UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended June 30, 20162017

Commission file number 1-640

 

NL INDUSTRIES, INC.

(Exact name of Registrant as specified in its charter)

 

 

New Jersey

 

13-5267260

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer Identification No.)

5430 LBJ Freeway, Suite 1700

Dallas, Texas 75240-2697

(Address of principal executive offices)

Registrant’s telephone number, including area code: (972) 233-1700

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨    Smaller reporting company  ¨    Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act).    

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

Number of shares of the Registrant’s common stock outstanding on July 29, 2016:  48,705,884.31, 2017:  48,714,884.

 

 

 

 


NL INDUSTRIES, INC. AND SUBSIDIARIES

INDEX

 

 

 

Page

number

Part I.

FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

 

 

 

Condensed Consolidated Balance Sheets - December 31, 2015;2016;  June 30, 20162017 (unaudited)

3

 

 

Condensed Consolidated Statements of Operations  (unaudited) – Three and six months ended June 30, 20152016 and 20162017

5

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) – Three and six months ended June 30, 20152016 and 20162017

6

 

 

Condensed Consolidated Statement of  Equity (unaudited) – Six months ended June 30, 20162017

7

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) -  Six months ended June 30, 20152016 and 20162017

8

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

9

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

2224

 

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

4041

 

Item 4.

Controls and Procedures

4041

 

 

 

 

 

 

Part II.

OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

4243

 

Item 1A.

Risk Factors

4243

 

Item 6.

Exhibits

4243

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)

 

 

December 31,

 

 

June 30,

 

 

2016

 

 

2017

 

 

 

 

 

 

(unaudited)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

93,162

 

 

$

90,063

 

Restricted cash and cash equivalents

 

3,791

 

 

 

3,223

 

Accounts and other receivables, net

 

10,586

 

 

 

12,373

 

Inventories, net

 

14,974

 

 

 

15,317

 

Prepaid expenses and other

 

986

 

 

 

904

 

 

 

 

 

 

 

 

 

Total current assets

 

123,499

 

 

 

121,880

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

Notes receivable from affiliate

 

27,400

 

 

 

39,500

 

Marketable securities

 

49,731

 

 

 

42,831

 

Investment in Kronos Worldwide, Inc.

 

120,346

 

 

 

188,969

 

Goodwill

 

27,156

 

 

 

27,156

 

Other assets, net

 

3,276

 

 

 

3,472

 

 

 

 

 

 

 

 

 

Total other assets

 

227,909

 

 

 

301,928

 

 

 

 

 

 

 

 

 

Property and equipment:

 

 

 

 

 

 

 

Land

 

5,146

 

 

 

5,146

 

Buildings

 

22,811

 

 

 

22,827

 

Equipment

 

66,112

 

 

 

66,244

 

Construction in progress

 

1,098

 

 

 

1,538

 

 

 

 

 

 

 

 

 

 

 

95,167

 

 

 

95,755

 

Less accumulated depreciation

 

61,583

 

 

 

62,466

 

 

 

 

 

 

 

 

 

Net property and equipment

 

33,584

 

 

 

33,289

 

 

 

 

 

 

 

 

 

Total assets

$

384,992

 

 

$

457,097

 

 

 

December 31,

 

 

June 30,

 

 

2015

 

 

2016

 

 

 

 

 

 

(unaudited)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

96,462

 

 

$

102,056

 

Restricted cash and cash equivalents

 

3,246

 

 

 

3,399

 

Accounts and other receivables, net

 

8,977

 

 

 

12,682

 

Inventories, net

 

15,098

 

 

 

14,124

 

Prepaid expenses and other

 

981

 

 

 

1,586

 

 

 

 

 

 

 

 

 

Total current assets

 

124,764

 

 

 

133,847

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

Marketable securities

 

19,260

 

 

 

22,566

 

Investment in Kronos Worldwide, Inc.

 

140,695

 

 

 

133,000

 

Goodwill

 

27,156

 

 

 

27,156

 

Other assets, net

 

3,331

 

 

 

3,578

 

Deferred income taxes

 

11

 

 

 

11

 

 

 

 

 

 

 

 

 

Total other assets

 

190,453

 

 

 

186,311

 

 

 

 

 

 

 

 

 

Property and equipment:

 

 

 

 

 

 

 

Land

 

5,138

 

 

 

5,138

 

Buildings

 

21,502

 

 

 

22,788

 

Equipment

 

64,051

 

 

 

65,445

 

Construction in progress

 

1,567

 

 

 

455

 

 

 

 

 

 

 

 

 

 

 

92,258

 

 

 

93,826

 

Less accumulated depreciation

 

58,152

 

 

 

60,003

 

 

 

 

 

 

 

 

 

Net property and equipment

 

34,106

 

 

 

33,823

 

 

 

 

 

 

 

 

 

Total assets

$

349,323

 

 

$

353,981

 


3


NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In thousands)

 

December 31,

 

 

June 30,

 

December 31,

 

 

June 30,

 

2015

 

 

2016

 

2016

 

 

2017

 

 

 

 

 

(unaudited)

 

 

 

 

 

(unaudited)

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

$

4,557

 

 

$

4,378

 

$

5,026

 

 

$

4,638

 

Accrued and other current liabilities

 

10,783

 

 

 

8,469

 

 

10,624

 

 

 

8,390

 

Accrued environmental remediation and related costs

 

8,668

 

 

 

11,385

 

 

13,350

 

 

 

13,101

 

Payable to affiliates

 

1,717

 

 

 

717

 

Income taxes

 

26

 

 

 

28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

24,008

 

 

 

24,232

 

 

30,743

 

 

 

26,874

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncurrent liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt from affiliate

 

500

 

 

 

500

 

Accrued pension costs

 

14,155

 

 

 

13,875

 

 

12,874

 

 

 

12,563

 

Accrued postretirement benefits (OPEB) costs

 

2,773

 

 

 

2,617

 

 

2,310

 

 

 

2,153

 

Accrued environmental remediation and related costs

 

104,465

 

 

 

103,728

 

 

103,308

 

 

 

106,058

 

Deferred income taxes

 

25,035

 

 

 

27,031

 

 

27,445

 

 

 

49,464

 

Other

 

13,636

 

 

 

13,596

 

 

13,542

 

 

 

13,515

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total noncurrent liabilities

 

160,064

 

 

 

160,847

 

 

159,979

 

 

 

184,253

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NL stockholders' equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

6,086

 

 

 

6,088

 

 

6,088

 

 

 

6,089

 

Additional paid-in capital

 

300,543

 

 

 

300,674

 

 

300,674

 

 

 

300,869

 

Retained earnings

 

88,679

 

 

 

87,055

 

 

104,004

 

 

 

153,521

 

Accumulated other comprehensive loss

 

(245,358

)

 

 

(240,670

)

 

(232,846

)

 

 

(231,549

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total NL stockholders' equity

 

149,950

 

 

 

153,147

 

 

177,920

 

 

 

228,930

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling interest in subsidiary

 

15,301

 

 

 

15,755

 

 

16,350

 

 

 

17,040

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity

 

165,251

 

 

 

168,902

 

 

194,270

 

 

 

245,970

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and equity

$

349,323

 

 

$

353,981

 

$

384,992

 

 

$

457,097

 

Commitments and contingencies (Notes 11 and(Note 13)

 

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)

 

Three months ended

 

 

Six months ended

 

June 30,

 

 

June 30,

 

Three months ended

 

 

Six months ended

 

 

2015

 

 

2016

 

 

2015

 

 

2016

 

June 30,

 

 

June 30,

 

 

(unaudited)

 

2016

 

 

2017

 

 

2016

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

 

Net sales

$

28,918

 

 

$

27,107

 

 

$

56,808

 

 

$

54,182

 

$

27,107

 

 

$

30,002

 

 

$

54,182

 

 

$

59,950

 

 

Cost of sales

 

19,758

 

 

 

18,621

 

 

 

39,082

 

 

 

37,491

 

 

18,621

 

 

 

20,494

 

 

 

37,491

 

 

 

40,757

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

9,160

 

 

 

8,486

 

 

 

17,726

 

 

 

16,691

 

 

8,486

 

 

 

9,508

 

 

 

16,691

 

 

 

19,193

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

4,854

 

 

 

4,769

 

 

 

9,719

 

 

 

9,621

 

 

4,769

 

 

 

4,907

 

 

 

9,621

 

 

 

10,066

 

 

Other operating income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insurance recoveries

 

233

 

 

 

233

 

 

 

3,367

 

 

 

323

 

 

233

 

 

 

66

 

 

 

323

 

 

 

116

 

 

Other income

 

17

 

 

 

5

 

 

 

17

 

 

 

5

 

Corporate expense

 

(5,656

)

 

 

(3,334

)

 

 

(9,487

)

 

 

(8,983

)

 

(3,329

)

 

 

(3,410

)

 

 

(8,978

)

 

 

(8,909

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

(1,100

)

 

 

621

 

 

 

1,904

 

 

 

(1,585

)

 

621

 

 

 

1,257

 

 

 

(1,585

)

 

 

334

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings (losses) of Kronos Worldwide, Inc.

