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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
OR
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number
(Exact name of Registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(IRS Employer Identification No.) |
(Address of principal executive offices)
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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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.
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
☐ |
Accelerated filer |
☐ |
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Smaller reporting company |
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Emerging growth company |
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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 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
Number of shares of the registrant’s common stock, $.125 par value per share, outstanding on October 30, 2020:
NL INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
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Page |
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Part I. |
FINANCIAL INFORMATION |
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Item 1. |
Financial Statements |
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Condensed Consolidated Balance Sheets - |
3 |
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5 |
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6 |
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7 |
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8 |
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Notes to Condensed Consolidated Financial Statements (unaudited) |
10 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
21 |
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Item 3. |
39 |
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Item 4. |
39 |
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Part II. |
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Item 1. |
41 |
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Item 1A. |
41 |
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Item 6. |
41 |
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Items 2, 3, 4 and 5 of Part II are omitted because there is no information to report.
2
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
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December 31, |
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September 30, |
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2019 |
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2020 |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ |
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$ |
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Restricted cash and cash equivalents |
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Accounts and other receivables, net |
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Inventories, net |
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Receivables from affiliates |
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Prepaid expenses and other |
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Total current assets |
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Other assets: |
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Restricted cash and cash equivalents |
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Note receivable from affiliate |
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Marketable securities |
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Investment in Kronos Worldwide, Inc. |
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Goodwill |
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Other assets, net |
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Total other assets |
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Property and equipment: |
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Land |
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Buildings |
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Equipment |
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Construction in progress |
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Less accumulated depreciation |
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Net property and equipment |
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Total assets |
$ |
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$ |
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3
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
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December 31, |
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September 30, |
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2019 |
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2020 |
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(unaudited) |
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LIABILITIES AND EQUITY |
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Current liabilities: |
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Accounts payable |
$ |
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$ |
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Accrued litigation settlement |
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Accrued and other current liabilities |
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Accrued environmental remediation and related costs |
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Payables to affiliates |
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Income taxes |
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Total current liabilities |
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Noncurrent liabilities: |
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Long-term debt from affiliate |
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Accrued environmental remediation and related costs |
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Long-term litigation settlement |
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Deferred income taxes |
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Accrued pension costs |
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Other |
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Total noncurrent liabilities |
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Equity: |
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NL stockholders' equity: |
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Common stock |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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( |
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( |
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Total NL stockholders' equity |
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Noncontrolling interest in subsidiary |
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Total equity |
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Total liabilities and equity |
$ |
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$ |
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Commitments and contingencies (Note 14)
See accompanying notes to Condensed Consolidated Financial Statements.
4
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
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Three months ended |
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Nine months ended |
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September 30, |
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September 30, |
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2019 |
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2020 |
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2019 |
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2020 |
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(unaudited) |
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Net sales |
$ |
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$ |
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$ |
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$ |
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Cost of sales |
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Gross margin |
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Selling, general and administrative expense |
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Other operating income (expense): |
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Insurance recoveries |
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- |
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Other income, net |
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- |
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Litigation settlement expense, net |
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- |
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( |
) |
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- |
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Corporate expense |
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( |
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( |
) |
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( |
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( |
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Income (loss) from operations |
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( |
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( |
) |
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Equity in earnings of Kronos Worldwide, Inc. |
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Other income (expense): |
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Interest and dividend income |
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Marketable equity securities |
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( |
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( |
) |
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( |
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Other components of net periodic pension and OPEB cost |
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( |
) |
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( |
) |
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( |
) |
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( |
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Interest expense |
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( |
) |
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( |
) |
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( |
) |
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( |
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Income (loss) before income taxes |
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( |
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Income tax expense (benefit) |
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( |
) |
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( |
) |
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Net income (loss) |
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( |
) |
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Noncontrolling interest in net income of subsidiary |
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Net income (loss) attributable to NL stockholders |
$ |
( |
) |
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$ |
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$ |
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$ |
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Amounts attributable to NL stockholders: |
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Basic and diluted net income (loss) per share |
$ |
( |
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$ |
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$ |
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$ |
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Weighted average shares used in the calculation of net income (loss) per share |
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See accompanying notes to Condensed Consolidated Financial Statements.
5
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
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Three months ended |
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Nine months ended |
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September 30, |
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September 30, |
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2019 |
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2020 |
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2019 |
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2020 |
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(unaudited) |
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Net income (loss) |
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$ |
( |
) |
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$ |
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$ |
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$ |
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Other comprehensive income (loss), net of tax: |
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Currency translation |
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( |
) |
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( |
) |
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( |
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Defined benefit pension plans |
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Other postretirement benefit plans |
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( |
) |
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( |
) |
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( |
) |
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( |
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Total other comprehensive income (loss), net |
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( |
) |
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( |
) |
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( |
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Comprehensive income (loss) |
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( |
) |
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Comprehensive income attributable to noncontrolling interest |
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Comprehensive income (loss) attributable to NL stockholders |
|
$ |
( |
) |
|
$ |
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$ |
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$ |
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See accompanying notes to Condensed Consolidated Financial Statements.
6
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)
|
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Three months ended September 30, 2019 and 2020 (unaudited) |
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Accumulated |
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Additional |
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other |
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Noncontrolling |
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Common |
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paid-in |
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Retained |
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comprehensive |
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interest in |
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Total |
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stock |
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capital |
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earnings |
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loss |
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subsidiary |
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equity |
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(unaudited) |
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Balance at June 30, 2019 |
$ |
|
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|
$ |
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$ |
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|
$ |
( |
) |
|
$ |
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$ |
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Net income (loss) |
|
- |
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- |
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( |
) |
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- |
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( |
) |
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Other comprehensive loss, net of tax |
|
- |
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- |
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- |
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( |
) |
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- |
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( |
) |
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Dividends paid to noncontrolling interest |
|
- |
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- |
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- |
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- |
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( |
) |
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( |
) |
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Other, net |
|
- |
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( |
) |
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- |
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- |
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- |
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( |
) |
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Balance at September 30, 2019 |
$ |
|
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|
$ |
|
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|
$ |
|
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|
$ |
( |
) |
|
$ |
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|
$ |
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Balance at June 30, 2020 |
$ |
|
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|
$ |
|
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|
$ |
|
|
|
$ |
( |
) |
|
$ |
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|
$ |
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Net income |
|
- |
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|
- |
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|
- |
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|
|
|
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Other comprehensive income, net of tax |
|
- |
|
|
|
- |
|
|
|
- |
|
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|
|
|
|
|
- |
|
|
|
|
|
|
Dividends paid - $ |
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
Dividends paid to noncontrolling interest |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2020 |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
|
Nine months ended September 30, 2019 and 2020 (unaudited) |
|
|||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
other |
|
|
Noncontrolling |
|
|
|
|
|
|||
|
|
Common |
|
|
paid-in |
|
|
Retained |
|
|
comprehensive |
|
|
interest in |
|
|
Total |
|
||||||
|
|
stock |
|
|
capital |
|
|
earnings |
|
|
loss |
|
|
subsidiary |
|
|
equity |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018 |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
Net income |
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net of tax |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
Issuance of NL common stock |
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Dividends paid to noncontrolling interest |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
Equity transactions with noncontrolling interest, net and other |
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2019 |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019 |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
Net income |
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net of tax |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
Issuance of NL common stock |
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Dividends paid - $ |
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
Dividends paid to noncontrolling interest |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
Other, net |
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2020 |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
See accompanying notes to Condensed Consolidated Financial Statements.
7
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
Nine months ended |
|
|||||
|
|
September 30, |
|
|||||
|
|
2019 |
|
|
2020 |
|
||
|
|
(unaudited) |
|
|||||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
$ |
|
|
|
$ |
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
|
|
|
( |
) |
|
Equity in earnings of Kronos Worldwide, Inc. |
|
( |
) |
|
|
( |
) |
|
Dividends received from Kronos Worldwide, Inc. |
|
|
|
|
|
|
|
|
Marketable equity securities |
|
|
|
|
|
|
|
|
Benefit plan expense greater than cash funding |
|
( |
) |
|
|
( |
) |
|
Noncash interest expense |
|
|
|
|
|
|
|
|
Net gain from sale of excess property |
|
( |
) |
|
|
- |
|
|
Other, net |
|
( |
) |
|
|
|
|
|
Change in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts and other receivables, net |
|
|
|
|
|
( |
) |
|
Inventories, net |
|
( |
) |
|
|
( |
) |
|
Prepaid expenses and other |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
( |
) |
|
|
( |
) |
|
Income taxes |
|
|
|
|
|
( |
) |
|
Accounts with affiliates |
|
|
|
|
|
|
|
|
Accrued environmental remediation and related costs |
|
( |
) |
|
|
( |
) |
|
Other noncurrent assets and liabilities, net |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
( |
) |
|
|
( |
) |
|
Note receivable from affiliate: |
|
|
|
|
|
|
|
|
Collections |
|
|
|
|
|
|
|
|
Loans |
|
( |
) |
|
|
( |
) |
|
Proceeds from sale of excess property |
|
|
|
|
|
- |
|
|
Other, net |
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Dividends paid |
|
- |
|
|
|
( |
) |
|
Distributions to noncontrolling interests in subsidiary |
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and restricted cash and cash equivalents - net change from: |
|
|
|
|
|
|
|
|
Operating, investing and financing activities |
|
|
|
|
|
( |
) |
|
Balance at beginning of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
$ |
|
|
|
$ |
|
|
8
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
|
|
Nine months ended |
|
|||||
|
|
September 30, |
|
|||||
|
|
2019 |
|
|
2020 |
|
||
|
|
(unaudited) |
|
|||||
|
Supplemental disclosures - cash paid (received) for: |
|
|
|
|
|
|
|
|
Interest |
$ |
|
|
|
$ |
|
|
|
Income taxes, net |
|
( |
) |
|
|
|
|
See accompanying notes to Condensed Consolidated Financial Statements.
9
NL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(unaudited)
Note 1 – Organization and basis of presentation:
Organization – At September 30, 2020, Valhi, Inc. (NYSE: VHI) held approximately
Basis of presentation – Consolidated in this Quarterly Report are the results of our majority-owned subsidiary, CompX International Inc. We also own approximately
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, 2019 that we filed with the SEC on March 11, 2020 (the 2019 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, 2019 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, 2019) 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, 2020 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 2019 Consolidated Financial Statements contained in our 2019 Annual Report.
Our results of operations for the first nine months of 2020 were significantly impacted by the COVID-19 pandemic, primarily in the second and third quarters, specifically through reduced demand for many of CompX and Kronos’ products resulting from the rapid contraction of vast areas of the global economy. The extent of the COVID-19 impact on our future operations will depend on the time period and degree to which the COVID-19 pandemic persists in the global economy thereby reducing customer demand for certain of CompX and Kronos’ products, including the timing and extent to which CompX and Kronos’ customers’ operations continue to be impacted, their customers’ perception as to when consumer demand for their products will return to pre-pandemic levels and on any future disruptions in their operations or their suppliers’ operations, all of which are difficult to predict.
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.
