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 quarter ended March 31, 2015

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 April 30, 2015: 48,682,884.

NL INDUSTRIES, INC. AND SUBSIDIARIES

INDEX

		Page number
Part I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets - December 31, 2014; March 31, 2015 (unaudited)	3

	Condensed Consolidated Statements of Income (unaudited) - Three months ended March 31, 2014 and 2015	5

	Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) - Three months ended March 31, 2014 and 2015	6

	Condensed Consolidated Statement of Equity (unaudited) - Three months ended March 31, 2015	7

	Condensed Consolidated Statements of Cash Flows (unaudited) - Three months ended March 31, 2014 and 2015	8

	Notes to Condensed Consolidated Financial Statements (unaudited)	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	36

Item 4.	Controls and Procedures	37


Part II.	OTHER INFORMATION

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	38

Item 6.	Exhibits	38

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

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	December 31,		March 31,
	2014		2015
			(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	72,560	$	73,202
Restricted cash and cash equivalents		3,995		3,420
Accounts and other receivables, net		9,256		12,441
Inventories, net		16,863		16,824
Prepaid expenses and other		792		824
Deferred income taxes		4,567		4,567

Total current assets		108,033		111,278

Other assets:
Marketable securities		92,131		89,544
Investment in Kronos Worldwide, Inc.		237,719		218,695
Goodwill		27,156		27,156
Other assets, net		2,143		2,145
Deferred income taxes		20		20

Total other assets		359,169		337,560

Property and equipment:
Land		5,138		5,138
Buildings		21,176		21,176
Equipment		62,264		62,832
Construction in progress		909		1,140

		89,487		90,286
Less accumulated depreciation		55,931		56,811

Net property and equipment		33,556		33,475

Total assets	$	500,758	$	482,313

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In thousands)

	December 31,			March 31,
	2014			2015
				(unaudited)
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	6,115		$	5,270
Accrued and other current liabilities		11,521			7,825
Accrued environmental remediation and related costs		6,984			7,044
Income taxes		7			14

Total current liabilities		24,627			20,153

Noncurrent liabilities:
Accrued pension cost		12,242			11,760
Accrued postretirement benefits (OPEB) costs		3,341			3,210
Accrued environmental remediation and related costs		103,031			102,791
Deferred income taxes		87,725			83,145
Other		18,342			13,676

Total noncurrent liabilities		224,681			214,582

Equity:
NL stockholders' equity:
Common stock		6,085			6,085
Additional paid-in capital		300,388			300,388
Retained earnings		112,588			122,630
Accumulated other comprehensive loss		(182,039	)		(196,186	)

Total NL stockholders' equity		237,022			232,917

Noncontrolling interest in subsidiary		14,428			14,661

Total equity		251,450			247,578

Total liabilities and equity	$	500,758		$	482,313

Commitments and contingencies (Notes 12 and 13)

See accompanying notes to Condensed Consolidated Financial Statements.

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

	Three months ended
	March 31,
	2014			2015
	(unaudited)

Net sales	$	25,781		$	27,891
Cost of sales		18,032			19,325

Gross margin		7,749			8,566

Selling, general and administrative expense		4,461			4,866
Other operating income (expense):
Insurance recoveries		787			3,134
Other income		131			-
Corporate expense		(4,270	)		(3,830	)

Income (loss) from operations		(64	)		3,004

Equity in earnings of Kronos Worldwide, Inc.		4,343			5,605
Other income:
Interest and dividend income		725			302

Income before income taxes		5,004			8,911

Income tax expense (benefit)		970			(1,446	)

Net income		4,034			10,357
Noncontrolling interest in net income of subsidiary		279			315

Net income attributable to NL stockholders	$	3,755		$	10,042

Amounts attributable to NL stockholders:

Basic and diluted net income per share	$	.08		$	.21

Weighted average shares used in the calculation of net income per share		48,674			48,683

See accompanying notes to Condensed Consolidated Financial Statements.

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

	Three months ended
	March 31,
	2014			2015
	(unaudited)

Net income	$	4,034		$	10,357

Other comprehensive income (loss), net of tax:
Marketable securities		(83,931	)		(1,786	)
Currency translation		(514	)		(12,959	)
Defined benefit pension plans		537			734
Other postretirement benefit plans		(157	)		(136	)

Total other comprehensive loss, net		(84,065	)		(14,147	)

Comprehensive loss		(80,031	)		(3,790	)
Comprehensive income attributable to noncontrolling interest		279			315

Comprehensive loss attributable to NL stockholders	$	(80,310	)	$	(4,105	)

See accompanying notes to Condensed Consolidated Financial Statements.

