Business context and reporting period
The supplied filing is NL Industries, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2014; this differs from the metadata company name, NLI Holdings, Inc. NL is primarily a holding company, consolidating majority-owned CompX International and accounting for its approximately 30% interest in Kronos Worldwide under the equity method.
Financial results and liquidity
Amounts below are in millions, except per-share data and percentages.
| Metric | Q1 2013 | Q1 2014 |
|---|---|---|
| Net sales | $21.5 | $25.8 |
| Gross margin | $6.0; 28% | $7.7; 30% |
| Operating loss | $(2.9) | $(0.1) |
| Net income (loss) attributable to NL stockholders | $(2.1) | $3.8 |
| Diluted EPS | $(0.04) | $0.08 |
| Operating cash flow | $(2.2) | $0.7 |
- CompX sales rose 20% to $25.8 million and operating income increased 129% to $3.3 million; operating margin improved to 13% from 7%. Security Products drove growth, while Marine Components remained slightly loss-making.
- NL had $52.6 million cash and cash equivalents, $3.2 million restricted cash, and $126.8 million in Valhi shares at quarter-end. Current assets were $88.6 million versus current liabilities of $18.9 million.
- NL and CompX had no outstanding debt; the $40 million Valhi revolving facility was unused, though any borrowing is at Valhi’s discretion. Kronos reported $346.6 million long-term debt, up from $180.4 million at year-end, and was in covenant compliance subject to a waiver on its European facility.
- Environmental remediation liabilities totaled $113.2 million, including $4.8 million current. First-quarter capital expenditures were $0.8 million. NL received $5.3 million in Kronos dividends.
- Comprehensive loss attributable to NL stockholders was $80.3 million, largely reflecting an $83.9 million after-tax unrealized loss on Valhi shares. Those shares fell from $17.58 to $8.82 during the quarter; the loss affected other comprehensive income, not reported net income.
Changes versus prior-year quarter
- NL moved from a $2.1 million attributable loss to $3.8 million income, mainly due to stronger CompX operating results and a swing in Kronos equity earnings from a $12.5 million loss to $4.3 million income.
- Kronos’ own sales declined 9% to $420.1 million, while operating results improved from a $46.9 million loss to $26.0 million income. Lower feedstock and production costs more than offset weaker selling prices and 7% lower sales volumes.
- Operating cash flow improved by $2.9 million year over year, including $2.4 million in insurance recoveries in Q1 2014; higher receivables and inventory partly offset the improvement.
- Total assets fell to $559.7 million from $685.8 million at December 31, 2013, primarily alongside the sharp decline in the market value of Valhi shares. NL stockholders’ equity fell to $275.1 million from $355.4 million.
Outlook, risks and unusual items
- Management said CompX’s robust first-quarter demand should not be taken as a full-year sales trend because of one-time projects and seasonality, while overall demand signals remained positive. Commodity raw-material cost volatility could pressure margins.
- NL expected 2014 corporate expenses to be below 2013, mainly due to lower anticipated environmental costs, but litigation and remediation costs could be higher than expected.
- Kronos expected 2014 operating income and sales volumes to exceed 2013 levels, citing lower feedstock costs, potential selling-price increases, and resumed Canadian production. It also expected to operate below capacity; outcomes depend on demand, pricing, costs, currency rates, and competition.
- NL paid no first-quarter 2014 dividend. In May 2014, the board suspended the regular quarterly dividend. Future dividends are discretionary.
- Major litigation contingency: In the Santa Clara lead-paint case, the court entered a judgment ordering NL and two co-defendants to fund an aggregate $1.15 billion in abatement. NL’s new-trial motion was denied; NL appealed in March 2014. NL said it did not consider a loss probable and recorded no accrual, but warned a future loss could materially affect results, financial position, and liquidity.
- NL also disclosed approximately $113 million accrued environmental remediation costs, with an estimated upper end of approximately $153 million for sites where costs could be estimated; costs at five additional sites could not be estimated. Tax examinations and a Canadian tax reassessment involving Kronos (potential cash tax of approximately $15.2 million if fully upheld) remain contingencies; the company believes its accruals are adequate.
Important facts for investors to verify
- Progress and potential financial impact of the Santa Clara appeal, including whether NL’s assessment of probability or estimability changes.
- Environmental remediation developments, particularly whether the estimated range expands or currently unestimable sites become estimable.
- Kronos’ debt, covenant waiver status, production restart, selling prices, volumes, and ability to deliver its 2014 outlook.
- CompX’s demand after the first-quarter one-time projects and the effect of raw-material costs on margins.
- NL’s liquidity and parent-level cash resources, the availability of discretionary Valhi borrowing, and the implications of the dividend suspension.
- Valhi share-price exposure: its market value materially affected NL’s assets, equity, and other comprehensive income in the quarter.