10
Note 2 – Accounts and other receivables, net:
|
|
December 31, |
|
|
September 30, |
|
||
|
|
2019 |
|
|
2020 |
|
||
|
|
(In thousands) |
|
|||||
|
Trade receivables - CompX |
$ |
|
|
|
$ |
|
|
|
Other receivables |
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
( |
) |
|
|
( |
) |
|
Total |
$ |
|
|
|
$ |
|
|
Note 3 – Inventories, net:
|
|
December 31, |
|
|
September 30, |
|
||
|
|
2019 |
|
|
2020 |
|
||
|
|
(In thousands) |
|
|||||
|
Raw materials |
$ |
|
|
|
$ |
|
|
|
Work in process |
|
|
|
|
|
|
|
|
Finished products |
|
|
|
|
|
|
|
|
Total |
$ |
|
|
|
$ |
|
|
Note 4 – Marketable securities:
Our marketable securities consist of investments in the publicly-traded shares of our immediate parent company Valhi, Inc. Our shares of Valhi common stock are accounted for as available-for-sale securities, which are carried at fair value using quoted market prices in active markets and represent a Level 1 input within the fair value hierarchy. Any unrealized gains or losses on the securities are recognized in Marketable equity securities on our Condensed Consolidated Statements of Operations.
|
|
Fair value measurement level |
|
Market value |
|
|
Cost basis |
|
|
Unrealized gain (loss) |
|
|||
|
|
|
|
(In thousands) |
|
|||||||||
|
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valhi common stock |
1 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valhi common stock |
1 |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
At December 31, 2019 and September 30, 2020, we held approximately
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, 2019 and September 30, 2020, we owned approximately
11
The change in the carrying value of our investment in Kronos during the first nine months of 2020 is summarized below.
|
|
Amount |
|
|
|
|
(In millions) |
|
|
|
Balance at the beginning of the period |
$ |
|
|
|
Equity in earnings of Kronos |
|
|
|
|
Dividends received from Kronos |
|
( |
) |
|
Equity in Kronos' other comprehensive income (loss): |
|
|
|
|
Currency translation |
|
( |
) |
|
Defined benefit pension plans |
|
|
|
|
Other |
|
( |
) |
|
Balance at the end of the period |
$ |
|
|
Selected financial information of Kronos is summarized below:
|
|
December 31, |
|
|
September 30, |
|
||
|
|
2019 |
|
|
2020 |
|
||
|
|
(In millions) |
|
|||||
|
Current assets |
$ |
|
|
|
$ |
|
|
|
Property and equipment, net |
|
|
|
|
|
|
|
|
Investment in TiO2 joint venture |
|
|
|
|
|
|
|
|
Other noncurrent assets |
|
|
|
|
|
|
|
|
Total assets |
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
$ |
|
|
|
$ |
|
|
|
Long-term debt |
|
|
|
|
|
|
|
|
Accrued pension costs |
|
|
|
|
|
|
|
|
Other noncurrent liabilities |
|
|
|
|
|
|
|
|
Stockholders' equity |
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity |
$ |
|
|
|
$ |
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
||||||||||
|
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
||||
|
|
|
(In millions) |
|
|||||||||||||
|
Net sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Cost of sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6 – Other assets, net:
|
|
December 31, |
|
|
September 30, |
|
||
|
|
2019 |
|
|
2020 |
|
||
|
|
(In thousands) |
|
|||||
|
Pension asset |
$ |
|
|
|
$ |
|
|
|
Other |
|
|
|
|
|
|
|
|
Total |
$ |
|
|
|
$ |
|
|
12
Note 7 – Accrued and other current liabilities:
|
|
December 31, |
|
|
September 30, |
|
||
|
|
2019 |
|
|
2020 |
|
||
|
|
(In thousands) |
|
|||||
|
Employee benefits |
$ |
|
|
|
$ |
|
|
|
Other |
|
|
|
|
|
|
|
|
Total |
$ |
|
|
|
$ |
|
|
Note 8 – Long-term debt:
During the first nine months of 2020, our wholly owned subsidiary, NLKW Holding, LLC had
Note 9 – Other noncurrent liabilities:
|
|
December 31, |
|
|
September 30, |
|
||
|
|
2019 |
|
|
2020 |
|
||
|
|
(In thousands) |
|
|||||
|
OPEB |
$ |
|
|
|
$ |
|
|
|
Reserve for uncertain tax positions |
|
|
|
|
|
|
|
|
Insurance claims and expenses |
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
Total |
$ |
|
|
|
$ |
|
|
Note 10 – Revenue recognition:
The following table disaggregates our net sales by reporting unit, which are the categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
|
|
Three months ended |
|
|
Nine months ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
||||
|
|
(In thousands) |
|
|||||||||||||
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security Products |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Marine Components |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Note 11 – Employee benefit plans:
The components of net periodic defined benefit pension cost are presented in the table below.
|
|
Three months ended |
|
|
Nine months ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
||||
|
|
(In thousands) |
|
|||||||||||||
|
Interest cost |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Expected return on plan assets |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Recognized actuarial losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
13
We currently expect our 2020 contributions to our defined benefit pension plans to be approximately $
Note 12 – Income taxes:
|
|
|
Three months ended |
|
|
Nine months ended |
|
||||||||||
|
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
||||
|
|
(In millions) |
|
||||||||||||||
|
Expected tax expense (benefit), at U.S. federal statutory income tax rate of |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Rate differences on equity in earnings of Kronos |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
U.S. state income taxes and other, net |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
- |
|
|
Income tax expense (benefit) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive provision (benefit) for income taxes allocable to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
Additional paid-in capital |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Pension plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPEB plans |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
Total |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
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. We received aggregate dividends from Kronos of $
On March 27, 2020, the “Coronavirus Aid, Relief and Economic Security (CARES) Act” was signed into law in response to the COVID-19 pandemic. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, modifications to net operating loss carryovers and carrybacks, modifications to the limitation of business interest for 2019 and 2020 and technical corrections to tax depreciation methods for qualified improvement property. We have evaluated the relevant provisions of the CARES Act and do not expect the NOL carryback provisions to result in a cash tax benefit to us because we do not have any prior year refundable income taxes and other provisions of the CARES Act will not have a material impact on our tax provision.
Income tax matters related to Kronos
Under the CARES Act, the modification to the business interest provisions increases the business interest limitation from
14
Note 13 – Accumulated other comprehensive loss:
Changes in accumulated other comprehensive loss attributable to NL stockholders, including amounts resulting from our investment in Kronos Worldwide (see Note 5), are presented in the table below.
|
|
Three months ended |
|
|
Nine months ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
||||
|
|
(In thousands) |
|
|||||||||||||
|
Accumulated other comprehensive loss, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Other comprehensive income (loss) |
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Balance at end of period |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Other comprehensive income - amortization of net losses included in net periodic pension cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPEB plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Other comprehensive loss - amortization of net gains included in net periodic OPEB cost |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Balance at end of period |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Other comprehensive income (loss) |
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Balance at end of period |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
See Note 11 for amounts related to our defined benefit pension plans.
Note 14 – Commitments and contingencies:
General
We are involved in various environmental, contractual, product liability, patent (or intellectual property), employment and other claims and disputes incidental to our current and former businesses. At least quarterly our management discusses and evaluates the status of any pending litigation or claim to which we are a party or which has been asserted against us. The factors considered in such evaluation include, among other things, the nature of such pending cases and claims, the status of such pending cases and claims, the advice of legal counsel and our experience in similar cases and claims (if any). Based on such evaluation, we make a determination as to whether we believe (i) it is probable a loss has been incurred, and if so if the amount of such loss (or a range of loss) is reasonably estimable, or (ii) it is reasonably possible but not probable a loss has been incurred, and if so, if the amount of such loss (or a range of loss) is reasonably estimable, or (iii) the probability a loss has been incurred is remote.
Lead pigment litigation
Our former operations included the manufacture of lead pigments for use in paint and lead-based paint. We, other former manufacturers of lead pigments for use in paint and lead-based paint (together, the “former pigment manufacturers”), and the Lead Industries Association (LIA), which discontinued business operations in 2002, have been named as defendants in various legal proceedings seeking damages for personal injury, property damage and governmental expenditures allegedly caused by the use of lead-based paints. Certain of these actions have been filed by or on behalf of states, counties, cities or their public housing authorities and school districts, and certain others have been asserted as class actions. These lawsuits seek recovery under a variety of theories, including public
15
and private nuisance, negligent product design, negligent failure to warn, strict liability, breach of warranty, conspiracy/concert of action, aiding and abetting, enterprise liability, market share or risk contribution liability, intentional tort, fraud and misrepresentation, violations of state consumer protection statutes, supplier negligence and similar claims.
The plaintiffs in these actions generally seek to impose on the defendants responsibility for lead paint abatement and health concerns associated with the use of lead-based paints, including damages for personal injury, contribution and/or indemnification for medical expenses, medical monitoring expenses and costs for educational programs. To the extent the plaintiffs seek compensatory or punitive damages in these actions, such damages are generally unspecified. In some cases, the damages are unspecified pursuant to the requirements of applicable state law. A number of cases are inactive or have been dismissed or withdrawn. Most of the remaining cases are in various pre-trial stages. Some are on appeal following dismissal or summary judgment rulings or a trial verdict in favor of either the defendants or the plaintiffs.
We believe that these actions are without merit, and we intend to continue to deny all allegations of wrongdoing and liability and to defend against all actions vigorously. Other than with respect to the Santa Clara, California public nuisance case discussed below, we do not believe it is probable that we have incurred any liability with respect to all of the lead pigment litigation cases to which we are a party, and with respect to all such lead pigment litigation cases to which we are a party we believe liability to us that may result, if any, in this regard cannot be reasonably estimated, because:
|
|
• |
we have never settled any of the market share, intentional tort, fraud, nuisance, supplier negligence, breach of warranty, conspiracy, misrepresentation, aiding and abetting, enterprise liability, or statutory cases (other than the Santa Clara case discussed below), |
|
|
• |
no final, non-appealable adverse judgments have ever been entered against us, and |
|
|
• |
we have never ultimately been found liable with respect to any such litigation matters, including over |
Accordingly, other than with respect to the Santa Clara case discussed below, we have not accrued any amounts for any of the pending lead pigment and lead-based paint litigation cases filed by or on behalf of states, counties, cities or their public housing authorities and school districts, or those asserted as class actions. In addition, we have determined that liability to us which may result, if any, cannot be reasonably estimated at this time because there is no prior history of a loss of this nature on which an estimate could be made and there is no substantive information available upon which an estimate could be based.
In the matter titled County of Santa Clara v. Atlantic Richfield Company, et al. (Superior Court of the State of California, County of Santa Clara, Case No. 1-00-CV-788657)
Under the terms of the global settlement agreement, each defendant must pay an aggregate $
16
New cases may continue to be filed against us. We do not know if we will incur liability in the future with respect to any of the pending or possible litigation in view of the inherent uncertainties involved in court and jury rulings. In the future, if new information regarding such matters becomes available to us (such as a final, non-appealable adverse verdict against us or otherwise ultimately being found liable with respect to such matters), at that time we would consider such information in evaluating any remaining cases then-pending against us as to whether it might then have become probable we have incurred liability with respect to these matters, and whether such liability, if any, could have become reasonably estimable. The resolution of any of these cases could result in the recognition of a loss contingency accrual that could have a material adverse impact on our net income for the interim or annual period during which such liability is recognized and a material adverse impact on our consolidated financial condition and liquidity.
Environmental matters and litigation
Our operations are governed by various environmental laws and regulations. Certain of our businesses are and have been engaged in the handling, manufacture or use of substances or compounds that may be considered toxic or hazardous within the meaning of applicable environmental laws and regulations. As with other companies engaged in similar businesses, certain of our past and current operations and products have the potential to cause environmental or other damage. We have implemented and continue to implement various policies and programs in an effort to minimize these risks. Our policy is to maintain compliance with applicable environmental laws and regulations at all of our plants and to strive to improve environmental performance. From time to time, we may be subject to environmental regulatory enforcement under U.S. and non-U.S. statutes, the resolution of which typically involves the establishment of compliance programs. It is possible that future developments, such as stricter requirements of environmental laws and enforcement policies, could adversely affect our production, handling, use, storage, transportation, sale or disposal of such substances. We believe that all of our facilities are in substantial compliance with applicable environmental laws.
