Edgar Filing: NL INDUSTRIES INC

nl-10q_20150930.htm

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 September 30, 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 October 30, 2015: 48,691,884.

NL INDUSTRIES, INC. AND SUBSIDIARIES

INDEX

		Page number
Part I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets - December 31, 2014; September 30, 2015 (unaudited)	3

	Condensed Consolidated Statements of Operations (unaudited) - Three and nine months ended September 30, 2014 and 2015	5

	Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) - Three and nine months ended September 30, 2014 and 2015	6

	Condensed Consolidated Statement of Equity (unaudited) - Nine months ended September 30, 2015	7

	Condensed Consolidated Statements of Cash Flows (unaudited) - Nine months ended September 30, 2014 and 2015	8

	Notes to Condensed Consolidated Financial Statements (unaudited)	9

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

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	41

Item 4.	Controls and Procedures	41


Part II.	OTHER INFORMATION

Item 1.	Legal Proceedings	42

Item 1A.	Risk Factors	42

Item 6.	Exhibits	42

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,		September 30,
	2014		2015
			(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	72,560	$	88,392
Restricted cash and cash equivalents		3,995		3,306
Accounts and other receivables, net		9,256		12,735
Inventories, net		16,863		15,448
Prepaid expenses and other		792		831
Deferred income taxes		4,567		4,567

Total current assets		108,033		125,279

Other assets:
Marketable securities		92,131		27,165
Investment in Kronos Worldwide, Inc.		237,719		154,588
Goodwill		27,156		27,156
Other assets, net		2,143		2,494
Deferred income taxes		20		20

Total other assets		359,169		211,423

Property and equipment:
Land		5,138		5,138
Buildings		21,176		21,498
Equipment		62,264		63,632
Construction in progress		909		1,749

		89,487		92,017
Less accumulated depreciation		55,931		58,489

Net property and equipment		33,556		33,528

Total assets	$	500,758	$	370,230

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In thousands)

	December 31,			September 30,
	2014			2015
				(unaudited)
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	6,115		$	5,107
Accrued and other current liabilities		11,521			9,902
Accrued environmental remediation and related costs		6,984			6,989
Income taxes		7			13

Total current liabilities		24,627			22,011

Noncurrent liabilities:
Accrued pension cost		12,242			11,237
Accrued postretirement benefits (OPEB) costs		3,341			3,081
Accrued environmental remediation and related costs		103,031			104,622
Deferred income taxes		87,725			36,935
Other		18,342			13,667

Total noncurrent liabilities		224,681			169,542

Equity:
NL stockholders' equity:
Common stock		6,085			6,086
Additional paid-in capital		300,388			300,543
Retained earnings		112,588			94,306
Accumulated other comprehensive loss		(182,039	)		(237,425	)

Total NL stockholders' equity		237,022			163,510

Noncontrolling interest in subsidiary		14,428			15,167

Total equity		251,450			178,677

Total liabilities and equity	$	500,758		$	370,230

Commitments and contingencies (Notes 11 and 13)

See accompanying notes to Condensed Consolidated Financial Statements.

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Three months ended						Nine months ended
	September 30,						September 30,
	2014			2015			2014			2015
	(unaudited)

Net sales	$	26,473		$	26,505		$	79,102		$	83,314
Cost of sales		18,331			18,387			54,598			57,471

Gross margin		8,142			8,118			24,504			25,843

Selling, general and administrative expense		4,710			4,684			13,872			14,402
Other operating income (expense):
Insurance recoveries		8,843			113			10,041			3,480
Other income		9			74			140			91
Corporate expense		(4,304	)		(2,659	)		(17,582	)		(12,146	)

Income from operations		7,980			962			3,231			2,866

Equity in earnings (losses) of Kronos Worldwide, Inc.		9,689			(3,600	)		24,101			(46,584	)
Other income - interest and dividend income		311			294			1,333			878

Income (loss) before income taxes		17,980			(2,344	)		28,665			(42,840	)

Income tax expense (benefit)		3,800			(3,581	)		4,645			(25,534	)

Net income (loss)		14,180			1,237			24,020			(17,306	)
Noncontrolling interest in net income of subsidiary		291			294			904			976

Net income (loss) attributable to NL stockholders	$	13,889		$	943		$	23,116		$	(18,282	)

Amounts attributable to NL stockholders:

Basic and diluted net income (loss) per share	$	.29		$	.02		$	.47		$	(.38	)

Weighted average shares used in the calculation of net income (loss) per share		48,683			48,692			48,678			48,687

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						Nine months ended
	September 30,						September 30,
	2014			2015			2014			2015
	(unaudited)

Net income (loss)	$	14,180		$	1,237		$	24,020		$	(17,306	)

Other comprehensive income (loss), net of tax:
Marketable securities		1,022			(34,513	)		(105,842	)		(41,657	)
Currency translation		(9,215	)		(3,538	)		(10,589	)		(15,309	)
Interest rate swap		-			(733	)		-			(733	)
Defined benefit pension plans		530			902			1,585			2,723
Other postretirement benefit plans		(156	)		(137	)		(469	)		(410	)

Total other comprehensive loss, net		(7,819	)		(38,019	)		(115,315	)		(55,386	)

Comprehensive income (loss)		6,361			(36,782	)		(91,295	)		(72,692	)
Comprehensive income attributable to noncontrolling interest		291			294			904			976

Comprehensive income (loss) attributable to NL stockholders	$	6,070		$	(37,076	)	$	(92,199	)	$	(73,668	)

See accompanying notes to Condensed Consolidated Financial Statements.

