Business context and reporting period
The supplied filing is NL Industries, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2013; it does not identify NLI Holdings, Inc. as the registrant. NL is primarily a holding company, consolidating majority-owned CompX International, which makes security and marine components, and accounting for its approximately 30% Kronos Worldwide interest under the equity method. The Furniture Components business was sold in December 2012, so its prior-year results are presented as discontinued operations.
Financial performance and position
Amounts are in millions of dollars, except per-share data and where noted.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | 24.2 | 21.3 | 69.7 | 63.9 |
| Gross margin | 7.5 | 6.3 | 21.1 | 18.8 |
| Loss from operations | (0.4) | (0.6) | (15.7) | (1.6) |
| Equity in Kronos earnings (loss) | (9.1) | 10.7 | (31.9) | 72.0 |
| Net income (loss) attributable to NL stockholders | (5.9) | 10.0 | (22.3) | 57.0 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | 7.4 | 9.4 |
- CompX sales increased 14% in Q3 and 9% year to date. Its operating income was $3.0 million for Q3 and $7.3 million year to date; overall gross margin was 31% and 30%, respectively.
- Q3 loss per NL share was $0.12, versus earnings of $0.21 including discontinued operations in Q3 2012; nine-month loss per share was $0.46, versus earnings of $1.17 in 2012. The comparable 2012 continuing-operations figures were $0.18 and $1.11 per share.
- NL reported a $3.1 million income tax benefit for Q3 and a $23.8 million benefit for the first nine months, primarily reflecting lower earnings.
- At September 30, cash and cash equivalents were $52.2 million and restricted cash was $5.0 million. Current assets were $88.5 million and current liabilities $22.4 million. Marketable securities were $286.9 million; the Kronos investment had a $280.1 million carrying value and $545.5 million quoted market value.
- CompX prepaid its remaining $18.5 million note debt in July; NL reported no debt at September 30 and had a $40 million Valhi revolving facility fully available. Kronos, an equity-method investee, reported $203.3 million of long-term debt.
- Nine-month cash flow included $7.4 million from operations, $3.9 million from investing activities, and $37.1 million used in financing; cash declined $25.8 million to $52.2 million. Dividends paid were $18.3 million, or $0.375 per NL share.
Material changes and unusual items
- The earnings reversal was driven mainly by NL’s share of Kronos’s losses in 2013 versus earnings in 2012. Kronos’s results deteriorated amid lower TiO2 prices and higher feedstock costs; its Q3 and nine-month sales fell 11% and 14%, respectively, while it recorded a $35 million litigation settlement charge.
- NL’s 2012 nine-month comparison included a $15.0 million gain from a real-property condemnation settlement; there was no corresponding 2013 gain. The 2013 nine-month results also included NL’s share of Kronos debt-prepayment charges.
- NL’s other comprehensive income included a $71.5 million nine-month net gain on marketable securities, chiefly Valhi stock. NL’s comprehensive income attributable to stockholders was $50.8 million for the nine months despite the net loss.
- Environmental remediation accruals rose to $58.0 million from $48.0 million at year-end 2012, including $12.7 million of additions charged to expense and $2.7 million of payments.
- CompX reduced its regular quarterly dividend from $0.125 to $0.05 per share beginning in Q2 2013. NL expected to receive approximately $27 million in 2013 dividends from Kronos, CompX and Valhi, based on stated rates and holdings.
Outlook, risks and contingencies
- NL expected sufficient liquidity for short-term obligations through September 30, 2014, but noted that actual developments could adversely affect liquidity. It did not provide quantified sales or earnings guidance for NL.
- CompX cited unstable customer demand and uncertainty about continued sales growth into the remainder of 2013 and 2014. It emphasized cost and productivity initiatives, while warning that commodity-cost increases may be difficult to pass through.
- Kronos expected higher 2013 sales volumes if economic conditions did not deteriorate, lower unit costs in the second half, and improved Q4 operating income versus earlier 2013 quarters. It nevertheless expected full-year operating income to be significantly below 2012, with pricing, demand, raw materials and capacity conditions uncertain.
- Kronos’s Canadian facility was operating at about 15% capacity during a union lockout; the facility represents approximately 19% of worldwide TiO2 capacity. There was no assurance of a labor agreement or an outcome without material adverse effect.
- NL had accrued approximately $58 million for environmental matters at about 50 sites; the estimated upper end of reasonably possible costs for estimable sites was approximately $154 million, including the accrual. Costs for about five sites could not be estimated.
- NL had not accrued for lead-pigment litigation, stating liability was not considered probable and could not be reasonably estimated. The filing warns that a future adverse outcome could materially affect earnings, financial condition and liquidity. It also disclosed 1,130 asbestos-related cases involving approximately 1,643 plaintiffs, for which no amount was accrued due to estimation uncertainty.
- Tax authorities were examining returns. Kronos disputed Canadian reassessments for 2002–2004; the potential cash tax liability if fully assessed was approximately $15.7 million, and Kronos believed its accruals were adequate.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing names NL Industries, Inc., not NLI Holdings, Inc.
- Review Kronos’s TiO2 pricing, feedstock costs, litigation settlement, Canadian labor lockout and outlook, given their substantial effect on NL’s equity-method earnings.
- Track environmental accruals against the disclosed $154 million upper-end estimate and the sites for which costs remain unestimable.
- Assess the status and potential financial consequences of lead-pigment, asbestos and insurance-coverage litigation, for which NL reports significant estimation uncertainty.
- Monitor liquidity and cash generation, including reliance on subsidiary and affiliate distributions, the availability of the Valhi facility, and dividend changes.