Edgar Filing: NL INDUSTRIES INC

nl-10q_20160630.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 June 30, 2016

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 July 29, 2016: 48,705,884.

NL INDUSTRIES, INC. AND SUBSIDIARIES

INDEX

		Page number
Part I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets - December 31, 2015; June 30, 2016 (unaudited)	3

	Condensed Consolidated Statements of Operations (unaudited) – Three and six months ended June 30, 2015 and 2016	5

	Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) – Three and six months ended June 30, 2015 and 2016	6

	Condensed Consolidated Statement of Equity (unaudited) – Six months ended June 30, 2016	7

	Condensed Consolidated Statements of Cash Flows (unaudited) - Six months ended June 30, 2015 and 2016	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	40

Item 4.	Controls and Procedures	40


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,		June 30,
	2015		2016
			(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	96,462	$	102,056
Restricted cash and cash equivalents		3,246		3,399
Accounts and other receivables, net		8,977		12,682
Inventories, net		15,098		14,124
Prepaid expenses and other		981		1,586

Total current assets		124,764		133,847

Other assets:
Marketable securities		19,260		22,566
Investment in Kronos Worldwide, Inc.		140,695		133,000
Goodwill		27,156		27,156
Other assets, net		3,331		3,578
Deferred income taxes		11		11

Total other assets		190,453		186,311

Property and equipment:
Land		5,138		5,138
Buildings		21,502		22,788
Equipment		64,051		65,445
Construction in progress		1,567		455

		92,258		93,826
Less accumulated depreciation		58,152		60,003

Net property and equipment		34,106		33,823

Total assets	$	349,323	$	353,981

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In thousands)

	December 31,			June 30,
	2015			2016
				(unaudited)
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	4,557		$	4,378
Accrued and other current liabilities		10,783			8,469
Accrued environmental remediation and related costs		8,668			11,385

Total current liabilities		24,008			24,232

Noncurrent liabilities:
Accrued pension costs		14,155			13,875
Accrued postretirement benefits (OPEB) costs		2,773			2,617
Accrued environmental remediation and related costs		104,465			103,728
Deferred income taxes		25,035			27,031
Other		13,636			13,596

Total noncurrent liabilities		160,064			160,847

Equity:
NL stockholders' equity:
Common stock		6,086			6,088
Additional paid-in capital		300,543			300,674
Retained earnings		88,679			87,055
Accumulated other comprehensive loss		(245,358	)		(240,670	)

Total NL stockholders' equity		149,950			153,147

Noncontrolling interest in subsidiary		15,301			15,755

Total equity		165,251			168,902

Total liabilities and equity	$	349,323		$	353,981

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						Six months ended
	June 30,						June 30,
	2015			2016			2015			2016
	(unaudited)

Net sales	$	28,918		$	27,107		$	56,808		$	54,182
Cost of sales		19,758			18,621			39,082			37,491

Gross margin		9,160			8,486			17,726			16,691

Selling, general and administrative expense		4,854			4,769			9,719			9,621
Other operating income (expense):
Insurance recoveries		233			233			3,367			323
Other income		17			5			17			5
Corporate expense		(5,656	)		(3,334	)		(9,487	)		(8,983	)

Income (loss) from operations		(1,100	)		621			1,904			(1,585	)

Equity in earnings (losses) of Kronos Worldwide, Inc.		(48,589	)		497			(42,984	)		(653	)
Other income - interest and dividend income	282				377		584				730

Income (loss) before income taxes		(49,407	)		1,495			(40,496	)		(1,508	)

Income tax provision (benefit)		(20,507	)		330			(21,953	)		(492	)

Net income (loss)		(28,900	)		1,165			(18,543	)		(1,016	)
Noncontrolling interest in net income of subsidiary		367			320			682			608

Net income (loss) attributable to NL stockholders	$	(29,267	)	$	845		$	(19,225	)	$	(1,624	)

Amounts attributable to NL stockholders:

