Business context and reporting period
This is NL Industries, Inc.’s Form 10-Q for the quarter ended June 30, 2017, covering the three and six months ended that date. The filing identifies the registrant as NL Industries, Inc., not “NLI Holdings, Inc.” NL is primarily a holding company: it consolidates majority-owned CompX International, a components manufacturer, and accounts for its 30% interest in Kronos Worldwide, a titanium dioxide producer, under the equity method. Valhi owned approximately 83% of NL.
Financial performance and position
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | 30.0 | 27.1 | 60.0 | 54.2 |
| Gross margin | 9.5 | 8.5 | 19.2 | 16.7 |
| Income (loss) from operations | 1.3 | 0.6 | 0.3 | (1.6) |
| Equity in Kronos earnings (losses) | 59.7 | 0.5 | 70.9 | (0.7) |
| Net income (loss) attributable to NL stockholders | 41.2 | 0.8 | 49.5 | (1.6) |
| Basic and diluted earnings (loss) per share | $0.85 | $0.02 | $1.02 | $(0.03) |
- NL’s reported earnings were heavily affected by its equity-method share of Kronos results. NL’s share of Kronos’s second-quarter earnings included an estimated $45 million after-tax benefit (about $0.64 per NL share) from Kronos’s noncash reversal of German and Belgian deferred-tax valuation allowances. The filing also says NL’s first-half earnings included about $0.66 per share from this tax item. This was not an operating cash inflow.
- CompX sales rose 11% in both the quarter and first half; its operating income rose 24% in Q2 to $4.6 million and 29% in the first half to $9.1 million. CompX’s first-half gross margin was 32%, versus 31% a year earlier.
- Kronos reported Q2 sales up 24% to $441.4 million and first-half sales up 20% to $811.2 million. Higher TiO2 prices and sales volumes drove improvement; its operating margin reached 16% in Q2 and 15% in the first half, compared with 3% and 2%, respectively, a year earlier.
- Net cash provided by operating activities was $10.2 million in the first half, versus $7.6 million in 2016. Capital expenditures were $1.6 million. Investing activities used $13.7 million, including a net $12.1 million loan to Valhi under CompX’s revolving note.
- At June 30, cash, cash equivalents and restricted cash totaled $94.6 million. NL had $0.5 million drawn under its $50 million Valhi credit facility, leaving $49.5 million available; CompX had no debt. NL reported total assets of $457.1 million and total equity of $246.0 million. Its environmental remediation liability was $119.2 million, including $13.1 million current.
Material changes versus the prior comparable period
- NL moved from a first-half net loss to profit, primarily because Kronos’s operating performance improved and it recorded the large noncash deferred-tax benefit. NL’s own operating income also improved, from a first-half loss of $1.6 million to income of $0.3 million.
- CompX’s higher Security Products volumes, particularly to existing government security customers, supported revenue and manufacturing efficiencies. Lower sales to a recreational-transportation customer partly offset growth.
- Kronos benefited from higher TiO2 prices: average selling prices rose 20% in Q2 and 19% in the first half year over year. Volumes increased 6% and 5%, respectively. Currency movements reduced Kronos sales by an estimated $8 million in Q2 and $15 million in the first half.
- NL cash and restricted cash declined from $98.2 million at year-end 2016 to $94.6 million. Its investment in Kronos rose in carrying value from $120.3 million to $189.0 million, principally reflecting equity earnings and other comprehensive income, partly offset by dividends.
Outlook, commentary and risks
- NL expected 2017 Security Products and Marine Components sales each to meet or exceed 2016 levels; it anticipated government security sales moderating in the second half and continued weakness in transportation-related sales. NL expected full-year general corporate expenses to be comparable to 2016, while noting litigation and environmental costs could exceed expectations.
- Kronos expected 2017 operating income to exceed 2016, with sales volumes comparable to 2016 and production volumes slightly higher. It expected full-year cost of sales per metric ton to be slightly higher than in 2016, as higher-cost feedstock was expected to affect results from Q3. Further price increases depended on market conditions. These are management expectations, not guarantees.
- NL expected to have sufficient liquidity for obligations through June 30, 2018, based on its operating outlook and available affiliate credit. It estimated 2017 dividends from Kronos, CompX and Valhi of $24.4 million in aggregate, subject to declarations and payment.
- Lead-pigment litigation: NL was appealing the California Santa Clara judgment that imposed joint and several liability on NL and two other defendants and ordered an aggregate $1.15 billion abatement payment. NL had not accrued a loss, stating that liability was not probable and could not be reasonably estimated; it acknowledged a future accrual could materially affect results, financial position and liquidity. Oral argument was scheduled for August 24, 2017.
- Environmental matters: NL had accrued approximately $119 million for about 41 sites; the upper end of its estimated reasonably possible costs was approximately $161 million. It could not estimate costs for five additional sites. Actual costs could exceed accrued amounts.
- Other risks include asbestos-related claims, tax examinations, insurance-recovery uncertainty, TiO2 market cyclicality, raw-material costs, currency fluctuations, litigation outcomes and environmental regulation. NL reported compliance with its credit-facility covenants and effective disclosure controls.
- After quarter-end, NL reported that it paid a settlement under a consent decree in July 2017 in United States v. NL Industries, Inc. In August 2017 it was served in a CERCLA and state-law contribution action concerning a former Indiana lead smelting facility; NL said it would deny liability and defend the claims.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for NL Industries, Inc., despite request metadata naming NLI Holdings, Inc.
- Separate recurring operating results and cash generation from Kronos’s noncash tax-allowance reversal when assessing NL’s reported profit.
- Review the California lead-pigment appeal and other litigation developments, including whether any loss becomes probable or estimable.
- Track environmental remediation spending and exposure against the $119 million accrued liability and $161 million estimated upper range.
- Monitor the Valhi affiliate note, available credit, cash balances and the ability of subsidiaries and affiliates to pay expected dividends.
- Compare management’s 2017 sales and earnings expectations with subsequent results, particularly Kronos pricing, volumes, feedstock costs and currency impacts.