operating margin declined from 8% to 7%.
- Kronos’s 2012 net sales increased 2% to $1.98 billion, while operating income fell 34% to $359.6 million and net income fell to $218.5 million from $321.0 million. Lower sales volumes, sharply higher feedstock costs, reduced production, and unabsorbed fixed costs pressured results.
- NL’s equity in Kronos earnings declined 32%. NL’s continuing-operations income attributable to stockholders fell 27%.
- NL sold CompX’s Furniture Components business on December 28, 2012, for approximately $58.0 million net cash proceeds and recorded a $23.7 million pretax gain. The sale contributed $17.8 million to NL-attributable discontinued-operations income, including the gain.
- Operating cash flow declined by $30.2 million, notably reflecting lower Kronos dividends and insurance recoveries. Investing cash flow included proceeds from the business disposal, TIMET shares, and real estate-related settlements and sales.
Outlook, commentary, risks, and unusual items
- NL expected 2013 income from continuing operations attributable to stockholders to be below 2012, primarily because lower Kronos earnings were expected. Kronos separately expected 2013 operating income to be significantly lower than 2012, despite anticipating improved demand and seeking price increases.
- CompX cited uncertain customer demand and expected commodity raw-material prices to rise in 2013. It planned continued cost-control, lean-manufacturing, and product-development efforts. Estimated 2013 CompX capital expenditures were approximately $3.6 million.
- NL reported $48 million accrued for environmental remediation at approximately 50 sites; the estimated upper end of reasonably possible costs for estimable sites was approximately $144 million, including the accrual. Costs at five sites could not be estimated.
- NL did not accrue for pending lead-pigment litigation because it said a loss was not considered probable and could not be reasonably estimated. The filing warns that an adverse outcome could materially affect earnings, financial condition, and liquidity. Asbestos claims also remained pending; no liability was accrued.
- Other 2012 items included a $16.6 million pretax gain on the sale of TIMET shares, a $15.0 million real-estate litigation settlement gain, a $3.2 million gain on other property sales, a $6.4 million goodwill impairment at insurance-brokerage subsidiary EWI, and $1.2 million of write-downs and losses on assets held for sale.
- NL stated it expected sufficient liquidity for short-term obligations and had an undrawn $40 million revolving facility from Valhi, although any loan is at Valhi’s discretion. NL depends significantly on distributions from subsidiaries and affiliates; those entities are not obligated to pay dividends.
- Governance and concentration considerations include Valhi’s approximately 83% ownership of NL and the filing’s statement that Harold C. Simmons may be deemed to control NL. The filing also reports related-party service arrangements and shared insurance arrangements.
Important facts for investors to verify
- Reconcile the reported $1.53 full-year EPS with continuing-operations EPS of $1.16 and discontinued-operations EPS of $0.37; assess how much 2012 earnings depended on the Furniture Components sale and other gains.
- Review Kronos’s 2013 results against management’s forecast of significantly lower operating income, including TiO₂ selling prices, sales volumes, feedstock costs, and production rates.
- Monitor environmental accruals and potential exposure above the $48 million reserve, as well as developments in lead-pigment, asbestos, and insurance-coverage litigation.
- Confirm liquidity available to NL itself versus cash held by CompX, and assess the reliability of anticipated affiliate dividends and access to the Valhi facility.
- Review the terms and ongoing related-party arrangements, including intercorporate service fees; NL expected approximately $24 million of such fees in 2013.