Edgar Filing: NL INDUSTRIES INC

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

Commission file number 1-640

NL INDUSTRIES, INC.

(Exact name of Registrant as specified in its charter)

New Jersey		13-5267260
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

5430 LBJ Freeway, Suite 1700

Dallas, Texas 75240-2697

(Address of principal executive offices)

Registrant’s telephone number, including area code: (972) 233-1700

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

Number of shares of the Registrant’s common stock outstanding on October 31, 2013: 48,673,884.

NL INDUSTRIES, INC. AND SUBSIDIARIES

INDEX

		Page number
Part I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets — December 31, 2012; September 30, 2013 (unaudited)	3

	Condensed Consolidated Statements of Operations (unaudited) — Three and nine months ended September 30, 2012 and 2013	5

	Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) — Three and nine months ended September 30, 2012 and 2013	7

	Condensed Consolidated Statement of Stockholders’ Equity (unaudited) — Nine months ended September 30, 2013	8

	Condensed Consolidated Statements of Cash Flows (unaudited) — Nine months ended September 30, 2012 and 2013	9

	Notes to Condensed Consolidated Financial Statements (unaudited)	11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	37

Item 4.	Controls and Procedures	37

Part II.	OTHER INFORMATION

Item 1.	Legal Proceedings	39

Item 1A.	Risk Factors	39

Item 6.	Exhibits	40

Items 2, 3, 4 and 5 of Part II are omitted because there is no information to report.

- 2 -

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	December 31, 2012		September 30, 2013
			(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	77,987	$	52,175
Restricted cash and cash equivalents		5,354		3,354
Accounts and other receivables, net		12,049		14,914
Inventories, net		11,223		12,926
Prepaid expenses and other		1,769		838
Deferred income taxes		4,271		4,271
Total current assets		112,653		88,478
Other assets:
Marketable securities		179,662		286,884
Investment in Kronos Worldwide, Inc.		323,128		280,100
Goodwill		27,156		27,156
Other assets, net		3,854		2,345
Total other assets		533,800		596,485
Property and equipment:
Land		5,138		5,138
Buildings		20,791		20,791
Equipment		59,010		57,414
Construction in progress		1,442		2,558
		86,381		85,901
Less accumulated depreciation		52,052		51,611
Net property and equipment		34,329		34,290
Total assets	$	680,782	$	719,253

- 3 -

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In thousands)

	December 31, 2012			September 30, 2013
				(unaudited)
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt	$	1,000		$	—
Accounts payable		5,363			6,268
Accrued and other current liabilities		12,749			11,471
Accrued environmental remediation and related costs		5,667			4,657
Income taxes		6			6
Total current liabilities		24,785			22,402
Noncurrent liabilities:
Long-term debt		17,480			—
Accrued pension costs		13,747			11,189
Accrued postretirement benefit (OPEB) costs		3,861			3,551
Accrued environmental remediation and related costs		42,339			53,356
Deferred income taxes		171,915			189,547
Other		18,572			18,372
Total noncurrent liabilities		267,914			276,015
Equity:
NL stockholders’ equity:
Common stock		6,083			6,084
Additional paid-in capital		300,227			300,223
Retained earnings		163,758			123,193
Accumulated other comprehensive loss		(95,253	)		(22,184	)
Total NL stockholders’ equity		374,815			407,316
Noncontrolling interest in subsidiary		13,268			13,520
Total equity		388,083			420,836
Total liabilities and equity	$	680,782		$	719,253

Commitments and contingencies (Notes 13 and 14)

See accompanying Notes to Condensed Consolidated Financial Statements.

