Edgar Filing: NL INDUSTRIES INC

nl-10q_20180630.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, 2018

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 75240-2620

(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 August 1, 2018: 48,727,884.

NL INDUSTRIES, INC. AND SUBSIDIARIES

INDEX

		Page number
Part I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets - December 31, 2017; June 30, 2018 (unaudited)	3

	Condensed Consolidated Statements of Operations (unaudited) – Three and six months ended June 30, 2017 and 2018	5

	Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) – Three and six months ended June 30, 2017 and 2018	6

	Condensed Consolidated Statement of Equity (unaudited) – Six months ended June 30, 2018	7

	Condensed Consolidated Statements of Cash Flows (unaudited) - Six months ended June 30, 2017 and 2018	8

	Notes to Condensed Consolidated Financial Statements (unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	46

Item 4.	Controls and Procedures	46


Part II.	OTHER INFORMATION

Item 1.	Legal Proceedings	48

Item 1A.	Risk Factors	48

Item 6.	Exhibits	48

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,
	2017		2018
			(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	98,316	$	111,140
Restricted cash and cash equivalents		3,370		3,445
Accounts and other receivables, net		10,670		29,079
Inventories, net		15,382		16,579
Receivable from affiliate		1,767		-
Prepaid expenses and other		1,162		938

Total current assets		130,667		161,181

Other assets:
Notes receivable from affiliate		38,200		37,600
Marketable securities		88,681		68,415
Investment in Kronos Worldwide, Inc.		229,543		259,752
Goodwill		27,156		27,156
Other assets, net		4,843		5,027

Total other assets		388,423		397,950

Property and equipment:
Land		5,146		5,141
Buildings		23,044		22,910
Equipment		67,926		68,447
Construction in progress		569		1,013

		96,685		97,511
Less accumulated depreciation		64,159		65,563

Net property and equipment		32,526		31,948

Total assets	$	551,616	$	591,079

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In thousands)

	December 31,			June 30,
	2017			2018
				(unaudited)
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	4,116		$	3,684
Accrued and other current liabilities		9,707			68,445
Accrued environmental remediation and related costs		5,302			18,253
Payable to affiliates		429			461
Income taxes		30			46

Total current liabilities		19,584			90,889

Noncurrent liabilities:
Long-term debt from affiliate		500			500
Accrued pension costs		12,194			11,490
Accrued postretirement benefits (OPEB) costs		1,846			1,737
Accrued environmental remediation and related costs		106,607			97,208
Deferred income taxes		49,315			39,563
Other		8,492			25,413

Total noncurrent liabilities		178,954			175,911

Equity:
NL stockholders' equity:
Common stock		6,089			6,090
Additional paid-in capital		300,866			301,139
Retained earnings		220,104			237,807
Accumulated other comprehensive loss		(191,737	)		(239,504	)

Total NL stockholders' equity		335,322			305,532

Noncontrolling interest in subsidiary		17,756			18,747

Total equity		353,078			324,279

Total liabilities and equity	$	551,616		$	591,079

Commitments and contingencies (Note 14)

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,
	2017			2018			2017			2018
	(unaudited)
Net sales	$	30,002		$	32,385		$	59,950		$	60,798
Cost of sales		20,494			21,151			40,757			40,061

Gross margin		9,508			11,234			19,193			20,737

Selling, general and administrative expense		4,907			5,251			10,066			10,380
Other operating income (expense):
Insurance recoveries		66			200			116			363
Other income, net		-			8			-			627
Litigation settlement expense, net		-			(62,000	)		-			(62,000	)
Corporate expense		(3,233	)		(4,816	)		(8,555	)		(12,769	)

Income (loss) from operations		1,434			(60,625	)		688			(63,422	)

Equity in earnings of Kronos Worldwide, Inc.		59,745			23,645			70,920			45,124

Other income (expense):
Marketable equity securities		-			(18,685	)		-			(20,266	)
Other components of net periodic pension and OPEB cost		(177	)		(99	)		(354	)		(198	)
Interest and dividend income		881			1,222			1,577			2,294
Interest expense		(7	)		(8	)		(14	)		(16	)

Income (loss) before income taxes		61,876			(54,550	)		72,817			(36,484	)

Income tax expense (benefit)		20,278			(12,588	)		22,457			(9,258	)

Net income (loss)		41,598			(41,962	)		50,360			(27,226	)
Noncontrolling interest in net income of subsidiary		431			653			843			1,140

Net income (loss) attributable to NL stockholders	$	41,167		$	(42,615	)	$	49,517		$	(28,366	)

Amounts attributable to NL stockholders:

Basic and diluted net income (loss) per share	$	.85		$	(.87	)	$	1.02		$	(.58	)

Weighted average shares used in the calculation of net income per share		48,710			48,721			48,708			48,718

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,
	2017			2018			2017			2018
	(unaudited)
Net income (loss)	$	41,598		$	(41,962	)	$	50,360		$	(27,226	)

Other comprehensive income (loss), net of tax:
Marketable securities		(2,869	)		-			(4,591	)		-
Currency translation		2,925			(6,108	)		4,696			(3,517	)
Interest rate swap		(84	)		-			28			-
Defined benefit pension plans		393			974			1,260			1,957
Other postretirement benefit plans		(48	)		(65	)		(96	)		(138	)

Total other comprehensive income (loss), net		317			(5,199	)		1,297			(1,698	)

Comprehensive income (loss)		41,915			(47,161	)		51,657			(28,924	)
Comprehensive income attributable to noncontrolling interest		431			653			843			1,140

Comprehensive income (loss) attributable to NL stockholders	$	41,484		$	(47,814	)	$	50,814		$	(30,064	)

See accompanying notes to Condensed Consolidated Financial Statements.

