NL Industries, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The filing identifies the registrant as NL Industries, Inc. (not “NLI Holdings, Inc.”). NL is primarily a holding company: it consolidates majority-owned CompX and accounts for its approximately 30% Kronos Worldwide interest under the equity method. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2014 | Q3 2015 | Nine months 2014 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $26.5 | $26.5 | $79.1 | $83.3 |
| Gross margin | $8.1 | $8.1 | $24.5 | $25.8 |
| Income from operations | $8.0 | $1.0 | $3.2 | $2.9 |
| Net income (loss) attributable to NL stockholders | $13.9 | $0.9 | $23.1 | $(18.3) |
| Basic and diluted earnings (loss) per share | $0.29 | $0.02 | $0.47 | $(0.38) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $22.9 | $18.3 |
Gross margin was about 31% of sales in both comparable periods. Q3 operating income fell sharply as prior-year insurance recoveries were much higher; nine-month operating income was also affected by lower insurance recoveries, partly offset by improved CompX results and lower corporate costs. The nine-month net loss was principally driven by NL’s $46.6 million equity-method loss from Kronos, compared with $24.1 million of equity earnings in 2014. NL recorded income tax benefits of $3.6 million for Q3 and $25.5 million year to date in 2015.
Balance sheet, liquidity and debt
- At September 30, 2015, cash and cash equivalents were $88.4 million; including restricted cash, total cash was $93.1 million. Cash and cash equivalents were $72.6 million at December 31, 2014.
- Current assets were $125.3 million and current liabilities $22.0 million, versus $108.0 million and $24.6 million, respectively, at year-end 2014.
- NL and CompX had no outstanding debt. NL had the full $40 million Valhi revolving facility available; any borrowing is at Valhi’s discretion. Kronos had $342.9 million of long-term debt and reported compliance with its debt covenants.
- NL’s total assets declined to $370.2 million from $500.8 million at year-end, reflecting, among other items, lower quoted values for its Valhi and Kronos holdings. NL held Valhi shares valued at $27.2 million and Kronos shares with a market value of $218.7 million; the Kronos investment’s carrying value was $154.6 million.
- Nine-month capital expenditures were $2.6 million. Management said it expected sufficient liquidity for obligations through September 30, 2016. The filing reports no material off-balance-sheet financing arrangements other than operating leases described in the 2014 annual report.
Material changes and management commentary
- CompX sales were flat in Q3 and up 5% year to date, to $83.3 million. Year-to-date operating income increased 8% to $11.4 million, supported by demand from government customers and growth in marine products. Management said Q3 sales had returned to more normalized levels after a strong first half; seasonal demand typically subsides in Q4.
- Kronos’ Q3 sales fell 19% to $336.5 million and its nine-month sales fell 17% to $1.06 billion. Lower TiO2 prices and adverse currency translation outweighed higher sales volumes. Kronos reported an operating loss of $3.2 million in Q3 and operating income of $18.6 million year to date, down from $47.9 million and $118.2 million, respectively.
- Kronos recorded a $12.0 million pre-tax impairment on a Valhi marketable equity security in Q3. It also recorded $21.5 million of workforce-reduction charges through September 30, affecting approximately 160 people.
- Kronos recognized a $150.3 million non-cash deferred tax valuation allowance in Q2 against German and Belgian tax assets, plus $2.3 million in Q3. NL’s share of Kronos’ valuation-allowance-related tax expense contributed materially to NL’s equity-method loss. Kronos said additional Q4 losses in those jurisdictions could increase the allowance.
- Management expected Kronos’ 2015 operating income to be significantly below 2014 and considered a Q4 operating loss likely, primarily because of lower selling prices. It expected higher 2015 sales volumes if global economic conditions did not deteriorate, and anticipated lower feedstock costs per ton than in the comparable 2014 period. The filing gives no quantified earnings guidance for NL as a whole.
- NL expected its 2015 general corporate expenses to be below 2014, mainly due to lower environmental and litigation costs, while cautioning that changed claims, sites or case developments could raise costs.
Risks, contingencies and unusual items
- Environmental remediation: NL accrued $111.6 million at September 30, 2015 for approximately 43 sites. The estimated upper end of reasonably possible costs for sites with estimable ranges was approximately $166 million, including the accrual; costs at about five additional sites could not be reasonably estimated. Actual costs may exceed accruals.
- Lead-pigment litigation: NL continued to appeal the California Santa Clara judgment holding it and two other defendants jointly and severally liable for abatement funding of $1.15 billion. NL did not accrue a loss, stating that loss was not probable and could not be reasonably estimated, but warned that an adverse resolution could materially affect results, financial position and liquidity.
- Other claims: NL reported 166 asbestos-related cases involving approximately 712 plaintiffs, plus approximately 8,692 claims administratively dismissed or inactive in Ohio. No amounts were accrued for these cases because liability and any loss could not be reasonably estimated. NL also described ongoing insurance-coverage disputes and tax examinations.
- Market and operating risks: The filing highlights TiO2 price and demand cyclicality, currency movements, raw-material costs, competition, supply capacity, environmental regulation, litigation outcomes and potential limits on dividends from subsidiaries and affiliates.
Most important facts for investors to verify
- Progress and outcome of the appeal of the Santa Clara lead-pigment judgment, and any change in NL’s loss-contingency assessment.
- Environmental remediation accruals, the unestimable sites and any developments that could push costs above the $166 million stated range.
- Kronos’ TiO2 pricing, margins, Q4 outlook, restructuring savings and further German and Belgian tax valuation allowances.
- NL’s liquidity and access to affiliate dividends and the discretionary $40 million Valhi facility; distinguish NL’s debt-free position from Kronos’ debt.
- Changes in the market value and accounting value of NL’s Valhi and Kronos investments, and the related impact on comprehensive income and equity.