NL Industries(NL) - 2019 Q4 - Annual Report

Part I Item 1. Business NL Industries operates as a holding company with majority ownership in CompX (component products) and a 30% interest in Kronos (chemicals) - NL Industries operates as a holding company with 86% ownership in CompX International Inc. (Component Products) and a 30% noncontrolling interest in Kronos Worldwide, Inc. (Chemicals)[11][18] - Valhi, Inc. owned approximately 83% of NL Industries' common stock at year-end 2019, establishing a clear control structure[12] - The business strategy focuses on evaluating acquisitions, maximizing asset return-on-investment, and adjusting capital structure through equity, debt, or asset sales[98][99] Component Products - CompX International Inc. CompX manufactures engineered components, including Security Products (locks) and Marine Components (exhaust systems), serving diverse industries - CompX's Security Products business leads the North American market in cabinet locks, offering diverse mechanical and electronic systems[20][22] - The Marine Components business specializes in high-precision parts for performance boats, such as exhaust systems and wake enhancement devices[23][26] - Primary raw materials for CompX, including zinc and stainless steel, constituted approximately 13% of total cost of sales in 2019[25][27] - The United States Postal Service was CompX's largest customer in 2019, accounting for 14% of sales, with the top ten customers representing 47% of sales[31] Chemicals - Kronos Worldwide, Inc. Kronos is a global leader in titanium dioxide (TiO2) production, operating facilities in Europe and North America, with vertical integration into ilmenite mining Kronos TiO2 Sales Volume Breakdown (2019) | By Geographic Region | Percentage | By End-Use | Percentage | | :--- | :--- | :--- | :--- | | Europe | 46% | Coatings | 57% | | North America | 34% | Plastics | 28% | | Asia Pacific | 10% | Paper | 5% | | Rest of World | 10% | Other | 10% | Kronos Worldwide Production Capacity (2019) | Competitor | Capacity Share | | :--- | :--- | | Chemours | 16% | | Tronox | 12% | | Lomon Billions | 9% | | Venator | 8% | | Kronos | 7% | | Other | 48% | - Kronos operates a 50/50 manufacturing joint venture, Louisiana Pigment Company, L.P. (LPC), with Venator Investments, equally sharing production from the Lake Charles plant[57] - The EU classified TiO2 powder as a suspected carcinogen via inhalation on February 18, 2020, mandating hazard labels on certain products in the EU from October 1, 2021[91] Item 1A. Risk Factors The company faces significant risks from historical lead pigment liabilities, dependence on subsidiary cash distributions, competitive markets, and Kronos's debt - The company faces significant potential costs from legal and environmental matters related to its former manufacturing of lead pigments for paint[104] - As a holding company, NL Industries relies on cash dividends and distributions from its subsidiaries (CompX) and affiliates (Kronos) to service liabilities and pay dividends[105] - Kronos faces risks from the cyclical nature of the TiO2 industry, where demand and pricing are linked to global economic conditions and profitability is highly dependent on TiO2 selling prices[120][121] - Kronos's total consolidated debt was approximately $445.5 million as of December 31, 2019, potentially impairing its financial condition and limiting flexibility[123] Item 2. Properties The company's principal executive offices are in Dallas, Texas, with subsidiary properties described in Item 1 and deemed adequate for use - The company's principal executive offices are located at 5430 LBJ Freeway, Dallas, Texas, 75240-2620[132] Item 3. Legal Proceedings The company is involved in significant legal proceedings, including a $101.7 million lead pigment settlement and environmental remediation claims - In July 2019, the Santa Clara, California public nuisance case settled for $305 million collectively, with NL's share being $101.7 million payable in installments[139][140] - The $101.7 million Santa Clara settlement was discounted to a net present value of $96.3 million for financial reporting, resulting in a $19.3 million litigation settlement expense in 2019[142] - As of December 31, 2019, the company accrued approximately $95 million for environmental remediation across 32 sites, with a reasonably possible upper range of $115 million[157] - The company is a defendant in 108 pending cases involving approximately 583 plaintiffs alleging