- 4 -

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Three months ended September 30,						Nine months ended September 30,
	2012			2013			2012			2013
	(unaudited)
Net sales	$	21,281		$	24,209		$	63,856		$	69,701
Cost of sales		14,971			16,695			45,025			48,557
Gross margin		6,310			7,514			18,831			21,144
Selling, general and administrative expense		4,270			4,537			13,050			13,790
Other operating income (expense):
Insurance recoveries		1,197			2,198			2,604			3,774
Litigation settlement gain		—			—			14,964			—
Other income		—			9			390			23
Assets held for sale write-down		(405	)		—			(405	)		—
Corporate expense and other, net		(3,438	)		(5,627	)		(24,944	)		(26,869	)
Loss from operations		(606	)		(443	)		(1,610	)		(15,718	)
Equity in earnings (loss) of Kronos Worldwide, Inc.		10,715			(9,101	)		71,951			(31,891	)
Other income (expense):
Securities transaction gains, net		—			—			—			11
Interest and dividends		829			725			2,371			2,198
Interest expense		(218	)		(10	)		(720	)		(127	)
Income (loss) from continuing operations before income taxes		10,720			(8,829	)		71,992			(45,527	)
Income tax expense (benefit)		2,097			(3,145	)		17,426			(23,827	)
Income (loss) from continuing operations		8,623			(5,684	)		54,566			(21,700	)
Income from discontinued operations, net of tax		1,724			—			3,273			—
Net income (loss)		10,347			(5,684	)		57,839			(21,700	)
Noncontrolling interest in net income of subsidiary		340			256			810			613
Net income (loss) attributable to NL stockholders	$	10,007		$	(5,940	)	$	57,029		$	(22,313	)

See accompanying Notes to Condensed Consolidated Financial Statements.

- 5 -

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)

(In thousands, except per share data)

	Three months ended September 30,					Nine months ended September 30,
	2012		2013			2012		2013
	(unaudited)
Amounts attributable to NL stockholders:
Income (loss) from continuing operations	$	8,508	$	(5,940	)	$	54,182	$	(22,313	)
Income from discontinued operations		1,499		—			2,847		—
Net income (loss) attributable to NL stockholders	$	10,007	$	(5,940	)	$	57,029	$	(22,313	)
Net income (loss) per share:
Continuing operations	$	.18	$	(.12	)	$	1.11	$	(.46	)
Discontinued operations		.03		—			.06		—
Net income (loss) per share	$	.21	$	(.12	)	$	1.17	$	(.46	)

Cash dividend per share	$	.125	$	.125		$	.375	$	.375
Basic and diluted weighted average shares outstanding		48,669		48,674			48,666		48,671

See accompanying Notes to Condensed Consolidated Financial Statements.

- 6 -

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

	Three months ended September 30,						Nine months ended September 30,
	2012			2013			2012			2013
	(unaudited)
Net income (loss)	$	10,347		$	(5,684	)	$	57,839		$	(21,700	)
Other comprehensive income (loss), net of tax:
Marketable securities		(482	)		59,716			(79,099	)		71,542
Currency translation		8,405			4,155			4,015			(119	)
Defined benefit pension plans		556			692			1,687			2,078
Other postretirement benefit plans		(138	)		(144	)		(414	)		(432	)
Total other comprehensive income (loss)		8,341			64,419			(73,811	)		73,069
Comprehensive income (loss)		18,688			58,735			(15,972	)		51,369
Comprehensive income attributable to noncontrolling interest		(459	)		(256	)		(945	)		(613	)
Comprehensive income (loss) attributable to NL stockholders	$	18,229		$	58,479		$	(16,917	)	$	50,756

See accompanying Notes to Condensed Consolidated Financial Statements.

- 7 -

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Nine months ended September 30, 2013

(In thousands)

	Common stock		Additional paid-in capital			Retained earnings			Accumulated other comprehensive loss			Noncontrolling interest in subsidiary			Total equity
	(unaudited)
Balance at December 31, 2012	$	6,083	$	300,227		$	163,758		$	(95,253	)	$	13,268		$	388,083
Net loss		—		—			(22,313	)		—			613			(21,700	)
Other comprehensive income, net		—		—			—			73,069			—			73,069
Issuance of NL common stock		1		58			—			—			—			59
Dividends		—		—			(18,252	)		—			(369	)		(18,621	)
Other, net		—		(62	)		—			—			8			(54	)
Balance at September 30, 2013	$	6,084	$	300,223		$	123,193		$	(22,184	)	$	13,520		$	420,836

See accompanying Notes to Condensed Consolidated Financial Statements.

