NL Industries, Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2011; filed November 2, 2011. Financial statements are unaudited. NL is primarily a holding company: it consolidates CompX International and accounts for its 30% interest in Kronos Worldwide using the equity method. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $35.7m | $35.7m | $105.8m | $102.9m |
| Gross margin | $8.5m; 23.9% | $9.7m; 27.1% | $27.1m; 25.6% | $27.7m; 26.9% |
| Income (loss) from operations | $12.9m | $5.1m | $9.6m | ($11.3m) |
| Equity in Kronos net income | $26.1m | $11.6m | $71.5m | $33.9m |
| Net income attributable to NL stockholders | $27.7m; $0.57/share | $11.5m; $0.24/share | $61.8m; $1.27/share | $13.5m; $0.23/share |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $24.0m | ($4.9m) |
NL’s reported sales primarily reflect CompX. Kronos contributed substantially to earnings through equity-method income: Kronos reported nine-month sales of $1.51bn and net income of $235.2m. NL received $32.6m in Kronos dividends during the first nine months, including $17.6m from a special dividend.
Balance sheet and liquidity
- At September 30, cash and cash equivalents were $14.2m and restricted cash was $4.8m, versus $15.5m and $7.4m, respectively, at year-end 2010.
- Total debt was $71.2m, down from $74.5m at December 31, 2010. Current maturities rose to $25.7m from $10.0m; long-term debt declined to $45.5m from $64.5m.
- Marketable equity securities were carried at $281.2m, including $259.5m of Valhi shares and $21.7m of TIMET shares. NL’s Kronos investment had a carrying value of $270.5m; its quoted market value was $566.3m.
- NL reported total assets of $756.7m and total equity of $404.3m. Environmental remediation liabilities totaled $42.1m, of which $7.7m was current.
- Operating cash flow improved year over year, helped by Kronos dividends and improved operating results. Investing activities used $3.8m and financing activities used $21.2m in the nine-month period; NL paid $18.2m in dividends.
Material changes and unusual items
- NL stockholder net income rose year over year, reflecting stronger Kronos earnings and a $16.1m insurance recovery recognized in Q3 2011. The recovery related substantially to a settlement for past lead-pigment litigation defense costs; it had not been collected by September 30.
- CompX received approximately $7.5m in a first-quarter patent-litigation settlement. CompX also recorded $2.0m of facility-consolidation costs for the nine months and $1.1m of held-for-sale asset write-downs in 2011.
- NL recorded $10.5m of environmental remediation expense in the first nine months of 2011. By comparison, 2010 included a $32.2m litigation settlement expense and $18.6m of insurance recoveries. These items make period comparisons less indicative of underlying trends.
- CompX acquired a Canadian ergonomic component products business in July for approximately $4.9m, with up to $1.5m additional contingent consideration. Its contribution to reported 2011 sales was not significant.
- Other comprehensive income was $96.2m for the nine months, primarily reflecting gains on marketable securities; NL’s accumulated other comprehensive loss narrowed from $108.8m to $12.6m.
Outlook, risks and contingencies
- CompX: Management said orders were flat late in Q2 and through Q3 and that renewed sales growth was uncertain. It cited higher raw-material costs, unfavorable product mix and currency effects as margin pressures, and described ongoing cost, productivity and market-share initiatives.
- Kronos: Kronos expected near-full-capacity operations and continued price increases through the remainder of 2011, with higher selling prices expected to more than offset rising production costs. Management’s outlook depends on demand, competition, capacity changes, raw-material costs and currency movements.
- NL expected 2011 general corporate expenses to exceed 2010 levels because of litigation and environmental costs. It stated that cash on hand and expected operating cash flow should cover liquidity needs, while noting that actual results could adversely affect liquidity. CompX’s revolving credit facility was due to expire in January 2012 and CompX expected to renew it.
- Environmental remediation costs are uncertain: NL had accrued approximately $42m for about 50 sites, with a reasonably possible range up to approximately $73m; it could not estimate costs for five additional sites. The company cautioned that actual costs could exceed accruals.
- NL had not accrued liabilities for pending lead-pigment litigation or asbestos-related personal-injury claims, citing uncertainty and inability to reasonably estimate exposure. It warned that adverse outcomes could materially affect earnings, financial condition or liquidity. New developments included reversal of the dismissal in the Baykeeper case and a CERCLA contribution suit brought by ASARCO; NL said it would defend the claims.
- NL repaid its $10.9m Valhi note in October 2011. CompX collected a $15.0m note receivable that month and used the proceeds to prepay $15.0m of its TIMET note payable.
Important facts for investors to verify
- Whether the $16.1m insurance recovery was collected and whether future insurance reimbursements remain probable and estimable.
- Underlying CompX profitability excluding the patent settlement, insurance recoveries, litigation items, facility costs and asset write-downs.
- Progress on environmental sites, the possible exposure above the $42m accrual, and developments in lead-pigment, asbestos and other litigation.
- Renewal terms and availability of CompX’s credit facility, debt maturities and the effect of subsequent repayments on liquidity.
- Whether Kronos’s pricing, demand and cost outlook held up, and the impact of its earnings and dividends on NL’s results and cash resources.