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

Nine months ended September 30, 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 (loss)		-		-		(18,282	)		-			976			(17,306	)
Other comprehensive loss, net of tax		-		-		-			(55,386	)		-			(55,386	)
Issuance of NL common stock		1		65		-			-			-			66
Dividends		-		-		-			-			(247	)		(247	)
Other, net		-		90		-			-			10			100

Balance at September 30, 2015	$	6,086	$	300,543	$	94,306		$	(237,425	)	$	15,167		$	178,677

See accompanying notes to Condensed Consolidated Financial Statements.

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Nine months ended
	September 30,
	2014			2015
	(unaudited)
Cash flows from operating activities:
Net income (loss)	$	24,020		$	(17,306	)
Depreciation and amortization		2,694			2,699
Deferred income taxes		1,132			(20,978	)
Equity in losses (earnings) of Kronos Worldwide, Inc.		(24,101	)		46,584
Dividends received from Kronos Worldwide, Inc.		15,849			15,849
Cash funding of benefit plans in excess of net benefit plan expense		(2,145	)		(1,116	)
Other, net		417			348
Change in assets and liabilities:
Accounts and other receivables, net		(1,839	)		(2,583	)
Inventories, net		(2,030	)		1,246
Prepaid expenses and other		15			(40	)
Accounts payable and accrued liabilities		2,184			(1,805	)
Income taxes		3			-
Accounts with affiliates		3,380			(1,497	)
Accrued environmental remediation and related costs		3,334			1,596
Other noncurrent assets and liabilities, net		(63	)		(4,700	)

Net cash provided by operating activities		22,850			18,297

Cash flows from investing activities:
Capital expenditures		(2,199	)		(2,570	)
Change in restricted cash equivalents, net		(454	)		348
Proceeds from the sale of marketable securities		-			255
Purchase of marketable securities		-			(251	)
Other		(57	)		-

Net cash used in investing activities		(2,710	)		(2,218	)

Cash flows from financing activities -
Distributions to noncontrolling interests in subsidiary		(246	)		(247	)

Cash and cash equivalents - net change from:
Operating, investing and financing activities		19,894			15,832
Cash and cash equivalents at beginning of period		52,609			72,560

Cash and cash equivalents at end of period	$	72,503		$	88,392

Supplemental disclosure - cash paid for:
Income taxes, net	$	190		$	1,587

See accompanying notes to Condensed Consolidated Financial Statements.

NL INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

(unaudited)

Note 1 – Organization and basis of presentation:

Organization – At September 30, 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 a family trust 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. 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 periods ended September 30, 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,			September 30,
	2014			2015
	(In thousands)
Trade receivables - CompX	$	8,825		$	11,687
Income taxes receivable from Valhi		-			914
Accrued insurance recoveries		346			71
Other receivables		163			145
Allowance for doubtful accounts		(78	)		(82	)

Total	$	9,256		$	12,735

Accrued insurance recoveries are discussed in Note 13.

Note 3 – Inventories, net:

	December 31,		September 30,
	2014		2015
	(In thousands)
Raw materials	$	3,393	$	3,262
Work in process		10,271		9,902
Finished products		3,199		2,284

Total	$	16,863	$	15,448

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

September 30, 2015
Valhi common stock	1	$	27,165	$	24,347	$	2,818

At December 31, 2014 and September 30, 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 September 30, 2015, the quoted per share market price of Valhi common stock was $6.41 and $1.89, 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 September 30, 2015, we owned approximately 35.2 million shares of Kronos common stock. At September 30, 2015, the quoted market price of Kronos’ common stock was $6.21 per share, or an aggregate market value of $218.7 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 nine months of 2015 is summarized below.


	Amount
	(In millions)
Balance at the beginning of the period	$	237.7
Equity in losses of Kronos		(46.6	)
Dividends received from Kronos		(15.8	)
Equity in Kronos' other comprehensive income:
Marketable securities		.9
Currency translation		(23.6	)
Interest rate swap		(1.1	)
Defined benefit pension plans		3.1

Balance at the end of the period	$	154.6

Selected financial information of Kronos is summarized below:

	December 31,		September 30,
	2014		2015
	(In millions)
Current assets	$	886.2	$	781.2
Property and equipment, net		479.7		431.3
Investment in TiO₂ joint venture		89.0		81.4
Other noncurrent assets		187.6		18.8

Total assets	$	1,642.5	$	1,312.7

Current liabilities	$	237.9	$	204.7
Long-term debt		344.7		342.9
Accrued pension and postretirement benefits		245.2		219.1
Other noncurrent liabilities		33.6		38.3
Stockholders' equity		781.1		507.7

Total liabilities and stockholders' equity	$	1,642.5	$	1,312.7

	Three months ended					Nine months ended
	September 30,					September 30,
	2014		2015			2014		2015
	(In millions)
Net sales	$	414.8	$	336.5		$	1,278.4	$	1,061.8
Cost of sales		319.1		293.3			1,008.4		894.7
Income (loss) from operations		47.9		(3.2	)		118.2		18.6
Income tax expense (benefit)		12.3