NL Industries, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; filed August 7, 2013. Figures below are in U.S. dollars. Financial statements are unaudited. The registrant is NL Industries, Inc., despite the request metadata naming NLI Holdings, Inc.
Business context
NL is primarily a holding company. It operates component-products businesses through majority-owned CompX and accounts for its approximately 30% interest in titanium dioxide producer Kronos Worldwide under the equity method. CompX sold its Furniture Components operations in December 2012; comparisons of 2013 continuing operations therefore exclude that business. Valhi owned approximately 83% of NL at quarter-end.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $24.0 million | $22.1 million | $45.5 million | $42.6 million |
| Income (loss) from operations | $(12.4) million | $12.5 million | $(15.3) million | $(1.0) million |
| Equity in Kronos earnings (losses) | $(10.3) million | $19.6 million | $(22.8) million | $61.2 million |
| Net income (loss) attributable to NL stockholders | $(14.3) million | $26.0 million | $(16.4) million | $47.0 million |
| Basic and diluted EPS | $(0.29) | $0.53 | $(0.34) | $0.97 |
- CompX sales increased 9% in Q2 and 7% year to date. Its gross margin rose to 32% from 29% in Q2 and to 30% from 29% year to date; operating income was $2.9 million in Q2 and $4.4 million for six months. Higher postal-product demand, market-share gains in marine products, improved production efficiency and lower medical costs contributed.
- The reported sales and margins largely reflect CompX; NL’s results also include its equity-method share of Kronos. Kronos reported a Q2 operating loss of $47.7 million and a six-month operating loss of $94.6 million, versus operating income of $110.6 million and $320.0 million in the comparable 2012 periods. Lower TiO₂ selling prices and higher feedstock costs were key pressures.
- Cash from operating activities was $2.6 million in the first half, down from $4.5 million. Investing activities provided $4.1 million; financing activities used $13.0 million, including $12.2 million of dividends. Cash and cash equivalents declined from $78.0 million at year-end to $71.7 million at June 30.
- At June 30, current assets were $107.2 million and current liabilities $20.2 million. Cash, cash equivalents and restricted cash totaled $77.8 million. NL also held Valhi shares with a $197.5 million market value and Kronos shares with a $572.0 million market value; the Kronos investment’s carrying value was $285.1 million.
- NL’s balance sheet showed $18.0 million of CompX debt, including $1.0 million current. CompX repaid the remaining principal in July 2013. NL had no borrowings on its $40 million Valhi revolving facility, which was available at quarter-end. Kronos’s debt is at the equity-method investee, not consolidated as NL debt; Kronos prepaid its remaining $100 million term-loan balance in July, partly funded with $50 million of revolver borrowings.
Material changes and unusual items
- NL’s earnings deterioration chiefly reflects the reversal from Kronos equity earnings to losses and the absence of the $15.0 million real-estate litigation settlement gain recorded in Q2 2012. Q2 2013 corporate expense was $16.3 million, including $11.8 million of environmental remediation and related costs, versus $5.1 million of corporate expense and $1.2 million of environmental costs in Q2 2012.
- Environmental remediation accruals rose from $48.0 million at year-end to $59.8 million at June 30, including $13.0 million of additions charged to expense, net of $1.3 million of payments. About $4.8 million was current and $55.0 million noncurrent.
- Other comprehensive income was $8.7 million for the first half, principally including $11.8 million of unrealized gains on Valhi securities, partly offset by currency translation losses. This is separate from net income.
Outlook, risks and contingencies
- NL said CompX demand remained uncertain and did not provide a specific sales or earnings forecast. Management expected 2013 net general corporate expenses to be comparable with 2012, but cautioned that litigation developments or environmental matters could increase expenses materially.
- Kronos expected its 2013 operating results to be significantly below 2012, while expecting improvement in the second half versus the first half. It cited higher-cost feedstock purchased in 2012, lower selling prices, and the timing and uncertainty of price increases. It expected possible higher sales volumes if demand improved, but noted outcomes depended on market conditions.
- Kronos’s Canadian plant was operating at approximately 15% of capacity during a labor lockout after the collective bargaining agreement expired in June. Kronos expected minimal customer disruption using inventory and other facilities, but no new agreement had been reached as of the filing.
- Environmental costs are uncertain: NL estimated a reasonably possible range up to approximately $156 million, including the $60 million accrued, for sites where it could estimate costs; it could not estimate a range for approximately five other sites. Lead-pigment litigation remains unaccrued because NL said liability was not probable or reasonably estimable. NL also reported 1,125 pending asbestos-related cases involving approximately 1,643 plaintiffs, with no accrual recorded.
- Tax authorities were examining certain returns. Kronos disputed Canadian reassessments that could result in approximately $15.6 million of cash taxes if fully assessed; the company said it had adequate accruals. NL identified market demand, commodity costs, currency movements, liquidity, litigation, environmental remediation and tax matters as risks.
Most important facts for investors to verify
- Whether Kronos’s TiO₂ pricing, input costs and operating performance improved as anticipated in the second half of 2013, and the financial effects of the Canadian labor lockout.
- Subsequent changes in environmental remediation estimates, payments and the potential costs at sites where no range was yet estimable.
- Developments in lead-pigment and asbestos litigation and whether any new information changes NL’s assessment that losses cannot be accrued or estimated.
- Post-quarter debt repayments and borrowing: CompX’s July repayment and Kronos’s term-loan prepayment and revolver borrowing.
- CompX’s demand trends and margin sustainability following the sale of Furniture Components, and the effect of its reduced quarterly dividend on cash available to NL.