NL Industries(NL) - 2019 Q1 - Quarterly Report

Part I. FINANCIAL INFORMATION Financial Statements This section presents NL Industries' unaudited condensed consolidated financial statements for Q1 2019, accompanied by detailed notes on accounting policies and specific accounts Condensed Consolidated Financial Statements The company reported increased total assets and net income for Q1 2019, with a slight decrease in operating cash flow compared to the prior year Condensed Consolidated Balance Sheet Highlights (In thousands) | Account | Dec 31, 2018 | Mar 31, 2019 | | :--- | :--- | :--- | | Total Assets | $547,242 | $560,797 | | Total current assets | $166,644 | $165,746 | | Investment in Kronos Worldwide, Inc. | $255,565 | $259,061 | | Total Liabilities and Equity | $547,242 | $560,797 | | Total current liabilities | $81,323 | $77,043 | | Total noncurrent liabilities | $162,361 | $163,854 | | Total Equity | $303,558 | $319,900 | Condensed Consolidated Statement of Income Highlights (In thousands, except per share data) | Metric | Q1 2018 | Q1 2019 | | :--- | :--- | :--- | | Net sales | $28,413 | $31,176 | | Income (loss) from operations | $(2,798) | $2,518 | | Equity in earnings of Kronos Worldwide, Inc. | $21,479 | $9,225 | | Net income attributable to NL stockholders | $14,248 | $15,204 | | Basic and diluted net income per share | $0.29 | $0.31 | Condensed Consolidated Statement of Cash Flows Highlights (In thousands) | Cash Flow Activity | Q1 2018 | Q1 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,843 | $1,750 | | Net cash used in investing activities | $(220) | $(6,439) | | Net cash used in financing activities | $(83) | $(117) | | Net change in cash | $1,540 | $(4,806) | Notes to Condensed Consolidated Financial Statements These notes detail the company's ownership structure, significant investment in Kronos, and critical commitments including extensive lead pigment litigation and environmental remediation liabilities - Valhi, Inc. holds approximately 83% of NL Industries' outstanding common stock as of March 31, 2019[24] - The company owns a 30% interest in Kronos Worldwide, Inc. (Kronos) and consolidates its majority-owned subsidiary, CompX International Inc[25] - The company adopted the new lease accounting standard (ASU 2016-02) on January 1, 2019, which did not have a material effect on its financial statements due to minimal use of lease financing[93] Note 5 – Investment in Kronos Worldwide, Inc. NL Industries' investment in Kronos Worldwide increased due to equity earnings, despite a significant decline in Kronos' net income for Q1 2019 Investment in Kronos (In millions) | Metric | Amount | | :--- | :--- | | Balance at Dec 31, 2018 | $255.5 | | Equity in earnings of Kronos | $9.2 | | Dividends received from Kronos | $(6.3) | | Balance at Mar 31, 2019 | $259.1 | Kronos Selected Financials (In millions) | Metric | Q1 2018 | Q1 2019 | | :--- | :--- | :--- | | Net sales | $430.4 | $436.5 | | Income from operations | $107.5 | $49.0 | | Net income | $70.7 | $30.3 | Note 14 – Commitments and Contingencies This note details significant legal and environmental liabilities, including ongoing lead pigment litigation with a denied settlement and accrued environmental remediation costs with a potential higher range - In the Santa Clara lead pigment case, a proposed settlement for $80 million ($65 million to be paid by NL) was denied court approval in September 2018. The company has appealed this denial[69][72][73] - The abatement fund for the Santa Clara case was recalculated to $401 million. The trial court has appointed a receiver for the fund, but a final judgment is pending the outcome of the settlement appeal[75] Accrued Environmental Remediation Costs (In thousands) | Metric | Amount | | :--- | :--- | | Balance at Dec 31, 2018 | $98,211 | | Additions (credited) to expense | $(668) | | Payments, net | $(527) | | Balance at Mar 31, 2019 | $97,016 | - The upper end of the range of reasonably possible costs for environmental remediation is approximately $117 million, including the currently accrued $97 million. Costs for an additional 5 sites could not be reasonably estimated[85][86] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) This section provides management's analysis of the company's financial performance, highlighting increased net income driven by lower expenses despite reduced Kronos equity earnings, and discusses liquidity Results of Operations Operating income improved due to reduced corporate expenses, offsetting a significant decline in equity earnings from Kronos, while the CompX segment showed increased sales but flat operating income - The increase in net