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

Six months ended June 30, 2018

(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, 2017	$	6,089	$	300,866	$	220,104		$	(191,737	)	$	17,756		$	353,078

Change in accounting principle - ASU 2016-01		—		—		46,069			(46,069	)		—			—
Balance at January 1, 2018, as adjusted		6,089		300,866		266,173			(237,806	)		17,756			353,078
Net income (loss)		—		—		(28,366	)		—			1,140			(27,226	)
Other comprehensive income (loss), net of tax		—		—		—			(1,698	)		—			(1,698	)
Issuance of NL common stock		1		119		—			—			—			120
Dividends		—		—		—			—			(167	)		(167	)
Other, net		—		154		—			—			18			172

Balance at June 30, 2018	$	6,090	$	301,139	$	237,807		$	(239,504	)	$	18,747		$	324,279

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,
	2017			2018
	(unaudited)
Cash flows from operating activities:
Net income (loss)	$	50,360		$	(27,226	)
Depreciation and amortization		1,861			1,752
Deferred income taxes		21,309			(9,312	)
Equity in earnings of Kronos Worldwide, Inc.		(70,920	)		(45,124	)
Dividends received from Kronos Worldwide, Inc.		10,566			11,974
Cash funding of benefit plans in excess of net benefit plan expense		(23	)		(137	)
Marketable equity securities		-			20,266
Other, net		280			371
Change in assets and liabilities:
Accounts and other receivables, net		(1,814	)		(3,414	)
Inventories, net		(417	)		(1,300	)
Prepaid expenses and other		81			224
Accounts payable and accrued liabilities		(2,581	)		43,266
Income taxes		(1	)		12
Accounts with affiliates		(985	)		1,799
Accrued environmental remediation and related costs		2,500			3,552
Other noncurrent assets and liabilities, net		(33	)		16,760

Net cash provided by operating activities		10,183			13,463

Cash flows from investing activities:
Capital expenditures		(1,611	)		(1,367	)
Promissory notes receivable from affiliate:
Loans		(39,300	)		(25,300	)
Collections		27,200			25,900
Other, net		2			225

Net cash used in investing activities		(13,709	)		(542	)

Cash flows from financing activities -
Distributions to noncontrolling interests in subsidiary		(166	)		(167	)

Cash and cash equivalents and restricted cash and cash equivalents - net change from:
Operating, investing and financing activities		(3,692	)		12,754
Balance at beginning of period		98,242			102,941

Balance at end of period	$	94,550		$	115,695

Supplemental disclosure - cash paid (received) for:
Interest	$	14		$	16
Income taxes, net	$	2,157		$	(1,747	)

See accompanying notes to Condensed Consolidated Financial Statements.

NL INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

(unaudited)

Note 1 – Organization and basis of presentation:

Organization – At June 30, 2018, Valhi, Inc. (NYSE: VHI) held approximately 83% of our outstanding common stock and a wholly-owned subsidiary of Contran Corporation held approximately 92% 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 American: 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, 2017 that we filed with the SEC on March 12, 2018 (the 2017 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, 2017 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, 2017) 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, 2018 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 2017 Consolidated Financial Statements contained in our 2017 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,
	2017			2018
	(In thousands)
Trade receivables - CompX	$	10,516		$	13,831
Accrued insurance recoveries		145			15,000
Other receivables		79			318
Allowance for doubtful accounts		(70	)		(70	)

Total	$	10,670		$	29,079

Accrued insurance recoveries are discussed in Note 14.

Note 3 – Inventories, net:

	December 31,		June 30,
	2017		2018
	(In thousands)
Raw materials	$	2,730	$	2,665
Work in process		9,836		10,630
Finished products		2,816		3,284

Total	$	15,382	$	16,579

Note 4 – Marketable securities:

Our marketable securities consist of investments in the publicly-traded shares of our immediate parent company Valhi, Inc. Prior to 2018, any unrealized gains or losses on the securities were recognized through other comprehensive income, net of deferred income taxes. Beginning on January 1, 2018 with the adoption of Accounting Standards Update (“ASU”) 2016-01, our marketable equity securities will continue to be carried at fair value as noted below, but any unrealized gains or losses on the securities are now recognized as a component of other income included in Marketable equity securities on our Condensed Consolidated Statements of Operations.

	Fair value measurement level	Market value		Cost basis		Unrealized gain
		(In thousands)
December 31, 2017
Valhi common stock	1	$	88,681	$	24,347	$	64,334

June 30, 2018
Valhi common stock	1	$	68,415	$	24,347	$	44,068

At December 31, 2017 and June 30, 2018, we held approximately 14.4 million shares of common stock of Valhi. See Note 1. 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, 2017 and June 30, 2018, the quoted per share market price of Valhi common stock was $6.17 and $4.76, respectively. During the first six months of 2018 we recognized a pre-tax loss of $20.3 million related to the aggregate net change in market value of our marketable equity securities during such period.

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, 2017 and June 30, 2018, we owned approximately 35.2 million shares of Kronos common stock. At June 30, 2018, the quoted market price of Kronos’ common stock was $22.53 per share, or an aggregate market value of $793.5 million. At December 31, 2017, the quoted market price was $25.77 per share, or an aggregate market value of $907.6 million.

The change in the carrying value of our investment in Kronos during the first six months of 2018 is summarized below.

	Amount
	(In millions)
Balance at the beginning of the period	$	229.5
Equity in earnings of Kronos		45.1
Dividends received from Kronos		(12.0	)
Equity in Kronos' other comprehensive income:
Currency translation		(4.4	)
Defined benefit pension plans		1.5

Balance at the end of the period	$	259.7

Selected financial information of Kronos is summarized below:

	December 31,				June 30,
	2017