- 8 -

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Nine months ended September 30,
	2012			2013
	(unaudited)
Cash flows from operating activities:
Net income (loss)	$	57,839		$	(21,700	)
Depreciation and amortization		4,346			2,513
Deferred income taxes		18,332			(21,651	)
Equity in (earnings) loss of Kronos Worldwide, Inc.		(71,951	)		31,891
Distributions from Kronos Worldwide, Inc.		15,849			15,849
Benefit plan expense greater (less) than cash funding:
Defined benefit pension plans		149			(348	)
Other postretirement benefits		(480	)		(547	)
Litigation settlement gain		(14,964	)		—
Reversal of contingent consideration		(778	)		—
Assets held for sale write-down		405			—
Securities transactions gains, net		—			(11	)
Other, net		383			274
Change in assets and liabilities:
Accounts and other receivables, net		(2,825	)		(3,661	)
Inventories, net		338			(1,884	)
Prepaid expenses and other		(442	)		171
Accounts payable and accrued liabilities		(1,404	)		100
Income taxes		(1,432	)		(6	)
Accounts with affiliates		800			(2,467	)
Accrued environmental remediation and related costs		7,820			10,007
Other noncurrent assets and liabilities, net		(2,571	)		(1,169	)
Net cash provided by operating activities		9,414			7,361
Cash flows from investing activities:
Capital expenditures		(3,172	)		(2,589	)
Proceeds from real estate-related litigation settlement		15,603			—
Change in restricted cash equivalents, net		(1,736	)		2,007
Collection of note receivable		—			3,034
Proceeds from the disposal of:
Asset held for sale		—			1,559
Marketable securities		—			272
Property, plant and equipment and other assets		48			5
Purchase of marketable securities		—			(261	)
Other		—			(99	)
Net cash provided by investing activities		10,743			3,928

- 9 -

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(In thousands)

	Nine months ended September 30,
	2012			2013
	(unaudited)
Cash flows from financing activities:
Dividends paid	$	(18,250	)	$	(18,252	)
Distributions to noncontrolling interests in subsidiary		(613	)		(369	)
Indebtedness:
Borrowings		25,350			—
Repayments		(29,500	)		(18,480	)
Other, net		(60	)		—
Net cash used in financing activities		(23,073	)		(37,101	)
Cash and cash equivalents — net change from:
Operating, investing and financing activities		(2,916	)		(25,812	)
Effect of exchange rate changes on cash		46			—
Cash and cash equivalents at beginning of period		11,652			77,987
Cash and cash equivalents at end of period	$	8,782		$	52,175
Supplemental disclosures:
Cash paid for:
Interest	$	684		$	222
Income taxes, net		2,181			296
Non-cash investing activity:
Accrual for capital expenditures		546			(198	)

See accompanying Notes to Condensed Consolidated Financial Statements.

- 10 -

NL INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013

(unaudited)

Note 1—Organization and basis of presentation:

Organization—At September 30, 2013, (i) Valhi, Inc. (NYSE: VHI) held approximately 83% of our outstanding common stock and (ii) Contran Corporation and its subsidiaries held an aggregate of approximately 94% of Valhi’s outstanding common stock. Substantially all of Contran’s outstanding voting stock is held by trusts established for the benefit of certain children and grandchildren of Harold C. Simmons (for which Mr. Simmons is the sole trustee), or is held by Mr. Simmons or other persons or companies related to Mr. Simmons. Consequently, Mr. Simmons may be deemed to control Contran, Valhi and us.

