NL Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012. The filing is for NL Industries, Inc. (not “NLI Holdings, Inc.”). NL is primarily a holding company: it consolidates majority-owned CompX and accounts for its approximately 30% interest in Kronos Worldwide using the equity method. Unless otherwise indicated, dollar amounts below are in millions.
Financial results and position
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| CompX net sales | $37.6 | $35.2 | $73.1 | $70.0 |
| CompX gross margin | $10.0 | $9.8 | $19.5 | $18.5 |
| NL income from operations | $14.2 | $(9.0) | $2.1 | $(3.3) |
| Equity in Kronos earnings | $19.6 | $27.1 | $61.2 | $45.4 |
| Net income attributable to NL stockholders | $26.0 | $16.9 | $47.0 | $34.1 |
| Basic and diluted earnings per share | $0.53 | $0.35 | $0.97 | $0.70 |
- CompX gross margin was 27% of sales in Q2 2012 versus 28% a year earlier; first-half gross margin was 27% versus 26%. NL’s results also reflect its equity-method earnings from Kronos and corporate items, so NL operating income is not a measure of CompX’s operating performance alone.
- First-half 2012 operating cash flow was $4.5, versus $22.0 in first-half 2011. Investing activities provided $13.1, including $15.6 received in the final closing of a New Jersey real-estate litigation settlement; financing used $21.9. Cash and cash equivalents ended at $7.5, and restricted cash was $5.2.
- At June 30, total debt was $28.0, down from $37.3 at December 31, 2011; current maturities were $6.1. Total assets were $683.5 and total equity $378.9. Marketable securities were $195.9 and the Kronos investment carrying value was $320.7.
- Accumulated other comprehensive loss widened to $86.9 from $4.7 at year-end, primarily reflecting a $78.6 first-half after-tax loss on marketable securities. Their quoted market value fell to $195.9 from $311.4.
Material changes and unusual items
- NL’s Q2 and first-half 2012 results include a $15.0 pre-tax gain from the final closing of a settlement involving former New Jersey property. The related $15.6 cash receipt is classified as investing cash flow.
- First-half 2011 included a $7.5 CompX patent-litigation settlement gain. CompX’s first-half operating income fell to $6.8 from $11.9, largely because of that prior-year gain; excluding the specified prior-year litigation and facility-consolidation items, management reported a 3% increase in CompX first-half operating income.
- Kronos contributed $19.6 of NL equity earnings in Q2, down from $27.1, while first-half contribution rose to $61.2 from $45.4. Kronos Q2 operating income declined 23% to $110.6; first-half operating income increased 30% to $320.0.
- Accrued environmental remediation and related costs rose to $53.7 from $41.6 at year-end, including $14.0 of first-half additions charged to expense and $2.0 of payments. The accrued amount covers approximately 50 sites; the estimated upper end of reasonably possible costs at estimable sites was about $83, including the accrual. NL could not estimate a range for approximately five sites.
Outlook, risks and contingencies
- CompX: Management described customer demand as unstable. Office-furniture demand was weak, while first-half sales from the acquired ergonomics healthcare product line partly offset it. Whether furniture demand improves and how the acquired line performs for the rest of 2012 were uncertain. Management expects full-year general corporate expense to exceed 2011, citing anticipated litigation and environmental costs.
- Kronos: It expected to operate at 90%–95% of attainable practical capacity for 2012, with full-year sales volumes below 2011 and sales exceeding production. Management expected average selling prices for the rest of 2012 to remain above comparable 2011 periods, but estimated its 2012 production cost per metric ton of TiO₂ would rise approximately 50%–60% versus 2011. It expected second-half operating income likely to be below the prior-year period as lower volume and higher costs outweighed pricing benefits.
- NL said it expected adequate liquidity for obligations through June 30, 2013. Valhi had agreed to provide up to $40.0 of revolving loans, subject to its discretion; CompX had $28.1 of available borrowing capacity. NL, CompX and Kronos were reported in compliance with debt covenants at June 30, 2012.
- Lead-pigment litigation remains unaccrued because NL says loss is not probable or reasonably estimable; an adverse outcome could materially affect results, financial condition and liquidity. Environmental costs may exceed recorded accruals. The filing also discusses asbestos-related claims, insurance-recovery uncertainty, tax examinations and other legal matters. In July 2012, NL reported new proceedings and EPA settlements concerning former facilities.
- Key risks identified include economic and product-demand cyclicality, raw-material and energy cost increases, currency movements, liquidity and subsidiary distributions, debt refinancing and covenants, environmental remediation, litigation outcomes, and tax matters. Management stated that no material changes had occurred in the previously disclosed risk factors through June 30.
Important facts for investors to verify
- How much of reported earnings and cash generation is recurring versus the $15.0 real-estate settlement gain, insurance recoveries and equity-method earnings from Kronos.
- Whether Kronos’s expected pricing can offset its projected cost inflation and lower sales volumes, and how those developments affect NL’s equity earnings and dividends.
- Environmental remediation exposure, including the $53.7 accrual, the approximately $83 upper estimate for estimable sites, and sites for which costs cannot yet be estimated.
- Liquidity available at NL itself, given cash held at subsidiaries, restrictions on securities resales, and the discretionary nature of Valhi’s revolving loan commitment.
- Progress and potential costs of lead-pigment, asbestos, environmental and tax matters, including the July 2012 developments described in the filing.