Edgar Filing: NL INDUSTRIES INC

nl-10q_20170630.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, 2017

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 ☒ 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 ☒ No ☐

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act). ☐

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

Number of shares of the Registrant’s common stock outstanding on July 31, 2017: 48,714,884.

NL INDUSTRIES, INC. AND SUBSIDIARIES

INDEX

		Page number
Part I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets - December 31, 2016; June 30, 2017 (unaudited)	3

	Condensed Consolidated Statements of Operations (unaudited) – Three and six months ended June 30, 2016 and 2017	5

	Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) – Three and six months ended June 30, 2016 and 2017	6

	Condensed Consolidated Statement of Equity (unaudited) – Six months ended June 30, 2017	7

	Condensed Consolidated Statements of Cash Flows (unaudited) - Six months ended June 30, 2016 and 2017	8

	Notes to Condensed Consolidated Financial Statements (unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	41

Item 4.	Controls and Procedures	41


Part II.	OTHER INFORMATION

Item 1.	Legal Proceedings	43

Item 1A.	Risk Factors	43

Item 6.	Exhibits	43

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,
	2016		2017
			(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	93,162	$	90,063
Restricted cash and cash equivalents		3,791		3,223
Accounts and other receivables, net		10,586		12,373
Inventories, net		14,974		15,317
Prepaid expenses and other		986		904

Total current assets		123,499		121,880

Other assets:
Notes receivable from affiliate		27,400		39,500
Marketable securities		49,731		42,831
Investment in Kronos Worldwide, Inc.		120,346		188,969
Goodwill		27,156		27,156
Other assets, net		3,276		3,472

Total other assets		227,909		301,928

Property and equipment:
Land		5,146		5,146
Buildings		22,811		22,827
Equipment		66,112		66,244
Construction in progress		1,098		1,538

		95,167		95,755
Less accumulated depreciation		61,583		62,466

Net property and equipment		33,584		33,289

Total assets	$	384,992	$	457,097

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In thousands)

	December 31,			June 30,
	2016			2017
				(unaudited)
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	5,026		$	4,638
Accrued and other current liabilities		10,624			8,390
Accrued environmental remediation and related costs		13,350			13,101
Payable to affiliates		1,717			717
Income taxes		26			28

Total current liabilities		30,743			26,874

Noncurrent liabilities:
Long-term debt from affiliate		500			500
Accrued pension costs		12,874			12,563
Accrued postretirement benefits (OPEB) costs		2,310			2,153
Accrued environmental remediation and related costs		103,308			106,058
Deferred income taxes		27,445			49,464
Other		13,542			13,515

Total noncurrent liabilities		159,979			184,253

Equity:
NL stockholders' equity:
Common stock		6,088			6,089
Additional paid-in capital		300,674			300,869
Retained earnings		104,004			153,521
Accumulated other comprehensive loss		(232,846	)		(231,549	)

Total NL stockholders' equity		177,920			228,930

Noncontrolling interest in subsidiary		16,350			17,040

Total equity		194,270			245,970

Total liabilities and equity	$	384,992		$	457,097

Commitments and contingencies (Note 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,
	2016			2017			2016			2017
	(unaudited)
Net sales	$	27,107		$	30,002		$	54,182		$	59,950
Cost of sales		18,621			20,494			37,491			40,757

Gross margin		8,486			9,508			16,691			19,193

Selling, general and administrative expense		4,769			4,907			9,621			10,066
Other operating income (expense):
Insurance recoveries		233			66			323			116
Corporate expense		(3,329	)		(3,410	)		(8,978	)		(8,909	)

Income (loss) from operations		621			1,257			(1,585	)		334

Equity in earnings (losses) of Kronos Worldwide, Inc.		497			59,745			(653	)		70,920

Other income (expense):
Interest and dividend income		377			881			730			1,577
Interest expense		-			(7	)		-			(14	)

Income (loss) before income taxes		1,495			61,876			(1,508	)		72,817

Income tax expense (benefit)		330			20,278			(492	)		22,457

Net income (loss)		1,165			41,598			(1,016	)		50,360
Noncontrolling interest in net income of subsidiary		320			431			608			843

Net income (loss) attributable to NL stockholders	$	845		$	41,167		$	(1,624	)	$	49,517

Amounts attributable to NL stockholders:

Basic and diluted net income (loss) per share	$	.02		$	.85		$	(.03	)	$	1.02

Weighted average shares used in the calculation of net income (loss) per share		48,699			48,710			48,695			48,708

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,
	2016			2017			2016			2017
	(unaudited)
Net income (loss)	$	1,165		$	41,598		$	(1,016	)	$	50,360

Other comprehensive income (loss), net of tax:
Marketable securities		3,730			(2,869	)		2,199			(4,591	)
Currency translation		(980	)		2,925			1,851			4,696
Interest rate swap		(157	)		(84	)		(728	)		28
Defined benefit pension plans		823			393			1,630			1,260
Other postretirement benefit plans		(132	)		(48	)		(264	)		(96	)

Total other comprehensive income, net		3,284			317			4,688			1,297

Comprehensive income		4,449			41,915			3,672			51,657
Comprehensive income attributable to noncontrolling interest		320			431			608			843

Comprehensive income attributable to NL stockholders	$	4,129		$	41,484		$	3,064		$	50,814

See accompanying notes to Condensed Consolidated Financial Statements.

