Business context and reporting period
NL Industries, Inc. filed this Form 10-Q for the quarter and nine months ended September 30, 2014. 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 using the equity method. Unless otherwise stated, financial amounts below are in U.S. dollars.
The request metadata names NLI Holdings, Inc., but the filing identifies NL Industries, Inc. as the registrant; verify the intended issuer.
Financial performance and position
- Third-quarter revenue and earnings: Net sales were $26.5 million, up 9% year over year. Gross margin was $8.1 million, or 31% of sales. Operating income was $8.0 million, versus an operating loss of $0.4 million. Net income attributable to NL stockholders was $13.9 million, or $0.29 per share, compared with a $5.9 million loss, or $0.12 per share.
- Nine-month performance: Net sales were $79.1 million, up 13%; gross margin was $24.5 million, or 31% of sales. Operating income was $3.2 million versus an operating loss of $15.7 million. NL stockholder net income was $23.1 million, or $0.47 per share, versus a $22.3 million loss, or $0.46 per share.
- Cash flow: Operating cash flow for the first nine months was $22.9 million, compared with $7.4 million in 2013. Investing activities used $2.7 million, including $2.2 million of capital expenditures; financing activities used $0.2 million. Cash and cash equivalents rose to $72.5 million from $52.6 million at year-end 2013. Cash, cash equivalents and restricted cash totaled $78.0 million.
- Liquidity, debt and assets: Total assets were $540.3 million, down from $685.8 million at December 31, 2013, largely reflecting the lower market value of Valhi shares held. Current assets were $108.4 million versus current liabilities of $32.2 million. NL and CompX had no outstanding debt; the full $40 million Valhi revolving facility was available, subject to Valhi’s discretion. Kronos had $345.7 million of long-term debt and reported compliance with its covenants.
- Investments and equity: NL’s Valhi shareholding was valued at $93.9 million, down from $252.7 million at year-end; its Kronos investment was carried at $274.1 million. NL stockholders’ equity was $263.3 million, compared with $355.4 million at year-end, with accumulated other comprehensive loss increasing to $150.3 million, mainly reflecting unrealized losses on marketable securities and currency translation.
- Other liabilities: Environmental remediation and related accruals totaled $117.0 million, including $12.7 million current. Deferred tax liabilities declined to $101.0 million from $161.9 million.
Material changes versus prior periods
- CompX sales rose 9% in the quarter and 13% for nine months. Nine-month operating income increased 45% to $10.6 million, supported by higher demand and production volumes. Security Products benefited from government-customer initiatives, transportation demand and electronic-lock sales; Marine Components benefited from market-share gains.
- Kronos’ results improved substantially: NL recorded equity earnings of $9.7 million in the quarter and $24.1 million for nine months, compared with equity losses of $9.1 million and $31.9 million, respectively, in 2013. Lower feedstock costs and higher production helped Kronos, while lower TiO₂ prices and, for the nine-month period, lower sales volumes weighed on sales.
- Insurance recoveries were $8.8 million in the third quarter and $10.0 million for nine months, largely reflecting a settlement for past litigation-defense costs. NL said the recoveries contributed approximately $0.12 per share after tax in the quarter and $0.13 for nine months.
- NL’s nine-month corporate expense and other net improved to $17.6 million from $26.9 million, with environmental remediation costs down to $6.1 million from $12.7 million and litigation costs down to $5.9 million from $8.1 million.
- NL suspended its regular quarterly dividend in May 2014; no NL cash dividend was paid in the first nine months, versus $0.375 per share in the comparable 2013 period.
Outlook, risks and unusual items
- NL expected continued strong demand from large government and commercial customers in the fourth quarter, while noting seasonal demand would subside and small-business demand remained soft. Management expected full-year 2014 general corporate expenses to be below 2013, primarily due to lower expected environmental costs. No formal consolidated earnings guidance was provided.
- Management highlighted commodity-cost volatility: zinc, brass and stainless steel represented approximately 11% of CompX cost of goods sold. Competitive conditions may limit the ability to pass cost increases to customers.
- Kronos expected 2014 operating income to exceed 2013, citing lower feedstock costs, higher production and the prior-year litigation charge. It expected 2014 cost of sales per ton to be below 2013, but warned that TiO₂ prices had declined and further pricing depended on market conditions.
- Lead-pigment litigation: In the Santa Clara case, a California court entered a January 2014 judgment finding NL and two other defendants jointly and severally liable and ordering $1.15 billion in aggregate abatement funding. NL appealed. NL stated it did not consider a loss probable and had not accrued a liability, but warned that an adverse ultimate outcome could materially affect results, financial position and liquidity.
- Environmental contingencies: NL accrued approximately $117 million for about 45 sites; the estimated upper end of reasonably possible costs for sites with estimable ranges was approximately $156 million, including the accrual. Costs at five additional sites could not then be reasonably estimated. Actual costs could exceed accruals.
- Controls: Management concluded disclosure controls were ineffective due to a material weakness at CompX involving monitoring of user access and segregation of duties after implementation of a new ERP system. Remediation controls had been introduced, but testing was ongoing and completion was expected in the fourth quarter of 2014.
- Other risks include asbestos and environmental claims, tax examinations, insurance-recovery uncertainty, currency movements, cyclical TiO₂ demand, and Kronos’ ability to maintain debt-covenant compliance. NL reported no material changes to its disclosed risk factors.
Important facts for investors to verify
- Confirm the intended issuer, given the metadata name NLI Holdings, Inc. versus the filing registrant NL Industries, Inc.
- Track the Santa Clara appeal and any change in NL’s assessment or accrual of the potential $1.15 billion aggregate judgment.
- Monitor environmental remediation accruals, unestimable sites and actual cash payments against the estimated cost range.
- Assess whether CompX’s ERP access-control weakness was remediated after testing, and whether management subsequently concluded controls were effective.
- Verify sustainability of CompX demand and margins, Kronos TiO₂ pricing and feedstock-cost trends, and cash distributions from affiliates.
- Confirm future dividend decisions, NL’s liquidity needs and the availability of affiliate distributions and the discretionary Valhi credit facility.