NL Industries, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filed March 10, 2016. The filing is for NL Industries, Inc. (NYSE: NL), not “NLI Holdings, Inc.” NL is primarily a holding company: it owns 87% of CompX International, a component-products manufacturer, and a 30% noncontrolling interest in Kronos Worldwide, a titanium dioxide producer, accounted for under the equity method.
Key financial results
| Metric | 2015 | 2014 | Change / context |
|---|---|---|---|
| NL consolidated net sales | $109.0 million | $103.8 million | Up 5%; primarily CompX sales |
| Gross margin | $33.4 million; 30.6% of sales | $32.2 million; 31.1% of sales | Dollar margin rose with sales; percentage was broadly stable |
| Income from operations | $0.3 million | $2.8 million | Lower mainly because insurance recoveries declined |
| Equity in Kronos earnings (losses) | $(52.8) million | $30.2 million | Major driver of NL’s earnings reversal |
| Net income (loss) attributable to NL stockholders | $(23.9) million; $(0.49) per share | $28.5 million; $0.59 per share | Changed from profit to loss |
| Operating cash flow | $28.1 million | $23.6 million | Up $4.5 million |
| Capital expenditures | $4.3 million | $2.9 million | Substantially related to CompX |
| Cash, cash equivalents and restricted cash | $101.0 million | $78.0 million | Includes $3.2 million restricted cash |
| Total assets / total equity | $349.3 million / $165.3 million | $496.2 million / $251.5 million | Asset and equity declines included lower market value of investments and other comprehensive losses |
| Debt | NL and CompX: none. Kronos: approximately $341.0 million consolidated debt | NL and CompX: none | Kronos debt is at the equity-method investee, not NL consolidated debt |
Performance and material changes
- CompX sales increased 5% to $109.0 million, with operating income of $14.0 million versus $13.6 million in 2014. Security Products benefited from government customers; Marine Components grew on demand in the ski/wakeboard boat market.
- Kronos reported sales of $1.349 billion, down 18%, and a net loss of $173.6 million, compared with 2014 net income of $99.2 million. Average TiO2 selling prices fell 14%; sales volume increased 6%, while currency movements reduced sales by an estimated $138 million. NL’s share of Kronos’ results was a $52.8 million loss.
- Kronos recorded a $159.0 million noncash deferred-tax valuation allowance for German and Belgian operations, plus $21.7 million of workforce-reduction charges. NL’s reported 2015 results also included a $28.6 million income-tax benefit, including a $3.0 million noncash release of NL’s uncertain-tax-position reserve.
- NL recognized $3.7 million of insurance recoveries in 2015 versus $10.4 million in 2014. Corporate expense declined to $17.5 million from $21.3 million, including lower environmental and litigation costs.
- NL paid no common-stock dividends in 2014 or 2015; its regular quarterly dividend was suspended in May 2014. Operating cash flow was positive, while investing activities used $3.9 million and financing activities used $0.3 million in 2015.
- At year-end, current assets were $124.8 million and current liabilities $24.0 million. NL also had an undrawn, discretionary $40 million revolving facility from Valhi; management expected adequate liquidity for short-term obligations.
Outlook, risks and contingencies
- NL expected 2016 net income attributable to NL stockholders to exceed 2015, primarily from improved Kronos equity earnings and lower environmental costs, partly offset by lower CompX operating income.
- CompX expected continued strong demand, but said more than $5 million of 2015 government-security sales was not expected to recur in 2016. Kronos expected higher 2016 sales and production volumes, lower unit costs and improved operating income, but cautioned it could record an operating loss in first-quarter 2016. Its outlook depended on market conditions and achievement of TiO2 price increases.
- NL had accrued $113.1 million for environmental remediation and related matters at approximately 42 sites; the upper end of the estimated range was $166 million, including the accrual. Costs at five additional sites could not then be reasonably estimated. Actual costs may exceed current estimates.
- NL’s appeal remained pending in the California lead-pigment case. A 2014 judgment held NL and two other defendants jointly and severally liable for an aggregate $1.15 billion abatement award. NL said a loss was not probable or reasonably estimable and recorded no accrual, but acknowledged a material future charge and liquidity impact were possible depending on the appeal.
- Other key risks include cyclical TiO2 pricing and competition, Kronos’ leverage and debt covenants, dependence on distributions from subsidiaries and affiliates, raw-material supply and cost volatility, foreign-exchange movements, environmental obligations, and potential lead-pigment and other litigation. NL reported no material off-balance-sheet financing arrangements.
Important facts for investors to verify
- Track the California lead-pigment appeal and any developments that could change the probability, estimability or potential amount of a loss.
- Review updates to environmental remediation accruals, the $166 million estimated upper range, and the five sites with no estimable range.
- Assess Kronos’ debt, covenant compliance, cash generation and ability to improve TiO2 pricing and margins; its results are not consolidated in NL’s sales.
- Separate recurring operating performance from Kronos’ deferred-tax valuation allowance, workforce charges, and NL’s insurance recoveries and tax-reserve release.
- Confirm liquidity at NL parent level and the sustainability of distributions from CompX, Kronos and Valhi; future NL dividends are discretionary and were suspended.