NL Industries, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; financial statements are unaudited. NL is primarily a holding company, operating through majority-owned CompX and holding a 30% equity-method interest in Kronos Worldwide. Valhi owned approximately 83% of NL.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $32.4 million | $30.0 million | $60.8 million | $60.0 million |
| Gross margin | $11.2 million | $9.5 million | $20.7 million | $19.2 million |
| Income (loss) from operations | $(60.6) million | $1.4 million | $(63.4) million | $0.7 million |
| Equity in Kronos earnings | $23.6 million | $59.7 million | $45.1 million | $70.9 million |
| Net income (loss) attributable to NL stockholders | $(42.6) million | $41.2 million | $(28.4) million | $49.5 million |
| Basic and diluted earnings (loss) per share | $(0.87) | $0.85 | $(0.58) | $1.02 |
- CompX sales rose 8% in Q2 and 1% in the first half. Its gross margin improved to 35% in Q2 and 34% in the first half, from 32% in both comparable 2017 periods. Higher volumes, favorable product mix, manufacturing efficiencies and lower costs supported margins.
- CompX operating income increased 30% to $6.0 million in Q2 and 13% to $10.4 million in the first half. Marine Components grew strongly; first-half Security Products sales were slightly lower, partly reflecting reduced government-customer sales.
- The reported operating and net losses primarily reflect a $62 million pre-tax California lead-pigment litigation settlement charge. NL also recorded a $20.3 million first-half loss on its Valhi marketable shares under a new accounting standard.
- Kronos’ underlying operating performance improved: first-half sales increased 11% and operating income increased 74%, primarily on higher TiO₂ prices and favorable currency effects. However, NL’s equity earnings from Kronos declined, in part because 2017 included a substantial noncash tax benefit from reversal of Kronos’ German and Belgian deferred-tax valuation allowance.
Cash, liquidity, debt and balance sheet
- At June 30, cash, cash equivalents and restricted cash totaled $115.7 million, up from $102.9 million at December 31, 2017. Six-month operating cash flow was $13.5 million, compared with $10.2 million a year earlier; investing activities used $0.5 million and financing activities used $0.2 million.
- Current assets were $161.2 million and current liabilities were $90.9 million. Current liabilities include $60 million related to the proposed California settlement. Total assets were $591.1 million and total equity was $324.3 million.
- NL had $0.5 million outstanding on its $50 million Valhi revolving credit facility, leaving $49.5 million available; NL reported covenant compliance. CompX had no debt. Kronos also reported covenant compliance.
- NL held Valhi shares worth $68.4 million and its Kronos stake had a quoted market value of $793.5 million. The carrying value of the Kronos investment was $259.8 million.
- Environmental remediation and related accruals totaled $115.5 million, including $18.3 million current and $97.2 million noncurrent. For estimable sites, the company reported a reasonably possible cost range up to approximately $145 million, including amounts accrued; it could not estimate costs for five sites.
Outlook, material items and risks
- CompX outlook: Management expected full-year 2018 sales to meet or exceed 2017 sales, supported by anticipated Security Products demand and continued Marine Components growth. NL expected 2018 net general corporate expenses to exceed 2017, primarily due to litigation costs.
- Kronos outlook: Kronos expected 2018 sales and operating income to exceed 2017, principally because of higher average selling prices, while expecting somewhat lower production and sales volumes and moderately higher per-ton costs. It expected 2018 net income below 2017, which included a significant tax benefit. These expectations depend on demand, pricing, production, raw-material costs, currency movements and competition.
- California lead-pigment case: NL and plaintiffs agreed in May 2018 to a proposed $80 million settlement: $65 million from NL and $15 million from a former insurer. NL’s portion includes $45 million payable upon court approval and five installments totaling $20 million beginning four years after approval. The agreement remained subject to trial-court approval; other defendants objected. NL had sought U.S. Supreme Court review of federal issues. Failure to obtain approval or other adverse developments could lead to further liability; the amount is uncertain.
- Other contingencies: NL faces ongoing lead-pigment, environmental, asbestos-related and other claims. The company said it had not accrued for most lead-pigment cases or asbestos claims because liability was not considered probable or reasonably estimable; future outcomes could materially affect results, financial position or liquidity. Environmental costs may exceed estimates, and some site obligations remain unestimable.
- Other notable items: Adoption of revenue-recognition guidance had no material impact. A new standard moved unrealized changes in marketable equity securities into earnings, contributing to the $20.3 million first-half loss. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the trial court approves the California settlement, its timing and the actual cash-payment schedule.
- Potential additional exposure from lead-pigment litigation and the $115.5 million environmental accrual, including the unestimable sites and possible costs above accruals.
- Whether CompX meets or exceeds management’s full-year sales outlook and how sales mix, volumes and margins develop.
- Whether Kronos sustains higher TiO₂ prices and operating income amid lower volumes, higher feedstock costs and industry and currency risks.
- The effect on NL’s earnings and liquidity of changes in Kronos distributions, Valhi share value, litigation costs and environmental spending.