March 11, 2020, 5:01 p.m. EDT

10-K: NL INDUSTRIES INC

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    CompX International Inc. (CIX)
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(EDGAR Online via COMTEX) -- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Business overview

We are primarily a holding company. We operate in the component products industry through our majority-owned subsidiary, CompX International Inc. We also own a noncontrolling interest in Kronos Worldwide, Inc. Both CompX /zigman2/quotes/205448789/composite CIX -0.35% and Kronos /zigman2/quotes/203604290/composite KRO -0.11% file periodic reports with the SEC.

CompX is a leading manufacturer of engineered components utilized in a variety of applications and industries. Through its Security Products operations, CompX manufactures mechanical and electronic cabinet locks and other locking mechanisms used in recreational transportation, postal, office and institutional furniture, cabinetry, tool storage and healthcare applications. CompX also manufactures stainless steel exhaust systems, gauges, throttle controls, wake enhancement systems and trim tabs for the recreational marine and other industries through its Marine Components operations.

We account for our 30% non-controlling interest in Kronos by the equity method. Kronos is a leading global producer and marketer of value-added titanium dioxide pigments. TiO2 is used for a variety of manufacturing applications including coatings, plastics, paper and other industrial products.

Net income (loss) overview

Our net income attributable to NL stockholders was $25.8 million, or $.53 per share, in 2019 compared to a net loss of $41.0 million, or $.84 per share, in 2018 and net income of $116.1 million, or $2.38 per share, in 2017.

As more fully described below, the increase in our earnings per share attributable to NL stockholders from 2018 to 2019 is primarily due to the net effects of:

a pre-tax litigation settlement expense of $19.3 million in 2019 (mostly recognized in the second quarter) compared to $62.0 million recognized in the second quarter of 2018,

equity in earnings from Kronos in 2019 of $26.5 million compared to $62.3 million in 2018,

favorable relative changes in the value of marketable equity securities of $60.0 million,

higher insurance recoveries in 2019 of $3.8 million related primarily to a single insurance recovery settlement of $4.5 million for certain past and future litigation defense costs,

a gain of $4.4 million in 2019 related to a sale of excess property, recognized in the third quarter,

a gain of $3.0 million in 2019 related to the sale of our insurance and risk management business, recognized in the fourth quarter,

lower environmental remediation and related costs of $3.3 million in 2019, and

lower litigation fees and related costs of $2.2 million in 2019.

As more fully described below, the decrease in our earnings per share attributable to NL stockholders from 2017 to 2018 is primarily due to the net effects of:

a pre-tax litigation settlement expense of $62.0 million recognized in the second quarter of 2018,

a pre-tax marketable equity securities expense of $60.9 million recognized in 2018 as a result of adopting ASU 2016-01 in 2018,

equity in earnings of Kronos in 2018 of $62.3 million compared to $107.8 million in 2017,

higher income from operations attributable to CompX of $2.6 million in 2018, and

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higher litigation fees and litigation related costs of $2.4 million in 2018.

Our 2019 net income per share attributable to NL stockholders includes:

a loss of $.31 per share, net of income tax benefit, related to the litigation settlement expense, recognized mainly in the second quarter,

income of $.08 per share, net of income tax expense, related to insurance recoveries, recognized mainly in the second quarter,

income of $.07 per share, net of income tax expense, related to a gain from a sale of excess property, recognized in the third quarter,

income of $.05 per share, net of income tax expense, related to a gain from the sale of our insurance and risk management business, recognized in the fourth quarter,

a loss of $.03 per share related to Kronos' fourth quarter recognition of a non-cash deferred income tax expense primarily related to the revaluation of Kronos' net deferred income tax asset in Germany as a result of a decrease in the German trade tax rate,

income of $.01 per share related to Kronos' fourth quarter recognition of an income tax benefit related to the favorable settlement of a prior year tax matter in Germany, and

income of $.01 per share related to Kronos' insurance settlement gain recognized in the fourth quarter.

Our 2018 net loss per share attributable to NL stockholders includes:

a loss of $1.01 per share related to the litigation settlement expense, recognized in the second quarter,

a loss of $.02 per share related to Kronos' tax on global intangible low-tax income, recognized in the fourth quarter, and

a loss of $.01 per share related to Kronos' reserve for uncertain tax positions, recognized in the first and fourth quarters.

