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10-Q: NL INDUSTRIES INC

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(EDGAR Online via COMTEX) -- ITEM 2. 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 non-controlling interest in Kronos Worldwide, Inc. Both CompX /zigman2/quotes/205448789/composite CIX +5.15% and Kronos /zigman2/quotes/203604290/composite KRO +4.54% file periodic reports with the Securities and Exchange Commission (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 our 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). TiO2 is used for a variety of manufacturing applications including paints, plastics, paper and other industrial and specialty products.

Forward-looking information

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Statements in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking in nature and represent management's beliefs and assumptions based on currently available information. Statements in this report including, but not limited to, statements found in Item 2 - "Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements that represent our management's beliefs and assumptions based on currently available information. In some cases you can identify forward-looking statements by the use of words such as "believes," "intends," "may," "should," "could," "anticipates," "expects" or comparable terminology, or by discussions of strategies or trends. Although we believe the expectations reflected in forward-looking statements are reasonable, we do not know if these expectations will be correct. Such statements by their nature involve substantial risks and uncertainties that could significantly impact expected results. Actual future results could differ materially from those predicted. The factors that could cause our actual future results to differ materially from those described herein are the risks and uncertainties discussed in this Quarterly Report and those described from time to time in our other filings with the SEC including, but are not limited to, the following:

Future supply and demand for our products

The extent of the dependence of certain of our businesses on certain market sectors

The cyclicality of our businesses (such as Kronos' TiO2 operations)

Customer and producer inventory levels

Unexpected or earlier-than-expected industry capacity expansion (such as the TiO2 industry)

Changes in raw material and other operating costs (such as energy, ore, zinc and brass costs) and our ability to pass those costs on to our customers or offset them with reductions in other operating costs

Changes in the availability of raw material (such as ore)

General global economic and political conditions (such as changes in the level of gross domestic product in various regions of the world and the impact of such changes on demand for, among other things, TiO2 and component products)

Competitive products and substitute products

Price and product competition from low-cost manufacturing sources (such as China)

Customer and competitor strategies

Potential consolidation of Kronos' competitors

Potential consolidation of Kronos' customers

The impact of pricing and production decisions

Competitive technology positions

Our ability to protect or defend intellectual property rights

Potential difficulties in integrating future acquisitions

Potential difficulties in upgrading or implementing accounting and manufacturing software systems

The introduction of trade barriers

Possible disruption of Kronos' or CompX's business, or increases in our cost of doing business resulting from terrorist activities or global conflicts

The impact of current or future government regulations (including employee healthcare benefit related regulations)

Fluctuations in currency exchange rates (such as changes in the exchange rate between the U.S. dollar and each of the euro, the Norwegian krone and the Canadian dollar), or possible disruptions to our business resulting from potential instability resulting from uncertainties associated with the euro or other currencies

Operating interruptions (including, but not limited to, labor disputes, leaks, natural disasters, fires, explosions, unscheduled or unplanned downtime, transportation interruptions and cyber attacks)

Decisions to sell operating assets other than in the ordinary course of business

Kronos' ability to renew or refinance credit facilities

Our ability to maintain sufficient liquidity

The timing and amounts of insurance recoveries

The extent to which our subsidiaries or affiliates were to become unable to pay us dividends

Uncertainties associated with CompX's development of new product features

The ultimate outcome of income tax audits, tax settlement initiatives or other tax matters, including future tax reform

Our ability to utilize income tax attributes or changes in income tax rates related to such attributes, the benefits of which may or may not have been recognized under the more-likely-than-not recognition criteria

Environmental matters (such as those requiring compliance with emission and discharge standards for existing and new facilities or new developments regarding environmental remediation at sites related to our former operations)

Government laws and regulations and possible changes therein (such as changes in government regulations which might impose various obligations on former manufacturers of lead pigment and lead-based paint, including us, with respect to asserted health concerns associated with the use of such products), including new environmental health and safety regulations

The ultimate resolution of pending litigation (such as our lead pigment and environmental matters)

Possible future litigation.

Should one or more of these risks materialize (or if the consequences of such a development worsen), or should the underlying assumptions prove incorrect, actual results could differ materially from those currently forecasted or expected. We disclaim any intention or obligation to update or revise any forward-looking statement whether as a result of changes in information, future events or otherwise.