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

Six months ended June 30, 2017

(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, 2016	$	6,088	$	300,674	$	104,004	$	(232,846	)	$	16,350		$	194,270

Net income		—		—		49,517		—			843			50,360
Other comprehensive income, net of tax		—		—		—		1,297			—			1,297
Issuance of NL common stock		1		82		—		—			—			83
Dividends		—		—		—		—			(166	)		(166	)
Other, net		—		113		—		—			13			126

Balance at June 30, 2017	$	6,089	$	300,869	$	153,521	$	(231,549	)	$	17,040		$	245,970

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,
	2016			2017
	(unaudited)
Cash flows from operating activities:
Net income (loss)	$	(1,016	)	$	50,360
Depreciation and amortization		1,889			1,861
Deferred income taxes		(534	)		21,309
Equity in earnings (losses) of Kronos Worldwide, Inc.		653			(70,920	)
Dividends received from Kronos Worldwide, Inc.		10,566			10,566
Cash funding of benefit plans in excess of net benefit plan expense		(146	)		(23	)
Other, net		328			280
Change in assets and liabilities:
Accounts and other receivables, net		(3,710	)		(1,814	)
Inventories, net		851			(417	)
Prepaid expenses and other		(605	)		81
Accounts payable and accrued liabilities		(2,491	)		(2,581	)
Income taxes		(4	)		(1	)
Accounts with affiliates		8			(985	)
Accrued environmental remediation and related costs		1,980			2,500
Other noncurrent assets and liabilities, net		(166	)		(33	)

Net cash provided by operating activities		7,603			10,183

Cash flows from investing activities:
Capital expenditures		(1,684	)		(1,611	)
Promissory notes receivable from affiliate:
Loans		-			(39,300	)
Collections		-			27,200
Other, net		-			2

Net cash used in investing activities		(1,684	)		(13,709	)

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

Cash and cash equivalents and restricted cash and cash equivalents - net change from:
Operating, investing and financing activities		5,753			(3,692	)
Balance at beginning of period		100,981			98,242

Balance at end of period	$	106,734		$	94,550

Supplemental disclosure - cash paid for:
Interest	$	-		$	14
Income taxes, net	$	55			2,157

See accompanying notes to Condensed Consolidated Financial Statements.

NL INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(unaudited)

Note 1 – Organization and basis of presentation:

Organization – At June 30, 2017, 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, 2016 that we filed with the SEC on March 10, 2017 (the 2016 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, 2016 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, 2016) 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, 2017 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 2016 Consolidated Financial Statements contained in our 2016 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,
	2016			2017
	(In thousands)
Trade receivables - CompX	$	10,417		$	12,225
Accrued insurance recoveries		104			86
Other receivables		135			132
Allowance for doubtful accounts		(70	)		(70	)

Total	$	10,586		$	12,373

Accrued insurance recoveries are discussed in Note 13.

Note 3 – Inventories, net:

	December 31,		June 30,
	2016		2017
	(In thousands)
Raw materials	$	2,743	$	2,891
Work in process		8,988		9,786
Finished products		3,243		2,640

Total	$	14,974	$	15,317

Note 4 – Marketable securities:

	Fair value measurement level	Market value		Cost basis		Unrealized gain (loss)
		(In thousands)
December 31, 2016
Valhi common stock	1	$	49,731	$	24,347	$	25,384

June 30, 2017
Valhi common stock	1	$	42,831	$	24,347	$	18,484

At December 31, 2016 and June 30, 2017, 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, 2016 and June 30, 2017, the quoted per share market price of Valhi common stock was $3.46 and $2.98, 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, 2016 and June 30, 2017, we owned approximately 35.2 million shares of Kronos common stock. At June 30, 2017, the quoted market price of Kronos’ common stock was $18.22 per share, or an aggregate market value of $641.7 million. At December 31, 2016, the quoted market price was $11.94 per share, or an aggregate market value of $420.5 million.

The change in the carrying value of our investment in Kronos during the first six months of 2017 is summarized below.

	Amount
	(In millions)
Balance at the beginning of the period	$	120.3
Equity in earnings of Kronos		70.9
Dividends received from Kronos		(10.6	)
Equity in Kronos' other comprehensive income (loss):
Marketable securities		(.1	)
Currency translation		7.2
Interest rate swap		.1
Defined benefit pension plans		1.2

Balance at the end of the period	$	189.0

Selected financial information of Kronos is summarized below:

	December 31,		June 30,
	2016		2017
	(In millions)
Current assets	$	650.4	$	800.0
Property and equipment, net		434.0		466.4
Investment in TiO₂ joint venture		78.9		70.5
Other noncurrent assets		16.3		136.0

Total assets	$	1,179.6	$	1,472.9

Current liabilities	$	182.1	$	210.9
Long-term debt		335.4		350.8
Accrued pension and postretirement benefits		234.2		253.1
Other noncurrent liabilities		32.9		37.3
Stockholders' equity		395.0		620.8

Total liabilities and stockholders' equity	$	1,179.6	$	1,472.9

	Three months ended				Six months ended
	June 30,				June 30,
	2016		2017		2016		2017
	(In millions)
Net sales	$	356.1	$	441.4	$	674.5	$	811.2
Cost of sales		300.6		311.6		578.6		578.0
Income from operations		10.5		70.1		10.2		122.4