Basic and diluted net income (loss) per share	$	(.60	)	$	.02		$	(.39	)	$	(.03	)

Weighted average shares used in the calculation of net income (loss) per share		48,687			48,699			48,685			48,695

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						Six months ended
	June 30,						June 30,
	2015			2016			2015			2016
	(unaudited)

Net income (loss)	$	(28,900	)	$	1,165		$	(18,543	)	$	(1,016	)

Other comprehensive income (loss), net of tax:
Marketable securities		(5,358	)		3,730			(7,144	)		2,199
Currency translation		1,188			(980	)		(11,771	)		1,851
Interest rate swap		-			(157	)		-			(728	)
Defined benefit pension plans		1,087			823			1,821			1,630
Other postretirement benefit plans		(137	)		(132	)		(273	)		(264	)

Total other comprehensive income (loss), net		(3,220	)		3,284			(17,367	)		4,688

Comprehensive income (loss)		(32,120	)		4,449			(35,910	)		3,672
Comprehensive income attributable to noncontrolling interest		367			320			682			608

Comprehensive income (loss) attributable to NL stockholders	$	(32,487	)	$	4,129		$	(36,592	)	$	3,064

See accompanying notes to Condensed Consolidated Financial Statements.

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

Six months ended June 30, 2016

(In thousands)

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

Balance at December 31, 2015	$	6,086	$	300,543	$	88,679		$	(245,358	)	$	15,301		$	165,251

Net income (loss)		-		-		(1,624	)		-			608			(1,016	)
Other comprehensive income, net of tax		-		-		-			4,688			-			4,688
Issuance of NL common stock		2		35		-			-			-			37
Dividends		-		-		-			-			(166	)		(166	)
Other, net		-		96		-			-			12			108

Balance at June 30, 2016	$	6,088	$	300,674	$	87,055		$	(240,670	)	$	15,755		$	168,902

See accompanying notes to Condensed Consolidated Financial Statements.

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Six months ended
	June 30,
	2015			2016
	(unaudited)
Cash flows from operating activities:
Net income (loss)	$	(18,543	)	$	(1,016	)
Depreciation and amortization		1,802			1,889
Deferred income taxes		(17,372	)		(534	)
Equity in losses of Kronos Worldwide, Inc.		42,984			653
Dividends received from Kronos Worldwide, Inc.		10,566			10,566
Cash funding of benefit plans in excess of net benefit plan expense		(757	)		(146	)
Other, net		280			328
Change in assets and liabilities:
Accounts and other receivables, net		(4,220	)		(3,710	)
Inventories, net		632			851
Prepaid expenses and other		(41	)		(605	)
Accounts payable and accrued liabilities		1,618			(2,599	)
Income taxes		(5	)		(4	)
Accounts with affiliates		(1,516	)		8
Accrued environmental remediation and related costs		1,993			1,980
Other noncurrent assets and liabilities, net		(4,672	)		(166	)

Net cash provided by operating activities		12,749			7,495

Cash flows from investing activities:
Capital expenditures		(1,994	)		(1,684	)
Change in restricted cash equivalents, net		-			(51	)
Proceeds from the sale of marketable securities		255			-
Purchase of marketable securities		(251	)		-

Net cash used in investing activities		(1,990	)		(1,735	)

Cash flows from financing activities -
Distributions to noncontrolling interests in subsidiary		(164	)		(166	)

Cash and cash equivalents - net change from:
Operating, investing and financing activities		10,595			5,594
Cash and cash equivalents at beginning of period		72,560			96,462

Cash and cash equivalents at end of period	$	83,155		$	102,056

Supplemental disclosure - cash paid for:
Income taxes, net	$	1,585		$	55

See accompanying notes to Condensed Consolidated Financial Statements.