Results of operations

Net income overview

Quarter ended June 30, 2019 compared to the quarter ended June 30, 2018

Our net income attributable to NL stockholders was $5.9 million, or $.12 per share, in the second quarter of 2019 compared to a net loss attributable to NL stockholders of $42.6 million, or $.87 per share, in the second quarter of 2018. As more fully described below, the increase in our earnings per share from 2018 to 2019 is primarily due to the net effects of:

a pre-tax litigation settlement expense in 2019 of $19.6 million compared to $62.0 million recognized in 2018;

equity in earnings of Kronos in 2019 of $9.0 million compared to $23.6 million in 2018;

favorable relative changes in the value of marketable equity securities of $28.1 million;

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

lower litigation fees and related costs of $1.1 million in 2019.

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

a loss of $.32 per share, net of income tax benefit, related to the litigation settlement expense; and

income of $.08 per share, net of income tax expense, related to insurance recoveries we recognized.

Our 2018 net loss per share attributable to NL stockholders includes a loss of $1.01 per share, net of income tax benefit, related to the litigation settlement expense recognized.

Six months ended June 30, 2019 compared to six months ended June 30, 2018

We had net income attributable to NL stockholders of $21.1 million, or $.43 per share, in the first six months of 2019 compared to a net loss attributable to NL stockholders of $28.4 million, or $.58 per share, in the first six months of 2018. As more fully described below, the increase in our earnings per share from 2018 to 2019 is primarily due to the net effects of:

a pre-tax litigation settlement expense in the second quarter of 2019 of $19.6 million compared to $62.0 million recognized in the second quarter of 2018;

equity in earnings of Kronos in 2019 of $18.2 million compared to $45.1 million in 2018;

favorable relative changes in the value of marketable equity securities of $35.2 million;

lower environmental remediation and related costs of $5.0 million in 2019;

higher insurance recoveries in 2019 of $4.6 million related primarily to a single insurance recovery settlement for certain past and future litigation defense costs; and

lower litigation fees and related costs of $2.1 million in 2019.

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

a loss of $.32 per share, net of income tax benefit, related to the litigation settlement expense recognized in the second quarter; and

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

Our 2018 net loss per share attributable to NL stockholders includes a loss of $1.01 per share, net of income tax benefit, related to the litigation settlement expense recognized in the second quarter.

Income (loss) from operations

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







                                            Three months                             Six months
                                           ended June 30,            %             ended June 30,            %
                                          2018        2019        Change          2018        2019        Change
                                              (In millions)                           (In millions)
        CompX                            $   6.0     $   5.6            (6 ) %   $  10.4     $   9.9            (4 ) %
        Insurance recoveries                  .2         4.7           n/m            .4         5.0           n/m
        Other income, net                      -           -             -            .6           -           n/m
        Litigation settlement expense      (62.0 )     (19.6 )         (68 )       (62.0 )     (19.6 )         (68 )
        Corporate expense                   (4.8 )      (3.6 )         (24 )       (12.8 )      (5.7 )         (55 )
        Loss from operations             $ (60.6 )   $ (12.9 )          79       $ (63.4 )   $ (10.4 )          84
        


Amounts attributable to CompX relate primarily to its components products business, while the other amounts generally relate to NL. Each of these items is further discussed below.

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







                                                                                             Six months
                                               Three months ended                              ended
                                                    June 30,                %                 June 30,             %
                                               2018            2019       Change          2018        2019       Change
                                                   (In millions)                             (In millions)
        Equity in earnings of Kronos        $      23.6       $  9.0          (62 ) %    $  45.1     $ 18.2          (60 )%
        Marketable equity securities              (18.7 )        9.4          150          (20.3 )     14.9          173
        Other components of net periodic
        pension
         and OPEB                                   (.1 )        (.4 )        300            (.2 )      (.8 )        300
        Interest and dividend income                1.2          2.1           75            2.3        3.6           57
        








        CompX International Inc.
                                               Three months ended                         Six months ended
                                                    June 30,                %                 June 30,               %
                                               2018           2019       Change           2018          2019      Change
                                                    (In millions)                             (In millions)
        Net sales                            $    32.4       $  33.7           4   %    $    60.8      $ 64.9           7   %
        Cost of sales                             21.2          22.7           8             40.1        44.3          11
        Gross margin                              11.2          11.0          (3 )           20.7        20.6          (1 )
        Operating costs and expenses               5.2           5.4           1             10.3        10.7           3
        Income from operations               $     6.0       $   5.6          (6 )      $    10.4      $  9.9          (4 )
        Percentage of net sales:
        Cost of sales                               65    %       67   %                       66    %     68   %
        Gross margin                                35            32                           34          32
        Operating costs and expenses                16            15                           17          17
        Income from operations                      19            17                           17          15
        


Net sales - Net sales increased $1.3 million and $4.1 million in the second quarter and for the first six months of 2019, respectively, compared to the same periods in 2018. The increase in sales is due to higher Marine Component sales in both periods, primarily surf pipes and wake enhancement systems to an original equipment boat manufacturer. Relative changes in selling prices did not have a material impact on net sales comparisons.