Certain properties and facilities used in our former operations, including divested primary and secondary lead smelters and former mining locations, are the subject of civil litigation, administrative proceedings or investigations arising under federal and state environmental laws and common law. Additionally, in connection with past operating practices, we are currently involved as a defendant, potentially responsible party (PRP) or both, pursuant to the Comprehensive Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act (CERCLA), and similar state laws in various governmental and private actions associated with waste disposal sites, mining locations, and facilities that we or our predecessors, our subsidiaries or their predecessors currently or previously owned, operated or used, certain of which are on the United States Environmental Protection Agency’s (EPA) Superfund National Priorities List or similar state lists. These proceedings seek cleanup costs, damages for personal injury or property damage and/or damages for injury to natural resources. Certain of these proceedings involve claims for substantial amounts. Although we may be jointly and severally liable for these costs, in most cases we are only one of a number of PRPs who may also be jointly and severally liable, and among whom costs may be shared or allocated. In addition, we are occasionally named as a party in a number of personal injury lawsuits filed in various jurisdictions alleging claims related to environmental conditions alleged to have resulted from our operations.
Obligations associated with environmental remediation and related matters are difficult to assess and estimate for numerous reasons including the:
|
|
• |
complexity and differing interpretations of governmental regulations, |
|
|
• |
number of PRPs and their ability or willingness to fund such allocation of costs, |
|
|
• |
financial capabilities of the PRPs and the allocation of costs among them, |
|
|
• |
solvency of other PRPs, |
|
|
• |
multiplicity of possible solutions, |
|
|
• |
number of years of investigatory, remedial and monitoring activity required, |
|
|
• |
uncertainty over the extent, if any, to which our former operations might have contributed to the conditions allegedly giving rise to such personal injury, property damage, natural resource and related claims, and |
|
|
• |
number of years between former operations and notice of claims and lack of information and documents about the former operations. |
In addition, the imposition of more stringent standards or requirements under environmental laws or regulations, new developments or changes regarding site cleanup costs or the allocation of costs among PRPs, solvency of other PRPs, the results of future testing and analysis undertaken with respect to certain sites or a
17
determination that we are potentially responsible for the release of hazardous substances at other sites, could cause our expenditures to exceed our current estimates. It is possible that actual costs will exceed accrued amounts or the upper end of the range for sites for which estimates have been made, and it is possible costs will be incurred for sites where no estimates presently can be made. Further, additional environmental and related matters may arise in the future. If we were to incur any future liability, this could have a material adverse effect on our consolidated financial statements, results of operations and liquidity.
We record liabilities related to environmental remediation and related matters (including costs associated with damages for personal injury or property damage and/or damages for injury to natural resources) when estimated future expenditures are probable and reasonably estimable. We adjust such accruals as further information becomes available to us or as circumstances change. Unless the amounts and timing of such estimated future expenditures are fixed and reasonably determinable, we generally do not discount estimated future expenditures to their present value due to the uncertainty of the timing of the payout. We recognize recoveries of costs from other parties, if any, as assets when their receipt is deemed probable.
We do not know and cannot estimate the exact time frame over which we will make payments for our accrued environmental and related costs. The timing of payments depends upon a number of factors, including but not limited to the timing of the actual remediation process, which in turn depends on factors outside of our control. At each balance sheet date, we estimate the amount of our accrued environmental and related costs which we expect to pay within the next twelve months, and we classify this estimate as a current liability. We classify the remaining accrued environmental costs as a noncurrent liability.
Changes in the accrued environmental remediation and related costs during the first nine months of 2020 are as follows:
|
|
Amount |
|
|
|
|
(In thousands) |
|
|
|
Balance at the beginning of the period |
$ |
|
|
|
Additions charged to expense |
|
|
|
|
Payments, net |
|
( |
) |
|
Balance at the end of the period |
$ |
|
|
|
|
|
|
|
|
Amounts recognized in the Condensed Consolidated |
|
|
|
|
Balance Sheet at the end of the period: |
|
|
|
|
Current liability |
$ |
|
|
|
Noncurrent liability |
|
|
|
|
Balance at the end of the period |
$ |
|
|
On a quarterly basis, we evaluate the potential range of our liability for environmental remediation and related costs at sites where we have been named as a PRP or defendant, including sites for which our wholly-owned environmental management subsidiary, NL Environmental Management Services, Inc. (EMS), has contractually assumed our obligations. At September 30, 2020, we had accrued approximately $
We believe that it is not reasonably possible to estimate the range of costs for certain sites. At September 30, 2020, there were approximately
18
time adjust our accruals. Any such adjustment could result in the recognition of an accrual that would have a material effect on our consolidated financial statements, results of operations and liquidity.
Insurance coverage claims
We are involved in certain legal proceedings with a number of our former insurance carriers regarding the nature and extent of the carriers’ obligations to us under insurance policies with respect to certain lead pigment and asbestos lawsuits. The issue of whether insurance coverage for defense costs or indemnity or both will be found to exist for our lead pigment and asbestos litigation depends upon a variety of factors and we cannot assure you that such insurance coverage will be available.
We have agreements with certain of our former insurance carriers pursuant to which the carriers reimburse us for a portion of our future lead pigment litigation defense costs, and one such carrier reimburses us for a portion of our future asbestos 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. While we continue to seek additional insurance recoveries, we do not know if we will be successful in obtaining reimbursement for either defense costs or indemnity. Accordingly, we recognize insurance recoveries in income only when receipt of the recovery is probable and we are able to reasonably estimate the amount of the recovery. In this regard we recognized $
For a complete discussion of certain litigation involving us and certain of our former insurance carriers, refer to our 2019 Annual Report.
Other litigation
In addition to the litigation described above, we and our affiliates are also involved in various other environmental, contractual, product liability, patent (or intellectual property), employment and other claims and disputes incidental to present and former businesses. In certain cases, we have insurance coverage for these items, although we do not expect additional material insurance coverage for environmental matters. We currently believe the disposition of all of these various other claims and disputes (including asbestos related claims), individually and in the aggregate, should not have a material adverse effect on our consolidated financial position, results of operations or liquidity beyond the accruals already provided.
Note 15 – Financial instruments and fair value measurements:
See Note 4 for information on how we determine fair value of our marketable securities.
The following table presents the financial instruments that are not carried at fair value but which require fair value disclosure:
|
|
|
December 31, 2019 |
|
|
September 30, 2020 |
|
||||||||||
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
||||
|
|
|
amount |
|
|
value |
|
|
amount |
|
|
value |
|
||||
|
|
|
(In thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash |
|
$ |
|
|
|
$ |
157,870 |
|
|
$ |
|
|
|
$ |
156,973 |
|
Due to their near-term maturities, the carrying amounts of accounts receivable and accounts payable are considered equivalent to fair value.
19
Note 16 – Recent accounting pronouncement:
In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2019-12, Simplifying the Accounting for Income Taxes, which changes the accounting for certain income tax transactions and reduces complexity in accounting for income taxes in certain areas. The ASU introduces new guidance including providing a policy election for an entity to not allocate consolidated current and deferred tax expense when a member of a consolidated tax return is not subject to income tax in its separate financial statements and is a disregarded entity by the taxing authority; and providing guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or a separate transaction. The ASU also changes existing guidance in a number of areas, including: the method of making an intraperiod allocation of total income tax expense if there is a loss in continuing operations and gains outside of continuing operations; determining when a deferred tax liability is recognized after an investor in a non-U.S. entity transitions to or from the equity method of accounting; accounting for tax law changes and year-to-date losses in interim periods; and determining how to apply the income tax guidance to franchise taxes that are partially based on income. We adopted this ASU as of January 1, 2020. The adoption of this ASU did not have a material effect on our Condensed Consolidated Financial Statements.
20
|
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 (NYSE American: CIX ) and Kronos (NYSE: KRO) 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 approximate 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, aluminum, steel 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 that harm the worldwide economy, disrupt our supply chain, increase material costs or reduce demand or perceived demand for Kronos’ TiO2 and our products or impair our ability to operate our facilities (including changes in the level of gross domestic product in various regions of the world, natural disasters, terrorist acts, global conflicts and public health crises such as COVID-19) |
|
|
• |
Competitive products and substitute products |
21
|
|
• |
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 or trade disputes |
|
|
• |
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 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, cyber-attacks and public health crises such as COVID-19) |
|
|
• |
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 ability of our subsidiaries or affiliates to pay us dividends |
|
|
• |
Uncertainties associated with CompX’s development of new products and 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 such as those seeking to limit or classify TiO2 or its use |
|
|
• |
The ultimate resolution of pending litigation (such as our lead pigment and environmental matters) |
|
|
• |
Possible future litigation. |
22
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 September 30, 2020 compared to the quarter ended September 30, 2019
Our net income attributable to NL stockholders was $3.9 million, or $.08 per share, in the third quarter of 2020 compared to a net loss attributable to NL stockholders of $1.6 million, or $.03 per share, in the third quarter of 2019. As more fully described below, the increase in our earnings per share from 2019 to 2020 is primarily due to the net effects of:
|
|
• |
favorable relative changes in the value of marketable equity securities of $18.5 million; |
|
|
• |
equity in earnings of Kronos in 2020 of $2.4 million compared to $5.4 million in 2019; |
|
|
• |
a gain of $4.4 million in 2019 related to a sale of excess property; and |
|
|
• |
lower income from operations attributable to CompX of $2.2 million in 2020. |
Our 2019 net loss per share attributable to NL stockholders includes income of $.07 per share, net of income tax expense, related to a gain from a sale of excess property.
Nine months ended September 30, 2020 compared to nine months ended September 30, 2019
We had net income attributable to NL stockholders of $10.4 million, or $.21 per share, in the first nine months of 2020 compared to net income attributable to NL stockholders of $19.5 million, or $.40 per share, in the first nine months of 2019. As more fully described below, the decrease in our earnings per share from 2019 to 2020 is primarily due to the net effects of:
|
|
• |
a pre-tax litigation settlement expense in 2019 of $19.3 million (mostly recognized in the second quarter) compared to nil recognized in 2020; |
|
|
• |
equity in earnings of Kronos in 2020 of $16.3 million compared to $23.6 million in 2019; |
|
|
• |
unfavorable relative changes in the value of marketable equity securities of $10.7 million; |
|
|
• |
higher insurance recoveries in 2019 of $5.1 million related primarily to a single insurance recovery settlement for certain past and future litigation defense costs; |
|
|
• |
a gain of $4.4 million in 2019 related to a sale of excess property; |
|
|
• |
lower income from operations attributable to CompX of $4.7 million in 2020; and |
|
|
• |
lower litigation fees and related costs of $1.9 million in 2020. |
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; and |
|
|
• |
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. |
23
Income (loss) from operations
The following table shows the components of our income (loss) from operations.
|
|
Three months ended September 30, |
|
|
% |
|
|
|
Nine months ended September 30, |
|
|
% |
|
|
||||||||||||
|
|
2019 |
|
|
2020 |
|
|
Change |
|
|
|
2019 |
|
|
2020 |
|
|
Change |
|
|
||||||
|
|
(In millions) |
|
|
|
|
|
(In millions) |
|
|
|
|
||||||||||||||
|
CompX |
$ |
4.3 |
|
|
$ |
2.1 |
|
|
|
(51 |
) |
% |
|
$ |
14.2 |
|
|
$ |
9.5 |
|
|
|
(33 |
) |
% |
|
Insurance recoveries |
|
.2 |
|
|
|
- |
|
|
n/m |
|
|
|
|
5.2 |
|
|
|
.1 |
|
|
|
(98 |
) |
|
|
|
Other income, net |
|
4.4 |
|
|
|
- |
|
|
n/m |
|
|
|
|
4.4 |
|
|
|
- |
|
|
n/m |
|
|
||
|
Litigation settlement expense, net |
|
.3 |
|
|
|
- |
|
|
n/m |
|
|
|
|
(19.3 |
) |
|
|
- |
|
|
n/m |
|
|
||
|
Corporate expense |
|
(3.4 |
) |
|
|
(2.4 |
) |
|
|
(30 |
) |
|
|
|
(9.1 |
) |
|
|
(7.4 |
) |
|
|
(20 |
) |
|
|
Income (loss) from operations |
$ |
5.8 |
|
|
$ |
(.3 |
) |
|
|
(105 |
) |
|
|
$ |
(4.6 |
) |
|
$ |
2.2 |
|
|
|
149 |
|
|
n/m Not meaningful.