NL INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

(unaudited)

Note 1 – Organization and basis of presentation:

Organization – At June 30, 2016, 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. 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 and their children for which Ms. Simmons and Ms. Connelly are co-trustees, or is held directly by Ms. Simmons and Ms. Connelly or entities related to them. Consequently, Ms. Simmons and Ms. Connelly 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, 2015 that we filed with the SEC on March 10, 2016 (the 2015 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 at December 31, 2015 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, 2015) 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 June 30, 2016 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 2015 Consolidated Financial Statements contained in our 2015 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,			June 30,
	2015			2016
	(In thousands)
Trade receivables - CompX	$	8,847		$	12,457
Accrued insurance recoveries		138			226
Other receivables		79			70
Allowance for doubtful accounts		(87	)		(71	)

Total	$	8,977		$	12,682

Accrued insurance recoveries are discussed in Note 13.

Note 3 – Inventories, net:

	December 31,		June 30,
	2015		2016
	(In thousands)
Raw materials	$	2,807	$	2,813
Work in process		9,346		8,832
Finished products		2,945		2,479

Total	$	15,098	$	14,124

Note 4 – Marketable securities:


	Fair value measurement level	Market value		Cost basis		Unrealized loss
		(In thousands)
December 31, 2015
Valhi common stock	1	$	19,260	$	24,347	$	(5,087	)

June 30, 2016
Valhi common stock	1	$	22,566	$	24,347	$	(1,781	)

At December 31, 2015 and June 30, 2016, 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, 2015 and June 30, 2016, the quoted per share market price of Valhi common stock was $1.34 and $1.57, respectively.

With respect to our investment in Valhi stock, our cost basis had exceeded its market value at December 2015, but we considered such decline in market price to be temporary, as the aggregate market value of our investment in Valhi common stock exceeded our cost basis as of April 19, 2016. At June 30, 2016, our cost basis had exceeded its market value continuously since June 24, 2016, but we also consider such decline in market price to be temporary, as the aggregate market value of our investment in Valhi stock exceeded our cost basis as of July 13, 2016.

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, 2015 and June 30, 2016, we owned approximately 35.2 million shares of Kronos common stock. At June 30, 2016, the quoted market price of Kronos’ common stock was $5.25 per share, or an aggregate market value of $184.9 million. At December 31, 2015, the quoted market price was $5.64 per share, or an aggregate market value of $198.6 million.

The change in the carrying value of our investment in Kronos during the first six months of 2016 is summarized below.

	Amount
	(In millions)
Balance at the beginning of the period	$	140.7
Equity in losses of Kronos		(.7	)
Dividends received from Kronos		(10.6	)
Equity in Kronos' other comprehensive income (loss):
Marketable securities		.1
Currency translation		2.8
Interest rate swap		(1.1	)
Defined benefit pension plans		1.8

Balance at the end of the period	$	133.0

Selected financial information of Kronos is summarized below:

	December 31,		June 30,
	2015		2016
	(In millions)
Current assets	$	710.8	$	697.4
Property and equipment, net		429.5		439.6
Investment in TiO₂ joint venture		82.9		76.3
Other noncurrent assets		19.5		21.1

Total assets	$	1,242.7	$	1,234.4

Current liabilities	$	201.7	$	218.6
Long-term debt		337.2		336.5
Accrued pension and postretirement benefits		209.4		208.6
Other noncurrent liabilities		32.5		34.1
Stockholders' equity		461.9		436.6

Total liabilities and stockholders' equity	$	1,242.7	$	1,234.4

	Three months ended					Six months ended
	June 30,					June 30,
	2015			2016		2015			2016
	(In millions)
Net sales	$	360.2		$	356.1	$	725.3		$	674.5
Cost of sales		313.7			300.6		601.4			578.6
Income (loss) from operations		(10.4	)		10.5		21.8			10.2
Income tax expense		145.1			3.9		154.5			2.5
Net income (loss)		(159.8	)		1.7		(141.4	)		(2.1	)

Note 6 – Other noncurrent assets, net:

	December 31,		June 30,
	2015		2016
	(In thousands)
Pension asset	$	1,303	$	1,420
Restricted cash		1,273		1,279
Other		755		879