Business context and reporting period
This is NL Industries, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2020. The supplied filing identifies the registrant as NL Industries, Inc. NL is primarily a holding company: it consolidates majority-owned CompX International, a maker of security and marine components, and accounts for its approximately 30% interest in Kronos Worldwide, a titanium dioxide (TiO₂) producer, using the equity method. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net sales | $32.3 | $31.2; up 4% |
| Gross margin | $10.4; 32% of sales | $9.6; 31% of sales |
| Income from operations | $2.5 | $2.5 |
| Income (loss) before tax | $(0.8) | $18.3 |
| Net income attributable to NL stockholders | $1.9 | $15.2 |
| Basic and diluted EPS | $0.04 | $0.31 |
| Cash provided by operating activities | $3.6 | $1.8 |
CompX sales rose 4%, with operating income increasing 17% to $5.0 million. Security Products sales increased 3% and Marine Components sales increased 6%; favorable customer and product mix supported margins in both units. NL’s equity in Kronos earnings decreased to $8.2 million from $9.2 million. Kronos reported sales of $421.0 million, down 4%, and net income of $27.0 million, down from $30.3 million; lower TiO₂ sales volumes and higher production costs pressured results.
NL’s Q1 loss before tax largely reflects a $12.1 million loss on marketable equity securities, versus a $5.5 million gain in Q1 2019. The securities are shares of parent Valhi: their reported value declined from $26.9 million at year-end to $14.8 million at March 31. NL recorded an income tax benefit of $3.3 million, compared with $2.6 million of tax expense a year earlier. Comprehensive loss attributable to NL stockholders was $7.2 million, including $9.2 million of other comprehensive loss, principally currency translation.
At March 31, NL had $161.6 million of cash, cash equivalents and restricted cash, versus $157.9 million at year-end. Current assets were $172.1 million and current liabilities $26.9 million. Debt was $0.5 million under an affiliate revolving facility, with $49.5 million available; NL reported covenant compliance. CompX had no debt and held $63.2 million of cash. Operating cash flow improved year over year; capital expenditures were $0.4 million. NL paid a $0.04-per-share dividend, totaling $2.0 million. The filing states NL expects sufficient liquidity for obligations through March 31, 2021, subject to actual developments.
Material changes, outlook, risks and contingencies
- COVID-19 outlook: The pandemic had limited operating impact in Q1, but customer requests to delay or postpone shipments began in late March. NL expected reduced revenue and operating income in Q2 versus Q1 and lower sales and earnings for the remainder of 2020; it provided no numerical forecast. CompX temporarily closed its Illinois facility for one week in late April and then resumed production. Further customer, supplier or facility disruptions remained possible.
- Kronos exposure: Kronos expected 2020 sales and earnings below its original plan because of pandemic-related uncertainty. Its Q1 sales volumes fell 5%; the company cited higher raw material and production costs. Kronos had more than $341 million in cash and more than $200 million available under revolvers at quarter-end. NL’s equity-method earnings and expected affiliate dividends are material to its results and liquidity.
- Environmental liabilities: NL accrued $94.2 million for remediation and related costs at approximately 32 sites; the estimated upper end of reasonably possible costs was approximately $115 million, including the accrual. Costs at five sites could not be reasonably estimated. Actual costs could exceed accruals, and timing of payments is uncertain.
- Lead-pigment litigation: NL reported a $72.3 million combined current and long-term litigation-settlement liability, principally associated with the Santa Clara settlement. NL states the case was dismissed with prejudice under a global settlement and denies liability. It has not accrued other pending lead-pigment cases, stating that loss is not considered probable or reasonably estimable; adverse future developments could materially affect results and liquidity.
- Other notable items: NL received $6.3 million in Kronos dividends, as in Q1 2019. Kronos’ Q1 results included a $1.5 million insurance-settlement gain, equivalent to about $0.01 per NL share through equity-method earnings. NL disclosed the April 22, 2020 death of Serena Simmons and described the resulting voting arrangements; Ms. Simmons and the Family Trust may be deemed to control Contran and indirectly NL.
- Principal risks: COVID-19 effects on demand and operations, TiO₂ industry cyclicality and pricing, raw material and currency changes, environmental remediation, litigation outcomes, insurance recoveries, and the ability of affiliates to maintain dividends are among the risks discussed.
Important facts for investors to verify
- Track post-quarter CompX customer orders, shipment deferrals, plant operations and the extent of any further COVID-related disruption.
- Monitor Kronos’ TiO₂ volumes, pricing, costs, cash position and dividends, which influence NL’s earnings and parent-level liquidity.
- Review movements in Valhi share value and the resulting reported gains or losses on NL’s marketable securities.
- Assess changes in environmental remediation estimates and the status of lead-pigment litigation, including settlement payments and any new loss accruals.
- Confirm liquidity, affiliate borrowing availability, dividend decisions and covenant compliance in subsequent filings; NL’s outlook contains no quantified full-year guidance.