NL Industries, Inc. — FY 2013 Form 10-K
Entity note: The filing is for NL Industries, Inc., not “NLI Holdings, Inc.” The fiscal year ended December 31, 2013; the filing was signed March 12, 2014. NL is primarily a holding company: it owned 87% of CompX International, consolidated in its results, and 30% of Kronos Worldwide, accounted for under the equity method.
Financial results and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| NL net sales, primarily CompX | $92.0 million | $83.2 million |
| NL income (loss) from operations | ($68.3) million | ($8.1) million |
| Equity in Kronos earnings (losses) | ($31.0) million | $66.4 million |
| NL net income (loss) attributable to stockholders | ($55.3) million; ($1.14) per share | $74.5 million; $1.53 per share |
| Operating cash flow | $14.9 million | $18.0 million |
| Cash, cash equivalents and restricted cash | $57.6 million | $83.3 million |
| Total assets / total equity | $685.8 million / $369.0 million | $680.8 million / $388.1 million |
NL and CompX had no debt outstanding at year-end after CompX repaid its remaining $18.5 million note in 2013. NL reported $40 million available under a discretionary revolving facility from Valhi, with no borrowings at year-end. NL paid $0.50 per share in dividends during 2013; the board deferred consideration of a first-quarter 2014 dividend.
Operating performance and changes from 2012
- CompX: Sales rose 11% to $92.0 million, while operating income increased 72% to $9.3 million. Gross margin was 30% and operating margin 10%. Growth reflected higher demand for high-security pin-tumbler locks and gains in marine sales outside the high-performance boat market. Marine Components remained slightly loss-making, with a $0.1 million operating loss.
- Kronos: Sales declined 12% to $1.732 billion; operating results swung from $359.6 million of income to a $132.6 million loss, and net results swung from $218.5 million of income to a $102.0 million loss. Cost of sales reached 94% of revenue and gross margin fell to 6%. Average TiO₂ prices decreased 19%, partly offset by a 6% increase in sales volume. Higher feedstock and other production costs, the Canadian labor disruption and a $35 million litigation settlement charge contributed to the deterioration. NL’s 30% equity-method share was a $31.0 million loss.
- NL corporate costs and other items: Corporate expense and other, net, rose to $87.0 million from $29.0 million, principally reflecting environmental and related costs of $68.9 million versus $14.5 million. Litigation and related costs were $10.2 million versus $7.5 million. Insurance recoveries of $9.4 million partially offset costs. In 2012, NL also recorded a $16.6 million gain on sale of TIMET shares and a $15.0 million real-estate litigation settlement gain, neither repeated in 2013.
- Quarterly result: NL reported a fourth-quarter 2013 net loss attributable to stockholders of $33.0 million, or $0.68 per share, versus fourth-quarter 2012 income of $17.5 million, or $0.36 per share. The prior-year quarter included material sale and investment gains.
NL’s investing cash flow was $3.0 million and financing cash outflow was $43.3 million in 2013. Operating cash flow declined by $3.1 million year over year. The balance sheet included $114 million of accrued environmental remediation and related costs, up from $48 million at year-end 2012.
Outlook, risks and contingencies
- Management expected NL’s 2014 income from continuing operations attributable to stockholders to exceed 2013, primarily because of anticipated higher equity earnings from Kronos and lower environmental and related costs. This is an expectation, not a quantified earnings forecast.
- Kronos expected 2014 sales and production volumes to increase and operating income to improve, citing lower-cost feedstock, recovering demand and possible price increases. It nevertheless expected to operate below full capacity, including during the Canadian plant restart and capital-improvement shutdowns.
- Kronos’s Canadian facility was affected by a union lockout beginning in June 2013. A new agreement was reached in November; production resumed in February 2014. The lockout generated about $19 million in unabsorbed fixed costs, while the new agreement generated about $9 million in one-time costs.
- Lead-pigment litigation: In January 2014, after the reporting year, a California court found NL and two co-defendants jointly and severally liable for abatement of lead paint in pre-1980 homes and ordered aggregate funding of $1.15 billion. NL said it would appeal and filed a new-trial motion in February. NL recorded no accrual, stating that loss was not probable and could not be reasonably estimated; the filing warns a future accrual could materially affect earnings, financial position and liquidity.
- Environmental exposure: The $114 million year-end accrual covered approximately 45 estimable sites; the estimated upper end of reasonably possible costs was $154 million. Costs at approximately five additional sites could not be estimated. NL cautioned that actual costs could exceed accruals and that new information or site developments could require material adjustments.
- Kronos debt and covenants: Kronos reported approximately $183.5 million of consolidated debt at December 31, 2013. A February 2014 term loan and use of its proceeds would have resulted in approximately $363.5 million of debt after repayment of a Contran note. Kronos’s European revolving facility had a waiver through June 30, 2014; borrowing availability depended on meeting an EBITDA requirement. Kronos also disclosed substantial contractual commitments.
- Other risks include TiO₂ price and demand cyclicality, raw-material availability and costs, foreign-exchange exposure, customer concentration at CompX, labor disruptions, environmental regulation, insurance recovery uncertainty, tax examinations and reliance on distributions from subsidiaries and affiliates. NL is controlled through Valhi and Contran and has significant related-party arrangements.
Important facts for investors to verify
- Developments in the California lead-pigment judgment, appeal and new-trial motion, and whether any loss accrual becomes necessary.
- Changes in environmental remediation estimates, including the five sites for which costs were not estimable and the $154 million estimated upper range for estimable matters.
- Kronos’s post-lockout production recovery, realized TiO₂ pricing, feedstock costs, debt levels and compliance with credit-facility covenants.
- Whether 2014 results and environmental costs support management’s outlook, and whether NL resumes dividends after deferring first-quarter 2014 consideration.
- The filing’s audited financial statements received an unqualified opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2013.