Business context and reporting period
NL Industries, Inc. filed this Form 10-K for the fiscal year ended December 31, 2011; it is an annual report, not a standalone fourth-quarter filing. NL is primarily a holding company: it owns 87% of CompX International, a component-products manufacturer, and 30% of Kronos Worldwide, a titanium dioxide producer accounted for under the equity method. Accordingly, NL’s reported net sales principally reflect CompX, while Kronos contributes equity earnings rather than consolidated sales. The filing identifies NL Industries, Inc. as the registrant.
Financial performance and position
- Revenue and operating performance: Net sales were $138.8 million, up 2.6% from $135.3 million in 2010. Gross margin was $35.2 million (about 25% of sales), versus $36.0 million (27%) in 2010. Income from operations was $8.4 million, compared with an operating loss of $14.2 million in 2010, reflecting changes in corporate and other items as well as CompX’s performance.
- Profit: Net income attributable to NL stockholders was $81.7 million, or $1.68 per diluted share, versus $70.4 million, or $1.40 per share, in 2010. Equity in Kronos earnings rose to $97.6 million from $45.6 million. The 2010 comparison included a $78.9 million pretax gain from NL’s reduced ownership interest in Kronos, so reported annual earnings are affected by significant nonrecurring items in both years.
- CompX: Operating income increased to $15.5 million from $9.3 million. Its 2011 result included a $7.5 million patent-settlement gain; higher raw-material costs and facility-consolidation inefficiencies pressured gross margin.
- Cash flow: Operating cash flow was $48.2 million, up from $5.4 million in 2010, including $37.9 million of Kronos dividends and CompX settlement proceeds. Investing activities provided $9.8 million; financing activities used $61.5 million. NL paid $24.3 million in dividends, or $0.50 per share.
- Debt and liquidity: Consolidated debt was $37.3 million at year-end, down from $74.5 million; $10.0 million was classified as current maturities. The balance sheet reported $11.7 million cash and $3.3 million restricted cash. Separately, management described aggregate restricted and unrestricted cash of $16.5 million; these disclosed figures do not reconcile clearly in the provided filing text and warrant verification. NL also held marketable securities with a $311.4 million market value and Kronos shares valued at $635.3 million; these are investment assets, not cash. CompX had approximately $28 million available under its amended $30 million credit facility, and NL expected it might borrow from Valhi in 2012.
- Fourth-quarter context: 2011 Q4 net sales were $33.1 million and net income attributable to NL stockholders was $19.9 million, or $0.41 per diluted share. In 2010 Q4, those figures were $32.4 million and $56.9 million, or $1.17 per share; the 2010 quarter included the Kronos ownership-reduction gain.
Material changes, outlook and risks
- Kronos reported 2011 sales of $1.94 billion, up 34%, and net income of $321.0 million, versus $130.6 million in 2010. Average TiO2 selling prices rose 40%; sales volumes fell 5%, including fourth-quarter customer destocking. Kronos operated at full capacity and production reached a record 550,000 metric tons.
- NL expects 2012 net income to exceed 2011, primarily because of higher equity earnings from Kronos. Kronos expected higher 2012 prices and sales volumes, with operating income higher despite forecast production-cost-per-ton increases of approximately 50%–60%. These are expectations, not guarantees. CompX described uncertain demand, particularly in Furniture Components, and expected higher commodity input costs and adverse currency effects.
- Major risks include cyclical TiO2 demand and pricing, higher feedstock and energy costs, competition and capacity additions, CompX’s exposure to office-furniture demand, currency movements, and dependence on distributions from subsidiaries and affiliates. Kronos had approximately $365 million of consolidated debt, while NL’s ability to meet parent-level obligations depends substantially on subsidiary and affiliate distributions.
- NL had accrued approximately $42 million for environmental matters at about 50 sites; the estimated upper end of reasonably possible costs for estimable sites was about $72 million, including the accrual. Costs at approximately five additional sites could not then be estimated. Lead-pigment litigation had no accrual because liability was not considered probable and could not be reasonably estimated; an adverse outcome could be material. The California public-nuisance trial was scheduled for September 2012.
- Other notable items: NL recognized $16.9 million in insurance recoveries in 2011, substantially related to a settlement for past litigation-defense costs. Environmental and related expense increased substantially in 2011. The filing states that disclosure controls and internal control over financial reporting were effective, and the auditor gave an unqualified opinion.
Most important facts for investors to verify
- How much of 2011 earnings and operating cash flow is repeatable after separating Kronos equity earnings, dividends, insurance recoveries and CompX’s patent-settlement gain.
- The year-end cash and restricted-cash reconciliation, and the availability and terms of expected Valhi funding.
- Kronos’s ability to pass through forecast raw-material cost increases, sustain demand and prices, manage debt, and meet its production and earnings outlook.
- The range and timing of environmental remediation and lead-pigment litigation exposure, including matters for which NL says costs cannot yet be estimated.
- CompX’s underlying margins and demand trends after excluding settlement gains and facility-consolidation effects, and the expected return from the 2011 acquisition.