Cost of sales and gross margin - Cost of goods sold as a percentage of sales for the second quarter and first six months of 2019 was approximately 2% higher than the same periods in 2018. As a result, gross margin as a percentage of sales decreased over the same periods. The decrease in gross margin percentage is primarily the result of increased labor rates due to regional pressure on wages for certain skilled labor positions and associated payroll costs at Security Products as well as a less favorable customer and product mix at Marine Components. Gross margin dollars for the second quarter and first six months of 2019 were comparable to the same periods in 2018.

Operating costs and expenses - Operating costs and expenses consist primarily of sales and administrative-related personnel costs, sales commissions and advertising expenses, as well as gains and losses on plant, property and equipment. Operating costs and expenses for the second quarter and first six months of 2019 were comparable to the same periods in 2018.

Income from operations - As a percentage of net sales, operating income for the second quarter and first six months of 2019 decreased compared to the same periods of 2018 and was primarily impacted by the factors impacting cost of goods sold, gross margin and operating costs discussed above.

Results by reporting unit

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







                                                Three months ended                         Six months ended
                                                     June 30,                %                 June 30,               %
                                                2018           2019        Change          2018          2019       Change
                                                     (In millions)                             (In millions)
        Net sales:
        Security Products                     $    27.3       $  26.9           (1 ) %   $    51.3      $ 51.6            1   %
        Marine Components                           5.1           6.8           32             9.5        13.3           40
        Total net sales                       $    32.4       $  33.7            4       $    60.8      $ 64.9            7
        Gross margin:
        Security Products                     $     9.6       $   8.9           (8 )     $    18.0      $ 16.9           (6 )
        Marine Components                           1.6           2.1           28             2.7         3.7           32
        Total gross margin                    $    11.2       $  11.0           (3 )     $    20.7      $ 20.6           (1 )
        Income from operations:
        Security Products                     $     6.8       $   6.0          (11 )     $    12.4      $ 11.1          (10 )
        Marine Components                            .9           1.3           37             1.5         2.2           43
        Corporate operating expenses               (1.7 )        (1.7 )          3            (3.5 )      (3.4 )         (6 )
        Total income from operations          $     6.0       $   5.6           (6 )     $    10.4      $  9.9           (4 )
        Gross margin:
        Security Products                            35    %       33   %                       35    %     33   %
        Marine Components                            31            30                           29          28
        Total gross margin                           35            32                           34          32
        Income from operations margin:
        Security Products                            25    %       23   %                       24    %     22   %
        Marine Components                            18            19                           16          16
        Total income from
         operations margin                           19            17                           17          15
        


Security Products - Security Products net sales in the second quarter and for the first six months of 2019 were comparable to the same periods in 2018. Gross profit margin and operating income as a percentage of sales for the second quarter and first six months of 2018 decreased compared to the same periods in the prior year due to increased labor rates and associated payroll costs, resulting from regional pressure on wages for certain skilled labor positions.

Marine Components - Marine Components net sales increased 32% and 40% in the second quarter and first six months of 2019, respectively, as compared to the same periods last year. The increase in sales is primarily due to increased sales of wake enhancement systems and surf pipes to an original equipment boat manufacturer. Gross profit margin decreased in the second quarter and first six months of 2019 compared to the same periods last year due to a less favorable customer and product mix; however, operating income as a percentage of net sales increased over the same comparative periods due to improved fixed cost leverage facilitated by higher production volumes.