income per share from $0.29 in Q1 2018 to $0.31 in Q1 2019 was primarily due to favorable changes in marketable equity securities (+$7.1 million), lower environmental costs (+$4.9 million), and lower litigation fees (+$1.1 million), which offset a significant drop in equity earnings from Kronos (-$12.3 million)[101][104] CompX International Inc. Performance (In millions) | Metric | Q1 2018 | Q1 2019 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $28.4 | $31.2 | 10% | | Gross margin | $9.5 | $9.6 | 1% | | Income from operations | $4.4 | $4.3 | (2)% | - CompX's Marine Components net sales surged 49% in Q1 2019, driven by increased sales of wake enhancement systems and surf pipes. Security Products sales grew 3% due to higher sales to government customers[115][117][118] - Corporate expenses decreased significantly to $2.1 million in Q1 2019 from $8.0 million in Q1 2018, primarily due to lower litigation fees ($0.8 million vs $1.9 million) and a net environmental benefit of $0.7 million versus an expense of $4.2 million[122][125] Equity in Earnings of Kronos Worldwide, Inc. Kronos' equity earnings significantly declined due to lower TiO2 selling prices and higher raw material costs, despite increased sales volumes, with expectations for lower full-year operating income Kronos Performance Highlights (In millions) | Metric | Q1 2018 | Q1 2019 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $430.4 | $436.5 | 1% | | Income from operations | $107.5 | $49.0 | (54)% | | Net income | $70.7 | $30.3 | (57)% | | Equity in earnings of Kronos | $21.5 | $9.2 | (57)% | Change in Kronos' TiO2 Net Sales (Q1 2019 vs Q1 2018) | Factor | % Change | | :--- | :--- | | TiO2 product pricing | (8)% | | TiO2 sales volumes | 15% | | Product mix/other | (3)% | | Currency exchange rates | (3)% | | Total | 1% | - Kronos' gross margin as a percentage of net sales decreased to 25% in Q1 2019 from 41% in Q1 2018, primarily due to lower average selling prices and higher raw material costs[140] - For the full year 2019, Kronos expects sales to be higher than 2018 due to increased volumes, but income from operations to be lower due to weaker pricing and higher feedstock costs[153] Liquidity and Capital Resources The company maintains sufficient liquidity through operating cash flow, substantial cash reserves, and an available revolving credit facility, supplemented by expected annual dividends from its investments - Net cash provided by operating activities was $1.7 million in Q1 2019, a slight decrease from $1.8 million in Q1 2018[158] Cash and Cash Equivalents by Entity (Mar 31, 2019, In millions) | Entity | Amount | | :--- | :--- | | CompX | $36.1 | | NL Parent and wholly-owned subsidiaries | $80.1 | | Total | $116.2 | - The company has access to a $50 million revolving credit facility from its parent company, Valhi, with $49.5 million available as of March 31, 2019[172] Expected Annual Dividends (In millions) | Source | Expected Annual Dividend | | :--- | :--- | | Kronos | $25.4 | | CompX | $3.0 | | Valhi | $1.1 | | Total | $29.5 | Quantitative and Qualitative Disclosure About Market Risk The company is exposed to market risks including currency, interest rates, and security prices, with no material changes reported since its 2018 Annual Report - The company confirms exposure to market risks such as currency exchange rates, interest rates, and security prices, but reports no material changes in these risks since its 2018 Annual Report[183] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2019, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2019[184] - There were no material changes to the company's internal control over financial reporting during the first quarter of 2019[188] Part II. OTHER INFORMATION Legal Proceedings This section updates legal matters, including a new EPA order regarding the Gowanus Canal Superfund Site, where NL denies liability but is pursuing a de minimis settlement - In April 2019, the EPA issued a second Unilateral Administrative Order to NL regarding the Gowanus Canal Superfund Site. While NL denies liability, it is exploring a de minimis settlement[191] Risk Factors This section refers to the company's 2018 Annual Report for risk factors, noting no material changes to previously disclosed risks - There have been no material changes to the risk factors previously disclosed in the company's 2018 Annual Report[192] Exhibits This section lists the exhibits filed with the Form 10-Q, including a Registration Agreement, officer certifications, and XBRL data files - Exhibits filed include a Registration Agreement with Valhi, Inc., CEO/CFO certifications, and XBRL interactive data files[193]