Basis of presentation—Consolidated in this Quarterly Report are the results of our majority-owned subsidiary, CompX International Inc. We also own 30% of Kronos Worldwide, Inc., CompX (NYSE MKT: CIX) and Kronos (NYSE: KRO) each file periodic reports with the Securities and Exchange Commission (SEC).

The unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report have been prepared on the same basis as the audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2012 that we filed with the SEC on March 12, 2013 (the 2012 Annual Report). In our opinion, we have made all necessary adjustments (which include only normal recurring adjustments) in order to state fairly, in all material respects, our consolidated financial position, results of operations and cash flows as of the dates and for the periods presented. We have condensed the Consolidated Balance Sheet and Statement of Stockholders’ Equity at December 31, 2012 contained in this Quarterly Report as compared to our audited Consolidated Financial Statements at that date and we have omitted certain information and footnote disclosures (including those related to the Consolidated Balance Sheet at December 31, 2012) normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). Our results of operations for the interim periods ended September 30, 2013 may not be indicative of our operating results for the full year. The Condensed Consolidated Financial Statements contained in this Quarterly Report should be read in conjunction with our 2012 Consolidated Financial Statements contained in our 2012 Annual Report.

Unless otherwise indicated, references in this report to “NL,” “we,” “us” or “our” refer to NL Industries, Inc. and its subsidiaries and affiliate, Kronos, taken as a whole.

Note 2—Discontinued operations:

On December 28, 2012, we completed the sale of CompX’s Furniture Components operations to a competitor of that business. Selected financial data for the operations of the disposed Furniture Components operations is presented below:

	Three months ended September 30,		Nine months ended September 30,
	2012		2012
	(In thousands)
Net sales	$	15,828	$	46,382
Income from operations	$	2,710	$	5,807
Income from discontinued operations:
Income before taxes	$	2,693	$	5,729
Income tax expense		969		2,456
Income from discontinued operations, net of tax		1,724		3,273
Noncontrolling interest in income from discontinued operations, net of tax		225		426
Total discontinued operations, net of tax and noncontrolling interest	$	1,499	$	2,847

- 11 -

In accordance with generally accepted accounting principles, the assets and liabilities relating to the Furniture Components business were eliminated from the 2012 Condensed Consolidated Balance Sheet at the date of sale. We have reclassified our September 30, 2012 Condensed Consolidated Statements of Operations to reflect the disposed operations as discontinued operations. We have not reclassified our September 30, 2012 Condensed Consolidated Statement of Cash Flows to reflect discontinued operations.

In conjunction with the sale of CompX’s Furniture Components business, the buyer was not interested in retaining certain undeveloped land located in Taiwan owned by CompX’s Taiwanese Furniture Component subsidiary. We had no additional use for the undeveloped land in Taiwan and therefore expected the land to be sold to a third party with CompX receiving the net proceeds. Based on the legal form of how we completed the disposal transaction, our interest in such land was represented by a $3.0 million promissory note receivable at December 31, 2012, issued to CompX by its former Taiwanese subsidiary which retained legal ownership in the land to facilitate the future sale of the land to a third party. The proceeds from the sale of the land were required to be used to settle the note receivable. During the first quarter of 2013, an agreement was entered into with a third party to sell the land for $3.0 million, $1.8 million of which was received during the first quarter of 2013 and the remaining $1.2 million was received in the second quarter 2013. Such note receivable is classified as part of accounts receivable in our Consolidated Balance Sheets at December 31, 2012. See Note 3.

Note 3—Accounts and other receivables, net:

	December 31, 2012			September 30, 2013
	(In thousands)
Trade receivables—CompX	$	8,696		$	10,815
Promissory note receivable		3,034			—
Accrued insurance recoveries		476			1,900
Income taxes receivable from Valhi		—			2,197
Other receivables		51			127
Refundable income taxes		8			14
Allowance for doubtful accounts		(216	)		(139	)
Total	$	12,049		$	14,914

Accrued insurance recoveries are discussed in Note 14.