 

(48,589

)

 

 

497

 

 

 

(42,984

)

 

 

(653

)

 

497

 

 

 

59,745

 

 

 

(653

)

 

 

70,920

 

 

Other income - interest and dividend income

282

 

 

 

377

 

 

584

 

 

 

730

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

377

 

 

 

881

 

 

 

730

 

 

 

1,577

 

 

Interest expense

 

-

 

 

 

(7

)

 

 

-

 

 

 

(14

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

(49,407

)

 

 

1,495

 

 

 

(40,496

)

 

 

(1,508

)

 

1,495

 

 

 

61,876

 

 

 

(1,508

)

 

 

72,817

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax provision (benefit)

 

(20,507

)

 

 

330

 

 

 

(21,953

)

 

 

(492

)

Income tax expense (benefit)

 

330

 

 

 

20,278

 

 

 

(492

)

 

 

22,457

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

(28,900

)

 

 

1,165

 

 

 

(18,543

)

 

 

(1,016

)

 

1,165

 

 

 

41,598

 

 

 

(1,016

)

 

 

50,360

 

 

Noncontrolling interest in net income of subsidiary

 

367

 

 

 

320

 

 

 

682

 

 

 

608

 

 

320

 

 

 

431

 

 

 

608

 

 

 

843

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to NL stockholders

$

(29,267

)

 

$

845

 

 

$

(19,225

)

 

$

(1,624

)

$

845

 

 

$

41,167

 

 

$

(1,624

)

 

$

49,517

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts attributable to NL stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net income (loss) per share

$

(.60

)

 

$

.02

 

 

$

(.39

)

 

$

(.03

)

$

.02

 

 

$

.85

 

 

$

(.03

)

 

$

1.02

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used in the calculation

of net income (loss) per share

 

48,687

 

 

 

48,699

 

 

 

48,685

 

 

 

48,695

 

 

48,699

 

 

 

48,710

 

 

 

48,695

 

 

 

48,708

 

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

 

5



NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

 

Three months ended

 

 

Six months ended

 

June 30,

 

 

June 30,

 

Three months ended

 

 

Six months ended

 

2015

 

 

2016

 

 

2015

 

 

2016

 

June 30,

 

 

June 30,

 

(unaudited)

 

2016

 

 

2017

 

 

2016

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

Net income (loss)

$

(28,900

)

 

$

1,165

 

 

$

(18,543

)

 

$

(1,016

)

$

1,165

 

 

$

41,598

 

 

$

(1,016

)

 

$

50,360

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities

 

(5,358

)

 

 

3,730

 

 

 

(7,144

)

 

 

2,199

 

 

3,730

 

 

 

(2,869

)

 

 

2,199

 

 

 

(4,591

)

Currency translation

 

1,188

 

 

 

(980

)

 

 

(11,771

)

 

 

1,851

 

 

(980

)

 

 

2,925

 

 

 

1,851

 

 

 

4,696

 

Interest rate swap

 

-

 

 

 

(157

)

 

 

-

 

 

 

(728

)

 

(157

)

 

 

(84

)

 

 

(728

)

 

 

28

 

Defined benefit pension plans

 

1,087

 

 

 

823

 

 

 

1,821

 

 

 

1,630

 

 

823

 

 

 

393

 

 

 

1,630

 

 

 

1,260

 

Other postretirement benefit plans

 

(137

)

 

 

(132

)

 

 

(273

)

 

 

(264

)

 

(132

)

 

 

(48

)

 

 

(264

)

 

 

(96

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss), net

 

(3,220

)

 

 

3,284

 

 

 

(17,367

)

 

 

4,688

 

Total other comprehensive income, net

 

3,284

 

 

 

317

 

 

 

4,688

 

 

 

1,297

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

(32,120

)

 

 

4,449

 

 

 

(35,910

)

 

 

3,672

 

Comprehensive income

 

4,449

 

 

 

41,915

 

 

 

3,672

 

 

 

51,657

 

Comprehensive income attributable to

noncontrolling interest

 

367

 

 

 

320

 

 

 

682

 

 

 

608

 

 

320

 

 

 

431

 

 

 

608

 

 

 

843

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss) attributable to

NL stockholders

$

(32,487

)

 

$

4,129

 

 

$

(36,592

)

 

$

3,064

 

Comprehensive income attributable to NL stockholders

$

4,129

 

 

$

41,484

 

 

$

3,064

 

 

$

50,814

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

 

6



NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

Six months ended June 30, 20162017

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

other

 

 

Noncontrolling

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

other

 

 

Noncontrolling

 

 

 

 

 

Common

 

 

paid-in

 

 

Retained

 

 

comprehensive

 

 

interest in

 

 

Total

 

Common

 

 

paid-in

 

 

Retained

 

 

comprehensive

 

 

interest in

 

 

Total

 

stock

 

 

capital

 

 

earnings

 

 

income (loss)

 

 

subsidiary

 

 

equity

 

stock

 

 

capital

 

 

earnings

 

 

income (loss)

 

 

subsidiary

 

 

equity

 

(unaudited)

 

(unaudited)

 

Balance at December 31, 2016

$

6,088

 

 

$

300,674

 

 

$

104,004

 

 

$

(232,846

)

 

$

16,350

 

 

$

194,270

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2015

$

6,086

 

 

$

300,543

 

 

$

88,679

 

 

$

(245,358

)

 

$

15,301

 

 

$

165,251

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

-

 

 

 

-

 

 

 

(1,624

)

 

 

-

 

 

 

608

 

 

 

(1,016

)

Net income

 

 

 

 

 

 

 

49,517

 

 

 

 

 

 

843

 

 

 

50,360

 

Other comprehensive income, net of tax

 

-

 

 

 

-

 

 

 

-

 

 

 

4,688

 

 

 

-

 

 

 

4,688

 

 

 

 

 

 

 

 

 

 

 

1,297

 

 

 

 

 

 

1,297

 

Issuance of NL common stock

 

2

 

 

 

35

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

37

 

 

1

 

 

 

82

 

 

 

 

 

 

 

 

 

 

 

 

83

 

Dividends

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(166

)

 

 

(166

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(166

)

 

 

(166

)

Other, net

 

-

 

 

 

96

 

 

 

-

 

 

 

-

 

 

 

12

 

 

 

108

 

 

 

 

 

113

 

 

 

 

 

 

 

 

 

13

 

 

 

126

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2016

$

6,088

 

 

$

300,674

 

 

$

87,055

 

 

$

(240,670

)

 

$

15,755

 

 

$

168,902

 

Balance at June 30, 2017

$

6,089

 

 

$

300,869

 

 

$

153,521

 

 

$

(231,549

)

 

$

17,040

 

 

$

245,970

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

 

7



NL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

Six months ended

 

Six months ended

 

June 30,

 

June 30,

 

2015

 

 

2016

 

2016

 

 

2017

 

(unaudited)

 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

(18,543

)

 

$

(1,016

)

$

(1,016

)

 

$

50,360

 

Depreciation and amortization

 

1,802

 

 

 

1,889

 

 

1,889

 

 

 

1,861

 

Deferred income taxes

 

(17,372

)

 

 

(534

)

 

(534

)

 

 

21,309

 

Equity in losses of Kronos Worldwide, Inc.

 

42,984

 

 

 

653

 

Equity in earnings (losses) of Kronos Worldwide, Inc.

 

653

 

 

 

(70,920

)

Dividends received from Kronos Worldwide, Inc.

 

10,566

 

 

 

10,566

 

 

10,566

 

 

 

10,566

 

Cash funding of benefit plans in excess of net benefit plan expense

 

(757

)

 

 

(146

)

 

(146

)

 

 

(23

)

Other, net

 

280

 

 

 

328

 

 

328

 

 

 

280

 

Change in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts and other receivables, net

 

(4,220

)

 

 

(3,710

)

 

(3,710

)

 

 

(1,814

)

Inventories, net

 

632

 

 

 

851

 

 

851

 

 

 

(417

)

Prepaid expenses and other

 

(41

)

 

 

(605

)

 

(605

)

 

 

81

 

Accounts payable and accrued liabilities

 

1,618

 

 

 

(2,599

)

 

(2,491

)

 

 

(2,581

)

Income taxes

 

(5

)

 

 

(4

)

 

(4

)

 

 

(1

)

Accounts with affiliates

 

(1,516

)

 

 

8

 

 

8

 

 

 

(985

)

Accrued environmental remediation and related costs

 

1,993

 

 

 

1,980

 

 

1,980

 

 

 

2,500

 

Other noncurrent assets and liabilities, net

 

(4,672

)

 

 

(166

)

 

(166

)

 

 

(33

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

12,749

 

 

 

7,495

 

 

7,603

 

 

 

10,183

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

(1,994

)

 

 

(1,684

)

 

(1,684

)

 

 

(1,611

)

Change in restricted cash equivalents, net

 

-

 

 

 

(51

)

Proceeds from the sale of marketable securities

 

255

 

 

 

-

 

Purchase of marketable securities

 

(251

)

 

 

-

 

Promissory notes receivable from affiliate:

 

 

 

 

 

 

 

Loans

 

-

 

 

 

(39,300

)

Collections

 

-

 

 

 

27,200

 

Other, net

 

-

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

(1,990

)

 

 

(1,735

)

 

(1,684

)

 

 

(13,709

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions to noncontrolling interests in subsidiary

 

(164

)

 

 

(166

)

 

(166

)

 

 

(166

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents - net change from:

 

 

 

 

 

 

 

Cash and cash equivalents and restricted cash and cash equivalents - net

change from:

 

 

 

 

 

 

 

Operating, investing and financing activities

 

10,595

 

 

 

5,594

 

 

5,753

 

 

 

(3,692

)

Cash and cash equivalents at beginning of period

 

72,560

 

 

 

96,462

 

Balance at beginning of period

 

100,981

 

 

 

98,242

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

$

83,155

 

 

$

102,056

 

Balance at end of period

$

106,734

 

 

$

94,550

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure - cash paid for:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

$

-

 

 

$

14

 

Income taxes, net

$

1,585

 

 

$

55

 

$

55

 

 

 

2,157

 

 

See accompanying notes to Condensed Consolidated Financial Statements.



