Business context and reporting period
NL Industries, Inc. (the filing registrant; the request metadata says NLI Holdings, Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. NL is primarily a holding company: it consolidates majority-owned CompX International, a component-products manufacturer, and accounts for its approximately 30% interest in titanium dioxide producer Kronos Worldwide using the equity method. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $33.7 | $32.4 | $64.9 | $60.8 |
| Gross margin | $10.9 (32%) | $11.2 (35%) | $20.6 (32%) | $20.7 (34%) |
| Operating loss | $(12.9) | $(60.6) | $(10.4) | $(63.4) |
| Net income (loss) attributable to NL stockholders | $5.9 | $(42.6) | $21.1 | $(28.4) |
| Basic and diluted EPS | $0.12 | $(0.87) | $0.43 | $(0.58) |
| Operating cash flow | Not separately stated for the quarter | $19.2 | $13.5 |
Reported sales are CompX sales; NL’s results also include its share of Kronos earnings and changes in the value of marketable securities. Q2 and first-half net income improved substantially year over year, but included volatile security gains and material litigation and insurance items. Kronos equity earnings fell to $9.0 million in Q2 and $18.2 million in the first half, from $23.6 million and $45.1 million, respectively. NL recorded marketable-securities gains of $9.5 million for Q2 and $14.9 million for the first half of 2019, compared with losses of $18.7 million and $20.3 million in 2018.
At June 30, 2019, cash and cash equivalents were $128.6 million, restricted cash was $3.0 million, and combined cash and restricted cash was $132.3 million. Current assets were $165.7 million and current liabilities $43.0 million. Total assets were $590.8 million and total equity $328.6 million. NL had $0.5 million of affiliate debt outstanding under its $50 million revolving facility, with $49.5 million available; it reported covenant compliance. CompX had no debt. Capital expenditures were $1.8 million in the first half. NL also held $40.0 million in notes receivable from affiliate Valhi.
NL’s investment in Kronos had a $264.1 million carrying value and $539.6 million quoted market value at June 30. Its Valhi shares were valued at $42.7 million. These quoted values are not equivalent to cash available for use.
Material changes versus the prior comparable period
- CompX sales rose 4% in Q2 and 7% in the first half, chiefly on higher Marine Components sales. Security Products sales were broadly flat; Marine Components sales increased 32% and 40%, respectively.
- CompX gross margin fell to 32% from 35% in Q2 and to 32% from 34% in the first half. Management cited wage and payroll-cost pressure in Security Products and less favorable Marine Components product and customer mix. CompX operating income declined 6% in Q2 and 4% in the first half.
- NL’s litigation settlement expense was $19.6 million in Q2 2019 versus $62.0 million in Q2 2018. Higher insurance recoveries and favorable year-over-year movements in marketable securities also aided comparisons.
- Kronos sales increased modestly, but lower TiO2 selling prices and higher feedstock and production costs sharply reduced operating income. Kronos reported first-half operating income of $95.5 million versus $227.4 million in 2018.
- Operating cash flow increased $5.7 million year over year to $19.2 million. Investing cash outflow was $7.7 million, including net $6.0 million of loans to Valhi and $1.8 million of capital expenditures.
Outlook, commentary, risks and contingencies
NL expected full-year 2019 sales to exceed 2018 and operating income to be comparable to the prior year; management expected Marine sales growth to moderate in the second half. The company said tariff impacts were minimal at the time but were being monitored. It expected sufficient liquidity for obligations through June 30, 2020, based on its operating expectations and available affiliate credit.
Kronos expected 2019 sales volumes and total sales to exceed 2018, but operating income to be lower because of lower expected average selling prices and higher feedstock costs. Management anticipated the market could support further price increases during the remainder of 2019. These expectations depend on demand, pricing, costs, currency movements, competition and industry capacity.
Santa Clara lead-pigment settlement: On July 24, 2019, the court approved a global settlement and dismissed the case with prejudice. NL expressly denied liability. NL’s share is $101.7 million: $25 million due within 60 days of approval and $76.7 million in six annual installments. At June 30, NL recorded a total settlement accrual of approximately $96.6 million, including $25 million current and $71.6 million present value of installments, and a $15.6 million insurance-recovery receivable committed toward the final payment. The Q2 2019 settlement expense was $19.6 million. The settlement superseded an unapproved 2018 agreement.
Environmental remediation liabilities totaled $96.8 million, including $4.7 million current and $92.1 million noncurrent; the estimated upper end of reasonably possible costs at estimable sites was approximately $117 million. NL could not estimate a range for approximately five sites. The filing warns that future litigation outcomes, environmental developments, insurance recoveries and affiliate distributions could materially affect results or liquidity. Other risks include cyclical TiO2 markets, input costs, foreign exchange, tariffs, customer demand and regulatory changes.
NL reported effective disclosure controls as of June 30, 2019, and no material change in internal control over financial reporting during the quarter. Adoption of the new lease accounting standard did not materially affect its financial statements. The filing provides no specific NL consolidated full-year earnings or EPS guidance.
Important facts for investors to verify
- Confirm the registrant identity: the supplied filing is for NL Industries, Inc., not a company named NLI Holdings, Inc.
- Track the payment schedule and funding of NL’s $101.7 million Santa Clara settlement, including the $15.6 million insurance receivable and installment accretion.
- Assess environmental exposure against the $96.8 million recorded reserve, the estimated $117 million upper range, and sites where costs remain unestimable.
- Separate recurring operating performance from Kronos equity earnings, Valhi-share mark-to-market gains, litigation charges and insurance recoveries.
- Monitor CompX labor costs and Marine demand, and Kronos TiO2 pricing, feedstock costs and operating margins against management’s outlook.
- Review the availability and terms of affiliate credit, reliance on subsidiary and affiliate dividends, and liquidity needs at the parent-company level.