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 (loss) before income taxes exclusive of our income (loss) from operations.
|
|
Three months ended September 30, |
|
|
% |
|
|
|
Nine months ended September 30, |
|
|
% |
|
|
||||||||||||
|
|
2019 |
|
|
2020 |
|
|
Change |
|
|
|
2019 |
|
|
2020 |
|
|
Change |
|
|
||||||
|
|
(In millions) |
|
|
|
|
|
(In millions) |
|
|
|
|
||||||||||||||
|
Equity in earnings of Kronos |
$ |
5.4 |
|
|
$ |
2.4 |
|
|
|
(55 |
) |
% |
|
$ |
23.6 |
|
|
$ |
16.3 |
|
|
|
(31 |
) |
% |
|
Marketable equity securities unrealized (loss) gain |
|
(15.3 |
) |
|
|
3.2 |
|
|
|
(121 |
) |
|
|
|
(.4 |
) |
|
|
(11.1 |
) |
|
|
2,479 |
|
|
|
Other components of net periodic pension and OPEB cost |
|
(.5 |
) |
|
|
(.2 |
) |
|
|
(52 |
) |
|
|
|
(1.3 |
) |
|
|
(.6 |
) |
|
|
(52 |
) |
|
|
Interest and dividend income |
|
1.6 |
|
|
|
.5 |
|
|
|
(70 |
) |
|
|
|
5.2 |
|
|
|
2.1 |
|
|
|
(60 |
) |
|
|
Interest expense |
|
(.3 |
) |
|
|
(.3 |
) |
|
|
12 |
|
|
|
|
(.3 |
) |
|
|
(1.0 |
) |
|
|
217 |
|
|
CompX International Inc.
CompX experienced normal sales volumes and operations during the first quarter of 2020. Beginning in late March 2020 as a result of the COVID-19 pandemic, CompX began receiving requests from certain customers of both its Security Products and Marine Components reporting units to postpone shipments, in some cases because customers’ production facilities were temporarily closed. CompX operates three facilities, each of which specializes in certain manufacturing processes and is therefore dependent upon the other facilities to some extent to manufacture finished goods. With the onset of COVID-19, within each facility CompX enhanced cleaning and sanitization procedures, mandated social distancing and implemented other health and safety protocols. For CompX sales, the second quarter of 2020 was the quarter most impacted by COVID-19 related order cancellations and delays. In the third quarter, CompX experienced significant recovery in sales, particularly in its Marine Components reporting unit, though not to the level expected prior to the pandemic. CompX income from operations has not recovered to the extent its sales have recovered due to a decline in gross margins discussed below.
CompX reported operating income of $2.1 million in the third quarter of 2020 compared to $4.3 million in the same period of 2019. Operating income for the first nine months of 2020 was $9.5 million compared to $14.2 million for the comparable period in 2019.
24
|
|
Three months ended September 30, |
|
|
% |
|
|
|
Nine months ended September 30, |
|
|
% |
|
|
||||||||||||
|
|
2019 |
|
|
2020 |
|
|
Change |
|
|
|
2019 |
|
|
2020 |
|
|
Change |
|
|
||||||
|
|
(In millions) |
|
|
|
|
|
(In millions) |
|
|
|
|
||||||||||||||
|
Net sales |
$ |
29.7 |
|
|
$ |
28.4 |
|
|
|
(4 |
) |
% |
|
$ |
94.6 |
|
|
$ |
84.5 |
|
|
|
(11 |
) |
% |
|
Cost of sales |
|
20.2 |
|
|
|
21.1 |
|
|
|
4 |
|
|
|
|
64.6 |
|
|
|
59.4 |
|
|
|
(8 |
) |
|
|
Gross margin |
|
9.5 |
|
|
|
7.3 |
|
|
|
(23 |
) |
|
|
|
30.0 |
|
|
|
25.1 |
|
|
|
(16 |
) |
|
|
Operating costs and expenses |
|
5.2 |
|
|
|
5.2 |
|
|
|
1 |
|
|
|
|
15.8 |
|
|
|
15.6 |
|
|
|
(1 |
) |
|
|
Income from operations |
$ |
4.3 |
|
|
$ |
2.1 |
|
|
|
(51 |
) |
|
|
$ |
14.2 |
|
|
$ |
9.5 |
|
|
|
(33 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
68 |
|
% |
|
74 |
|
% |
|
|
|
|
|
|
68 |
|
% |
|
70 |
|
% |
|
|
|
|
|
Gross margin |
|
32 |
|
|
|
26 |
|
|
|
|
|
|
|
|
32 |
|
|
|
30 |
|
|
|
|
|
|
|
Operating costs and expenses |
|
18 |
|
|
|
19 |
|
|
|
|
|
|
|
|
17 |
|
|
|
19 |
|
|
|
|
|
|
|
Income from operations |
|
14 |
|
|
|
7 |
|
|
|
|
|
|
|
|
15 |
|
|
|
11 |
|
|
|
|
|
|
Net sales – Net sales decreased $1.3 million in the third quarter of 2020 compared to the same period in 2019 as higher Marine Component sales to the towboat market were more than offset by lower Security Products sales across a variety of markets. Net sales decreased $10.1 million in the first nine months of 2020 compared to the same period in 2019 primarily due to lower Security Products sales particularly in the second quarter of 2020 as many of its customers were temporarily closed or reduced production due to government ordered closures or reduced demand resulting from the COVID-19 pandemic. Relative changes in selling prices did not have a material impact on net sales comparisons.
Cost of sales and gross margin – Cost of sales as a percentage of sales for the third quarter and for the first nine months of 2020 was approximately 6% and 2% higher than the same periods in 2019, respectively. As a result, gross margin as a percentage of sales decreased over the same periods. Gross margin percentages decreased in the third quarter and first nine months of 2020 compared to the same periods in 2019 primarily due to the decline in the Security Products gross margin percentage and to a lesser extent the Marine Components gross margin percentage. See reporting unit discussion below.
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 business unit and corporate management activities, as well as gains and losses on property and equipment. Operating costs and expenses for the third quarter and first nine months of 2020 were comparable to the same periods last year. Operating costs and expenses as a percentage of net sales increased in both periods of 2020 due to the lower sales.
Income from operations – As a percentage of net sales, income from operations for the third quarter and first nine months of 2020 decreased compared to the same periods of 2019 and was primarily impacted by the factors impacting cost of goods sold, gross margin and operating costs. See reporting unit discussion below.
25
Results by reporting unit
The key performance indicator for CompX’s reporting units is the level of their income from operations (see discussion below). Reporting unit results exclude CompX corporate expenses.
|
|
|
Three months ended September 30, |
|
|
% |
|
|
|
Nine months ended September 30, |
|
|
% |
|
||||||||||||
|
|
|
2019 |
|
|
2020 |
|
|
Change |
|
|
|
2019 |
|
|
2020 |
|
|
Change |
|
||||||
|
|
(In millions) |
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|||||||||||
|
Security Products: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
23.4 |
|
|
$ |
21.2 |
|
|
|
(9 |
) |
% |
|
$ |
75.0 |
|
|
$ |
65.2 |
|
|
|
(13 |
) |
|
Cost of sales |
|
|
15.7 |
|
|
|
15.7 |
|
|
|
- |
|
|
|
|
50.4 |
|
|
|
45.3 |
|
|
|
(10 |
) |
|
Gross margin |
|
|
7.7 |
|
|
|
5.5 |
|
|
|
(28 |
) |
|
|
|
24.6 |
|
|
|
19.9 |
|
|
|
(19 |
) |
|
Operating costs and expenses |
|
|
2.8 |
|
|
|
2.7 |
|
|
|
(4 |
) |
|
|
|
8.6 |
|
|
|
8.0 |
|
|
|
(6 |
) |
|
Operating income |
|
$ |
4.9 |
|
|
$ |
2.8 |
|
|
|
(43 |
) |
|
|
$ |
16.0 |
|
|
$ |
11.9 |
|
|
|
(26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
33 |
% |
|
|
26 |
% |
|
|
|
|
|
|
|
33 |
% |
|
|
31 |
% |
|
|
|
|
|
Operating income margin |
|
|
21 |
% |
|
|
13 |
% |
|
|
|
|
|
|
|
21 |
% |
|
|
18 |
% |
|
|
|
|
Security Products – Security Products net sales in the third quarter of 2020 decreased 9% compared to the same period in 2019. Certain market segments have been slower to recover from reduced demand related to COVID-19, including transportation which had $1.3 million lower sales than the same period in 2019, distribution customers which were $.7 million lower than the same period in 2019, and office furniture which was $.6 million lower than the same period in 2019. These declines were partially offset by $.7 million higher sales to the government security market. Similarly, Security Products net sales decreased 13% in the first nine months of 2020 compared to the same period last year primarily due to $4.4 million in lower sales to the transportation market, $2.5 million in lower sales to distribution customers, and $1.2 million in lower sales to the office furniture market primarily as a result of the negative impact of COVID-19 on second quarter 2020 sales and the slower recovery of these markets in the third quarter as noted above.
Gross margin as a percentage of net sales for the third quarter was lower than the same period last year as higher cost inventory produced during the second quarter was sold in the third quarter. Security Products inventory produced during the second quarter of 2020 had a higher carrying value compared to prior periods due to higher fixed cost per unit of production as a result of lower production volumes during the second quarter of 2020. This negatively impacted its cost of sales during the third quarter of 2020 compared to the same period in the prior year as this higher cost inventory was sold. Gross margin for the first nine months of 2020 decreased compared to the same period in the prior year primarily due to the decline in gross margin in the third quarter of 2020 noted above. Additionally, gross margin was unfavorably impacted by increased medical costs of $.5 million for the third quarter and $.9 million for the first nine months of 2020 compared to the same periods in prior year. Operating costs and expenses in the third quarter of 2020 were comparable to the same period in the prior year. Operating costs decreased in the first nine months of 2020 compared to the same period last year predominantly due to decreased expenses related to travel and cancelled or postponed advertising expenses which were $.4 million lower in aggregate. Operating income as a percentage of net sales for the third quarter and first nine months of 2020 decreased compared to the same periods of 2019 as a result of the factors impacting gross margin as well as reduced coverage of operating costs and expenses from lower sales for both comparative periods.