8


NL INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 20162017

(unaudited)

 

Note 1 Organization and basis of presentation:

Organization At June 30, 2016,2017, Valhi, Inc. (NYSE: VHI) held approximately 83% of our outstanding common stock and a wholly-owned subsidiary of Contran Corporation held approximately 93% of Valhi’s outstanding common stock. All of Contran’s outstanding voting stock is held by a family trust established for the benefit of Lisa K. Simmons and Serena Simmons Connelly and their children for which Ms. Simmons and Ms. Connelly are co-trustees, or is held directly by Ms. Simmons and Ms. Connelly or entities related to them.  Consequently, Ms. Simmons and Ms. Connelly may be deemed to control Contran, Valhi and us.

Basis of presentation Consolidated in this Quarterly Report are the results of our majority-owned subsidiary, CompX International Inc.  We also own 30% of Kronos Worldwide, Inc. (Kronos).  CompX (NYSE MKT: CIX) and Kronos (NYSE: KRO); each file periodic reports with the Securities and Exchange Commission (SEC).

The unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report have been prepared on the same basis as the audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 20152016 that we filed with the SEC on March 10, 20162017 (the 20152016 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, 20152016 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, 2015)2016) normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).  Our results of operations for the interim periods ended June 30, 20162017 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 20152016 Consolidated Financial Statements contained in our 20152016 Annual Report.

Unless otherwise indicated, references in this report to “NL,” “we,” “us” or “our” refer to NL Industries, Inc. and its subsidiaries and affiliate, Kronos, taken as a whole.

Note 2 Accounts and other receivables, net:

 

December 31,

 

 

June 30,

 

December 31,

 

 

June 30,

 

2015

 

 

2016

 

2016

 

 

2017

 

(In thousands)

 

(In thousands)

 

Trade receivables - CompX

$

8,847

 

 

$

12,457

 

$

10,417

 

 

$

12,225

 

Accrued insurance recoveries

 

138

 

 

 

226

 

 

104

 

 

 

86

 

Other receivables

 

79

 

 

 

70

 

 

135

 

 

 

132

 

Allowance for doubtful accounts

 

(87

)

 

 

(71

)

 

(70

)

 

 

(70

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

8,977

 

 

$

12,682

 

$

10,586

 

 

$

12,373

 

 

Accrued insurance recoveries are discussed in Note 13.

9



Note 3 Inventories, net:

 

December 31,

 

 

June 30,

 

December 31,

 

 

June 30,

 

2015

 

 

2016

 

2016

 

 

2017

 

(In thousands)

 

(In thousands)

 

Raw materials

$

2,807

 

 

$

2,813

 

$

2,743

 

 

$

2,891

 

Work in process

 

9,346

 

 

 

8,832

 

 

8,988

 

 

 

9,786

 

Finished products

 

2,945

 

 

 

2,479

 

 

3,243

 

 

 

2,640

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

15,098

 

 

$

14,124

 

$

14,974

 

 

$

15,317

 

 

Note 4 Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

measurement

level

 

Market

value

 

 

Cost basis

 

 

Unrealized

gain (loss)

 

Fair value measurement level

 

Market value

 

 

Cost basis

 

 

Unrealized loss

 

 

 

(In thousands)

 

 

 

(In thousands)

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Valhi common stock

1

 

$

19,260

 

 

$

24,347

 

 

$

(5,087

)

1

 

$

49,731

 

 

$

24,347

 

 

$

25,384

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Valhi common stock

1

 

$

22,566

 

 

$

24,347

 

 

$

(1,781

)

1

 

$

42,831

 

 

$

24,347

 

 

$

18,484

 

 

At December 31, 20152016 and June 30, 2016,2017, we held approximately 14.4 million shares of common stock of our immediate parent company, Valhi.  See Note 1.  We account for our investment in Valhi common stock as available-for-sale marketable equity securities and any unrealized gains or losses on the securities are recognized through other comprehensive income, net of deferred income taxes.  Our shares of Valhi common stock are carried at fair value based on quoted market prices, representing a Level 1 input within the fair value hierarchy.  At December 31, 20152016 and June 30, 2016,2017, the quoted per share market price of Valhi common stock was $1.34$3.46 and $1.57,$2.98, respectively.

With respect to our investment in Valhi stock, our cost basis had exceeded its market value at December 2015, but we considered such decline in market price to be temporary, as the aggregate market value of our investment in Valhi common stock exceeded our cost basis as of April 19, 2016.  At June 30, 2016, our cost basis had exceeded its market value continuously since June 24, 2016, but we also consider such decline in market price to be temporary, as the aggregate market value of our investment in Valhi stock exceeded our cost basis as of July 13, 2016.

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, 20152016 and June 30, 2016,2017, we owned approximately 35.2 million shares of Kronos common stock.  At June 30, 2016,2017, the quoted market price of Kronos’ common stock was $5.25$18.22 per share, or an aggregate market value of $184.9$641.7 million.  At December 31, 2015,2016, the quoted market price was $5.64$11.94 per share, or an aggregate market value of $198.6$420.5 million.

10



The change in the carrying value of our investment in Kronos during the first six months of 20162017 is summarized below.

Amount

 

Amount

 

(In millions)

 

(In millions)

 

Balance at the beginning of the period

$

140.7

 

$

120.3

 

Equity in losses of Kronos

 

(.7

)

Equity in earnings of Kronos

 

70.9

 

Dividends received from Kronos

 

(10.6

)

 

(10.6

)

Equity in Kronos' other comprehensive income (loss):

 

 

 

 

 

 

Marketable securities

 

.1

 

 

(.1

)

Currency translation

 

2.8

 

 

7.2

 

Interest rate swap

 

(1.1

)

 

.1

 

Defined benefit pension plans

 

1.8

 

 

1.2

 

 

 

 

 

 

 

Balance at the end of the period

$

133.0

 

$

189.0

 

 

Selected financial information of Kronos is summarized below:

December 31,

 

 

June 30,

 

December 31,

 

 

June 30,

 

2015

 

 

2016

 

2016

 

 

2017

 

(In millions)

 

(In millions)

 

Current assets

$

710.8

 

 

$

697.4

 

$

650.4

 

 

$

800.0

 

Property and equipment, net

 

429.5

 

 

 

439.6

 

 

434.0

 

 

 

466.4

 

Investment in TiO2 joint venture

 

82.9

 

 

 

76.3

 

 

78.9

 

 

 

70.5

 

Other noncurrent assets

 

19.5

 

 

 

21.1

 

 

16.3

 

 

 

136.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

1,242.7

 

 

$

1,234.4

 

$

1,179.6

 

 

$

1,472.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

$

201.7

 

 

$

218.6

 

$

182.1

 

 

$

210.9

 

Long-term debt

 

337.2

 

 

 

336.5

 

 

335.4

 

 

 

350.8

 

Accrued pension and postretirement benefits

 

209.4

 

 

 

208.6

 

 

234.2

 

 

 

253.1

 

Other noncurrent liabilities

 

32.5

 

 

 

34.1

 

 

32.9

 

 

 

37.3

 

Stockholders' equity

 

461.9

 

 

 

436.6

 

 

395.0

 

 

 

620.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

$

1,242.7

 

 

$

1,234.4

 

$

1,179.6

 

 

$

1,472.9

 

 

Three months ended

 

 

Six months ended

 

Three months ended

 

 

Six months ended

 

June 30,

 

 

June 30,

 

June 30,

 

 

June 30,

 

2015

 

 

2016

 

 

2015

 

 

2016

 

2016

 

 

2017

 

 

2016

 

 

2017

 

(In millions)

 

(In millions)

 

Net sales

$

360.2

 

 

$

356.1

 

 

$

725.3

 

 

$

674.5

 

$

356.1

 

 

$

441.4

 

 

$

674.5

 

 

$

811.2

 

Cost of sales

 

313.7

 

 

 

300.6

 

 

 

601.4

 

 

 

578.6

 

 

300.6

 

 

 

311.6

 

 

 

578.6

 

 

 

578.0

 

Income (loss) from operations

 

(10.4

)

 

 

10.5

 

 

 

21.8

 

 

 

10.2

 

Income tax expense

 

145.1

 

 

 

3.9

 

 

 

154.5

 

 

 

2.5

 

Income from operations

 

10.5

 

 

 

70.1

 

 

 

10.2

 

 

 

122.4

 

Income tax expense (benefit)

 

3.9

 

 

 

(131.1

)

 

 

2.5

 

 

 

(120.1

)

Net income (loss)

 

(159.8

)

 

 

1.7

 

