Business context and reporting period
NL Industries, Inc. (the registrant named in the filing) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. NL is primarily a holding company: it consolidates majority-owned CompX International, a components manufacturer, and accounts for its approximately 30% interest in titanium dioxide producer Kronos Worldwide under the equity method. Unless noted, financial statement amounts below are in millions of U.S. dollars.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales (CompX) | $28.9 | $26.8 | $56.8 | $52.6 |
| Gross margin | $9.2 | $8.6 | $17.7 | $16.4 |
| Income (loss) from operations | $(1.1) | $(4.7) | $1.9 | $(4.7) |
| Equity in Kronos earnings (losses) | $(48.6) | $10.1 | $(43.0) | $14.4 |
| Net income (loss) attributable to NL stockholders | $(29.3) | $5.5 | $(19.2) | $9.2 |
| Basic and diluted earnings (loss) per share | $(0.60) | $0.11 | $(0.39) | $0.19 |
- CompX gross margin was approximately 31.7% in Q2 2015 versus 32.1% a year earlier; operating margin was approximately 14.9% in both periods. First-half gross margin was approximately 31.2% in both years.
- Net cash provided by operating activities was $12.7 million in the first half, compared with $6.9 million in 2014. Capital expenditures were $2.0 million; cash and cash equivalents rose to $83.2 million from $72.6 million at year-end. Aggregate cash, cash equivalents and restricted cash was $88.1 million.
- At June 30, current assets were $122.6 million and current liabilities $25.1 million. NL and CompX had no debt outstanding; NL had the full $40 million Valhi revolving facility available, subject to Valhi’s discretion. Kronos had $343.9 million of long-term debt.
- NL’s balance-sheet investment in Kronos was $167.9 million, down from $237.7 million at year-end. NL held Valhi shares valued at $81.4 million and Kronos shares with a quoted market value of $386.0 million. NL stockholders’ equity was $200.6 million.
Material changes and management commentary
- NL’s earnings swung to a loss primarily because its equity-method share of Kronos results changed from earnings to losses. Kronos reported a $159.8 million Q2 net loss, including a $150.3 million noncash deferred-tax valuation allowance against German and Belgian tax assets. NL attributed $0.61 per share of its Q2 loss to its share of that allowance and $0.07 per share to Kronos workforce-reduction charges.
- Kronos sales declined 19% in Q2 and 16% in the first half, mainly reflecting TiO₂ price declines and adverse currency translation, partly offset by higher sales volumes. Kronos’s Q2 operating result was a $10.4 million loss, versus $44.3 million of operating income in Q2 2014. Its second-quarter restructuring charge was $21.1 million, related to reductions affecting approximately 110 employees.
- CompX sales rose 8% in both Q2 and the first half, driven chiefly by government security-product demand. Marine Components also contributed to first-half growth. Management said Q2 Security Products mix reduced variable margins, while higher production and improved efficiencies supported Marine Components.
- NL recognized $3.4 million of insurance recoveries in the first half, substantially from a settlement for past litigation defense costs. First-half corporate expense was lower than in 2014, principally because environmental remediation costs declined. NL expects full-year 2015 corporate expenses to be lower than 2014, but cautioned that litigation and environmental developments could increase them.
- CompX management anticipated continued strong demand through 2015, while noting that government security demand could ease in the second half and that demand growth was not broad-based. Kronos expected 2015 sales volumes above 2014 and production at practical capacity in the second half, but forecast full-year operating income significantly below 2014, principally due to lower average selling prices.
- NL said it expected sufficient liquidity for short-term obligations through June 30, 2016 and did not expect to draw on the Valhi facility in the remainder of 2015. It estimated 2015 dividends from Kronos, CompX and Valhi of $24.4 million in total, based on then-current dividend rates; actual distributions are not assured.
Risks, contingencies and unusual items
- Environmental remediation accruals totaled $112.0 million at June 30, 2015, covering approximately 46 sites; the estimated upper end of reasonably possible costs for estimable sites was approximately $165 million, including amounts accrued. NL could not estimate a range for about five additional sites.
- In the California lead-pigment case, a trial court judgment held NL and two other defendants jointly and severally liable for an aggregate $1.15 billion abatement award. NL appealed, maintained that loss was not probable and could not be reasonably estimated, and recorded no accrual. NL warned that an adverse resolution could materially affect results, financial position and liquidity.
- NL disclosed 166 asbestos-, silica- or mixed-dust-related cases involving approximately 712 plaintiffs and had not accrued amounts, citing uncertainty and inability to estimate liability. Insurance reimbursement for defense costs and indemnity is also uncertain.
- Other key risks include Kronos’s cyclical TiO₂ market, pricing and currency exposure, environmental and legal liabilities, tax examinations, reliance on subsidiary and affiliate dividends, and Kronos’s ability to comply with debt covenants. Kronos reported covenant compliance at June 30, 2015.
- The filing provides no specific NL consolidated earnings or revenue guidance. Interim results may not indicate full-year results. NL said it was evaluating the forthcoming revenue-recognition standard and had not determined its adoption method.
Important facts for investors to verify
- Track Kronos pricing, volumes, currency impacts, restructuring savings and the conditions required to reverse its $150.3 million deferred-tax valuation allowance.
- Monitor the California lead-pigment appeal and changes to environmental remediation estimates, including the unestimable sites.
- Assess whether CompX’s government-related demand persists in the second half and whether product mix affects margins.
- Confirm cash generation, access to the Valhi credit facility, and actual dividends received from affiliates against the amounts assumed in NL’s liquidity outlook.
- Review Kronos debt, covenant compliance and its outlook for lower 2015 operating income as TiO₂ selling prices evolve.