Outlook - Sales for the first half of the year exceeded prior year largely due to continued high demand for our marine products where we continue to benefit from innovation and diversification in our product offerings to the recreational boat markets. Operating income and operating margin for the Security Products segment decreased for the first six months of 2019 relative to prior year due to higher labor rates and associated payroll costs, the effect of which we were not able to offset through higher selling prices. Heading into the second half of 2019, we expect our

rate of Marine sales growth to moderate as compared to the same period in 2018 when we significantly increased our deliveries of wake enhancement systems. We anticipate full year sales for 2019 will be above 2018 and full year operating income to be comparable to the prior year. Currently, we are experiencing minimal impact as a result of recently enacted tariffs; however, we are actively monitoring developments and exploring options so that we will be able to quickly react should the impact of such tariffs become significant. We 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 our lean manufacturing and cost improvement initiatives. Additionally, we continue to seek opportunities to gain market share in markets we currently serve, 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 our sales base.

General corporate and other items

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. Substantially all of the $4.7 million insurance recoveries we recognized in the second quarter of 2019 relates to a 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 the receipt is probable and the amount is determinable. See Note 14 to our Condensed Consolidated Financial Statements.

Litigation settlement expense - We recognized a pre-tax $62.0 million and $19.6 million litigation settlement expense in the second quarters of 2018 and 2019, respectively, related to the lead pigment litigation in California. See Note 14 to our Condensed Consolidated Financial Statements.

Corporate expense - Corporate expenses were $3.6 million in the second quarter of 2019, $1.2 million lower than in the second quarter of 2018 primarily due to lower environmental remediation and related costs and lower litigation fees and related costs in 2019. Included in corporate expense in the second quarter of 2018 and 2019 are:

litigation fees and related costs of $1.0 million in 2019 compared to $2.1 million in 2018, and

environmental remediation and related expense of nil in 2019 and $.1 million in 2018.

Corporate expenses were $5.7 million in the first six months of 2019, $7.1 million lower than in the first six months of 2018 primarily due to lower litigation fees and related costs and lower environmental remediation and related costs in 2019. Included in corporate expense in the first six months of 2018 and 2019 are:

litigation fees and related costs of $1.9 million in 2019 compared to $4.0 million in 2018, and

environmental remediation and related benefit of $.7 million in 2019 compared to expense of $4.3 million in 2018.

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 14 to our Condensed Consolidated Financial Statements. If our current expectations regarding the number of cases in which we expect to be involved during 2019 or the nature of such cases were to change, our corporate expenses could be higher than we currently estimate.

Obligations for environmental remediation 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 2019, 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 14 to our Condensed Consolidated Financial Statements.

Overall, we currently expect that our net general corporate expenses in 2019 will be lower than in 2018 primarily due to lower expected litigation fees and related costs.

Interest and dividend income - Interest and dividend income increased $.9 million in the second quarter and $1.3 million in the first half of 2019 compared to the prior year periods primarily due to interest income earned on the accrued insurance recovery receivable and CompX's revolving promissory note receivable from Valhi. Interest income on such note receivable from Valhi was $.5 million and $.6 million in the second quarters of 2018 and 2019, respectively, and $1.0 million and $1.2 million in the first six months of 2018 and 2019, respectively.

Marketable equity securities - Unrealized gains (losses) on our marketable equity securities were $(18.7) million and $9.4 million in the second quarters of 2018 and 2019, respectively, and $(20.3) million and $14.9 million in the first six months of 2018 and 2019, respectively.

Income tax expense (benefit) - We recognized an income tax expense of $.6 million in the second quarter of 2019 compared to an income tax benefit of $12.6 million in the second quarter of 2018 and an income tax expense of $3.2 in the first half of 2019 compared to an income tax benefit of $9.3 million in the first half of 2018. In accordance with GAAP, we recognize deferred income taxes on our undistributed equity in earnings (losses) 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 dividends from Kronos of $12.0 million in the first six months of 2018 and $12.7 million in the first six months of 2019.

Our effective tax rate attributable to our equity in earnings of Kronos, . . .

Aug 07, 2019

(c) 1995-2019 Cybernet Data Systems, Inc. All Rights Reserved

/zigman2/quotes/205448789/composite
US : U.S.: NYSE American
$ 13.69
+0.67 +5.15%
Volume: 412.00
July 15, 2020 12:02p
P/E Ratio
10.46
Dividend Yield
2.92%
Market Cap
$162.01 million
Rev. per Employee
$216,119
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/zigman2/quotes/203604290/composite
US : U.S.: NYSE
$ 11.06
+0.48 +4.54%
Volume: 167,120
July 15, 2020 2:01p
P/E Ratio
15.28
Dividend Yield
6.51%
Market Cap
$1.22 billion
Rev. per Employee
$757,130
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