 

 

(141.4

)

 

 

(2.1

)

 

1.7

 

 

 

196.5

 

 

 

(2.1

)

 

 

233.3

 

 

11



Note 6 Other noncurrent assets, net:

December 31,

 

 

June 30,

 

December 31,

 

 

June 30,

 

2015

 

 

2016

 

2016

 

 

2017

 

(In thousands)

 

(In thousands)

 

Restricted cash

$

1,289

 

 

$

1,264

 

Pension asset

$

1,303

 

 

$

1,420

 

 

1,037

 

 

 

1,251

 

Restricted cash

 

1,273

 

 

 

1,279

 

Other

 

755

 

 

 

879

 

 

950

 

 

 

957

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

3,331

 

 

$

3,578

 

$

3,276

 

 

$

3,472

 

 

Note 7 Accrued and other current liabilities:

 

December 31,

 

 

June 30,

 

December 31,

 

 

June 30,

 

2015

 

 

2016

 

2016

 

 

2017

 

(In thousands)

 

(In thousands)

 

Employee benefits

$

8,438

 

 

$

5,940

 

$

8,375

 

 

$

6,000

 

Professional fees

 

698

 

 

 

416

 

 

613

 

 

 

686

 

Payables to affiliates:

 

 

 

 

 

 

 

Income taxes - Valhi

 

40

 

 

 

32

 

Other

 

180

 

 

 

196

 

Income taxes

 

5

 

 

 

5

 

Other

 

1,422

 

 

 

1,880

 

 

1,636

 

 

 

1,704

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

10,783

 

 

$

8,469

 

$

10,624

 

 

$

8,390

 

 

Note 8 Other noncurrent liabilities:

 

December 31,

 

 

June 30,

 

 

2015

 

 

2016

 

 

(In thousands)

 

Reserve for uncertain tax positions

$

12,186

 

 

$

12,186

 

Insurance claims and expenses

 

663

 

 

 

627

 

Other

 

787

 

 

 

783

 

 

 

 

 

 

 

 

 

Total

$

13,636

 

 

$

13,596

 

Our reserve for uncertain tax positions is discussed in Note 11.

Note 9 Long-term debt:  

During the first six monthshalf of 2016, we2017, our wholly owned subsidiary, NLKW Holding, LLC had no borrowings or repayments under our promissory noteits $50 million secured revolving credit facility with Valhi, and atValhi.  At June 30, 2016,2017, we had outstanding borrowings of $0.5 million under such facility, and the full $40remaining $49.5 million was available for future borrowing under this facility.  The amountOutstanding borrowings under such credit facility bear interest at the prime rate plus 1.875% per annum, and the average interest rate as of anyand for the six months ended June 30, 2017 was 6.125% and 5.80%, respectively.  We are in compliance with all of the convenants contained in such loan Valhi would make to us isfacility at Valhi’s discretion.June 30, 2017.  

12


Note 10 9 Accumulated other comprehensive income (loss): Employee benefit plans:

Changes in accumulated other comprehensive income (loss) attributable to NL stockholders, including amounts resulting from our investment in Kronos Worldwide (see Note 5),Defined benefit plans The components of net periodic defined benefit pension cost are presented in the table below.

 

Three months ended

 

 

Six months ended

 

 

June 30,

 

 

June 30,

 

 

2015

 

 

2016

 

 

2015

 

 

2016

 

 

(In thousands)

 

Accumulated other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

45,326

 

 

$

(1,336

)

 

$

47,112

 

 

$

195

 

Other comprehensive income -

  unrealized gains (losses) arising during the year

 

(5,358

)

 

 

3,730

 

 

 

(7,144

)

 

 

2,199

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of period

$

39,968

 

 

$

2,394

 

 

$

39,968

 

 

$

2,394

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

(167,132

)

 

$

(169,553

)

 

$

(154,173

)

 

$

(172,384

)

Other comprehensive income (loss)

 

1,188

 

 

 

(980

)

 

 

(11,771

)

 

 

1,851

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of period

$

(165,944

)

 

$

(170,533

)

 

$

(165,944

)

 

$

(170,533

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

-

 

 

$

(1,016

)

 

$

-

 

 

$

(445

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses arising during the year

 

-

 

 

 

(269

)

 

 

-

 

 

 

(952

)

Less reclassification adjustment for

  amounts included in interest expense

 

-

 

 

 

112

 

 

 

-

 

 

 

224

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of period

$

-

 

 

$

(1,173

)

 

$

-

 

 

$

(1,173

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

(74,526

)

 

$

(71,905

)

 

$

(75,260

)

 

$

(72,712

)

Other comprehensive income -

  amortization of net losses included

  in net periodic pension cost

 

1,087

 

 

 

823

 

 

 

1,821

 

 

 

1,630

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of period

$

(73,439

)

 

$

(71,082

)

 

$

(73,439

)

 

$

(71,082

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPEB plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

146

 

 

$

(144

)

 

$

282

 

 

$

(12

)

Other comprehensive loss -

  amortization of prior service credit and

  net gains included in net periodic OPEB cost

 

(137

)

 

 

(132

)

 

 

(273

)

 

 

(264

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of period

$

9

 

 

$

(276

)

 

$

9

 

 

$

(276

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total accumulated other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

(196,186

)

 

$

(243,954

)

 

$

(182,039

)

 

$

(245,358

)

Other comprehensive income (loss)

 

(3,220

)

 

 

3,284

 

 

 

(17,367

)

 

 

4,688

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of period

$

(199,406

)

 

$

(240,670

)

 

$

(199,406

)

 

$

(240,670

)

 

Three months ended

 

 

Six months ended

 

 

June 30,

 

 

June 30,

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

 

(In thousands)

 

Interest cost

$

601

 

 

$

506

 

 

$

1,193

 

 

$

1,012

 

Expected return on plan assets

 

(736

)

 

 

(689

)

 

 

(1,471

)

 

 

(1,378

)

Recognized actuarial losses

 

477

 

 

 

394

 

 

 

908

 

 

 

788

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

342

 

 

$

211

 

 

$

630

 

 

$

422

 

See Note 12 for amounts related


Postretirement benefits The components of net periodic postretirement benefits other than pension (OPEB) income are presented in the table below.

 

Three months ended

 

 

Six months ended

 

 

June 30,

 

 

June 30,

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

 

(In thousands)

 

Interest cost

$

24

 

 

$

20

 

 

$

48

 

 

$

40

 

Amortization of prior service credit

 

(136

)

 

 

-

 

 

 

(271

)

 

 

-

 

Recognized actuarial gains

 

(38

)

 

 

(54

)

 

 

(76

)

 

 

(108

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

(150

)

 

$

(34

)

 

$

(299

)

 

$

(68

)

Contributions We currently expect our 2017 contributions to our defined benefit pension plans and OPEB plans.other postretirement plans to be approximately $1.4 million.

13Note 10 Other noncurrent liabilities:

 


 

December 31,

 

 

June 30,

 

 

2016

 

 

2017

 

 

(In thousands)

 

Reserve for uncertain tax positions

$

12,186

 

 

$

12,186

 

Insurance claims and expenses

 

589

 

 

 

625

 

Other

 

767

 

 

 

704

 

 

 

 

 

 

 

 

 

Total

$

13,542

 

 

$

13,515

 


Note 11 Income taxes:

 

Three months ended

 

 

Six months ended

 

Three months ended

 

 

Six months ended

 

June 30,

 

 

June 30,

 

June 30,

 

 

June 30,

 

2015

 

 

2016

 

 

2015

 

 

2016

 

2016

 

 

2017

 

 

2016

 

 

2017

 

(In millions)

 

(In millions)

 

Expected tax expense (benefit), at U.S. federal statutory

income tax rate of 35%

$

(17.3

)

 

$

.6

 

 

$

(14.2

)

 

$

(.5

)

$

0.6

 

 

$

21.7

 

 

$

(0.5

)

 

$

25.5

 

Rate differences on equity in earnings (losses) of Kronos

 

(3.2

)

 

 

(.1

)

 

 

(4.7

)

 

 

.2

 

 

(.1

)

 

 

(1.3

)

 

 

.2

 

 

 

(2.9

)

Adjustment to the reserve for uncertain tax positions, net

 

-

 

 

 

-

 

 

 

(3.0

)

 

 

-

 

Nontaxable income

 

(.1

)

 

 

-

 

 

 

(.2

)

 

 

(.2

)

 

-

 

 

 

-

 

 

 

(.2

)

 

 

(.2

)

U.S. state income taxes and other, net

 

-

 

 

 

(.2

)

 

 

.1

 

 

 

-

 

 

(.2

)

 

 

(.1

)

 

 

-

 

 

 

.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

$

(20.6

)

 

$

.3

 

 

$

(22.0

)

 

$

(.5

)

$

.3

 

 

$

20.3

 

 

$

(.5

)

 

$

22.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive provision for income taxes (benefit) allocable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

(20.6

)

 

$

.3

 

 

$

(22.0

)

 

$

(.5

)

$

.3

 

 

$

20.3

 

 

$

(.5

)

 

$

22.5

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities

 

(2.8

)

 

 

2.0

 

 

 

(3.8

)

 

 

1.2

 

 

2.0

 

 

 

(1.6

)

 

 

1.2

 

 

 

(2.5

)

Currency translation

 

.7

 

 

 

(.5

)

 

 

(6.3

)

 

 

1.0

 

 

(.5

)

 

 

1.6

 

 

 

1.0

 

 

 

2.5

 

Interest rate swap

 

-

 

 

 

(.1

)

 

 

-

 

 

 

(.4

)

 

(.1

)

 

 

(.1

)

 

 

(.4

)

 

 

-

 

Pension plans

 

.6

 

 

 

.5

 

 

 

1.0

 

 

 

.9

 

 

.5

 

 

 

.2

 

 

 

.9

 

 

 

.7

 

OPEB plans

 

(.1

)

 

 

-

 

 

 

(.2

)

 

 

(.1

)

 

-

 

 

 

.1

 

 

 

(.1

)

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

(22.2

)

 

$

2.2

 

 

$

(31.3

)

 

$

2.1

 

$

2.2

 

 

$

20.5

 

 

$

2.1

 

 

$

23.2

 

 

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.  We received aggregate dividends from Kronos of $10.6 million in the first six monthshalf of 20152016 and 2016.2017.  The amounts shown in the above table of our income tax rate reconciliation for rate differences on equity in earnings (losses) of Kronos represents the net tax (benefit) associated with such non-taxability of the dividends we receive from Kronos, as it relates to the amount of deferred income taxes we recognize on our undistributed equity in earnings (losses) of Kronos.