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

Three months ended March 31, 2015

(In thousands)

							Accumulated
			Additional				other			Noncontrolling
	Common		paid-in		Retained		comprehensive			interest in			Total
	stock		capital		earnings		loss			subsidiary			equity
	(unaudited)

Balance at December 31, 2014	$	6,085	$	300,388	$	112,588	$	(182,039	)	$	14,428		$	251,450

Net income		-		-		10,042		-			315			10,357
Other comprehensive loss, net of tax		-		-		-		(14,147	)		-			(14,147	)
Dividends		-		-		-		-			(82	)		(82	)

Balance at March 31, 2015	$	6,085	$	300,388	$	122,630	$	(196,186	)	$	14,661		$	247,578

See accompanying notes to Condensed Consolidated Financial Statements.

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Three months ended
	March 31,
	2014			2015
	(unaudited)
Cash flows from operating activities:
Net income	$	4,034		$	10,357
Depreciation and amortization		895			902
Deferred income taxes		369			3,039
Equity in earnings of Kronos Worldwide, Inc.		(4,343	)		(5,605	)
Dividends received from Kronos Worldwide, Inc.		5,283			5,283
Cash funding of benefit plans in excess of net benefit plan expense		(168	)		(452	)
Other, net		85			82
Change in assets and liabilities:
Accounts and other receivables, net		(2,628	)		(3,191	)
Inventories, net		(1,970	)		(34	)
Prepaid expenses and other		111			(31	)
Accounts payable and accrued liabilities		(703	)		(4,134	)
Income taxes		8			7
Accounts with affiliates		706			(430	)
Accrued environmental remediation and related costs		(409	)		(180	)
Other noncurrent assets and liabilities, net		(571	)		(4,672	)

Net cash provided by operating activities		699			941

Cash flows from investing activities:
Capital expenditures		(752	)		(796	)
Change in restricted cash equivalents, net		99			575
Proceeds from the sale of marketable securities		-			255
Purchase of marketable securities		-			(251	)

Net cash used in investing activities		(653	)		(217	)

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(In thousands)

	Three months ended
	March 31,
	2014			2015
	(unaudited)

Cash flows from financing activities -
distributions to noncontrolling interests in subsidiary	$	(82	)	$	(82	)

Cash and cash equivalents - net change from:
Operating, investing and financing activities		(36	)		642
Cash and cash equivalents at beginning of period		52,609			72,560

Cash and cash equivalents at end of period	$	52,573		$	73,202

Supplemental disclosures:
Cash paid for:
Income taxes, net	$	(53	)	$	584

See accompanying notes to Condensed Consolidated Financial Statements.

NL INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2015

(unaudited)

Note 1 - Organization and basis of presentation:

Organization - At March 31, 2015, Valhi, Inc. (NYSE: VHI) held approximately 83% of our outstanding common stock and a wholly-owned subsidiary of Contran Corporation held approximately 93% of Valhi’s outstanding common stock. Substantially all of Contran’s outstanding voting stock is held by family trusts established for the benefit of Lisa K. Simmons and Serena Simmons Connelly, daughters of Harold C. Simmons, and their children (for which Ms. Lisa Simmons and Ms. Connelly are co-trustees) or is held directly by Ms. Lisa Simmons and Ms. Connelly or persons or entities related to them, including their step-mother Annette C. Simmons, the widow of Mr. Simmons. Prior to his death in December 2013, Mr. Simmons served as sole trustee of the family trusts. Under a voting agreement entered into by all of the voting stockholders of Contran, effective in February 2014 and as amended, the size of the board of directors of Contran was fixed at five members, Ms. Lisa Simmons, Ms. Connelly and Ms. Annette Simmons (and in the event of their death, their heirs) each has the right to designate one of the five members of the Contran board and the remaining two members of the Contran board must consist of members of Contran management. Ms. Lisa Simmons, Ms. Connelly, and Ms. Annette Simmons each serve as members of the Contran board. The voting agreement expires in February 2017 (unless Ms. Lisa Simmons, Ms. Connelly and Ms. Annette Simmons otherwise unanimously agree), and the ability of Ms. Lisa Simmons, Ms. Connelly, and Ms. Annette Simmons to each designate one member of the Contran board is dependent upon each of their continued beneficial ownership of at least 5% of the combined voting stock of Contran. Consequently, Ms. Lisa Simmons, Ms. Connelly and Ms. Annette 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. (Kronos). 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, 2014 that we filed with the SEC on March 12, 2015 (the 2014 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, 2014 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, 2014) 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 period ended March 31, 2015 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 2014 Consolidated Financial Statements contained in our 2014 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 - Accounts and other receivables, net:

	December 31,			March 31,
	2014			2015
	(In thousands)
Trade receivables - CompX	$	8,825		$	12,253
Accrued insurance recoveries		346			216
Other receivables		163			58
Allowance for doubtful accounts		(78	)		(86	)

Total	$	9,256		$	12,441

Accrued insurance recoveries are discussed in Note 13.

