Business context and reporting period
The filing is NL Industries, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. The request identifies NLI Holdings, Inc., but the filing itself is for NL Industries, Inc. NL is primarily a holding company: it consolidates CompX International, a component-products manufacturer, and accounts for its approximately 30% interest in Kronos Worldwide, a titanium dioxide producer, under the equity method. Valhi owned approximately 83% of NL. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $30.0 million | $27.0 million | $90.8 million | $86.9 million |
| Gross margin | $9.6 million; 31.9% | $8.2 million; 30.4% | $30.3 million; 33.4% | $27.4 million; 31.5% |
| Income (loss) from operations | $3.5 million | $1.0 million | $(59.9) million | $1.7 million |
| Equity in Kronos earnings | $9.9 million | $22.4 million | $55.0 million | $93.4 million |
| Net income (loss) attributable to NL stockholders | $(15.4) million; $(0.32) per share | $17.5 million; $0.36 per share | $(43.8) million; $(0.90) per share | $67.0 million; $1.38 per share |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $22.3 million | $15.2 million |
CompX’s sales rose 11% in Q3 and 4% year to date. Management attributed improvement to stronger security-products demand and growth in marine components; higher volumes, production efficiencies and fixed-cost leverage improved margins. Kronos’s Q3 sales fell 12% and net income declined to $32.6 million from $73.8 million, while its nine-month sales increased 3% but net income fell to $181.0 million from $307.1 million. NL’s equity-method earnings from Kronos consequently declined.
NL reported a $62.0 million litigation-settlement expense in Q2 and a $55.9 million nine-month loss on marketable equity securities. The latter followed adoption of a standard that requires fair-value changes to be recognized in earnings rather than other comprehensive income. The Valhi shares held by NL fell in market value from $88.7 million at year-end 2017 to $32.8 million at September 30, 2018.
At September 30, NL had $123.0 million of cash and cash equivalents, $4.3 million of restricted cash, and $174.4 million of current assets against $95.3 million of current liabilities. Cash, cash equivalents and restricted cash totaled $128.4 million, up from $102.9 million at year-end 2017. NL had $0.5 million drawn on its $50 million Valhi revolving facility, leaving $49.5 million available; CompX had no debt. NL reported $111.5 million in accrued environmental remediation costs, including $17.8 million current and $93.7 million noncurrent. Total equity was $311.3 million, down from $353.1 million at year-end.
Operating cash flow was $22.3 million; investing activities provided $3.4 million, mainly reflecting net repayments on affiliate promissory notes, while capital expenditures were $2.0 million. The filing reports $25.4 million net cash growth from operating, investing and financing activities.
Material changes, outlook and risks
- NL’s nine-month loss primarily reflects the California lead-pigment litigation charge, the securities fair-value loss and lower Kronos equity earnings; these items more than offset CompX’s improved operating results.
- For CompX, management expected full-year 2018 sales and operating earnings to exceed 2017, citing strong Q3 performance and marine-product growth. The company planned to monitor demand and manage costs; no consolidated NL earnings guidance was provided.
- Kronos expected 2018 sales and operating income to be comparable to 2017, with lower sales volumes and higher costs offsetting higher average selling prices. It expected lower net income than 2017, which included substantial tax benefits. Management noted that Q4 customer-inventory movements could contribute to selling-price declines.
- The proposed $80 million Santa Clara litigation settlement was denied approval by the trial court in September 2018. NL appealed; the filing says there is no assurance the appeal will be heard or succeed. Separately, the court set a recalculated abatement fund of $409 million for the underlying case. NL’s allocation remains unresolved, and further loss accruals could materially affect results, financial position or liquidity.
- Environmental remediation obligations are uncertain: approximately $111 million was accrued for about 37 sites, with estimated reasonably possible costs up to approximately $130 million, including the accrual; costs at five additional sites could not be reasonably estimated. Other risks include lead-related and asbestos litigation, insurance-recovery uncertainty, affiliate dividend dependence, marketable-security price fluctuations, Kronos cyclicality, raw-material costs, foreign exchange and potential production or demand changes.
- NL expected sufficient liquidity for near-term obligations. Management estimated 2018 contributions to pension and other postretirement plans of approximately $3.4 million; capital-project purchase commitments were $0.6 million.
Investor verification priorities
- Confirm the registrant: the provided filing is for NL Industries, Inc., not NLI Holdings, Inc.
- Track the Santa Clara appeal and any subsequent settlement approval, allocation of the $409 million abatement fund, and resulting changes to NL’s litigation accruals and cash requirements.
- Review environmental-remediation estimates, including the $130 million stated upper end and sites for which costs remain unestimable.
- Separate recurring CompX performance and Kronos equity earnings from the securities valuation loss, litigation charge and prior-year Kronos tax benefits when assessing earnings trends.
- Monitor Kronos’s volumes, pricing, feedstock costs and inventory levels, and NL’s liquidity, affiliate distributions and restricted cash.