Edgar Filing: NL INDUSTRIES INC

nl-10q_20180930.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, 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 every Interactive Data File required to be submitted 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 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 November 2, 2018: 48,727,484.

NL INDUSTRIES, INC. AND SUBSIDIARIES

INDEX

		Page number
Part I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

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

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

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

	Condensed Consolidated Statement of Equity (unaudited) – Nine months ended September 30, 2018	7

	Condensed Consolidated Statements of Cash Flows (unaudited) - Nine months ended September 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	29

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	47

Item 4.	Controls and Procedures	47


Part II.	OTHER INFORMATION

Item 1.	Legal Proceedings	49

Item 1A.	Risk Factors	49

Item 6.	Exhibits	49

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,
	2017		2018
			(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	98,316	$	123,028
Restricted cash and cash equivalents		3,370		4,254
Accounts and other receivables, net		10,670		28,869
Inventories, net		15,382		17,159
Receivable from affiliate		1,767		-
Prepaid expenses and other		1,162		1,052

Total current assets		130,667		174,362

Other assets:
Notes receivable from affiliate		38,200		33,000
Marketable securities		88,681		32,770
Investment in Kronos Worldwide, Inc.		229,543		265,776
Goodwill		27,156		27,156
Other assets, net		4,843		5,137

Total other assets		388,423		363,839

Property and equipment:
Land		5,146		5,151
Buildings		23,044		22,704
Equipment		67,926		66,118
Construction in progress		569		994

		96,685		94,967
Less accumulated depreciation		64,159		63,209

Net property and equipment		32,526		31,758

Total assets	$	551,616	$	569,959

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In thousands)

	December 31,			September 30,
	2017			2018
				(unaudited)
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	4,116		$	5,833
Accrued and other current liabilities		9,707			70,050
Accrued environmental remediation and related costs		5,302			17,762
Payable to affiliates		429			1,600
Income taxes		30			46

Total current liabilities		19,584			95,291

Noncurrent liabilities:
Long-term debt from affiliate		500			500
Accrued pension costs		12,194			9,242
Accrued postretirement benefits (OPEB) costs		1,846			1,709
Accrued environmental remediation and related costs		106,607			93,720
Deferred income taxes		49,315			32,781
Other		8,492			25,396

Total noncurrent liabilities		178,954			163,348

Equity:
NL stockholders' equity:
Common stock		6,089			6,090
Additional paid-in capital		300,866			301,139
Retained earnings		220,104			222,421
Accumulated other comprehensive loss		(191,737	)		(237,507	)

Total NL stockholders' equity		335,322			292,143

Noncontrolling interest in subsidiary		17,756			19,177

Total equity		353,078			311,320

Total liabilities and equity	$	551,616		$	569,959

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						Nine months ended
	September 30,						September 30,
	2017			2018			2017			2018
	(unaudited)
Net sales	$	26,993		$	30,029		$	86,943		$	90,827
Cost of sales		18,795			20,433			59,552			60,494

Gross margin		8,198			9,596			27,391			30,333

Selling, general and administrative expense		4,829			5,075			14,895			15,455
Other operating income (expense):
Insurance recoveries		103			526			219			889
Other income, net		140			18			140			645
Litigation settlement expense, net		-			-			-			(62,000	)
Corporate expense		(2,575	)		(1,583	)		(11,130	)		(14,352	)

Income (loss) from operations		1,037			3,482			1,725			(59,940	)

Equity in earnings of Kronos Worldwide, Inc.		22,437			9,905			93,357			55,029

Other income (expense):
Marketable equity securities		-			(35,645	)		-			(55,911	)
Other components of net periodic pension and OPEB cost		(177	)		(99	)		(531	)		(297	)
Interest and dividend income		977			1,336			2,554			3,630
Interest expense		(8	)		(9	)		(22	)		(25	)

Income (loss) before income taxes		24,266			(21,030	)		97,083			(57,514	)

Income tax expense (benefit)		6,466			(6,158	)		28,923			(15,416	)

Net income (loss)		17,800			(14,872	)		68,160			(42,098	)
Noncontrolling interest in net income of subsidiary		328			514			1,171			1,654

Net income (loss) attributable to NL stockholders	$	17,472		$	(15,386	)	$	66,989		$	(43,752	)

Amounts attributable to NL stockholders:

Basic and diluted net income (loss) per share	$	.36		$	(.32	)	$	1.38		$	(.90	)

Weighted average shares used in the calculation of net income per share		48,715			48,727			48,710			48,721

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,
	2017			2018			2017			2018
	(unaudited)
Net income (loss)	$	17,800		$	(14,872	)	$	68,160		$	(42,098	)