Our 2017 net income per share attributable to NL stockholders includes:

income of $.77 per share related to a non-cash deferred income tax benefit related to the revaluation of our net deferred income tax liability resulting from the reduction in the U.S. federal corporate income tax rate enacted into law on December 22, 2017,

income of $.01 per share, net of income taxes, related to insurance recoveries we recognized,

income of $.76 per share related to Kronos' non-cash deferred income tax benefit recognized as the result of the reversal of its deferred income tax asset valuation allowances associated with its German and Belgian operations, mostly recognized in the second quarter,

income of $.08 per share related to Kronos' fourth quarter non-cash deferred income tax benefit recognized as the result of the reversal of its deferred income tax asset valuation allowance related to certain U.S. deferred income tax assets of one of its non-U.S. subsidiaries (which subsidiary is treated as a dual resident for U.S. income tax purposes),

a loss of $.31 per share related to Kronos' fourth quarter provisional current income tax expense as a result of a change in the 2017 Tax Act for the one-time repatriation tax imposed on the post-1986 undistributed earnings of Kronos' non-U.S. subsidiaries,

income of $.05 per share related to Kronos' income tax benefit related to the execution and finalization of an Advance Pricing Agreement between the Canada and Germany, mostly recognized in the third quarter (which includes an $8.6 million non-cash income tax benefit as a result of a net decrease in Kronos' reserve for uncertain tax positions),

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a loss of $.02 per share related to Kronos' fourth quarter provisional non-cash deferred income tax expense related to a change in its conclusions regarding its permanent reinvestment assertion with respect to the post-1986 undistributed earnings of Kronos' European subsidiaries, and

a loss of $.02 per share related to Kronos' third quarter loss on prepayment of debt.







        Outlook
        We currently expect our net income attributable to NL stockholders in 2020 to be
        lower than 2019 primarily due to lower expected equity in earnings from Kronos
        partially offset by the net effects of the non-recurring items discussed above.
        Income (loss) from operations
        The following table shows the components of our income (loss) from operations.
                                                Years ended December 31,                % Change
                                              2017         2018        2019       2017-18      2018-19
                                                  (Dollars in millions)
         CompX                              $    15.2     $  17.8     $  17.7           17   %       (1 ) %
         Insurance recoveries                      .4         1.3         5.1          246          296
         Other income, net                         .2          .6         7.4          279        1,056
         Litigation settlement expense, net         -       (62.0 )     (19.3 )       n.m.          (69 )
         Corporate expense                      (14.1 )     (18.4 )     (12.5 )         31          (32 )
         Income (loss) from operations      $     1.7     $ (60.7 )   $  (1.6 )     (3,671 )         97
        


The following table shows the components of our income (loss) before income taxes exclusive of our income (loss) from operations.







                                               Years ended December 31,                    % Change
                                          2017            2018          2019         2017-18       2018-19
                                                (Dollars in millions)
        Equity in earnings of Kronos    $   107.8       $   62.3      $   26.5            (42 ) %       (58 ) %
        Marketable equity securities            -          (60.9 )         (.9 )         n.m.           (99 )
        Other components of net
        periodic pension
        cost                                  (.8 )          (.1 )        (1.4 )          (86 )       1,096
        Interest and dividend income          3.5            5.0           6.7             42            32
        Interest expense                        -              -           (.7 )            -          n.m.
        


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        CompX International Inc.
                                            Years ended December 31,                 % Change
                                          2017         2018        2019        2017-18       2018-19
                                              (Dollars in millions)
           Net sales                    $   112.0     $ 118.2     $ 124.2             6   %         5   %
           Cost of sales                     77.2        79.9        85.2             4             7
           Gross margin                      34.8        38.3        39.0            10             2
           Operating costs and expenses      19.6        20.5        21.3             4             4
           Income from operations       $    15.2     $  17.8     $  17.7            17            (1 )
           Percentage of net sales:
           Cost of sales                     68.9   %    67.6   %    68.6   %
           Gross margin                      31.1        32.4        31.4
           Operating costs and expenses      17.5        17.3        17.1
           Income from operations            13.6        15.1        14.2
        


Net sales - Net sales increased approximately $6.0 million in 2019 compared to 2018 primarily due to higher Marine Components sales to the towboat market. Relative changes in selling prices did not have a material impact on net sales comparisons.

Net sales increased approximately $6.2 million in 2018 compared to 2017 primarily due to higher Marine Components sales volumes to manufacturers of ski/wakeboard boats and larger center-console boats; and to a lesser extent Security Products sales to certain markets, particularly transportation and office furniture. Relative changes in selling prices did not have a material impact on net sales comparisons.