Kronos has substantial net operating lossesloss (NOL) carryforwards in Germany and Belgium, the benefit of which Kronos had previously recognized under the more-likely-than-not recognition criteria.  In the second quarter of 2015, Kronos determined that such losses did not meet the more-likely-than-not recognition criteria, and as a result Kronos recognized a non-cash deferred income tax expense of $150.3 million in the second quarter of 2015 as a valuation allowance against Kronos’its net deferred income tax assets in such jurisdictions.  Kronos continued to conclude such losses did not meet the more-likely-than-not recognition criteria through March 31, 2017.    During 2016, Kronos recognized $2.9an aggregate $2.2 million non-cash income tax benefit as the result of a net decrease in such deferred income tax expensevaluation allowance, as the impact of utilizing a portion of its German NOLs during such period more than offset the impact of additional losses recognized by its Belgian operations during such period.  During the first six months of 2017, Kronos recognized an aggregate non-cash income tax benefit of $12.7 million as a result of a net decrease in such deferred income tax asset valuation allowance, due to utilizing a portion of both the German and Belgian NOLs during such period, including $7.7 million in the second quarter and first six months of 2016 as additional2017.  At June 30, 2017, Kronos concluded it now has sufficient positive evidence under the more-likely-than-not recognition criteria to support reversal of the entire valuation allowance against additional lossesrelated to its German and Belgian operations.  As discussed below, a large portion of the remaining valuation allowance is reversed as of June 30, 2017, but a portion of the remaining valuation allowance will be reversed in the second half of 2017.  Such sufficient positive evidence at June 30, 2017 includes, among other things, the existence of cumulative profits in the most recent twelve consecutive quarters (Germany) or profitability in recent quarters during which such jurisdictions.  The rate difference related profitability was trending upward throughout such period (Belgium), the ability


to demonstrate future profitability in Germany and Belgium for a sustainable period, and the indefinite carryforward period for the German and Belgian NOLs.  Accordingly our equity in losses ofincome from Kronos in the second quarter of 2017 includes our share of an aggregate non-cash income tax benefit of $149.9 million recognized by Kronos related to such reversal at June 30, 2017 ($141.9 million related to Germany, and first six months$8.0 million related to Belgium).  Such second quarter 2017 income tax benefit associated with the reversal of 2015the German and 2016 includesBelgian valuation allowance excludes the non-cash income tax benefit of $7.7 million, also recognized in the second quarter, as discussed above.   In accordance with the ASC 740-270 guidance regarding accounting for income taxes at interim dates, the amount of the valuation allowance reversed at June 30, 2017 ($149.9 million) relates to Kronos’ change in judgment regarding the realizability of the related deferred income tax asset as it relates to future years (i.e. 2018 and after).  A change in judgment regarding the realizability of deferred tax assets as it relates to the current year is considered in determining the estimated annual effective tax rate for the year. Accordingly, the remaining $20 million (which relates to the expected profitability of Kronos’ German and Belgiun operations in calendar 2017), will be reversed in the third and fourth quarters of 2017 and our share of such reversal will be included in our equity in income from Kronos for such non-cash deferred income tax expense recognized by Kronos.periods.

Tax authorities are examining certain of ourKronos’ U.S. and non-U.S. tax returns including those of Kronos, and tax authorities have or may propose tax deficiencies, including penalties and interest.  We cannot guarantee these tax matters will be resolved in our favor due toBecause of the inherent uncertainties involved in settlement initiatives and court and tax proceedings.  proceedings, Kronos cannot guarantee that these matters will be resolved in its favor, and therefore Kronos’ potential exposure, if any, is also uncertain.  As a result of ongoing audits in certain jurisdictions, in 2008 Kronos filed Advance Pricing Agreement Requests with the tax authorities in the U.S., Canada and Germany.  These requests have been under review with the respective tax authorities since 2008 and prior to 2016, it was uncertain whether an agreement would be reached between the tax authorities and whether Kronos would agree to execute and finalize such agreements.  During 2016, Contran, as the ultimate parent of Kronos’ U.S. Consolidated income tax group, executed and finalized an Advance Pricing Agreement with the U.S. Internal Revenue Service and Kronos’ Canadian subsidiary executed and finalized an Advance Pricing Agreement with the Competent Authority for Canada (collectively, the “U.S.-Canada APA”) effective for tax years 2005 - 2015. Pursuant to the terms of the U.S.-Canada APAs, the U.S. and Canadian tax authorities agreed to certain prior year changes to taxable income of Kronos’ U.S. and Canadian subsidiaries.  As a result of such agreed-upon changes, Kronos’ Canadian subsidiary will incur a cash income tax payment of approximately CAD $3 million (USD $2.3 million) related to the U.S.-Canada APA, but such payment was fully offset by previously provided accruals.  Kronos currently expects the Advance Pricing Agreement between Canada and Germany (collectively, the “Canada-Germany APA”) to be executed and finalized within the next twelve months.  Kronos believes it has adequate accruals to cover any cash income tax payment which might result from the finalization of the Canada-Germany APA, and accordingly Kronos does not expect the execution of such APA to have a material adverse effect on its consolidated financial position, results of operations or liquidity.  

We believe we have adequate accruals for additional taxes and related interest expense which could ultimately result from tax examinations.  We believe the ultimate disposition of tax examinations should not have a material adverse effect on our consolidated financial position, results of operationsoperating or liquidity.

14


In the first six months of 2015, we recognized a first quarter non-cash income tax benefit of $3.0 million related to the release of a portion of our reserve for uncertain tax positions due to the expiration of the applicable statute of limitations.  We currently estimate that our unrecognized tax benefits will not change materially during the next twelve months.


Note 12 Employee benefit plans: Accumulated other comprehensive income (loss):

Defined benefit plans The components of net periodic defined benefit pension cost (income)Changes in accumulated other comprehensive income (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

 

 

Six months ended

 

 

June 30,

 

 

June 30,

 

 

2015

 

 

2016

 

 

2015

 

 

2016

 

 

(In thousands)

 

Interest cost

$

635

 

 

$

601

 

 

$

1,204

 

 

$

1,193

 

Expected return on plan assets

 

(875

)

 

 

(736

)

 

 

(1,676

)

 

 

(1,471

)

Recognized actuarial losses

 

350

 

 

 

477

 

 

 

676

 

 

 

908

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

110

 

 

$

342

 

 

$

204

 

 

$

630

 

 

Three months ended

 

 

Six months ended

 

 

June 30,

 

 

June 30,

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

(1,336

)

 

$

18,751

 

 

$

195

 

 

$

20,473

 

Other comprehensive loss - unrealized

   gains (losses) arising during the year

 

3,730

 

 

 

(2,869

)

 

 

2,199

 

 

 

(4,591

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of period

$

2,394

 

 

$

15,882

 

 

$

2,394

 

 

$

15,882

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

(169,553

)

 

$

(174,088

)

 

$

(172,384

)

 

$

(175,859

)

Other comprehensive income (loss)

 

(980

)

 

 

2,925

 

 

 

1,851

 

 

 

4,696

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of period

$

(170,533

)

 

$

(171,163

)

 

$

(170,533

)

 

$

(171,163

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

(1,016

)

 

$

(278

)

 

$

(445

)

 

$

(390

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses arising during the year

 

(269

)

 

 

(178

)

 

 

(952

)

 

 

(177

)

Less reclassification adjustment for

   amounts included in interest expense

 

112

 

 

 

94

 

 

 

224

 

 

 

205

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of period

$

(1,173

)

 

$

(362

)

 

$

(1,173

)

 

$

(362

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

(71,905

)

 

$

(75,843

)

 

$

(72,712

)

 

$

(76,710

)

Other comprehensive income -

   amortization of net losses included

   in net periodic pension cost

 

823

 

 

 

393

 

 

 

1,630

 

 

 

1,260

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of period

$

(71,082

)

 

$

(75,450

)

 

$

(71,082

)

 

$

(75,450

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPEB plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

(144

)

 

$

(408

)

 

$

(12

)

 

$

(360

)

Other comprehensive loss -

   amortization of prior service credit and

   net gains included in net periodic OPEB cost

 

(132

)

 

 

(48

)

 

 

(264

)

 

 

(96

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of period

$

(276

)

 

$

(456

)

 

$

(276

)

 

$

(456

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total accumulated other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

(243,954

)

 

$

(231,866

)

 

$

(245,358

)

 

$

(232,846

)

Other comprehensive income

 

3,284

 

 

 

317

 

 

 

4,688

 

 

 

1,297

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of period

$

(240,670

)

 

$

(231,549

)

 

$

(240,670

)

 

$

(231,549

)

Postretirement benefits The components of net periodic postretirement benefits other than pension (OPEB) income are presented in the table below.