26
|
|
|
Three months ended September 30, |
|
|
% |
|
|
|
Nine months ended September 30, |
|
|
% |
|
|
||||||||||||
|
|
|
2019 |
|
|
2020 |
|
|
Change |
|
|
|
2019 |
|
|
2020 |
|
|
Change |
|
|
||||||
|
|
|
(In millions) |
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
||||||||||
|
Marine Components: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
6.3 |
|
|
$ |
7.2 |
|
|
|
15 |
|
% |
|
$ |
19.6 |
|
|
$ |
19.3 |
|
|
|
(1 |
) |
% |
|
Cost of sales |
|
|
4.5 |
|
|
|
5.4 |
|
|
|
20 |
|
|
|
|
14.2 |
|
|
|
14.1 |
|
|
|
- |
|
|
|
Gross margin |
|
|
1.8 |
|
|
|
1.8 |
|
|
|
1 |
|
|
|
|
5.4 |
|
|
|
5.2 |
|
|
|
(5 |
) |
|
|
Operating costs and expenses |
|
|
.8 |
|
|
|
.7 |
|
|
|
(8 |
) |
|
|
|
2.2 |
|
|
|
2.2 |
|
|
|
(4 |
) |
|
|
Operating income |
|
$ |
1.0 |
|
|
$ |
1.1 |
|
|
|
8 |
|
|
|
$ |
3.2 |
|
|
$ |
3.0 |
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
29 |
% |
|
|
25 |
% |
|
|
|
|
|
|
|
28 |
% |
|
|
27 |
% |
|
|
|
|
|
|
Operating income margin |
|
|
17 |
% |
|
|
16 |
% |
|
|
|
|
|
|
|
17 |
% |
|
|
16 |
% |
|
|
|
|
|
Marine Components – Marine Components net sales in the third quarter of 2020 increased 15% compared to the same period in 2019 primarily due to increased sales of $1.2 million to the towboat market. Marine Components net sales decreased 1% in the first nine months of 2020 compared to the same period in the prior year as increases in first and third quarter sales primarily to the towboat and center console boat markets were more than offset by lower sales in the second quarter 2020, the quarter most impacted by COVID-19. As a percentage of net sales, gross margin decreased in the third quarter of 2020 compared to the same period in 2019. Similar to Security Products, inventory sold in the third quarter of 2020 was primarily produced in the second quarter of 2020 and had a higher carrying value compared to prior periods due to higher fixed cost per unit of production as a result of lower production volumes during the second quarter of 2020. The gross margin percentage decreased in the first nine months of 2020 compared to the same period last year primarily due to the decline in gross margin in the third quarter of 2020 noted above. Operating income as a percentage of net sales for the third quarter and first nine months of 2020 decreased compared to the same periods of 2019 as a result of the factors impacting gross margin slightly offset by lower operating costs and expenses.
Outlook – In the third quarter of 2020, CompX sales began to recover from the historically low levels it experienced during the second quarter, although the COVID-19 pandemic continues to impact CompX’s operations and demand for its products. In the third quarter, CompX’s manufacturing operations returned to more normal production rates as demand from its customers began to return, although for the most part, below pre-pandemic levels. CompX’s global and domestic supply chains remain intact, and it has experienced minimal supply chain disruptions. The markets CompX sells to have recovered to varying degrees, and CompX continues to work closely with all of its customers and monitor their progress as they continue to adjust their operations. Marine sales have outpaced prior year performance in the third quarter while the transportation, distribution and office furniture markets CompX’s Securities Products reporting unit serves have been slow to recover. CompX expects these trends to continue for the remainder of the year.
Considerable effort continues at all of CompX’s locations to manage current COVID-19 conditions including enhanced health and safety protocols and additional cleaning and disinfecting efforts. Throughout the course of the COVID-19 pandemic, CompX has focused its efforts on maintaining efficient operations while closely managing its expenses and capital projects. In this regard, CompX is constantly evaluating its staffing levels and CompX believes its current staffing levels are aligned with its sales and production forecasts for the remainder of the year.
The advance of the COVID-19 pandemic and the global efforts to mitigate its spread have resulted in sharp contractions of vast areas of the global economy and are expected to continue to challenge workers, businesses and governments for the foreseeable future. Government actions in various regions have generally permitted the gradual resumption of commercial activities following various regional shutdowns, but further government action restricting economic activity is possible in an effort to mitigate increases in COVID-19 cases in certain regions. The success and timing of these mitigating actions will depend in part on deployment of effective tools to fight COVID-19, including increased testing, enhanced monitoring, data analysis, effective treatments and a safe vaccine, before economic growth is likely to return to pre-pandemic levels. Even as these measures are implemented and become effective, they will not directly address the business and employment losses already experienced. As a result, we expect U.S. and worldwide gross domestic product to be significantly impacted for an indeterminate period.
27
Based on current conditions, CompX expects to report reduced revenue and income from operations in 2020 compared to 2019. CompX believes the second quarter of 2020 will be the period most impacted by reduced demand for its products due to COVID-19 as compared to 2019; however, due to the negative impact of higher fixed costs per unit of production in the third quarter as the result of lower production volumes in the second and third quarters of 2020 as discussed above, CompX expects income from operations for the remainder of 2020 to continue to be lower than comparable periods. The severity of the impact of COVID-19 on the remainder of the year will depend on customer demand for CompX’s products, including the timing and extent to which its customers’ operations continue to be impacted, on its customers’ perception as to when consumer demand for their products will return to pre-pandemic levels and on any future disruptions in CompX’s operations or its suppliers’ operations, all of which are difficult to predict. CompX’s operations teams meet daily to ensure they are taking appropriate actions to maintain a safe working environment for all of its employees, minimize operational disruptions and manage inventory levels. CompX increased inventory at both of its reporting units during the second quarter of 2020 to keep its workforce productive by focusing on high-demand products and components. As expected, inventory balances declined over the third quarter and CompX expects inventory to further decline over the remainder of the year as CompX aligns its production to current demand levels. It is possible CompX may temporarily close one or more of its facilities for the health and safety of its employees before the COVID-19 crisis is over. CompX has significant cash balances of approximately $65.1 million at September 30, 2020, and CompX believes it is well positioned to navigate the uncertainty ahead.
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. We recognized $5.2 million in insurance recoveries in the first nine months of 2019 related primarily 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.
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.
Litigation settlement expense, net – We recognized a pre-tax $19.3 million litigation settlement expense in the first nine months of 2019 related to the lead pigment litigation in California. See Note 14 to our Condensed Consolidated Financial Statements.
Corporate expense – Corporate expenses were $2.4 million in the third quarter of 2020, $1.0 million lower than in the third quarter of 2019 primarily due to lower litigation fees and related costs in 2020. Included in corporate expense are:
|
|
• |
litigation fees and related costs of $.3 million in the third quarter of 2020 compared to $1.4 million in the third quarter of 2019, and |
|
|
• |
environmental remediation and related costs of $.1 million in each of 2020 and 2019. |
Corporate expenses were $7.4 million in the first nine months of 2020, $1.7 million lower than in the first nine months of 2019 primarily due to lower litigation fees and related costs partially offset by higher environmental remediation and related costs. Included in corporate expense in the first nine months of 2019 and 2020 are:
|
|
• |
litigation fees and related costs of $1.4 million in 2020 compared to $3.3 million in 2019, and |
|
|
• |
environmental remediation and related costs of $.1 million in 2020 compared to a related benefit of $.6 million in 2019. |
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
28
(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 2020 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 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 14 to our Condensed Consolidated Financial Statements.
Overall, we currently expect that our net general corporate expenses in 2020 will be lower than 2019 primarily due to lower expected litigation fees and related costs.
Interest and dividend income – Interest and dividend income decreased $1.1 million in the third quarter and $3.1 million in the first nine months of 2020 compared to the prior year periods primarily due to lower average outstanding balances under CompX’s revolving promissory note receivable from Valhi and lower average interest rates on invested balances partially offset by higher cash and cash equivalents and restricted cash and cash equivalents available for investment.
Marketable equity securities – We recognized a gain of $3.2 million on the change in value of our marketable equity securities in the third quarter of 2020 compared to a loss of $15.3 million in the third quarter of 2019. We recognized a loss of $11.1 million on the change in value of our marketable equity securities in the first nine months of 2020 compared to a loss of $.4 million in the first nine months of 2019.
Income tax expense (benefit) – We recognized an income tax expense of $1.2 million in the third quarter of 2020 compared to an income tax benefit of $2.3 million in the third quarter of 2019 and an income tax benefit of $3.6 million in the first nine months of 2020 compared to an income tax expense of $.9 million in the first nine months of 2019. 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 $19.0 million in each of the first nine months of 2019 and 2020.
Our effective tax rate attributable to our equity in earnings of Kronos, including the effect of the nontaxable dividends we received from Kronos was an 11.5% benefit in the first nine months of 2020 and 4.2% expense in the first nine months of 2019. The decrease is primarily attributable to the net effects of Kronos’ lower earnings in the first nine months of 2020 as compared to the first nine months of 2019 and the impact of the income tax benefit related to the nontaxable dividends received from Kronos. See Note 12 to our Condensed Consolidated Financial Statements for more information about our 2020 income tax items, including a tabular reconciliation of our statutory tax expense (benefit) to our actual expense (benefit).
We record a valuation allowance to reduce our deferred income tax assets to the amount that is believed to be realized under the more-likely-than-not recognition criteria. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance, it is possible that we may change our estimate of the amount of the deferred income tax assets that would more-likely-than-not be realized in the future, resulting in an adjustment to the deferred income tax asset valuation allowance that would either increase or decrease, as applicable, reported net income in the period such change in estimate was made. At December 31, 2019, we had approximately $31.7 million of deferred tax assets primarily related to our litigation and environmental accruals. At this time, we consider it more likely than not that we will have sufficient taxable income in the future that will allow us to realize these deferred tax assets.
29
Noncontrolling interest – Noncontrolling interest in net income of CompX is lower in the third quarter and first nine months of 2020 compared to the prior year periods due to lower earnings of CompX. The noncontrolling interest we recognize in each period is directly related to the level of earnings at CompX for the period.
Equity in earnings of Kronos Worldwide, Inc.
|
|
Three months ended September 30, |
|
|
% |
|
Nine months ended September 30, |
|
|
% |
||||||||||||||||
|
|
2019 |
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|
2020 |
|
|
Change |
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2019 |
|
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2020 |
|
|
Change |
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|
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(In millions) |
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|
|
|
|
|
|
(In millions) |
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|
|
|
|
|
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|
Net sales |
$ |
437.4 |
|
|
$ |
416.9 |
|
|
|
(5 |
) |
% |
|
$ |
1,358.4 |
|
|
$ |
1,223.9 |
|
|
|
(10 |
) |
% |
|
Cost of sales |
|
349.7 |
|
|
|
336.3 |
|
|
|
(4 |
) |
|
|
|
1,051.9 |
|
|
|
959.4 |
|
|
|
(9 |
) |
|
|
Gross margin |
$ |
87.7 |
|
|
$ |
80.6 |
|
|
|
|
|
|
|
$ |
306.5 |
|
|
$ |
264.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
$ |
33.1 |
|
|
$ |
19.3 |
|
|
|
(42 |
) |
% |
|
$ |
128.6 |
|
|
$ |
95.8 |
|
|
|
(26 |
) |
% |
|
Interest and dividend income |
|
1.4 |
|
|
|
.1 |
|
|
|
|
|
|
|
|
5.2 |
|
|
|
1.5 |
|
|
|
|
|
|
|
Insurance settlement gain |
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
- |
|
|
|
1.5 |
|
|
|
|
|
|
|
Marketable equity securities unrealized gain (loss) |
|
(1.9 |
) |
|
|
.4 |
|
|
|
|
|
|
|
|
(.1 |
) |
|
|
(1.3 |
) |
|
|
|
|
|
|
Other components of net periodic pension and OPEB cost |
|
(3.8 |
) |
|
|
(5.0 |
) |
|
|
|
|
|
|
|
(11.4 |
) |
|
|
(14.4 |
) |
|
|
|
|
|
|
Interest expense |
|
(4.6 |
) |
|
|
(4.9 |
) |
|
|
|
|
|
|
|
(14.1 |
) |
|
|
(14.1 |
) |
|
|
|
|
|
|
Income before income taxes |
|
24.2 |
|
|
|
9.9 |
|
|
|
|
|
|
|
|
108.2 |
|
|
|
69.0 |
|
|
|
|
|
|
|
Income tax expense |
|
6.3 |
|
|
|
1.8 |
|
|
|
|
|
|
|
|
30.5 |
|
|
|
15.3 |
|
|
|
|
|
|
|
Net income |
$ |
17.9 |
|
|
$ |
8.1 |
|
|
|
|
|
|
|
$ |
77.7 |
|
|
$ |
53.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
80 |
|
% |
|
81 |
|
% |
|
|
|
|
|
|
77 |
|
% |
|
78 |
|
% |
|
|
|
|
|
Income from operations |
|
8 |
|
|
|
5 |
|
|
|
|
|
|
|
|
9 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of Kronos Worldwide, Inc. |
$ |
5.4 |
|
|
$ |
2.4 |
|
|
|
|
|
|
|
$ |
23.6 |
|
|
$ |
16.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TiO2 operating statistics: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales volumes* |
|
144 |
|
|
|
136 |
|
|
|
(6 |
) |
% |
|
|
445 |
|
|
|
396 |
|
|
|
(11 |
) |
% |
|
Production volumes* |
|
136 |
|
|
|
122 |
|
|
|
(11 |
) |
|
|
|
406 |
|
|
|
387 |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in TiO2 net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TiO2 sales volumes |
|
|
|
|
|
|
|
|
|
(6 |
) |
% |
|
|
|
|
|
|
|
|
|
|
(11 |
) |
% |
|
TiO2 product pricing |
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
TiO2 product mix/other |
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
Changes in currency exchange rates |
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
Total |
|
|
|
|
|
|
|
|
|
(5 |
) |
% |
|
|
|
|
|
|
|
|
|
|
(10 |
) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Thousands of metric tons |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kronos’ key performance indicators are its TiO2 average selling prices, its level of TiO2 sales and production volumes and the cost of its third-party feedstock. TiO2 selling prices generally follow industry trends and prices will increase or decrease generally as a result of competitive market pressures.