Note 4—Inventories, net:

	December 31, 2012		September 30, 2013
	(In thousands)
Raw materials	$	3,253	$	3,994
Work in process		5,902		6,707
Finished goods		2,068		2,225
Total	$	11,223	$	12,926

- 12 -

Note 5—Marketable securities:

	Fair value measurement level	Market value		Cost basis		Unrealized gains
		(In thousands)
December 31, 2012:
Noncurrent assets
Valhi common stock	1	$	179,662	$	24,347	$	155,315
September 30, 2013:
Noncurrent assets
Valhi common stock	1	$	286,884	$	24,347	$	262,537

At December 31, 2012 and September 30, 2013, we held approximately 14.4 million shares of Valhi’s common stock with a market price of $12.50 and $19.96 per share, respectively. Contran, Mr. Harold Simmons and persons and other entities related to Mr. Simmons own a majority of Valhi’s outstanding common stock. We account for our investment in Valhi common stock as available-for-sale marketable equity securities and any unrealized gains or losses on the securities are recognized through other comprehensive income, net of deferred income taxes. Our shares of Valhi common stock are carried at fair value based on quoted market prices, representing a Level 1 input within the fair value hierarchy.

The Valhi common stock we own is subject to the restrictions on resale pursuant to certain provisions of the SEC Rule 144. In addition, as a majority-owned subsidiary of Valhi, we cannot vote our shares of Valhi common stock under Delaware Corporation Law, but we do receive dividends from Valhi on these shares, when declared and paid.

Note 6—Investment in Kronos Worldwide, Inc.:

At December 31, 2012 and September 30, 2013, we owned approximately 35.2 million shares of Kronos common stock. At September 30, 2013, the quoted market price of Kronos’ common stock was $15.49 per share, or an aggregate market value of $545.5 million. At December 31, 2012, the quoted market price was $19.50 per share, or an aggregate market value of $686.8 million.

The change in the carrying value of our investment in Kronos during the first nine months of 2013 is summarized below:

	Amount
	(In millions)
Balance at the beginning of the period	$	323.1
Equity in loss of Kronos		(31.9	)
Dividends received from Kronos		(15.8	)
Other, principally equity in Kronos’ other comprehensive income		4.7
Balance at the end of the period	$	280.1

- 13 -

Selected financial information of Kronos is summarized below:

	December 31, 2012		September 30, 2013
	(In millions)
Current assets	$	1,223.4	$	821.5
Property and equipment, net		522.5		524.0
Investment in TiO₂joint venture		109.9		105.9
Other noncurrent assets		171.2		222.4
Total assets	$	2,027.0	$	1,673.8
Current liabilities	$	328.4	$	297.4
Long-term debt		378.9		203.3
Accrued pension and postretirement benefits		203.3		198.4
Other noncurrent liabilities		54.3		54.2
Stockholders’ equity		1,062.1		920.5
Total liabilities and stockholders’ equity	$	2,027.0	$	1,673.8

	Three months ended September 30,					Nine months ended September 30,
	2012		2013			2012		2013
	(In millions)
Net sales	$	472.9	$	419.1		$	1,579.5	$	1,363.8
Cost of sales		386.9		371.9			1,068.7		1,303.1
Income (loss) from operations		38.5		(37.0	)		358.5		(131.6	)
Net income (loss)		35.2		(29.9	)		236.6		(104.9	)

Note 7—Other noncurrent assets, net:

	December 31, 2012		September 30, 2013
	(In thousands)
Assets held for sale	$	1,965	$	529
Restricted cash		1,694		1,687
Other		195		129
Total	$	3,854	$	2,345

In the fourth quarter of 2012, CompX entered into an agreement to sell one of its facilities classified as an asset held for sale. The transaction closed during the first quarter of 2013. The net proceeds from the sale of $1.6 million approximated the carrying value of the assets as of the date of the sale.

Note 8—Accrued and other current liabilities:

December 31,
2012