NL Industries, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2013; unaudited. The filing identifies the registrant as NL Industries, Inc. (not “NLI Holdings, Inc.”). NL is primarily a holding company, operating through majority-owned CompX and holding an approximately 30% equity-method interest in Kronos Worldwide.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales, primarily CompX | $21.453 million | $20.428 million |
| Gross margin | $6.020 million; 28% of sales | $6.012 million; 29% of sales |
| Loss from operations | $2.853 million | $13.459 million |
| Equity in Kronos earnings (loss) | $(12.487) million | $41.612 million |
| Income (loss) from continuing operations attributable to NL stockholders | $(2.118) million; $(0.04) per share | $20.475 million; $0.42 per share |
| Operating cash flow | $(2.225) million | $(1.077) million |
| Investing / financing cash flow | $3.369 million / $(6.538) million | $(0.809) million / $(4.914) million |
- At March 31, cash and cash equivalents were $72.6 million; restricted cash brought total cash and restricted cash to approximately $79.0 million. Marketable Valhi shares were carried at $230.7 million, and the Kronos investment at $299.0 million. These investments are subject to market-price movements.
- Total debt was $18.23 million, all at CompX, including $1.0 million current maturities. NL had no borrowings under its affiliate revolving facility, with $40 million available, subject to Valhi’s discretion.
- Total assets were $700.5 million and total equity $408.9 million. The quarterly dividend remained $0.125 per share; $6.1 million was paid.
- NL’s net loss was partly offset by a $12.7 million income tax benefit. Comprehensive income attributable to NL stockholders was $26.9 million, principally reflecting $33.9 million of after-tax unrealized gains on marketable securities, partly offset by currency translation losses.
Material changes and operating drivers
- NL’s attributable continuing-operations result swung from $20.5 million income to a $2.1 million loss, mainly because its equity-method share of Kronos shifted from earnings of $41.6 million to a loss of $12.5 million. Q1 2012 also included discontinued Furniture Components operations, sold in December 2012; those operations contributed $0.6 million after tax in Q1 2012.
- CompX sales increased 5%, but operating income declined 9% to $1.4 million. Security Products sales rose 4% on improved postal-market demand, while its operating income fell 8%. Marine Components sales rose 11%, narrowing its operating loss.
- CompX’s gross margin percentage declined from 29% to 28%, primarily due to higher self-insured medical costs. Corporate expense fell to $4.9 million from $16.4 million, principally because environmental remediation expense was lower ($1.2 million versus $12.8 million). Insurance recoveries also decreased, to $0.6 million from $1.1 million.
- Kronos reported Q1 sales of $463.6 million, down 17%, and a net loss of $41.1 million versus income of $136.9 million. TiO₂ selling prices fell 21% year over year, while cost of sales rose 53%, reflecting higher feedstock costs and lower production volumes. Kronos also recorded a $6.6 million pre-tax debt-prepayment charge.
Outlook, risks and contingencies
- NL said it expects sufficient liquidity for short-term obligations, but results and cash availability depend substantially on subsidiary and affiliate performance and distributions. Management did not provide specific earnings guidance. CompX cited uncertain demand and said total sales growth for the rest of 2013 was uncertain; it planned continued cost, productivity and market-share initiatives.
- Kronos expected 2013 operating income to be significantly below 2012. It anticipated lower unit costs later in 2013 as higher-cost inventory was worked through, and announced TiO₂ price increases planned to begin in Q2; the ability to realize increases depends on market conditions. Demand, pricing and production remain exposed to global economic conditions and industry supply.
- Environmental remediation accruals were $48.5 million for approximately 50 sites; the estimated upper end of reasonably possible costs was approximately $139 million, including amounts accrued. Costs could exceed current estimates, and NL could not estimate ranges for about five sites.
- NL had not accrued liabilities for pending lead-pigment litigation, stating that liability was not considered probable or reasonably estimable; adverse outcomes could materially affect results, financial condition and liquidity. Asbestos-related personal-injury cases also remained unaccrued due to estimation uncertainty.
- Tax authorities were examining returns. Kronos disputed Canadian reassessments that could result in approximately $15.7 million of cash tax liability if fully assessed; the company said it had accrued adequately. Other key risks include commodity costs, currency movements, insurance recoveries, affiliate dividends, debt covenants and environmental or legal developments.
Important facts for investors to verify
- Whether Kronos TiO₂ pricing, demand, production rates and feedstock costs improved as management expected after Q1.
- The cash generation and dividend capacity of CompX and Kronos, and the availability and terms of NL’s $40 million affiliate facility.
- Changes in environmental accruals, site estimates and litigation exposure, including whether any lead-pigment or asbestos claims become estimable.
- Market values and liquidity implications of NL’s concentrated Valhi and Kronos equity holdings, including resale restrictions on Valhi shares.
- Whether the tax benefit and Kronos-related losses are recurring; the filing cautions that interim results may not indicate full-year performance.