Current industry conditions
Kronos started 2020 with average TiO2 selling prices 1% lower than at the beginning of 2019. At the end of the third quarter of 2020, Kronos’ average TiO2 selling prices were 3% lower than the beginning of the year and comparable to its average TiO2 selling prices at the end of the second quarter of 2020. Kronos experienced lower sales volumes in all major markets in the first nine months of 2020 as compared to the same period of 2019 primarily due to demand contraction related to the COVID-19 pandemic, which primarily impacted the second and third quarters. See further discussion below under Outlook.
30
Kronos operated its production facilities at overall average capacity utilization rates of 92% for the year-to-date period ended September 30, 2020 compared to 97% for the comparable period of 2019. Early in the third quarter of 2020, Kronos decreased production levels to align with demand and its market expectations for the near term as a result of the COVID-19 pandemic, and late in the third quarter Kronos began increasing production levels as demand improved. The table below lists Kronos’ comparative quarterly production capacity utilization rates.
|
|
Production Capacity Utilization Rates |
|
|
|||
|
|
2019 |
|
|
2020 |
|
|
|
First quarter |
97% |
|
|
95% |
|
|
|
Second quarter |
97% |
|
|
96% |
|
|
|
Third quarter |
97% |
|
|
86% |
|
|
Primarily due to a moderate rise in the cost of third-party feedstock Kronos procured in 2019 and 2020, its cost of sales per metric ton of TiO2 sold in the first nine months of 2020 was higher as compared to the first nine months of 2019 (excluding the effect of changes in currency exchange rates).
Net sales – Kronos’ net sales in the third quarter of 2020 decreased 5%, or $20.5 million, compared to the third quarter of 2019 primarily due to a 6% decrease in sales volumes (which decreased net sales by approximately $26 million) and a 4% decrease in average TiO2 selling prices (which decreased net sales by approximately $17 million). TiO2 selling prices will increase or decrease generally as a result of competitive market pressures, changes in the relative level of supply and demand as well as changes in raw material and other manufacturing costs.
Kronos’ sales volumes decreased 6% in the third quarter of 2020 as compared to the third quarter of 2019 primarily due to lower demand in its European and export markets resulting from the COVID-19 pandemic. In addition to the impact of lower sales volumes and lower average selling prices, Kronos estimates that changes in currency exchange rates (primarily the euro) increased its net sales by approximately $7 million in the third quarter of 2020 as compared to the third quarter of 2019.
Kronos’ net sales in the first nine months of 2020 decreased 10%, or $134.5 million, compared to the first nine months of 2019 primarily due to an 11% decrease in sales volumes (which decreased net sales by approximately $149 million) and a 2% decrease in average TiO2 selling prices (which decreased net sales by approximately $27 million). TiO2 selling prices will increase or decrease generally as a result of competitive market pressures, changes in the relative level of supply and demand as well as changes in raw material and other manufacturing costs.
Kronos’ sales volumes decreased 11% in the first nine months of 2020 as compared to the first nine months of 2019 primarily due to lower sales volumes in all major markets, with a significant portion of the decrease occurring in the second and third quarters resulting from the COVID-19 pandemic. In addition to the impact of lower sales volumes and lower average selling prices, Kronos estimates that changes in currency exchange rates (primarily the euro) decreased its net sales by approximately $4 million in the first nine months of 2020 as compared to the first nine months of 2019.
Cost of sales and gross margin – Kronos’ cost of sales decreased $13.4 million, or 4%, in the third quarter of 2020 compared to the third quarter of 2019 due to a 6% decrease in sales volumes and lower production costs of approximately $8 million (primarily lower energy costs). Kronos’ cost of sales as a percentage of net sales increased to 81% in the third quarter of 2020 compared to 80% in the same period of 2019 primarily due to the unfavorable effects of lower average TiO2 selling prices partially offset by lower production costs.
Gross margin as a percentage of net sales decreased to 19% in the third quarter of 2020 compared to 20% in the third quarter of 2019. As discussed and quantified above, Kronos’ gross margin as a percentage of net sales decreased primarily due to the net effect of lower sales volumes, lower average TiO2 selling prices and lower production costs.
Kronos’ cost of sales decreased $92.5 million, or 9%, in the first nine months of 2020 compared to the first nine months of 2019 due to the net effect of an 11% decrease in sales volumes, higher raw materials and other production costs of approximately $21 million (including higher cost for third-party feedstock and other raw materials) and currency fluctuations (primarily the euro). Kronos’ cost of sales as a percentage of net sales increased to 78% in the first nine months of 2020 compared to 77% in the same period of 2019 primarily due to the
31
unfavorable effects of lower average TiO2 selling prices and higher raw materials and other production costs, as discussed above.
Gross margin as a percentage of net sales decreased to 22% in the first nine months of 2020 compared to 23% in the first nine months of 2019. As discussed and quantified above, Kronos’ gross margin as a percentage of net sales decreased primarily due to the unfavorable effects of lower sales volumes, lower average TiO2 selling prices and higher raw materials and other production costs.
Selling, general and administrative expense – Kronos’ selling, general and administrative expense in the third quarter of 2020 was comparable to the third quarter of 2019.
Kronos’ selling, general and administrative expense decreased $10.7 million, or 6%, in the first nine months of 2020 compared to the first nine months of 2019 primarily due to variable costs related to lower overall sales volumes.
Income from operations – Kronos’ income from operations decreased by $13.8 million, or 42%, in the third quarter of 2020 compared to the third quarter of 2019. Income from operations as a percentage of net sales decreased to 5% in the third quarter of 2020 from 8% in the same period of 2019. This decrease was driven by the lower gross margin discussed above. Kronos estimates that changes in currency exchange rates decreased income from operations by approximately $5 million in the third quarter of 2020 as compared to the same period in 2019, as discussed in the Effects of Currency Exchange Rates section below.
Kronos’ income from operations decreased by $32.8 million, or 26%, in the first nine months of 2020 compared to the first nine months of 2019. Income from operations as a percentage of net sales decreased to 8% in the first nine months of 2020 from 9% in the same period of 2019. This decrease was driven by the lower gross margin discussed above. Kronos estimates that changes in currency exchange rates increased income from operations by approximately $6 million in the first nine months of 2020 as compared to the same period in 2019, as discussed below.
Other non-operating income (expense) – Kronos recognized a gain of $.4 million on the change in value of its marketable equity securities in the third quarter of 2020 compared to a loss of $1.9 million in the third quarter of 2019. Other components of net periodic pension and OPEB cost in the third quarter of 2020 increased $1.2 million compared to the third quarter of 2019 primarily due to increased amortization costs from previously unrecognized actuarial losses as a result of lower discount rates and lower expected returns on plan assets. Kronos’ interest expense in the third quarter of 2020 was comparable to the third quarter of 2019 and Kronos currently expects its interest expense for all of 2020 to be comparable to 2019.
Kronos recognized a loss of $1.3 million on the change in value of its marketable equity securities in the first nine months of 2020 and a loss of $.1 million in the first nine months of 2019. Other components of net periodic pension and OPEB cost in the first nine months of 2020 increased $3.0 million compared to the first nine months of 2019 primarily due to increased amortization costs from previously unrecognized actuarial losses as a result of lower discount rates and lower expected returns on plan assets. In the first nine months of 2020, Kronos recognized an insurance settlement gain of $1.5 million related to a property damage claim. Interest expense in the first nine months of 2020 was comparable to the first nine months of 2019.
Income tax expense – Kronos recognized income tax expense of $1.8 million in the third quarter of 2020 compared to income tax expense of $6.3 million in the third quarter of 2019. Kronos recognized income tax expense of $15.3 million in the first nine months of 2020 compared to income tax expense of $30.5 million in the first nine months of 2019. The difference is primarily due to lower earnings in 2020. Kronos’ earnings are subject to income tax in various U.S. and non-U.S. jurisdictions, and the income tax rates applicable to the pre-tax earnings (losses) of its non-U.S. operations are generally higher than the income tax rates applicable to its U.S. operations. Kronos would generally expect its overall effective tax rate to be higher than the U.S. federal statutory tax rate of 21% primarily because of its sizeable non-U.S. operations.
Effects of Currency Exchange Rates
Kronos has substantial operations and assets located outside the United States (primarily in Germany, Belgium, Norway and Canada). The majority of Kronos’ sales from non-U.S. operations are denominated in currencies other than the U.S. dollar, principally the euro, other major European currencies and the Canadian dollar.
32
A portion of Kronos’ sales generated from its non-U.S. operations is denominated in the U.S. dollar (and consequently its non-U.S. operations will generally hold U.S. dollars from time to time). Certain raw materials used in all Kronos’ production facilities, primarily titanium-containing feedstocks, are purchased in U.S. dollars, while labor and other production and administrative costs are incurred primarily in local currencies. Consequently, the translated U.S. dollar value of Kronos’ non-U.S. sales and operating results are subject to currency exchange rate fluctuations which may favorably or unfavorably impact reported earnings and may affect the comparability of period-to-period operating results. In addition to the impact of the translation of sales and expenses over time, Kronos’ non-U.S. operations also generate currency transaction gains and losses which primarily relate to (i) the difference between the currency exchange rates in effect when non-local currency sales or operating costs (primarily U.S. dollar denominated) are initially accrued and when such amounts are settled with the non-local currency, (ii) changes in currency exchange rates during time periods when its non-U.S. operations are holding non-local currency (primarily U.S. dollars), and (iii) relative changes in the aggregate fair value of currency forward contracts held from time to time. Kronos periodically uses currency forward contracts to manage a portion of its currency exchange risk, and relative changes in the aggregate fair value of any currency forward contracts it holds from time to time serve in part to mitigate the currency transaction gains or losses Kronos would otherwise recognize from the first two items described above.
