NL Industries, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing identifies the registrant as NL Industries, Inc. (NYSE: NL), a holding company. NL owned approximately 87% of CompX International, which it consolidates, and approximately 30% of Kronos Worldwide, which it accounts for under the equity method.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| NL consolidated net sales | $103.8 million | $92.0 million |
| Gross margin | $32.2 million; 31% of sales | $27.6 million; 30% of sales |
| Income (loss) from operations | $2.8 million | $(68.3) million |
| Equity in Kronos earnings (losses) | $30.2 million | $(31.0) million |
| Net income (loss) attributable to NL stockholders | $28.5 million; $0.59 per share | $(55.3) million; $(1.14) per share |
| Net cash provided by operating activities | $23.6 million | $14.9 million |
| Cash, cash equivalents and restricted cash | $78.0 million | $57.6 million |
| Total assets | $500.8 million | $685.8 million |
| NL and CompX debt | None outstanding | None outstanding at year-end |
NL consolidated sales and gross margin principally reflect CompX. CompX sales rose 13% to $103.8 million and operating income increased 46% to $13.6 million; operating margin was approximately 13%. Its sales growth reflected stronger security-products demand, including government applications, electronic locks and transportation customers, as well as marine-components growth.
Kronos, which is not consolidated into NL’s sales, reported 2014 sales of $1.652 billion, operating income of $149.7 million and net income of $99.2 million, versus an operating loss of $132.6 million and net loss of $102.0 million in 2013. Kronos sales fell 5%, principally due to a 6% decline in average TiO₂ selling prices; lower feedstock and production costs drove a substantial operating recovery. NL received $21.1 million in Kronos dividends.
NL’s operating cash flow increased $8.7 million year over year. Capital expenditures were $2.9 million; investing cash flow was a $3.3 million use, and financing cash flow was a $0.3 million use. NL had $72.6 million of unrestricted cash and $5.4 million of restricted cash at year-end, plus a $40 million Valhi revolving facility with no borrowings outstanding; draws are at Valhi’s discretion. Current assets were $108.0 million and current liabilities $24.6 million.
Kronos reported consolidated debt of approximately $348.6 million at year-end and was in compliance with its debt covenants. Its disclosed 2015 payments under debt, leases and other agreements, including feedstock commitments, totaled approximately $454 million.
Material changes versus 2013
- NL returned to profit, primarily as its share of Kronos results improved from a loss to earnings, environmental costs declined, and CompX operating income rose.
- Corporate expense declined to $21.3 million from $87.0 million, mainly because environmental and related costs fell to $6.5 million from $68.9 million. Litigation costs were $7.0 million, down from $10.2 million.
- CompX sales increased 13% and its operating income rose to $13.6 million from $9.3 million.
- Kronos’ operating performance rebounded with lower feedstock costs and higher production, despite lower selling prices. Production was 511,000 metric tons versus 474,000; sales volumes were broadly flat.
- NL’s total assets declined by $185.1 million and equity by $117.5 million. Marketable securities, principally Valhi shares, fell in value to $92.1 million from $252.7 million; 2014 other comprehensive loss was $147.0 million, largely reflecting marketable-security, currency-translation and pension losses.
- NL suspended its regular quarterly dividend in May 2014 after deferring the first-quarter payment. No NL cash dividends were paid in 2014; future dividends are discretionary.
Outlook, risks and unusual items
- Management expected 2015 net income attributable to NL stockholders to be somewhat below 2014, primarily because of lower anticipated insurance recoveries and lower CompX operating income, partly offset by lower environmental costs. NL expected lower general corporate expenses and approximately $3.9 million of capital expenditures.
- CompX anticipated continued strong demand in 2015 but did not expect government security-application demand to match 2014 levels. Kronos expected higher sales and production volumes but operating income broadly comparable to 2014, as lower expected selling prices would largely offset volume benefits.
- NL recognized $10.4 million of insurance recoveries in 2014, substantially related to a September 2014 settlement reimbursing past litigation defense costs. The filing notes that future recoveries are uncertain.
- NL accrued approximately $110 million for environmental remediation and related matters at about 47 sites; the estimated upper end of reasonably possible costs was approximately $149 million, including the accrual. Costs at five additional sites could not be reasonably estimated.
- A California court entered a $1.15 billion joint-and-several abatement judgment against NL and two other defendants in the Santa Clara lead-pigment case. NL appealed, stated that it believed the judgment was unsupported, and did not accrue a loss because it concluded a loss was not probable and could not be reasonably estimated. The filing cautions that an adverse outcome could materially affect results, financial position and liquidity.
- Other principal risks include cyclical TiO₂ pricing and competition, raw-material and energy costs and availability, labor disruptions, currency movements, environmental obligations, litigation, and reliance on distributions from subsidiaries and affiliates. NL also depends on related-party structures and has concentrated control: Valhi owned approximately 83% of NL.
- CompX’s new ERP system had a material weakness in user-access monitoring identified earlier in 2014; management reported remediation and concluded the controls were operating effectively by year-end. The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Track the California lead-pigment appeal and any change in the probability or estimability of a potential loss; the judgment amount is aggregate and joint-and-several.
- Review environmental site developments, the $110 million accrual, the $149 million estimated upper range, and the five sites for which costs were not estimable.
- Monitor Kronos pricing, feedstock costs, debt, covenant compliance and ability to meet substantial contractual commitments; NL’s earnings and cash receipts depend materially on Kronos.
- Assess whether CompX demand and margins can persist after unusually strong 2014 government-related orders, and whether 2015 results match management’s expectations.
- Confirm the timing and amount of any future NL dividend and the availability of parent-company liquidity, including the discretionary Valhi credit facility and affiliate distributions.
- Consider the impact of the decline in NL’s Valhi investment value and the resulting volatility in reported equity and comprehensive income.