Cost of sales and gross margin - Cost of sales increased from 2018 to 2019 due to the effects of increased sales volumes for both CompX's Security Products and Marine Components businesses and increased labor costs at Security Products. As a result, gross margin as a percentage of sales decreased over the same period. The decrease in gross margin percentage is the result of the decline in Security Products gross margin percentage in 2019 as compared to 2018.

Cost of sales increased from 2017 to 2018 primarily due to increased sales volumes for both CompX's Security Products and Marine Components businesses. Gross margin dollars and gross margin as a percentage of sales increased from 2017 to 2018 primarily due to greater fixed cost leverage facilitated by higher production volumes for each of our business segments.

Operating costs and expenses - Operating costs and expenses consist primarily of sales and administrative-related personnel costs, sales commissions and advertising expenses directly related to product sales and administrative costs relating to CompX's businesses and its corporate management activities, as well as gains and losses on property and equipment. Operating costs and expenses as a percentage of sales were comparable in 2017, 2018 and 2019.

Income from operations - As a percentage of net sales, operating income decreased from 2018 to 2019 while operating income increased from 2017 to 2018. Operating margins were primarily impacted by the factors impacting net sales, cost of sales, gross margin and operating costs discussed above.

General - CompX's profitability primarily depends on its ability to utilize production capacity effectively, which is affected by, among other things, the demand for its products and its ability to control manufacturing costs, primarily comprised of labor costs and materials. The materials used in its products consist of purchased components and raw materials some of which are subject to fluctuations in the commodity markets such as zinc, brass and stainless steel. Total material costs represented approximately 45% of CompX's cost of sales in 2019, with commodity-related raw materials accounting for approximately 13% of cost of sales. During 2018, markets for the primary commodity-related raw materials used in the manufacture of its locking mechanisms, primarily zinc and brass, generally strengthened, but moderated at the end of 2018 and remained relatively stable through 2019. Over that same period, the market for stainless steel, the primary raw material used for the manufacture of marine exhaust

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headers and pipes and wake enhancement systems, remained relatively stable. While CompX expects the markets for its primary commodity-related raw materials to remain stable during 2020, it recognizes that economic conditions could introduce renewed volatility on these and other manufacturing materials.

CompX occasionally enters into short-term commodity-related raw material supply arrangements to mitigate the impact of future increases in commodity related raw material costs. See Item 1 - "Business- Raw Materials."

Results by reporting unit

The key performance indicator for CompX's reporting units is the level of their income from operations (see discussion below).







                                            Years ended December 31,                 % Change
                                          2017           2018       2019       2017-18       2018-19
                                              (Dollars in millions)
           Security Products:
           Net sales                    $    96.6       $ 98.4     $ 99.3             2   %         1   %
           Cost of sales                     65.5         65.5       67.1             -             2
           Gross margin                      31.1         32.9       32.2             6            (2 )
           Operating costs and expenses      11.9         11.0       11.2            (9 )           3
           Operating income             $    19.2       $ 21.9     $ 21.0            14            (4 )
           Gross margin                      32.2    %    33.4   %   32.5   %
           Operating income margin           19.9         22.3       21.2
        


Security Products - Security Products net sales increased 1% to $99.3 million in 2019 compared to $98.4 million in 2018, primarily due to higher sales to government security and medical cart manufacturing markets, partially offset by lower sales to the transportation, electronic control panel and distribution markets. As a percentage of sales, gross margin and operating income for 2019 declined as compared to 2018 primarily due to increased labor rates and associated payroll costs resulting from regional pressure on wages for certain skilled labor positions, partially offset by favorable medical costs.

Security Products net sales increased 2% to $98.4 million in 2018 compared to $96.6 million in 2017, primarily due to higher sales to the transportation and office furniture markets. As a percentage of sales, gross profit for 2018 increased slightly over 2017 due to lower production costs, including headcount reductions made during the second quarter of 2017, and improved coverage of fixed costs over increased production volumes. Operating costs and expenses for 2018 were slightly lower than 2017. As a result, Security Products operating income as a percentage of net sales for 2018 exceeded 2017.