Overall, Kronos estimates that fluctuations in currency exchange rates had the following effects on the reported amounts of its sales and income from operations for the periods indicated.
|
Impact of changes in currency exchange rates Three months ended September 30, 2020 vs September 30, 2019 |
|
||||||||||||||||||
|
|
|||||||||||||||||||
|
|
Transaction gains (losses) recognized |
|
|
Translation gains – impact of rate changes |
|
|
Total currency impact 2020 vs 2019 |
|
|||||||||||
|
|
2019 |
|
|
2020 |
|
|
Change |
|
|
|
|
|
|||||||
|
|
(In millions) |
|
|||||||||||||||||
|
Impact on: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
7 |
|
|
$ |
7 |
|
|
Income from operations |
|
6 |
|
|
|
(3 |
) |
|
|
(9 |
) |
|
|
4 |
|
|
|
(5 |
) |
The $7 million increase in net sales (translation gain) was caused primarily by a weakening of the U.S. dollar relative to the euro, as Kronos’ euro-denominated sales were translated into more U.S. dollars in 2020 as compared to 2019. The strengthening of the U.S. dollar relative to the Canadian dollar and the Norwegian krone in 2020 did not have a significant effect on the reported amount of Kronos’ net sales, as a substantial portion of the sales generated by its Canadian and Norwegian operations are denominated in the U.S. dollar.
The $5 million decrease in income from operations was comprised of the following:
|
|
• |
A decrease by approximately $9 million from net currency transaction gains and losses primarily caused by relative changes in currency exchange rates at each applicable balance sheet date between the U.S. dollar and the euro, Canadian dollar and the Norwegian krone, which causes increases or decreases, as applicable, in U.S. dollar-denominated receivables and payables and U.S. dollar currency held by Kronos’ non-U.S. operations, and |
|
|
• |
Approximately $4 million from net currency translation gains primarily caused by the strengthening of the U.S. dollar relative to the Canadian dollar and Norwegian krone, as local currency-denominated operating costs were translated into fewer U.S. dollars in 2020 as compared to 2019, and such translation, as it related to the U.S. dollar relative to the euro, had a nominal effect on income from operations in 2020 as compared to 2019. |
33
|
Impact of changes in currency exchange rates Nine months ended September 30, 2020 vs September 30 2019 |
|
||||||||||||||||||
|
|
|||||||||||||||||||
|
|
|
|
|
Translation gains (losses)- impact of rate changes |
|
|
Total currency impact 2020 vs 2019 |
|
|||||||||||
|
|
Transaction gains recognized |
|
|
|
|
|
|||||||||||||
|
2019 |
|
|
2020 |
|
|
Change |
|||||||||||||
|
|
(In millions) |
|
|||||||||||||||||
|
Impact on: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(4 |
) |
|
$ |
(4 |
) |
|
Income from operations |
|
6 |
|
|
|
3 |
|
|
|
(3 |
) |
|
|
9 |
|
|
|
6 |
|
The $4 million decrease in net sales (translation loss) was caused primarily by a strengthening of the U.S. dollar relative to the euro, as Kronos’ euro-denominated sales were translated into fewer U.S. dollars in 2020 as compared to 2019. The strengthening of the U.S. dollar relative to the Canadian dollar and the Norwegian krone in 2020 did not have a significant effect on the reported amount of Kronos’ net sales, as a substantial portion of the sales generated by its Canadian and Norwegian operations are denominated in the U.S. dollar.
The $6 million increase in income from operations was comprised of the following:
|
|
• |
Lower net currency transaction gains of approximately $3 million primarily caused by relative changes in currency exchange rates at each applicable balance sheet date between the U.S. dollar and the euro, Canadian dollar and the Norwegian krone, and between the euro and the Norwegian krone, which causes increases or decreases, as applicable, in U.S. dollar-denominated receivables and payables and U.S. dollar currency held by Kronos’ non-U.S. operations, and in Norwegian krone denominated receivables and payables held by Kronos’ non-U.S. operations, and |
|
|
• |
Approximately $9 million from net currency translation gains primarily caused by the strengthening of the U.S. dollar relative to the Canadian dollar and Norwegian krone, as local currency-denominated operating costs were translated into fewer U.S. dollars in 2020 as compared to 2019, and such translation, as it related to the U.S. dollar relative to the euro, had a nominal effect on income from operations in 2020 as compared to 2019. |
Outlook
In the third quarter of 2020 Kronos’ sales volumes increased from the levels it experienced during the second quarter, although the COVID-19 pandemic, including the measures employed to mitigate its spread, continues to impact Kronos’ operations through reduced demand for its products, resulting in lower sales and earnings than otherwise would have been expected. Kronos’ manufacturing facilities operated at near planned production rates in the first half of 2020, however, early in the third quarter Kronos decreased production levels to align with demand and its market expectations for the near term, and late in the third quarter Kronos began increasing production levels as demand improved. To-date, the availability of raw materials has not been adversely impacted.
Kronos’ manufacturing and administrative facilities are generally located in densely populated regions of Europe and North America which have experienced substantial outbreaks of COVID-19 and are in varying stages of outbreak and recovery. Kronos continues to employ a variety of methods to protect the health and well-being of its workforce and its customers, including the implementation of contact tracing, deep cleaning and disinfecting of facilities, work-from-home strategies and staggered shift deployment, among other health and safety protocols. To-date, Kronos has had limited cases of COVID-19 among its workforce and all of its facilities have remained open and operational.
The advance of the COVID-19 pandemic and the global efforts to mitigate its spread have resulted in sharp contractions of vast areas of the global economy and are expected to continue to challenge workers, businesses and governments for the foreseeable future. Government actions in various regions have generally permitted the resumption of commercial activities following various regional shutdowns, but further government action restricting economic activity is possible in an effort to mitigate increases in COVID-19 in certain regions. As a result, Kronos expects U.S. and worldwide gross domestic product to be significantly impacted for an indeterminate period of time. While many of Kronos’ products are used by its customers in end-products that thus far have remained in demand
34
across the world economy, Kronos believes overall demand for its products and its customers’ products will continue to be negatively impacted by reduced economic activity.
Given the impact of COVID-19 on the global economy, Kronos expects its sales volumes and resulting earnings for the remainder of 2020 will continue to be lower compared to 2019. The full extent of the COVID-19 impact on Kronos’ operations will depend on numerous factors, including customer demand for its products, any future disruption in its operations or its suppliers’ operations and the timing and effectiveness of measures deployed to fight COVID-19, all of which are uncertain and cannot be predicted. Kronos will continue to monitor current and anticipated near-term customer demand throughout the year and further align its production and inventory levels accordingly.
Although it is not possible to predict the impact of the COVID-19 pandemic on future demand for Kronos’ products or those of its customers, Kronos believes it has sufficient liquidity (including cash on-hand of approximately $348 million and borrowing capacity under its revolving credit facilities of approximately $231 million at September 30, 2020) available to meet its obligations, and Kronos is prepared to implement multiple cash-saving strategies as necessary, including reduction of inventories, delays in certain capital expenditures and other cost saving initiatives. Kronos believes it is well positioned to navigate the uncertainty ahead and Kronos commends its employees for their continuing efforts and support in these challenging times as they work together to foster their physical and economic health as well as that of the company.
On August 24, 2020, the chloride-process TiO2 facility operated by Kronos’ 50%-owned joint venture, Louisiana Pigment Company (LPC), temporarily halted production due to Hurricane Laura. Although storm damage to core manufacturing facilities was not severe, a variety of factors, including loss of utilities, limited availability of employees to return to work and restrictions on the facility’s access to raw materials, prevented the resumption of operations until September 25, 2020. LPC believes insurance (subject to applicable deductibles) will cover a majority of its losses, including those related to property damage and the disruption of its operations. The Kronos warehouse and slurry facilities located near LPC’s facility were also temporarily closed due to the hurricane, but property damage to these facilities was not significant. Kronos’ third quarter income from operations includes immaterial costs related to Hurricane Laura, primarily costs to relocate inventory and modify shipping schedules in order to maintain service levels to its customers following the hurricane. Kronos believes insurance (subject to applicable deductibles) will cover a majority of its losses from the hurricane, including property damage, business interruption losses related to its share of LPC’s lost production and other costs resulting from the disruption of operations, but no insurance recoveries have yet been recognized as the allowable damage claim amounts are not presently determinable. On October 9, 2020 Hurricane Delta caused an additional temporary halt to production at the LPC facility. Damages resulting from Hurricane Delta were not as severe and production activities were resumed within five days from the time of initial shutdown prior to landfall of the hurricane. Similar to Hurricane Laura, losses determined to be incurred by LPC and Kronos as a result of Hurricane Delta are expected to be recoverable from insurance (subject to applicable deductibles).
Liquidity and Capital Resources
Consolidated cash flows
Operating activities
Trends in cash flows from operating activities, excluding the impact of deferred taxes and relative changes in assets and liabilities, are generally similar to trends in our income from operations.
Net cash provided by operating activities was $9.2 million in the first nine months of 2020 compared to $17.4 million in the first nine months of 2019. The decrease in cash provided by operating activities includes the net effects of:
|
|
• |
higher net cash used for relative changes in receivables, inventories, payables and accrued liabilities in 2020 of $15.1 million primarily due to the reclassification of $15.0 million from accrued insurance recovery receivable to noncurrent restricted cash in 2019; |
|
|
• |
annual installment payment of $12.0 million in 2020 compared to the initial cash payment of $25.0 million in 2019 related to the litigation settlement; |
|
|
• |
lower cash received for insurance recoveries of $5.1 million; |
|
|
• |
lower income from operations from CompX in 2020 of $4.7 million; |
35
|
|
• |
lower cash paid for environmental remediation and related costs in 2020 of $1.7 million related to settlement of an environmental site in 2019; and |
|
|
• |
a $.6 million decrease in interest received in 2020 due to lower average interest rates and a lower average affiliate receivable balance partially offset by the relative timing of interest received. |
We do not have complete access to CompX’s cash flows in part because we do not own 100% of CompX. A detail of our consolidated cash flows from operating activities is presented in the table below. Intercompany dividends have been eliminated. The reference to NL Parent in the table below is a reference to NL Industries, Inc., as the parent company of CompX and our wholly-owned subsidiaries.
|
|
Nine months ended September 30, |
|
|||||
|
|
2019 |
|
|
2020 |
|
||
|
|
(In millions) |
|
|||||
|
Net cash provided by operating activities: |
|
|
|
|
|
|
|
|
CompX |
$ |
12.5 |
|
|
$ |
9.2 |
|
|
NL Parent and wholly-owned subsidiaries |
|
7.2 |
|
|
|
3.2 |
|
|
Eliminations |
|
(2.3 |
) |
|
|
(3.2 |
) |
|
Total |
$ |
17.4 |
|
|
$ |
9.2 |
|
Relative changes in working capital can have a significant effect on cash flows from operating activities. As shown below, our average days sales outstanding increased from December 31, 2019 to September 30, 2020 primarily as a result of relative changes in the timing of collections. Our total average number of days in inventory increased from December 31, 2019 to September 30, 2020 as Security Products inventory, which was unusually high during the second quarter and had not yet fully returned to normalized levels at September 30. For comparative purposes, we have provided December 31, 2018 and September 30, 2019 numbers below.
|
|
December 31, |
|
September 30, |
|
December 31, |
|
September 30, |
|
|
2018 |
|
2019 |
|
2019 |
|
2020 |
|
Days sales outstanding |
40 days |
|
41 days |
|
36 days |
|
39 days |
|
Days in inventory |
80 days |
|
85 days |
|
81 days |
|
83 days |
Investing activities
Our capital expenditures were $1.3 million in the first nine months of 2020 compared to $2.5 million in the first nine months of 2019 and primarily related to CompX. CompX has limited expenditures to those required to meet its expected customer demand and those required to properly maintain its facilities and technology infrastructure as a result of the COVID-19 pandemic.
During the first nine months of 2020, Valhi borrowed a net $2.4 million under the promissory note ($25.2 million of gross borrowings and $22.8 million of gross repayments). During the first nine months of 2019, Valhi borrowed a net $2.7 million under the promissory note ($28.1 million of gross borrowings and $25.4 million of gross repayments).