 

Three months ended

 

 

Six months ended

 

 

June 30,

 

 

June 30,

 

 

2015

 

 

2016

 

 

2015

 

 

2016

 

 

(In thousands)

 

Interest cost

$

27

 

 

$

24

 

 

$

54

 

 

$

48

 

Amortization of prior service credit

 

(156

)

 

 

(136

)

 

 

(311

)

 

 

(271

)

Recognized actuarial gains

 

(26

)

 

 

(38

)

 

 

(51

)

 

 

(76

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

(155

)

 

$

(150

)

 

$

(308

)

 

$

(299

)

Contributions We currently expect our 2016 contributionsSee Note 9 for amounts related to our defined benefit pension plans and other postretirement plans to be approximately $1 million.OPEB plans.


Note 13 – 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.

15


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 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.  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 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,

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,

no final, non-appealable adverse verdicts have ever been entered against us, and

no final, non-appealable adverse verdicts have ever been entered against us, and

we have never ultimately been found liable with respect to any such litigation matters, including over 100 cases over a twenty-year period for which we were previously a party and for which we have been dismissed without any finding of liability.

we have never ultimately been found liable with respect to any such litigation matters, including over 100 cases over a twenty-year period for which we were previously a party and for which we have been dismissed without any finding of liability.

 

Accordingly, we have not accrued any amounts for any of the pending lead pigment and lead-basedlead—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 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 one of these lead pigment cases, in April 2000 we were served with a complaint in 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) brought by a number of California government entities against the former pigment manufacturers, the LIA and certain paint manufacturers.  The County of Santa Clara sought to recover compensatory damages for funds the plaintiffs have expended or would in the future expend for medical treatment, educational expenses, abatement or other costs due to exposure to, or potential exposure to, lead paint, disgorgement of profit, and punitive damages.  In July 2003, the trial judge granted defendants’ motion to dismiss all remaining claims.  Plaintiffs appealed and the intermediate appellate court reinstated public nuisance, negligence, strict liability, and fraud claims in March 2006.  A fourth amended complaint was filed in March 2011 on behalf of The People of California by the County Attorneys of Alameda, Ventura, Solano, San Mateo, Los Angeles and Santa Clara, and the City Attorneys of San Francisco, San Diego and Oakland.  That complaint alleged that the presence of lead paint created a public nuisance in each of the prosecuting jurisdictions and sought its abatement.  In July and August 2013, the case was tried.  In January 2014, the Judge issued a judgment finding us, The Sherwin Williams Company and ConAgra Grocery Products Company jointly and severally liable for the abatement of lead paint in pre-1980 homes, and ordered the

16


defendants to pay an aggregate $1.15 billion to the people of the State of California to fund such abatement.  In February 2014, we filed a motion for a new trial, and in March 2014 the court denied the motion.  Subsequently in March 2014, we filed a notice of appeal with the Sixth District Court of Appeal for the State of California and the appeal is proceeding with the appellate court. The California Sixth District Court of Appeal has scheduled on August 24, 2017 the oral argument in the appeal of the lower court decision.  NL believes that this judgment is inconsistent with California law and is unsupported by the evidence, and we will defend vigorously against all claims.

The Santa Clara case is unusual in that this is the second time that an adverse verdict in the lead pigment litigation has been entered against NL (the first adverse verdict against NL was ultimately overturned on appeal). We have concluded that the likelihood of a loss in this case has not reached a standard of “probable” as contemplated by ASC 450, given (i) the substantive, substantial and meritorious grounds on which the adverse verdict in the Santa Clara case will be appealed, (ii) the uniqueness of the Santa Clara verdict (i.e. no final, non-appealable verdicts have ever been rendered against us, or any of the other former lead pigment manufacturers, based on the public nuisance theory of liability or otherwise), and (iii) the rejection of the public nuisance theory of liability as it relates to lead pigment matters in many other jurisdictions (no jurisdiction in which a plaintiff has asserted a public nuisance theory of liability has ever successfully been upheld).  In addition, liability that may result, if any, cannot be reasonably estimated, as NL continues to have no basis on which an estimate of liability could be made, as discussed above. However, as with any legal proceeding, there is no assurance that any appeal would be successful, and it is reasonably possible, based on the outcome of the appeals process, that NL may in the future incur some liability resulting in the recognition of a loss contingency accrual that could have a material adverse impact on our results of operations, financial position and liquidity.

New cases may continue to be filed against us.  We cannot assure you thatdo not know if we will not incur liability in the future in respect of 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.  

17


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,

complexity and differing interpretations of governmental regulations,

number of PRPs and their ability or willingness to fund such allocation of costs,

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,

financial capabilities of the PRPs and the allocation of costs among them,

solvency of other PRPs,

solvency of other PRPs,

multiplicity of possible solutions,

multiplicity of possible solutions,

number of years of investigatory, remedial and monitoring activity required,

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

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.

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 determination that we are potentially responsible for the release of hazardous substances at other sites, could cause our expenditures to exceed our current estimates.  We cannot assure you thatdo not know if actual costs will not exceed accrued amounts or the upper end of the range for sites for which estimates have been made, and we cannot assure you thatdo not know if costs will not 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.  At December 31, 20152016 and June 30, 2016,2017, we have not recognized any receivables for recoveries.

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.

18


Changes in the accrued environmental remediation and related costs during the first six months of 20162017 are as follows:

Amount

 

Amount

 

(In thousands)

 

(In thousands)

 

Balance at the beginning of the period

$

113,133

 

$

116,658

 

Additions charged to expense, net

 

3,024

 

 

3,147

 

Payments, net

 

(1,044

)

 

(646

)

 

 

 

 

 

 

Balance at the end of the period

$

115,113

 

$

119,159

 

 

 

 

 

 

 

Amounts recognized in the Condensed Consolidated

 

 

 

 

 

 

Balance Sheet at the end of the period:

 

 

 

 

 

 

Current liability

$

11,385

 

$

13,101

 

Noncurrent liability

 

103,728

 

 

106,058

 

 

 

 

 

 

 

Balance at the end of the period

$

115,113

 

$

119,159

 

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 June 30, 2016,2017, we had accrued approximately $115$119 million related to approximately 4041 sites associated with remediation and related matters that we believe are at the present time and/or in their current phase reasonably estimable.  The upper end of the range of reasonably possible costs to us for remediation and related matters for which we believe it is possible to estimate costs is approximately $173$161 million, including the amount currently accrued.  These accruals have not been discounted to present value.

We believe that it is not reasonably possible to estimate the range of costs for certain sites.  At June 30, 2016,2017, there were approximately 5 sites for which we are not currently able to reasonably estimate a range of costs.  For these sites, generally the investigation is in the early stages, and we are unable to determine whether or not we actually had any association with the site, the nature of our responsibility for the contamination at the site, if any, and the extent of contamination at and cost to remediate the site.  The timing and availability of information on these sites is dependent on events outside of our control, such as when the party alleging liability provides information to us.  At certain of these previously inactive sites, we have received general and special notices of liability from the EPA and/or state agencies alleging that we, sometimes with other PRPs, are liable for past and future costs of remediating environmental contamination allegedly caused by former operations.  These notifications may assert that we, along with any other alleged PRPs, are liable for past and/or future clean-up costs.  As further information becomes available to us for any of these sites, which would allow us to estimate a range of costs, we would at that 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.

19


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.

For a complete discussion of certain litigation involving us and certain of our former insurance carriers, refer to our 20152016 Annual Report.

Other litigation

We have been named as a defendant in various lawsuits in several jurisdictions, alleging personal injuries as a result of occupational exposure primarily to products manufactured by our former operations containing asbestos, silica and/or mixed dust. In addition, some plaintiffs allege exposure to asbestos from working in various facilities previously owned and/or operated by us.  There are 103101 of these types of cases pending, involving a total of approximately 588586 plaintiffs.  In addition, the claims of approximately 8,6928,687 plaintiffs have been administratively dismissed or placed on the inactive docket in Ohio state court.  We do not expect these claims will be re-opened unless the plaintiffs meet the courts’ medical criteria for asbestos-related claims.  We have not accrued any amounts for this litigation because of the uncertainty of liability and inability to reasonably estimate the liability, if any.  To date, we have not been adjudicated liable in any of these matters.

