Business context and reporting period
NL Industries, Inc. (NYSE: NL) filed this unaudited Form 10-Q for the quarter ended March 31, 2019. 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. Valhi owned approximately 83% of NL.
Financial performance and position
Amounts are in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q1 2018 | Q1 2019 |
|---|---|---|
| Net sales | $28.4 | $31.2 |
| Gross margin | $9.5 | $9.6 |
| Gross margin as % of sales | 33.4% | 30.9% |
| Income (loss) from operations | $(2.8) | $2.5 |
| Equity in Kronos earnings | $21.5 | $9.2 |
| Net income attributable to NL stockholders | $14.2 | $15.2 |
| Basic and diluted earnings per share | $0.29 | $0.31 |
| Cash provided by operating activities | $1.8 | $1.8 |
- CompX sales increased 10%, while operating income declined 2% to $4.3 million. Security Products sales rose 3%, but operating income fell 10%; Marine Components sales rose 49% and operating income rose 54%.
- NL’s Q1 2019 operating income included $2.1 million of corporate expense, versus $8.0 million in Q1 2018. Lower environmental costs and litigation fees contributed to the improvement.
- NL’s share of Kronos earnings fell 57%. Kronos reported sales of $436.5 million and net income of $30.3 million, versus $430.4 million and $70.7 million a year earlier; lower TiO₂ prices and higher feedstock and other production costs pressured results.
- Net income also benefited from a $5.5 million unrealized gain on marketable securities, compared with a $1.6 million loss in Q1 2018. NL’s shares of Valhi were valued at $33.2 million at March 31, 2019.
- At March 31, NL had $111.4 million of cash and cash equivalents and $3.8 million of restricted cash. Current assets were $165.7 million and current liabilities $77.0 million.
- Debt was $0.5 million under an affiliate revolving facility; $49.5 million remained available. CompX had no outstanding debt. NL reported compliance with its facility covenants.
- Investing cash outflow was $6.4 million, including net $6.0 million of additional lending to Valhi under a promissory note. Cash, cash equivalents and restricted cash decreased $4.8 million during the quarter to $116.2 million.
- Environmental remediation accruals totaled $97.0 million, including $4.7 million current and $92.3 million noncurrent. NL stockholders’ equity was $300.1 million.
Changes, outlook and material risks
- Sales growth was driven primarily by Marine Components demand and higher Security Products sales to existing government customers. CompX’s margin percentage weakened due to higher labor and medical costs and less favorable Marine Components mix.
- Management expected 2019 sales to exceed 2018, with full-year profitability comparable to 2018. It expected lower net general corporate expenses, principally from lower anticipated litigation costs. These are expectations, not guarantees.
- Kronos expected 2019 sales volumes to increase, but anticipated lower operating income than in 2018 because of lower selling prices and higher raw-material costs. Management noted the possibility of price stabilization or modest increases later in 2019 if customer inventories declined as expected.
- The proposed Santa Clara lead-paint litigation settlement would have NL pay $65 million, with a former insurer contributing $15 million. The trial court had denied approval; NL’s appeal was pending, and the court had set the abatement fund at $401 million after an offset. If the settlement is not approved, NL’s share and ultimate liability remain uncertain; the filing warns of possible additional accruals with material effects on results, financial position and liquidity.
- NL reported approximately $97 million accrued for environmental matters at 32 sites; the upper end of its estimable cost range was approximately $117 million, including the accrual. Costs at five other sites could not be reasonably estimated. The filing also describes lead-pigment claims, insurance-recovery uncertainty, and an April 2019 EPA order concerning the Gowanus Canal site.
- NL expected to have sufficient liquidity for short-term obligations, but noted that liquidity depends in part on operating cash flows and distributions from subsidiaries and affiliates. The filing identifies risks including cyclical TiO₂ markets, pricing and input-cost changes, currency movements, environmental obligations and litigation.
Important facts for investors to verify
- Developments in the Santa Clara settlement appeal, entry of judgment, and NL’s potential share of the abatement fund.
- Changes in the $97 million environmental accrual, the estimated upper-range exposure, and costs at sites that remain unestimable.
- Whether CompX can sustain sales growth while managing labor, medical, product-mix and margin pressures.
- Whether Kronos’ selling prices, feedstock costs and earnings evolve in line with management’s outlook.
- Cash generation, affiliate lending and dividends, and continued availability of the $49.5 million revolving credit capacity.