                                            Years ended December 31,                 % Change
                                          2017           2018       2019       2017-18       2018-19
                                              (Dollars in millions)
           Marine Components:
           Net sales                    $    15.4       $ 19.8     $ 24.9            29   %        26   %
           Cost of sales                     11.7         14.4       18.2            23            26
           Gross margin                       3.7          5.4        6.7            46            25
           Operating costs and expenses       2.4          2.7        3.1            13            16
           Operating income             $     1.3       $  2.7     $  3.6           104            33
           Gross margin                      24.0    %    27.2   %   27.0   %
           Operating income margin            8.7         13.8       14.6
        


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Marine Components - Marine Components net sales increased 26% in 2019 as compared to 2018 primarily due to increased sales to the towboat market, primarily wake enhancement systems and surf pipes to an original equipment boat manufacturer. Gross margin as a percentage of sales in 2019 was comparable to 2018. Operating income as a percentage of net sales increased in 2019 compared to 2018 principally due to improved leverage on operating costs and expenses facilitated by higher production volumes.

Marine Components net sales increased 29% in 2018 as compared to 2017 as a result of continued strong demand for our products, particularly those sold to the ski/wakeboard boat market as well as to manufacturers of large center-console boats and industrial customers. Gross profit margin and operating income as a percentage of net sales increased in 2018 compared to 2017 principally due to improved fixed cost leverage facilitated by higher production volumes.

Outlook - 2019 was a breakout year for CompX's Marine Components reporting unit which sustained the significant growth experienced in the second half of 2018 and for the full year of 2019. Growth of Marine Components reporting unit will be more normalized in 2020. CompX's Security Products reporting unit experienced modest sales growth in 2019 however it began to notice headwinds late in 2019 which may carry into 2020. In 2020, CompX plans to capitalize on the positive momentum that the Marine Components reporting unit has experienced over the last two years while maintaining strong results in the Security Products reporting unit. It will continue to monitor economic conditions and sales order rates and respond to fluctuations in customer demand through continuous evaluation of staffing levels and consistent execution of lean manufacturing and cost improvement initiatives. Additionally, CompX will continue to seek opportunities to gain market share in markets currently served, to expand into new markets and to develop new product features in order to mitigate the impact of changes in demand as well as broaden its sales base.

General corporate items, interest and dividend income, interest expense, provision for income taxes, noncontrolling interest and related party transactions

Insurance recoveries - We have agreements with certain insurance carriers pursuant to which the carriers reimburse us for a portion of our past lead pigment and asbestos litigation defense costs. Insurance recoveries include amounts we received from these insurance carriers. We recognized $5.1 million in insurance recoveries in 2019 primarily related to a single settlement we reached with one of our insurance carriers in which they agreed to reimburse us for a portion of our past and future litigation defense costs.

The agreements with certain of our insurance carriers also include reimbursement for a portion of our future litigation defense costs. We are not able to determine how much we will ultimately recover from these carriers for defense costs incurred by us because of certain issues that arise regarding which defense costs qualify for reimbursement. Accordingly, these insurance recoveries are recognized when receipt is probable and the amount is determinable. See Note 17 to our Consolidated Financial Statements.

Other income, net - Other income, net in 2019 includes a gain of $4.4 million related to a sale of excess property in the third quarter and a gain of $3.0 million related to the sale of our insurance and risk management business in the fourth quarter. See Note 13 to our Consolidated Financial Statements.

Litigation settlement expense - We recognized a pre-tax $62.0 million and $19.3 million litigation settlement expense net of expected insurance recoveries in 2018 and 2019, respectively, related to the lead pigment litigation in California. See Note 17 to our Consolidated Financial Statements.

Corporate expense - Corporate expenses were $12.5 million in 2019, $5.9 million or 32% lower than in 2018 primarily due to lower litigation fees and related costs and lower environmental remediation and related costs. Included in corporate expenses are:

litigation fees and related costs of $4.0 million in 2019 compared to $6.2 million in 2018, and

environmental remediation and related benefit of $.6 million in 2019 compared to costs of $2.7 million in 2018.

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Corporate expenses were $18.4 million in 2018, $4.3 million or 31% higher than in 2017 primarily due to higher litigation fees and related costs somewhat offset by lower environmental remediation and related costs. Included in corporate expenses are:

litigation fees and related costs of $6.2 million in 2018 compared to $3.8 million in 2017, and

environmental remediation and related costs of $2.7 million in 2018 compared to $3.4 million in 2017.

Overall, we currently expect that our net general corporate expenses in 2020 will be higher than in 2019 primarily due to higher expected litigation fees and related costs and higher environmental remediation and related costs.

