NL Industries, Inc. — Q3 2019 Form 10-Q
Issuer and period: The filing is for NL Industries, Inc. (NYSE: NL), for the quarter and nine months ended September 30, 2019. NL is primarily a holding company: it consolidates majority-owned CompX International, a component-products manufacturer, and accounts for its 30% Kronos Worldwide interest using the equity method. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $29.7 | $30.0 | $94.6 | $90.8 |
| Gross margin | $9.5 | $9.6 | $30.0 | $30.3 |
| Income (loss) from operations | $5.8 | $3.5 | ($4.6) | ($59.9) |
| Equity in Kronos earnings | $5.5 | $9.9 | $23.6 | $55.0 |
| Net income (loss) attributable to NL stockholders | ($1.5) | ($15.4) | $19.5 | ($43.8) |
| Basic and diluted earnings (loss) per share | ($0.03) | ($0.32) | $0.40 | ($0.90) |
CompX generated the reported sales. Its gross margin was 32% in Q3 2019 versus 32% a year earlier, and 32% for the first nine months versus 33%. CompX operating income was $4.3 million for Q3 and $14.2 million year to date, down 6% and 5%, respectively. Security Products’ weaker sales and margins weighed on results; Marine Components grew, notably in the towboat market.
Cash provided by operations was $17.4 million for the first nine months, compared with $22.3 million in 2018. Capital expenditures were $2.5 million. Cash, cash equivalents and restricted cash totaled $137.6 million at September 30, 2019, including $109.4 million of unrestricted cash. Total assets were $555.3 million and equity was $323.5 million. NL reported $0.5 million of debt under its affiliate facility, with $49.5 million available; CompX had no debt outstanding. Kronos is an equity-method investee, not consolidated debt of NL.
Changes versus comparable periods
- Q3 attributable loss narrowed to $1.5 million from $15.4 million. The comparison benefited from a smaller loss on marketable equity securities ($15.4 million versus $35.6 million) and a $4.4 million gain on excess property sold in 2019; lower Kronos earnings partly offset those benefits.
- Nine-month results swung to $19.5 million of attributable income from a $43.8 million loss. The prior-year period included a $62.0 million litigation-settlement charge, versus $19.3 million in 2019. The 2019 comparison also benefited from a much smaller marketable-securities loss ($0.4 million versus $55.9 million), insurance recoveries, the property-sale gain and lower corporate costs. Kronos equity earnings declined substantially, to $23.6 million from $55.0 million.
- Net sales rose 4% for the nine-month period, despite a 1% Q3 decline. Marine Components sales grew 31% year to date, while Security Products sales were down 1%.
- Operating cash flow fell $4.9 million year over year, including the $25.0 million initial payment for the California lead-pigment settlement.
Outlook, risks and unusual items
- NL expected 2019 sales to exceed 2018 absent further economic slowdown, and expected net general corporate expenses to be lower than in 2018. Management noted weakening conditions among Security Products customers and moderating Marine Components growth; it planned to monitor orders, staffing and discretionary spending. No full-year earnings or revenue guidance amount was provided.
- Kronos expected 2019 sales volumes and total sales to be higher than 2018, but operating income lower, as higher volumes were expected to be more than offset by lower average selling prices and higher raw-material and operating costs. It expected selling prices to remain stable for the rest of 2019, assuming conditions described in the filing.
- The Santa Clara lead-pigment case was dismissed with prejudice after approval of a global settlement. NL’s share is $101.7 million nominally; NL paid $25.0 million in September 2019, with the remaining $76.7 million payable in six annual installments. The recorded settlement liability was carried at present value: $11.8 million current and $59.8 million noncurrent. Restricted cash included $15.6 million transferred from an insurance-recovery receivable and a further $9.0 million placed in escrow.
- Environmental remediation liabilities were $95.0 million across approximately 32 sites; the upper end of the reasonably possible estimated range was approximately $115 million, including accrued amounts. Costs for about five other sites could not be reasonably estimated. Actual costs could exceed accruals or arise at sites with no current estimate.
- NL reported ongoing lead-pigment, environmental, insurance-coverage and other litigation. It said the outcomes of lead-pigment and environmental matters are uncertain and could materially affect earnings, financial condition or liquidity. A new Indiana state-court complaint was filed by Refined Metals in October 2019; NL stated it would defend the claims.
- NL expected sufficient liquidity for short-term obligations, while noting dependence on cash flows and distributions from subsidiaries and affiliates. Other identified risks include economic and demand conditions, TiO₂ prices and feedstock costs, currency movements, environmental obligations, litigation and insurance-recovery timing.
Important facts for investors to verify
- Whether the expected recovery in CompX sales and margins materializes, particularly in Security Products and Marine Components.
- Kronos’s subsequent pricing, sales volumes, feedstock costs and earnings, given NL’s dependence on equity-method earnings and affiliate dividends.
- Cash availability and restrictions, including the settlement escrow and the extent to which subsidiary cash can support parent-company needs.
- Future settlement payments, insurance recoveries and any changes to the $95.0 million environmental accrual or estimated exposure range.
- Whether non-operating valuation swings in marketable securities continue to materially affect reported earnings.