Other comprehensive income (loss), net of tax:
Marketable securities		(5,260	)		-			(9,851	)		-
Currency translation		5,908			1,103			10,604			(2,414	)
Interest rate swap		362			-			390			-
Defined benefit pension plans		738			959			1,998			2,916
Other postretirement benefit plans		(49	)		(65	)		(145	)		(203	)

Total other comprehensive income, net		1,699			1,997			2,996			299

Comprehensive income (loss)		19,499			(12,875	)		71,156			(41,799	)
Comprehensive income attributable to noncontrolling interest		328			514			1,171			1,654

Comprehensive income (loss) attributable to NL stockholders	$	19,171		$	(13,389	)	$	69,985		$	(43,453	)

See accompanying notes to Condensed Consolidated Financial Statements.

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

Nine months ended September 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)		—		—		(43,752	)		—			1,654			(42,098	)
Other comprehensive income, net of tax		—		—		—			299			—			299
Issuance of NL common stock		1		119		—			—			—			120
Dividends		—		—		—			—			(251	)		(251	)
Other, net		—		154		—			—			18			172

Balance at September 30, 2018	$	6,090	$	301,139	$	222,421		$	(237,507	)	$	19,177		$	311,320

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,
	2017			2018
	(unaudited)
Cash flows from operating activities:
Net income (loss)	$	68,160		$	(42,098	)
Depreciation and amortization		2,794			2,609
Deferred income taxes		27,924			(16,624	)
Equity in earnings of Kronos Worldwide, Inc.		(93,357	)		(55,029	)
Dividends received from Kronos Worldwide, Inc.		15,849			17,961
Cash funding of benefit plans in excess of net benefit plan expense		(689	)		(2,074	)
Marketable equity securities		-			55,911
Other, net		348			426
Change in assets and liabilities:
Accounts and other receivables, net		(1,436	)		(18,203	)
Inventories, net		(475	)		(1,935	)
Prepaid expenses and other		70			110
Accounts payable and accrued liabilities		(466	)		62,025
Income taxes		2			11
Accounts with affiliates		(2,062	)		2,939
Accrued environmental remediation and related costs		(1,392	)		(428	)
Other noncurrent assets and liabilities, net		(54	)		16,698

Net cash provided by operating activities		15,216			22,299

Cash flows from investing activities:
Capital expenditures		(2,152	)		(2,043	)
Promissory notes receivable from affiliate:
Loans		(49,700	)		(39,000	)
Collections		40,400			44,200
Other, net		4			225

Net cash provided by (used in) investing activities		(11,448	)		3,382

Cash flows from financing activities -
Distributions to noncontrolling interests in subsidiary		(250	)		(251	)

Cash and cash equivalents and restricted cash and cash equivalents - net change from:
Operating, investing and financing activities		3,518			25,430
Balance at beginning of period		98,242			102,941

Balance at end of period	$	101,760		$	128,371

Supplemental disclosure - cash paid (received) for:
Interest	$	22		$	25
Income taxes, net	$	3,085		$	(1,740	)

See accompanying notes to Condensed Consolidated Financial Statements.

NL INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(unaudited)

Note 1 – Organization and basis of presentation:

Organization – At September 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 September 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,			September 30,
	2017			2018
	(In thousands)
Trade receivables - CompX	$	10,516		$	13,416
Accrued insurance recoveries		145			15,427
Other receivables		79			96
Allowance for doubtful accounts		(70	)		(70	)

Total	$	10,670		$	28,869

Accrued insurance recoveries are discussed in Note 14.

Note 3 – Inventories, net:

	December 31,		September 30,
	2017		2018
	(In thousands)
Raw materials	$	2,730	$	3,001
Work in process		9,836		10,864
Finished products		2,816		3,294

Total	$	15,382	$	17,159

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. See Note 16.

	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

September 30, 2018
Valhi common stock	1	$	32,770	$	24,347	$	8,423

At December 31, 2017 and September 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 September 30, 2018, the quoted per share market price of Valhi common stock was $6.17 and $2.28, respectively. During the first nine months of 2018 we recognized a pre-tax loss of $55.9 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 September 30, 2018, we owned approximately 35.2 million shares of Kronos common stock. At September 30, 2018, the quoted market price of Kronos’ common stock was $16.25 per share, or an aggregate market value of $572.3 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 nine months of 2018 is summarized below.

	Amount
	(In millions)
Balance at the beginning of the period	$	229.5
Equity in earnings of Kronos		55.0
Dividends received from Kronos		(17.9	)
Equity in Kronos' other comprehensive income:
Currency translation		(3.0	)
Defined benefit pension plans		2.2

Balance at the end of the period	$	265.8

Selected financial information of Kronos is summarized below:

	December 31,				September 30,
	2017