Based on information available to us, including:

·

facts concerning historical operations,

facts concerning historical operations,

·

the rate of new claims,

the rate of new claims,

·

the number of claims from which we have been dismissed, and

the number of claims from which we have been dismissed, and

·

our prior experience in the defense of these matters,

our prior experience in the defense of these matters,

we believe that the range of reasonably possible outcomes of these matters will be consistent with our historical costs (which are not material).  Furthermore, we do not expect any reasonably possible outcome would involve amounts material to our consolidated financial position, results of operations or liquidity.  We have sought and will continue to vigorously seek, dismissal and/or a finding of no liability from each claim.  In addition, from time to time, we have received notices regarding asbestos or silica claims purporting to be brought against former subsidiaries, including notices provided to insurers with which we have entered into settlements extinguishing certain insurance policies.  These insurers may seek indemnification from us. For a discussion of other legal proceedings to which we are a party, refer to our 20152016 Annual Report.

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, 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 14 Related party transactions:

From time to time, we may have loans and advances outstanding between us and various related parties pursuant to term and demand notes.  We generally enter into these loans and advances for cash management purposes.  When we loan funds to related parties, we are generally able to earn a higher rate of return on the loan than we would earn if we invested the funds in other instruments, and when we borrow from related parties, we are generally able to pay a lower rate of interest than we would pay if we had incurred third-party indebtedness.  While certain of these loans to affiliates may be of a lesser credit quality than cash equivalent instruments otherwise available to us, we believe we have considered the credit risks in the terms of the applicable loans.  In this regard, on

20


August 3, 2016 CompX entered into an unsecured revolving demand promissory note with Valhi whereby CompX has agreed to loan Valhi up to $40 million.  CompX’s loan to Valhi bears interest at prime plus 1.00%, payable quarterly, with all principal due on demand, but in any event no earlier than December 31, 2017.  The amount of CompX’s outstanding loans to Valhi at any time is at its discretion.

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 at December 31, 2015 and June 30, 2016:disclosure:

December 31, 2015

 

 

June 30, 2016

 

December 31, 2016

 

 

June 30, 2017

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

amount

 

 

value

 

 

amount

 

 

value

 

amount

 

 

value

 

 

amount

 

 

value

 

(In thousands)

 

(In thousands)

 

Cash, cash equivalents and restricted cash

$

100,981

 

 

$

100,981

 

 

$

106,734

 

 

$

106,734

 

$

98,242

 

 

$

98,242

 

 

$

94,550

 

 

$

94,550

 

Noncontrolling interest in CompX common stock

 

15,301

 

 

 

18,878

 

 

 

15,755

 

 

 

19,136

 

 

16,350

 

 

 

26,790

 

 

 

17,040

 

 

 

25,399

 

The fair value of our noncontrolling interest in CompX stockholders’ equity is based upon its quoted market price at each balance sheet date, which represents a Level 1 input.  Due to their near-term maturities, the carrying amounts of accounts receivable and accounts payable are considered equivalent to fair value.

Note 1615 – Recent accounting pronouncements not yet adopted:

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606).  This standard replaces existing revenue recognition guidance, which in many cases was tailored for specific industries, with a uniform accounting standard applicable to all industries and transactions.  The new standard, as amended, is currently effective for us beginning with the first quarter of 2018.  Entities may elect to adopt ASU No. 2014-09 retrospectively for all periods for all contracts and transactions which occurred during the period (with a few exceptions for practical expediency) or retrospectively with a cumulative effect recognized as of the date of adoption.  ASU No. 2014-09 is a fundamental rewriting of existing GAAP with respect to revenue recognition, and we are still evaluating the effect the Standard will have on our Consolidated Financial Statements.  We currently expect to adopt the standard in the first quarter of 2018.  In addition,2018 using the modified retrospective approach to adoption.  Our sales generally involve single performance obligations to ship goods pursuant to customer purchase orders without further underlying contracts, and as such, we expect adoption of this standard will have not yet determineda minimal effect on our revenues.  We are in the method we will use to adoptprocess of evaluating the Standard.additional disclosure requirements.  

In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects related to the recognition, measurement, presentation and disclosure of financial instruments.  The ASU requires equity investments (except for those accounted for under the equity method of accounting or those that result in the consolidation of the investee) to generally be measured at fair value with changes in fair value recognized in net income.  The amendment also requires a number of other changes,  including among others: simplifying the impairment assessment for equity instruments without readily determinable fair values; eliminating the requirement for public business entities to disclose method and assumptions used to determine fair value for financial instruments measured at amortized cost; requiring an exit price notion when measuring the fair value of financial instruments for disclosure purposes; and requiring separate presentation of financial assets and liabilities by measurement category and form of asset.  The changes indicated above will be effective for us beginning in the first quarter of 2018, with prospective application required, and early adoption is not permitted.  The most significant aspect of adopting this ASU will be the requirement to recognize changes in fair value of our available-for-sale marketable equity securities in net income (currently changes in fair value of such securities are recognized in other comprehensive income).

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which is a comprehensive rewriting of the lease accounting guidance which aims to increase comparability and transparency with regard to lease


transactions.   The primary change will be the recognition of lease assets for the right-of-use of the underlying asset and lease liabilities for the obligation to make payments by lessees on the balance sheet for leases currently classified as operating leases.   The ASU also requires increased qualitative disclosure about leases in addition to quantitative disclosures currently required.  Companies are required to use a modified retrospective approach to adoption with a practical expedient which will allow companies to continue to account for existing leases under the prior guidance unless a lease is modified, other than the requirement to recognize the right-of-use asset and lease liability for all operating leases.  The changes indicated above will be effective for us beginning in the first quarter of 2019, with early adoption permitted.  We are in the process of assessing all of our current leases.  We have not yet evaluated the effect this ASU will have on our Consolidated Financial Statements, but given the insignificant amount of our future minimum payments under non-cancellable operating leases at December 31, 2016 discussed in Note 17 to our 2016 Annual Report, we do not expect the adoption of this standard to have a material effect on our Consolidated Balance Sheets.

21In January 2017, the FASB issued ASU 2017-04, Intangibles— Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment, which aims to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test.  Previously, Step 2 measured a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill.  Instead, under the new ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and a goodwill impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value.  In no circumstances would the loss recognized exceed the total amount of goodwill allocated to that reporting unit.  The changes indicated above will be effective for us beginning in 2020 (our annual impairment tests are completed in the third quarter), with prospective application required, and early adoption is permitted.  We do not believe the application of ASU 2017-04 will have a material effect on our Condensed Consolidated Financial Statements, and we plan to early adopt this ASU beginning with our current year goodwill impairment tests.

In March 2017, the FASB issued ASU 2017-07, Compensation— Retirement Benefits (Topic 715)  Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires that the service cost component of net periodic defined benefit pension and OPEB cost be reported in the same line item as other compensation costs for applicable employees incurred during the period.  Other components of such net benefit cost are required to be presented in the income statement separately from the service cost component, and below income from operations (if such a subtotal is presented).  These other net benefit cost components must be disclosed either on the face of the financial statements or in the notes to the financial statements.  In addition only the service cost component is eligible for capitalization in assets where applicable (inventory or internally constructed fixed assets for example).  The amendments in ASU 2017-06 are effective for us beginning with in the first quarter of 2018, early adoption as of the beginning of an annual period is permitted, retrospective presentation is required for the income statement presentation of the service cost component and other components of net benefit cost, and prospective application is required for the capitalization in assets of the service cost component of net benefit cost.  We expect to adopt this ASU in the first quarter of 2018.  Our net benefit cost for both defined benefit pension plans and OPEB plans does not include any service cost component, none of such net benefit costs are capitalized in assets, we present a subtotal for income from operations and our net benefit cost is currently included in the determination of income from operations.  Accordingly, adoption of this standard will change the determination of the amount we report as income from operations.  As disclosed in Note 11 to our 2016 Annual Report, our total net periodic defined benefit pension costs were $865,000 in 2016, and our net periodic OPEB cost was a credit of $597,000 during 2016.

 



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 MKT: 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 and trim tabs for the recreational marine and other non-marine industries through its Marine Components operations.  

We account for our 30% non-controlling interest in Kronos by the equity method.  Kronos is a leading global producer and marketer of value-added titanium dioxide pigments (TiO2).  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

Future supply and demand for our products

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

 

·

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

Customer and producer inventory levels

 

·

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

·

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

Changes in raw material and other operating costs (such as ore, zinc, brass, aluminum, steel and energy 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)

 

·

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

·

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

·

Competitive products and substitute products

Competitive products and substitute products


 

·

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

22


·

Customer and competitor strategies

·

Potential consolidation of Kronos’ competitors

·

Potential consolidation of  Kronos’ customers

·

The impact of pricing and production decisions

·

Competitive technology positions

·

Potential difficulties in integrating future acquisitions

·

Potential difficulties in upgrading or implementing new accounting and manufacturing software systems

·

The introduction of trade barriers

·

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

·

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

·

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

·

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

·

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

·

Kronos’ ability to renew or refinance credit facilities

·

Our ability to maintain sufficient liquidity

·

The timing and amounts of insurance recoveries

·

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

·

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

·

Uncertainties associated with CompX’s development of new product features

·

Our ability to utilize income tax attributes or changes in income tax rates related to such attributes, the benefits of which 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)

·

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

·

Possible future litigation.  