The level of our litigation fees and related costs varies from period to period depending upon, among other things, the number of cases in which we are currently involved, the nature of such cases and the current stage of such cases (e.g. discovery, pre-trial motions, trial or appeal, if applicable). See Note 17 to our Consolidated Financial Statements. If our current expectations regarding the number of cases in which we expect to be involved during 2020 or the nature of such cases were to change, our corporate expenses could be higher than we currently estimate.

Obligations for environmental remediation and related costs are difficult to assess and estimate and it is possible that actual costs for environmental remediation will exceed accrued amounts or that costs will be incurred in the future for sites in which we cannot currently estimate our liability. If these events were to occur in 2020, our corporate expenses would be higher than we currently estimate. In addition, we adjust our environmental accruals as further information becomes available to us or as circumstances change. Such further information or changed circumstances could result in an increase in our accrued environmental costs. See Note 17 to our Consolidated Financial Statements.

Interest and dividend income - Interest income increased $1.7 million in 2019 compared to 2018 and increased $1.5 million in 2018 compared to 2017 primarily due to higher cash and cash equivalent and restricted cash and cash equivalent balances available for investment, higher average outstanding balances under CompX's loan to Valhi under a promissory note and higher average interest rates. We also recognized $.6 million of accrued interest income on the insurance recovery receivable in the second quarter of 2019.

Marketable equity securities - Beginning on January 1, 2018 with the adoption of ASU 2016-01, any unrealized gains or losses on our marketable equity securities are now recognized in Marketable equity securities on our Consolidated Statements of Operations. See Note 5 to our Consolidated Financial Statements.

Income tax expense (benefit) - We recognized an income tax benefit of $5.6 million in 2017 and $15.4 million in 2018 and an income tax expense of $.6 million in 2019. As discussed below, our income tax benefit in 2017 includes a non-cash deferred income tax benefit of $37.5 million related to the revaluation of our net deferred income tax liability resulting from the reduction in the U.S. federal corporate income tax rate enacted into law on December 22, 2017.

In accordance with GAAP, we recognize deferred income taxes on our undistributed equity in earnings of Kronos. Because we and Kronos are part of the same U.S. federal income tax group, any dividends we receive from Kronos are nontaxable to us. Accordingly, we do not recognize and we are not required to pay income taxes on dividends from Kronos. Therefore, our full-year effective income tax rate will generally be lower than the U.S. federal statutory income tax rate in years during which we receive dividends from Kronos and recognize equity in earnings of Kronos. Conversely, our effective income tax rate will generally be higher than the U.S. federal statutory income tax rate in years during which we receive dividends from Kronos and recognize equity in losses of Kronos. During interim periods, our effective income tax rate may not necessarily correspond to the foregoing due to the application of accounting for income taxes in interim periods which requires us to base our effective rate on full year projections. We received aggregate dividends from Kronos of $21.1 million in 2017, $23.9 million in 2018 and $25.4 million in 2019. Our effective tax rate attributable to our equity in earnings (losses) of Kronos, including the effect of non-taxable dividends we received from Kronos, was 28.1% in 2017, 12.9% in 2018 and .9% in 2019. The reduction in our effective rate attributable to our equity in earnings of Kronos from 2017 to 2018 is primarily attributable to the reduction in the corporate income tax rate discussed below. The reduction in our effective rate from 2018 to 2019 is

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primarily attributable to the net effects of Kronos' lower earnings in 2019 as compared to 2018 and the impact of the income tax benefit related to the non-taxable dividends received from Kronos.

See Note 14 to our Consolidated Financial Statements for more information about our 2019 income tax items, including a tabular reconciliation of our statutory tax expense (benefit) to our actual tax expense (benefit).

Noncontrolling interest - Noncontrolling interest in net income of CompX attributable to continuing operations is consistent in each of 2017, 2018 and 2019.

Related party transactions - We are a party to certain transactions with related parties. See Notes 1 and 16 to our Consolidated Financial Statements. It is our policy to engage in transactions with related parties on terms, in our opinion, . . .

Mar 11, 2020

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/zigman2/quotes/205448789/composite
US : U.S.: NYSE American
$ 14.10
-0.05 -0.35%
Volume: 1,188
May 22, 2020 4:00p
P/E Ratio
10.77
Dividend Yield
2.84%
Market Cap
$175.45 million
Rev. per Employee
$216,119
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/zigman2/quotes/203604290/composite
US : U.S.: NYSE
$ 8.85
-0.01 -0.11%
Volume: 93,679
May 22, 2020 4:00p
P/E Ratio
12.22
Dividend Yield
8.14%
Market Cap
$1.02 billion
Rev. per Employee
$757,130
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