Financing activities
During the first nine months of 2020, our board of directors approved and we paid quarterly dividends of $.04 per share to stockholders aggregating $5.9 million. The declaration and payment of future dividends, and the amount thereof, is discretionary and is dependent upon these and other factors deemed relevant by our board of directors. The amount and timing of past dividends is not necessarily indicative of the amount or timing of any future dividends which might be paid. There are currently no contractual restrictions on the amount of dividends which we may pay.
Cash flows from financing activities in the first nine months of each of 2019 and 2020 also include CompX dividends paid to its stockholders other than us.
Outstanding debt obligations
At September 30, 2020, NLKW had outstanding debt obligations of $.5 million under its secured revolving credit facility with Valhi, and CompX did not have any outstanding debt obligations. We are in compliance with all
36
of the covenants contained in our secured revolving credit facility with Valhi at September 30, 2020. See Note 8 to our Condensed Consolidated Financial Statements.
Kronos’ North American and European revolvers and its senior notes contain a number of covenants and restrictions which, among other things, restrict its ability to incur or guarantee additional debt, incur liens, pay dividends or make other restricted payments, or merge or consolidate with, or sell or transfer substantially all of its assets to, another entity, and contains other provisions and restrictive covenants customary in lending transactions of this type. Certain of Kronos’ credit agreements contain provisions which could result in the acceleration of indebtedness prior to their stated maturity for reasons other than defaults for failure to comply with typical financial or payment covenants. For example, certain credit agreements allow the lender to accelerate the maturity of the indebtedness upon a change of control (as defined in the agreement) of the borrower. In addition, certain credit agreements could result in the acceleration of all or a portion of the indebtedness following a sale of assets outside the ordinary course of business. Kronos’ European revolving credit facility also requires the maintenance of certain financial ratios, and one of such requirements is based on the ratio of net debt to the last twelve months EBITDA of the borrowers. Kronos is in compliance with all of its debt covenants at September 30, 2020. Kronos believes that it will be able to continue to comply with the financial covenants contained in its credit facilities through their maturity.
Future cash requirements
Liquidity
Our primary source of liquidity on an ongoing basis is our cash flow from operating activities and credit facilities with affiliates as further discussed below. We generally use these amounts to fund capital expenditures (substantially all of which relate to CompX), pay ongoing environmental remediation and litigation costs and provide for the payment of dividends (if declared).
At September 30, 2020, we had aggregate cash, cash equivalents and restricted cash of $157.0 million, substantially all of which was held in the U.S. A detail by entity is presented in the table below.
|
|
Amount |
|
|
|
|
(In millions) |
|
|
|
CompX |
$ |
65.1 |
|
|
NL Parent and wholly-owned subsidiaries |
|
91.9 |
|
|
Total |
$ |
157.0 |
|
In addition, at September 30, 2020 we owned approximately 1.2 million shares of Valhi common stock with an aggregate market value of $15.8 million. See Note 4 to our Condensed Consolidated Financial Statements. We also owned approximately 35.2 million shares of Kronos common stock at September 30, 2020 with an aggregate market value of $452.9 million. See Note 5 to our Condensed Consolidated Financial Statements.
We routinely compare our liquidity requirements and alternative uses of capital against the estimated future cash flows we expect to receive from our subsidiaries and affiliates. As a result of this process, we have in the past and may in the future seek to raise additional capital, incur debt, repurchase indebtedness in the market or otherwise, modify our dividend policies, consider the sale of our interests in our subsidiaries, affiliates, business, marketable securities or other assets, or take a combination of these and other steps, to increase liquidity, reduce indebtedness and fund future activities. Such activities have in the past and may in the future involve related companies.
We periodically evaluate acquisitions of interests in or combinations with companies (including related companies) perceived by management to be undervalued in the marketplace. These companies may or may not be engaged in businesses related to our current businesses. We intend to consider such acquisition activities in the future and, in connection with this activity, may consider issuing additional equity securities and increasing indebtedness. From time to time, we also evaluate the restructuring of ownership interests among our respective subsidiaries and related companies.
Based upon our expectations of our operating performance, and the anticipated demands on our cash resources we expect to have sufficient liquidity to meet our short-term obligations (defined as the twelve-month period ending September 30, 2021) including any amounts CompX might loan from time to time under the terms of its revolving loan to Valhi (which loans would be solely at CompX’s discretion). If actual developments differ materially from
37
our expectations, our liquidity could be adversely affected. In this regard, Valhi has agreed to loan us up to $50 million on a revolving basis. At September 30, 2020, we had $.5 million in outstanding borrowings under this facility, and we had $49.5 million available for future borrowing. See Note 8 to our Condensed Consolidated Financial Statements.
Capital expenditures
Firm purchase commitments for capital projects in process at September 30, 2020 totaled $.2 million. CompX’s 2020 capital investments are limited to those expenditures required to meet its expected customer demand and those required to properly maintain its facilities and technology infrastructure. It is possible CompX will curtail or eliminate planned capital projects based on market conditions.
Dividends
Because our operations are conducted primarily through subsidiaries and affiliates, our long-term ability to meet parent company-level corporate obligations is largely dependent on the receipt of dividends or other distributions from our subsidiaries and affiliates. In May 2020, Valhi implemented a reverse split of its common stock at a ratio of 1-for-12 and declared a regular quarterly dividend of $.08 per share post reverse stock split. We have adjusted all share and per share disclosures related to our investment in Valhi stock for all periods prior to June 2020 to give effect to the reverse stock split. A detail of annual dividends we expect to receive from our subsidiaries and affiliates in 2020, based on the number of shares of common stock of these affiliates we own as of September 30, 2020 and their current regular quarterly dividend rate, is presented in the table below. Following Valhi’s May 2020 1-for-12 reverse stock split, Valhi decreased its regular quarterly dividend from $.24 per share to $.08 per share. The amount shown in the table below for Valhi reflects aggregate dividends we expect to receive from Valhi during 2020 (including actual receipts in the first, second and third quarters).
|
|
Shares held |
|
Quarterly |
|
Annual expected |
||||||
|
|
(In millions) |
|
|
|
|
(In millions) |
|||||
|
Kronos |
|
35.2 |
|
|
$ |
.18 |
|
|
$ |
25.4 |
|
|
CompX |
|
10.8 |
|
|
|
.10 |
|
|
|
4.3 |
|
|
Valhi |
|
1.2 |
|
|
|
.08 |
|
|
|
.6 |
|
|
Total expected annual dividends |
|
|
|
|
|
|
|
|
$ |
30.3 |
|
Investments in our subsidiaries and affiliates and other acquisitions
We have in the past and may in the future, purchase the securities of our subsidiaries and affiliates or third-parties in market or privately-negotiated transactions. We base our purchase decisions on a variety of factors, including an analysis of the optimal use of our capital, taking into account the market value of the securities and the relative value of expected returns on alternative investments. In connection with these activities, we may consider issuing additional equity securities or increasing our indebtedness. We may also evaluate the restructuring of ownership interests of our businesses among our subsidiaries and related companies.
Off-balance sheet financing arrangements
We are not party to any material off-balance sheet financing arrangements.
Commitments and contingencies
There have been no material changes in our contractual obligations since we filed our 2019 Annual Report and we refer you to that report for a complete description of these commitments.
We are subject to certain commitments and contingencies, as more fully described in our 2019 Annual Report, or in Note 14 to our Condensed Consolidated Financial Statements or in Part II, Item 1 of this report, including certain legal proceedings. In addition to such legal proceedings, various legislation and administrative regulations have, from time to time, been proposed that seek to (i) impose various obligations on present and former manufacturers of lead pigment and lead-based paint (including us) with respect to asserted health concerns associated with the use of such products and (ii) effectively overturn court decisions in which we and other pigment manufacturers have been successful. Examples of such proposed legislation include bills which would permit civil liability for damages on the basis of market share, rather than requiring plaintiffs to prove that the defendant’s product caused the alleged damage and bills which would revive actions barred by the statute of limitations. While
38
no legislation or regulations have been enacted to date that are expected to have a material adverse effect on our consolidated financial position, results of operations or liquidity, enactment of such legislation could have such an effect.
Recent accounting pronouncements
See Note 16 to our Condensed Consolidated Financial Statements.
Critical accounting policies and estimates
For a discussion of our critical accounting policies, refer to Part I, — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2019 Annual Report. There have been no changes in our critical accounting policies during the first nine months of 2020.
|
ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
We are exposed to market risk, including currency exchange rates, interest rates and security prices. There have been no material changes in these market risks since we filed our 2019 Annual Report, and we refer you to Part I, Item 7A. –“Quantitative and Qualitative Disclosure about Market Risk” in our 2019 Annual Report. See also Note 15 to our Condensed Consolidated Financial Statements.
|
ITEM 4. |
CONTROLS AND PROCEDURES |
Evaluation of disclosure controls and procedures – We maintain disclosure controls and procedures which, as defined in Exchange Act Rule 13a-15(e), means controls and other procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit to the SEC under the Securities Exchange Act of 1934, as amended (the Act), is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports we file or submit to the SEC under the Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions to be made regarding required disclosure. Each of Robert D. Graham, our Vice Chairman of the Board and Chief Executive Officer and Amy Allbach Samford, our Vice President and Chief Financial Officer, have evaluated the design and effectiveness of our disclosure controls and procedures as of September 30, 2020. Based upon their evaluation, these executive officers have concluded that our disclosure controls and procedures are effective as of the date of this evaluation.
Internal control over financial reporting – Our management is responsible for establishing and maintaining adequate internal control over financial reporting which, as defined by Exchange Act Rule 13a-15(f) means a process designed by, or under the supervision of, our principal executive and principal financial officers, or persons performing similar functions, and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
|
|
• |
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect transactions and dispositions of our assets, |
|
|
• |
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are made only in accordance with authorizations of our management and directors, and |
|
|
• |
Provide reasonable assurance regarding prevention or timely detection of an unauthorized acquisition, use or disposition of assets that could have a material effect on our Condensed Consolidated Financial Statements. |
Other – As permitted by the SEC, our assessment of internal control over financial reporting excludes (i) internal control over financial reporting of equity method investees and (ii) internal control over the preparation of any financial statement schedules which would be required by Article 12 of Regulation S-X. However, our assessment of internal control over financial reporting with respect to equity method investees did include controls over the recording of amounts related to our investment that are recorded in the consolidated financial statements,
39
including controls over the selection of accounting methods for our investments, the recognition of equity method earnings and losses and the determination, valuation and recording of our investment account balances.
Changes in internal control over financial reporting – There have been no changes to our internal control over financial reporting during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
40
PART II. OTHER INFORMATION
|
Item 1. |
Legal Proceedings |
In addition to the matter discussed below, refer to Note 14 to our Condensed Consolidated Financial Statements, our 2019 Annual Report and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020.
Raritan Bay Slag Site (formerly called Margaret’s Creek Site) (Old Bridge Township, New Jersey). In October 2020, NL and the State voluntarily dismissed the State court lawsuit pursuant to a tolling agreement that allows the lawsuit to potentially be refiled in the future. NL’s federal court lawsuit seeking contribution from other parties remains pending.
|
Item 1A. |
Risk Factors |
Reference is made to the 2019 Annual Report and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 for a discussion of risk factors related to our businesses.
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Item 6. |
Exhibits |
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31.1 |
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31.2 |
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32.1 |
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101.INS |
Inline XBRL Instance – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
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101.SCH |
Inline XBRL Taxonomy Extension Schema |
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101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase |
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101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase |
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101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase |
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101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase |
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104 |
Cover page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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NL INDUSTRIES, INC. |
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(Registrant) |
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Date: November 4, 2020 |
/s/ Amy Allbach Samford |
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Amy Allbach Samford |
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(Vice President and Chief Financial Officer, Principal Financial Officer) |
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Date: November 4, 2020 |
/s/ Patty S. Brinda |
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Patty S. Brinda |
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(Vice President and Controller, Principal Accounting Officer) |
42
