NLI HOLDINGS, INC. annual report, FY2019

Full document

NL Industries, Inc. — 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019; this is an annual report, not a standalone fourth-quarter filing. The filing identifies the registrant as NL Industries, Inc. (NYSE: NL), rather than “NLI Holdings, Inc.” NL is primarily a holding company: it consolidates its 86%-owned CompX component-products subsidiary and accounts for its 30%-owned Kronos Worldwide chemicals investment under the equity method.

Financial performance and liquidity

  • Revenue and operating results: Reported net sales were $124.2 million, up 5.1% from $118.2 million in 2018. These sales principally reflect CompX; Kronos’s much larger sales are not consolidated into NL’s revenue. Gross margin was $39.0 million, or 31.4% of sales, versus $38.3 million, or 32.4%, in 2018. NL reported an operating loss of $1.6 million, compared with an operating loss of $60.7 million in 2018.
  • Profit: Net income attributable to NL stockholders was $25.8 million, or $0.53 per diluted share, versus a net loss of $41.0 million, or $0.84 per share, in 2018. The comparison reflects, among other items, a smaller lead-litigation settlement charge in 2019 and lower equity earnings from Kronos.
  • CompX: Operating income was $17.7 million, down slightly from $17.8 million. Marine Components sales rose 26% to $24.9 million, while Security Products sales rose 1% to $99.3 million. Higher Security Products labor costs weighed on margins.
  • Kronos investment: NL’s equity in Kronos earnings fell 58%, to $26.5 million from $62.3 million. Kronos reported net sales of $1.73 billion, net income of $87.1 million and operating income of $145.8 million. Its operating margin declined to 8% from 20%, primarily reflecting lower TiO₂ selling prices and higher feedstock and other production costs.
  • Cash flow: Net cash from operating activities was $27.4 million, up from $17.1 million. Investing activities provided $9.9 million, including proceeds from asset and business sales and net collections on an affiliate note; financing activities used $0.5 million. Capital expenditures were $3.2 million.
  • Liquidity and debt: Cash, cash equivalents and restricted cash totaled $157.9 million at year-end, including $28.1 million of restricted cash. Current assets were $164.7 million and current liabilities $29.8 million. NL had $0.5 million of debt outstanding and $49.5 million available under its affiliate revolving facility; CompX had no debt. Kronos, the equity-method investee, had approximately $444 million of long-term debt.
  • Other balance-sheet items: Total assets were $557.5 million and total equity was $327.2 million. NL’s investment in Kronos had a carrying value of $248.4 million and a quoted market value of $471.9 million. NL received $25.4 million in Kronos dividends in 2019.

Material changes and unusual items

  • The 2018 net loss included a $62.0 million pre-tax lead-pigment litigation settlement charge and a $60.9 million marketable-equity-securities loss. In 2019, the settlement charge was $19.3 million; favorable relative changes in marketable securities also supported the year-over-year comparison.
  • NL recorded $5.1 million of insurance recoveries, a $4.4 million gain on an excess-property sale and a $3.0 million gain on the sale of its insurance and risk-management business. These transactions are not necessarily recurring.
  • The Santa Clara lead-pigment case was settled and dismissed with prejudice. NL’s stated settlement obligation is $101.7 million, payable in installments; the initial $25.0 million payment was made in September 2019. At year-end, the recorded present-value liability was $11.8 million current and $60.1 million noncurrent. Restricted cash included $15.6 million on deposit with the court and a further $9.0 million in escrow.
  • Environmental remediation liabilities totaled approximately $94.5 million for about 32 sites; the estimated upper end of reasonably possible costs was approximately $115 million. NL could not estimate a cost range for five other sites.
  • NL paid no common dividends in 2019. In February 2020, its board declared a $0.04-per-share first-quarter dividend.

Outlook, commentary and risks

  • NL expects 2020 net income attributable to its stockholders to be lower than in 2019, primarily because it expects lower equity earnings from Kronos.
  • CompX described 2019 as a breakout year for Marine Components and expects more normalized growth in 2020. Security Products experienced late-year headwinds that may continue. NL expects higher corporate expenses, including litigation and environmental costs.
  • Kronos expected 2020 sales and operating income to be lower than in 2019, citing lower expected sales volumes and higher feedstock costs. It anticipated production slightly above 2019 levels, sales volumes slightly lower, and stable first-quarter selling prices, subject to market conditions.
  • Management identified the coronavirus outbreak as a source of uncertainty for demand, supply chains and operations. Other significant risks include the cyclical and competitive TiO₂ market, raw-material availability and costs, currency movements, Kronos’s leverage and refinancing needs, environmental obligations, lead-pigment litigation, and NL’s dependence on distributions from subsidiaries and affiliates.
  • The EU classified TiO₂ powder and certain mixtures as suspected carcinogens via inhalation, with labeling requirements scheduled to take effect October 1, 2021. NL also cautioned that regulatory developments could affect demand, marketability and compliance costs.

Important facts for investors to verify

  • Review CompX’s and Kronos’s separate filings for their full financial statements, cash generation, debt terms and operating outlook; NL’s consolidated sales do not include Kronos’s sales.
  • Confirm the timing and funding of the remaining Santa Clara settlement installments, and monitor potential developments in other lead-pigment cases.
  • Track environmental remediation estimates, especially the five sites for which costs could not yet be reasonably estimated.
  • Assess Kronos’s ability to absorb higher feedstock costs, maintain margins and meet debt and contractual obligations.
  • Review related-party arrangements, including CompX’s loan to Valhi, NL’s affiliate credit facility and shared services, insurance and tax arrangements.
  • Distinguish unrestricted cash from restricted cash and consider NL’s reliance on subsidiary and affiliate distributions to meet parent-level obligations.