NL Industries, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. The filing identifies the registrant as NL Industries, Inc., although the request metadata names NLI Holdings, Inc. NL is primarily a holding company: it consolidates majority-owned CompX International and accounts for its approximately 30% Kronos Worldwide interest using the equity method.
Financial results and position
- Revenue: $35.5 million, up 2% from $34.8 million. Consolidated sales principally reflect CompX.
- Profit: Operating loss was $12.1 million versus operating income of $5.7 million. Net income was $21.2 million versus $17.7 million; income attributable to NL stockholders was $21.0 million, or $0.43 per share, versus $17.2 million, or $0.35 per share.
- Margins: Gross margin was $9.5 million (26.7% of sales), versus $8.7 million (25.0%). CompX operating income fell to $2.9 million from $8.8 million, largely because Q1 2011 included a $7.5 million patent-settlement gain. The 2012 operating loss at NL consolidated level principally reflected higher corporate costs, including environmental expenses.
- Kronos contribution: Equity in Kronos earnings increased to $41.6 million from $18.3 million. Kronos reported sales of $561.3 million, net income of $136.9 million, and operating income of $209.4 million for the quarter.
- Cash flow: Operating activities used $1.1 million, versus providing $17.4 million. Investing activities used $0.8 million and financing activities used $4.9 million. Cash and cash equivalents declined to $5.0 million from $11.7 million. NL attributed the operating cash-flow decline mainly to lower Kronos distributions, including the absence of its 2011 special dividend, and the prior-year CompX settlement receipt.
- Liquidity and debt: At March 31, cash and cash equivalents were $5.0 million; current restricted cash was $3.5 million (plus $1.6 million of noncurrent restricted cash). Total debt was $38.7 million, of which $16.5 million was current. NL had $6.5 million outstanding under a Valhi note with $33.5 million of stated borrowing availability, subject to Valhi’s discretion. CompX had $2.0 million outstanding and $28.0 million available under its revolving facility. The company reported compliance with debt covenants.
- Other balance-sheet items: Marketable securities were $273.8 million, down from $311.4 million, largely reflecting lower quoted prices for Valhi and TIMET shares. NL’s Kronos investment carrying value rose to $320.9 million from $281.3 million. Total assets were $758.9 million and total equity was $419.6 million at quarter-end.
- Dividend: NL paid $0.125 per share, unchanged from Q1 2011.
Changes and management outlook
- CompX sales increased slightly; improved production efficiency following its 2011 facility consolidation supported higher gross margin. Management cited stronger demand in some North American markets but continued weakness among several office-furniture customers.
- Kronos benefited from higher TiO2 selling prices and volumes. Its Q1 average selling prices were 34% above the prior-year quarter, and sales volumes rose 5%. Kronos expected stronger demand, higher sales volumes and higher operating income for 2012 than 2011, while anticipating sharply higher feedstock and other production costs; its estimated 2012 cost per metric ton produced was 50%–60% above 2011.
- NL reported $16.2 million of corporate expense and other, net, versus $3.4 million in Q1 2011. Environmental remediation and related costs were $12.8 million versus $0.2 million; NL expected corporate expenses for 2012 to exceed 2011.
- In May 2012, after quarter-end, NL received $15.6 million in cash in the final closing of a New Jersey property settlement and expected to recognize an approximately $15 million pretax gain in Q2.
- Environmental remediation liabilities totaled $53.8 million, including $8.6 million current. NL estimated the upper end of reasonably possible costs for sites where it could estimate a range at approximately $86 million, including accrued amounts; it could not estimate costs for approximately five sites.
- NL had not accrued for pending lead-pigment litigation, stating liability was not considered probable and could not be reasonably estimated. It also had not accrued for asbestos-related personal-injury cases, citing uncertainty and inability to estimate. Outcomes could nevertheless materially affect results or liquidity.
- Management said it expected sufficient liquidity for short-term obligations. The filing cautioned that results may be affected by market demand, input costs, foreign exchange, reliance on affiliate distributions, debt refinancing, taxes, litigation and environmental matters. No specific NL earnings or revenue guidance was provided.
Important facts for investors to verify
- Whether Kronos’s pricing, demand and cost assumptions—and its ability to refinance notes due in April 2013—develop as expected.
- How environmental remediation estimates change, particularly for sites without estimable ranges, and whether costs exceed the $53.8 million accrual.
- Whether the expected Q2 property-settlement gain was recognized, and the final cash and earnings impact.
- Whether NL can maintain liquidity given negative Q1 operating cash flow, current debt maturities and reliance on distributions or affiliate financing.
- How market-price changes in related-party securities affect accumulated other comprehensive income and the value of NL’s investment portfolio.
- Developments in lead-pigment, asbestos, insurance-recovery and tax matters; the filing states outcomes and potential exposure are uncertain.