personal injuries from asbestos, silica, and/or mixed dust exposure from former operations[169] Item 4. Mine Safety Disclosures This section is not applicable to the company's operations - No mine safety disclosures were reported[178] Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters NL Industries' common stock trades on the NYSE under NL, with a performance graph comparing its return against market indices - The company's common stock is listed on the NYSE under the symbol NL[180] Cumulative Total Stockholder Return (2014-2019) | Index | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | NL common stock | $100 | $35 | $95 | $166 | $41 | $45 | | S&P 500 Composite | $100 | $101 | $114 | $138 | $132 | $174 | | S&P 500 Industrial Conglomerates | $100 | $117 | $127 | $116 | $85 | $106 | Item 6. Selected Financial Data This section provides a five-year summary of NL Industries' key financial data from 2015 to 2019, including sales, income, and assets Selected Financial Data (2015-2019) | (In millions, except per share data) | 2015 | 2016 | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | :--- | :--- | | Statements of Operations Data: | | | | | | | Net sales | $109.0 | $108.9 | $112.0 | $118.2 | $124.2 | | Equity in earnings (losses) of Kronos | ($52.8) | $13.2 | $107.8 | $62.3 | $26.5 | | Net income (loss) attributable to NL stockholders | ($23.9) | $15.3 | $116.1 | ($41.0) | $25.8 | | Diluted EPS attributable to NL stockholders | ($0.49) | $0.31 | $2.38 | ($0.84) | $0.53 | | Balance Sheet Data (at year end): | | | | | | | Total assets | $349.3 | $385.0 | $551.6 | $547.2 | $557.5 | | NL stockholders' equity | $150.0 | $177.9 | $335.3 | $284.1 | $304.5 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Net income improved in 2019 due to lower litigation expense and favorable securities values, despite reduced Kronos earnings, with sufficient liquidity expected for 2020 - Net income attributable to NL stockholders was $25.8 million ($0.53/share) in 2019, a significant improvement from a net loss of $41.0 million (-$0.84/share) in 2018[190] - The earnings improvement was primarily driven by a lower pre-tax litigation settlement expense ($19.3 million in 2019 vs. $62.0 million in 2018) and favorable changes in marketable equity securities value[190] - The company expects 2020 net income attributable to NL stockholders to be lower than 2019, mainly due to anticipated lower equity in earnings from Kronos[192] Results of Operations CompX's operating income remained stable with a 5% sales increase, while Kronos's equity earnings declined significantly due to lower TiO2 prices and higher costs CompX International Inc. Performance (2018 vs. 2019) | (In millions) | 2018 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $118.2 | $124.2 | 5% | | Gross margin | $38.3 | $39.0 | 2% | | Income from operations | $17.8 | $17.7 | (1)% | Kronos Worldwide, Inc. Performance (2018 vs. 2019) | (In millions) | 2018 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $1,661.9 | $1,731.1 | 4% | | Income from operations | $330.1 | $145.8 | (56)% | | Net income | $205.0 | $87.1 | (58)% | | NL's Equity in Earnings | $62.3 | $26.5 | (58)% | - Kronos's 2019 sales increase was driven by a 15% rise in sales volume, but offset by a 6% decrease in average TiO2 selling prices and higher production costs, leading to a 56% drop in operating income[231][239] Liquidity and Capital Resources Operating cash flow increased to $27.4 million in 2019 despite a $25 million litigation payment, with $157.9 million in cash and a $50 million credit facility - Net cash provided by operating activities increased to $27.4 million in 2019 from $17.1 million in 2018, despite a $25.0 million cash payment for the California lead pigment litigation settlement[279][280] - At December 31, 2019, the company had aggregate cash, cash equivalents, and restricted cash of $157.9 million[294] - The company has access to a $50 million revolving credit facility from Valhi, with $49.5 million available for future borrowing at year-end 2019[298] Contractual Commitments as of December 31, 2019 (In millions) | Contractual Commitment | 2020 | 2021/2022 | 2023/2024 | 2025 and after | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Indebtedness: principal payments | $- | $- | $0.5 | $- | $0.5 | | Legal settlement | $12.0 | $24.0 | $24.0 | $16.7 | $76.7 | | Operating leases | $0.1 | $0.1 | $- | $- | $0.2 | | Purchase obligations | $12.2 | $0.1 | $- | $- | $12.3 | | Total | $24.5 | $24.2 | $24.5 | $16.7 | $89.9 | Critical Accounting Policies and Estimates Critical accounting policies involve significant judgments for contingencies, long-lived assets, goodwill, and defined benefit pension plans, requiring careful estimation - Key critical accounting estimates include contingencies (environmental and legal), impairment assessments for long-lived assets and goodwill, and assumptions for defined benefit pension plans[263] - Goodwill totaled $27.2 million at December 31, 2019, related to CompX's Security Products unit, with a qualitative impairment assessment concluding no quantitative test was needed[264][266] - The company maintains defined benefit pension plans in the U.S. and U.K., with funded status sensitive to actuarial assumptions like discount rates and long-term asset returns[268] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate fluctuations, marketable security prices, and raw material costs, with limited hedging activities - The company is exposed to interest rate risk on its $0.5 million of variable-rate debt and a $28.1 million variable-rate note receivable from an affiliate[312][313] - The fair value of marketable equity securities was $26.9 million at December 31, 2019, where a 10% price change would result in a $2.7 million change in fair value[314] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019, with no material changes - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[319] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2019, based on the 2013 COSO framework[321] Part III Items 10-14 Information for Items 10 through 14, covering governance, compensation, and related party transactions, is incorporated by reference from the proxy statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the Registrant's definitive proxy statement for its 2020 annual meeting[328][329][330][331][332] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists financial statements and an index of all exhibits filed with the report, including corporate governance and material contracts - The consolidated financial statements of Kronos Worldwide, Inc. are incorporated by reference in Exhibit 99.1[336] - The report includes an Exhibit Index listing all filed documents, such as the Certificate of Incorporation, Bylaws, material contracts, and various SEC-required certifications[338] Financial Statements Consolidated Balance Sheets Total assets increased to $557.5 million in 2019, driven by restricted cash, while total liabilities decreased and total equity rose to $327.2 million Consolidated Balance Sheet Highlights (in thousands) | | Dec 31, 2018 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Assets | $547,242 | $557,492 | | Cash and cash equivalents | $116,259 | $129,730 | | Investment in Kronos Worldwide, Inc. | $255,565 | $248,355 | | Total Liabilities | $243,684 | $230,279 | | Accrued litigation settlement (Current) | $60,000 | $11,830 | | Long-term litigation settlement | $17,000 | $60,081 | | Accrued environmental costs (Noncurrent) | $93,184 | $91,443 | | Total Equity | $303,558 | $327,213 | Consolidated Statements of Operations Net income attributable to stockholders was $25.8 million in 2019, a turnaround from a 2018 loss, driven by lower litigation expense and improved securities values Consolidated Statement of Operations (in thousands) | | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | | Net sales | $112,035 | $118,217 | $124,243 | | Income (loss) from operations | $1,699 | ($60,666) | ($1,609) | | Equity in earnings of Kronos | $107,785 | $62,316 | $26,470 | | Marketable equity securities loss | - | ($60,941) | ($863) | | Litigation settlement expense, net | - | ($62,000) | ($19,266) | | Net income (loss) attributable to NL stockholders | $116,100 | ($41,017) | $25,844 | | Diluted EPS | $2.38 | ($0.84) | $0.53 | Consolidated Statements of Cash Flows Operating cash flow increased to $27.4 million in 2019, contributing to a year-end cash balance of $157.9 million, up from $121.0 million Consolidated Statement of Cash Flows Highlights (in thousands) | | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $18,638 | $17,076 | $27,435 | | Net cash provided by (used in) investing activities | ($13,606) | $1,307 | $9,916 | | Net cash used in financing activities | ($333) | ($335) | ($470) | | Net change in cash, cash equivalents, and restricted cash | $4,699 | $18,048 | $36,881 | | Cash, cash equivalents, and restricted cash at end of year | $102,941 | $120,989 | $157,870 |