Note 3 - Inventories, net:

	December 31,		March 31,
	2014		2015
	(In thousands)
Raw materials	$	3,393	$	3,318
Work in process		10,271		10,729
Finished products		3,199		2,777

Total	$	16,863	$	16,824

Note 4 - Marketable securities:


	Fair value measurement level	Market value		Cost basis		Unrealized gain
		(In thousands)
December 31, 2014
Valhi common stock	1	$	92,131	$	24,347	$	67,784

March 31, 2015
Valhi common stock	1	$	89,544	$	24,347	$	65,197

At December 31, 2014 and March 31, 2015, we held approximately 14.4 million shares of common stock of our immediate parent company, Valhi. See Note 1. 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. At December 31, 2014 and March 31, 2015, the quoted per share market price of Valhi common stock was $6.41 and $6.23, respectively.

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 General Corporation Law, but we do receive dividends from Valhi on these shares, when declared and paid.

Note 5 - Investment in Kronos Worldwide, Inc.:

At December 31, 2014 and March 31, 2015, we owned approximately 35.2 million shares of Kronos common stock. At March 31, 2015, the quoted market price of Kronos’ common stock was $12.65 per share, or an aggregate market value of $445.5 million. At December 31, 2014, the quoted market price was $13.02 per share, or an aggregate market value of $458.6 million.

The change in the carrying value of our investment in Kronos during the first three months of 2015 is summarized below.


	Amount
	(In millions)
Balance at the beginning of the period	$	237.7
Equity in earnings of Kronos		5.6
Dividends received from Kronos		(5.3	)
Equity in Kronos' other comprehensive income:
Marketable securities		(.2	)
Currency translation		(19.9	)
Defined benefit pension plans		.8

Balance at the end of the period	$	218.7

Selected financial information of Kronos is summarized below:

	December 31,		March 31,
	2014		2015
	(In millions)
Current assets	$	886.2	$	817.1
Property and equipment, net		479.7		430.1
Investment in TiO₂ joint venture		89.0		77.8
Other noncurrent assets		187.6		179.5

Total assets	$	1,642.5	$	1,504.5

Current liabilities	$	237.9	$	193.8
Long-term debt		344.7		344.7
Accrued pension and postretirement benefits		245.2		216.3
Other noncurrent liabilities		33.6		31.2
Stockholders' equity		781.1		718.5

Total liabilities and stockholders' equity	$	1,642.5	$	1,504.5

	Three months ended
	March 31,
	2014		2015
	(In millions)
Net sales	$	420.1	$	365.1
Cost of sales		339.6		287.7
Income from operations		26.0		32.2
Net income		14.3		18.4

Note 6 - Other noncurrent assets, net:

	December 31,		March 31,
	2014		2015
	(In thousands)
Restricted cash	$	1,420	$	1,420
Assets held for sale		590		590
Other		133		135

Total	$	2,143	$	2,145

Note 7 - Accrued and other current liabilities:

	December 31,		March 31,
	2014		2015
	(In thousands)
Employee benefits	$	8,278	$	4,517
Professional fees		951		1,379
Payables to affiliates		659		229
Other		1,633		1,700

Total	$	11,521	$	7,825

Note 8 - Long-term debt:

During the first three months of 2015, we had no borrowings under our promissory note with Valhi, and at March 31, 2015, the full $40 million was available for borrowing under this facility. The amount of any such loan Valhi would make to us is at Valhi’s discretion.

Note 9 - Other noncurrent liabilities:


	December 31,		March 31,
	2014		2015
	(In thousands)
Reserve for uncertain tax positions	$	16,832	$	12,186
Insurance claims and expenses		589		604
Other		921		886

Total	$	18,342	$	13,676

Our reserve for uncertain tax positions is discussed in Note 12.

Note 10 - Employee benefit plans:

Defined benefit plans - The components of net periodic defined benefit pension cost (income) are presented in the table below.

	Three months ended
	March 31,
	2014			2015
	(In thousands)
Interest cost	$	628		$	569
Expected return on plan assets		(852	)		(801	)
Recognized actuarial losses		232			326

Total	$	8		$	94

Postretirement benefits - The components of net periodic postretirement benefits other than pension (OPEB) income are presented in the table below.

	Three months ended
	March 31,
	2014			2015
	(In thousands)
Interest cost	$	29		$	27
Amortization of prior service credit		(161	)		(155	)
Recognized actuarial gain		(44	)		(25	)

Total	$	(176	)	$	(153	)

Contributions - We currently expect our 2015 contributions to our defined benefit pension plans and other postretirement plans to be approximately $1.3 million.

Note 11 - Other comprehensive income (loss):

Changes in accumulated other comprehensive loss attributable to NL stockholders for the three months ended March 31, 2015 are presented in the table below.

	Three months ended
	March 31,
	2014			2015
	(In thousands)
Accumulated other comprehensive loss, net of tax:
Marketable securities:
Balance at beginning of period	$	154,169		$	47,112
Other comprehensive loss -
unrealized losses arising during the year		(83,931	)		(1,786	)

Balance at end of period	$	70,238		$	45,326

Currency translation:
Balance at beginning of period	$	(133,816	)	$	(154,173	)
Other comprehensive loss		(514	)		(12,959	)

Balance at end of period	$	(134,330	)	$	(167,132	)