Business context and reporting period
This is NL Industries, Inc.’s Form 10-K for the fiscal year ended December 31, 2020 (filed March 10, 2021). The filing is for NL Industries, not an entity named “NLI Holdings, Inc.” NL is primarily a holding company: it consolidates its 86%-owned component-products subsidiary CompX and accounts for its 30%-owned chemicals investee Kronos Worldwide under the equity method. NL’s reported net sales therefore principally reflect CompX; Kronos contributes through equity in earnings.
Financial performance and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $114.5 million | $124.2 million |
| Gross margin | $32.8 million; 28.7% of sales | $39.0 million; 31.4% of sales |
| Income (loss) from operations | $2.4 million | $(1.6) million |
| Equity in Kronos earnings | $19.4 million | $26.5 million |
| Net income attributable to NL stockholders | $14.7 million; $0.30 per diluted share | $25.8 million; $0.53 per diluted share |
| Cash from operating activities | $19.0 million | $27.4 million |
- NL’s sales declined 8% and attributable net income declined 43%. Operating cash flow fell $8.4 million year over year.
- CompX operating income decreased 33% to $11.8 million. Security Products sales declined 12% to $87.9 million, while Marine Components sales rose 7% to $26.7 million. Lower volumes and higher unit production costs pressured margins.
- Kronos reported sales of $1.64 billion, down 5%; operating income of $116.2 million, down 20%; and net income of $63.9 million, down 27%. TiO2 sales volumes fell 6% and average selling prices fell 2%; operating margin was 7%, versus 8% in 2019.
- At year-end, NL had $165.3 million of cash, cash equivalents and restricted cash, including $25.5 million of noncurrent restricted cash. NL debt was $0.5 million; CompX had no debt. Kronos, the equity-method investee, reported $486.7 million of debt.
- NL reported total assets of $548.2 million and total equity of $335.3 million. NL’s investment in Kronos had a $242.4 million carrying value and $525.1 million market value.
- NL paid $7.8 million in dividends, or $0.16 per share, during 2020. The board declared a $0.06-per-share first-quarter 2021 dividend. CompX increased its regular quarterly dividend to $0.20 per share in March 2021.
Material changes, outlook and risks
- COVID-19 reduced demand for both businesses, particularly in the second and third quarters. Kronos lowered production in the third quarter as demand weakened, then increased production as demand recovered. CompX’s Security Products business remained below pre-pandemic levels at year-end.
- Management expects NL’s 2021 net income to exceed 2020, mainly on higher expected Kronos earnings, partly offset by higher litigation and environmental costs. Kronos expects higher 2021 sales and operating income, principally from improved TiO2 prices and volumes; CompX expects higher revenue and operating income but does not expect Security Products to return to 2019 levels. These expectations remain sensitive to pandemic effects and economic demand.
- NL accrued $93.4 million for environmental remediation and related matters at approximately 32 sites. The upper end of the estimable range was approximately $114 million, including the accrual; costs at five additional sites could not be reasonably estimated. The auditor identified this estimate as a critical audit matter.
- The Santa Clara lead-pigment settlement requires NL to pay $101.7 million in total. NL paid $25 million in 2019 and a $12 million installment in September 2020; further installments remain. Other lead-pigment litigation is generally unaccrued because management says loss is not probable or reasonably estimable. Potential future liabilities could be material.
- TiO2 regulatory classification is a notable risk: an EU regulation classifies TiO2 powder and certain mixtures as suspected carcinogens by inhalation, with labeling requirements scheduled to take effect October 1, 2021. Environmental rules, feedstock availability and costs, currency movements, and competition also pose risks.
- NL stated that it expected sufficient liquidity for short-term obligations and had $49.5 million available under its $50 million Valhi revolving facility at year-end. Parent-company liquidity depends substantially on distributions from subsidiaries and affiliates. Related-party arrangements include a $29.5 million CompX receivable from Valhi.
- The financial statements received an unqualified audit opinion. Management reported effective disclosure controls and internal control over financial reporting; the external auditor did not attest to internal control.
Important facts for investors to verify
- Confirm the registrant’s identity and distinguish NL’s consolidated results from Kronos’s equity-method financials and debt.
- Review the assumptions, payment schedule and funding for the lead-settlement obligation, and developments in other lead-pigment and environmental cases.
- Track Kronos TiO2 prices, volumes, feedstock costs and leverage, as well as CompX Security Products’ recovery and production-cost trends.
- Assess the availability and timing of subsidiary dividends, restrictions on distributions, and the extent to which restricted cash is unavailable for general use.
- Monitor the EU TiO2 classification implementation and any resulting customer, demand, labeling or compliance effects.