Customer and competitor strategies

Potential consolidation of Kronos’ competitors

Potential consolidation of  Kronos’ customers

The impact of pricing and production decisions

Competitive technology positions

Potential difficulties in integrating future acquisitions

Potential difficulties in upgrading or implementing new accounting and manufacturing software systems (such as Kronos’ new enterprise resource planning system)

The introduction of trade barriers

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

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

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

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

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

Kronos’ ability to renew or refinance credit facilities

Our ability to maintain sufficient liquidity

The timing and amounts of insurance recoveries

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

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

Uncertainties associated with CompX’s development of new product features

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)

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

Possible future litigation.  

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


23


Results of operations

Net income (loss) overview

Quarter ended June 30, 20162017 compared to the quarter ended June 30, 20152016

Our net income attributable to NL stockholders was $41.2 million, or $.85 per share, in the second quarter of 2017 compared to $.9 million, or $.02 per share, in the second quarter of 2016 compared to net loss attributable to NL stockholders of $29.2 million, or $.60 per share, in the second quarter of 2015.2016.  As more fully described below, the increase in our earnings per share from 20152016 to 20162017 is primarily due to the net effects of:

equity in earnings of Kronos in 2017 of $59.7 million compared to $.5 million in 2016;

higher income from operations attributable to CompX of $.9 million in 2017; and

higher litigation fees and related costs of $.5 million in 2017.

Our 2017 net income attributable to NL stockholders includes income of $.64 per share, net of income taxes, included in our equity in earnings of Kronos related to Kronos’ non-cash deferred income tax benefit recognized as a result of a net decrease in Kronos’ deferred income tax asset valuation allowance related to its German and Belgian operations.  

·

equity in earnings from Kronos in 2016 of $.5 million compared to equity in losses from Kronos in 2015 of $48.6 million,

·

lower income from operations attributable to CompX of $.6 million, and

·

lower environmental remediation and related costs in 2016 of $2.2 million.

Our 2016 net income attributable to NL stockholders includes:

·

includes a loss of $.01 per share, net of income taxes, included in our equity in earnings of Kronos related to Kronos’ recognition of a deferred income tax asset valuation allowance related to its German and Belgian operations.

Our 2015 net loss attributable to NL stockholders includes:

·

loss of $.61 per share, net of income taxes, included in our equity in losses of Kronos related to Kronos’ recognition of a deferred income tax asset valuation allowance related to its German and Belgian operations, and

·

loss of $.07 per share, net of income taxes, included in our equity in losses of Kronos related to certain workforce reduction charges recognized by Kronos.

Six months ended June 30, 20162017 compared to six months ended June 30, 20152016

Our net income attributable to NL stockholders was $49.5 million, or $1.02 per share, in the first six months of 2017 compared to a net loss attributable to NL stockholders wasof $1.6 million, or $.03 per share, in the first six months of 2016 compared to net loss attributable to NL stockholders of $19.2 million, or $.39 per share, in the first six months of 2015.2016.  As more fully described below, the increase in our earnings per share from 20152016 to 20162017 is primarily due to the net effects of:

·

equity in losses from Kronos in 2016 of $.7 million compared to equity in losses from Kronos in 2015 of $43.0 million,

equity in earnings of Kronos in 2017 of $70.9 million compared to equity in losses of $.7 million in 2016;

·

lower income from operations attributable to CompX of $.9 million,

higher income from operations attributable to CompX of $2.0 million in 2017; and

·

lower insurance recoveries in 2016 of $3.1 million primarily related to an insurance recovery settlement for certain past lead pigment litigation defense costs in the first quarter of 2015,

higher litigation fees and related costs of $.2 million in 2017, and

higher environmental remediation and related costs of $.1 million in 2017.

Our 2017 net income attributable to NL stockholders includes income of $.66 per share, net of income taxes, included in our equity in losses of Kronos related to Kronos’ non-cash deferred income tax benefit recognized as a result of a net decrease in Kronos’ deferred income tax asset valuation allowance related to its German and Belgian operations.

·

a first quarter non-cash income tax benefit in 2015 related to a net reduction in our reserve for uncertain tax positions of $3.0 million, and

·

lower litigation fees and related costs in 2016 of $1.1 million.

Our 2016 net loss attributable to NL stockholders includes:

·

income of $.01 per share, net of income taxes, included in our equity in losses of Kronos related to Kronos’ insurance settlement gain related to a 2014 business interruption claim, and

income of $.01 per share, net of income taxes, included in our equity in losses of Kronos related to Kronos’ insurance settlement gain related to a 2014 business interruption claim, and

·

loss of $.01 per share, net of income taxes, included in our equity in losses of Kronos related to Kronos’ recognition of a deferred income tax asset valuation allowance related to its German and Belgian operations.

loss of $.01 per share, net of income taxes, included in our equity in losses of Kronos related to Kronos’ recognition of a deferred income tax asset valuation allowance related to its German and Belgian operations.

 

24



Our 2015 net loss attributable to NL stockholders includes:

·

loss of $.61 per share, net of income taxes, included in our equity in losses of Kronos related to Kronos’ recognition of a deferred income tax asset valuation allowance related to its German and Belgian operations,

·

loss of $.07 per share, net of income taxes, included in our equity in losses of Kronos related to certain workforce reduction charges recognized by Kronos,

·

income of $.06 per share related to a net reduction of our reserve for uncertain tax positions, and

·

income of $.04 per share, net of income taxes, related to insurance recoveries we recognized.

Income (loss) from operations

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

Three months ended

June 30,

 

 

%

 

 

 

Six months ended

June 30,

 

 

%

 

 

Three months ended

June 30,

 

 

%

 

 

 

Six months ended

June 30,

 

%

 

 

2015

 

 

2016

 

 

Change

 

 

 

2015

 

 

2016

 

 

Change

 

 

2016

 

 

2017

 

 

Change

 

 

 

2016

 

 

2017

 

Change

 

 

(In millions)

 

 

 

 

 

(In millions)

 

 

 

 

(In millions)

 

 

 

 

 

(In millions)

 

 

 

 

 

CompX

$

4.3

 

 

$

3.7

 

 

 

(14

)

%

 

$

8.0

 

 

$

7.1

 

 

 

(12

)

%

 

$

3.7

 

 

$

4.6

 

 

 

24

 

%

 

$

7.1

 

 

$

9.1

 

 

28

 

%

Insurance recoveries

 

.3

 

 

 

.2

 

 

 

-

 

 

 

 

3.4

 

 

 

.3

 

 

 

(90

)

 

 

.2

 

 

 

-

 

 

 

(72

)

 

 

 

.3

 

 

 

.1

 

 

(67

)

 

Corporate expense

 

(5.7

)

 

 

(3.3

)

 

 

(41

)

 

 

 

(9.5

)

 

 

(9.0

)

 

 

(5

)

 

 

 

(3.3

)

 

 

(3.4

)

 

 

(3

)

 

 

 

(9.0

)

 

 

(8.9

)

 

1

 

 

Income (loss) from operations

$

(1.1

)

 

$

.6

 

 

 

156

 

 

 

$

1.9

 

 

$

(1.6

)

 

 

(183

)

 

 

$

.6

 

 

$

1.2

 

 

102

 

 

 

$

(1.6

)

 

$

.3

 

 

119

 

 

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

June 30,

 

 

%

 

 

 

Six months ended

June 30,

 

 

%

 

 

Three months ended

June 30,

 

 

%

 

 

 

Six months ended

June 30,

 

%

 

 

2015

 

 

2016

 

 

Change

 

 

 

2015

 

 

2016

 

 

Change

 

 

2016

 

 

2017

 

 

Change

 

 

 

2016

 

 

2017

 

Change

 

 

(In millions)

 

 

 

 

 

(In millions)

 

 

 

 

(In millions)

 

 

 

 

 

(In millions)

 

 

 

 

 

Equity in earnings (losses)

of Kronos

$

(48.6

)

 

$

.5

 

 

 

101

 

%

 

$

(43.0

)

 

$

(.7

)

 

 

98

 

%

 

$

.5

 

 

$

59.7

 

 

 

11,840

 

%

 

$

(.7

)

 

$

70.9

 

 

10,229

 

%

Interest and dividend income

 

.3

 

 

 

.4

 

 

 

34

 

 

 

 

.6

 

 

 

.8

 

 

 

25

 

 

 

 

.4

 

 

 

.9

 

 

 

125

 

 

 

 

.8

 

 

 

1.6

 

 

100

 

 

25


CompX International Inc.

Three months ended

June 30,

 

 

%

 

 

 

Six months ended

June 30,

 

 

%

 

 

Three months ended

June 30,

 

 

%

 

 

 

Six months ended

June 30,

 

%

 

 

2015

 

 

2016

 

 

Change

 

 

 

2015

 

 

2016

 

 

Change

 

 

2016

 

 

2017

 

 

Change

 

 

 

2016

 

 

2017

 

Change

 

 

(In milllions)

 

 

 

 

 

(In millions)

 

 

 

 

(In millions)

 

 

 

 

 

(In millions)

 

 

 

 

 

Net sales

$

28.9

 

 

$

27.1

 

 

 

(6

)

%

 

$

56.8

 

 

$

54.2

 

 

 

(5

)

%

$

27.1

 

 

$

30.0

 

 

 

11

 

%

 

$

54.2

 

 

$

60.0

 

 

11

 

%

Cost of sales

 

19.8

 

 

 

18.6

 

 

 

(6

)

 

 

 

39.1

 

 

 

37.5

 

 

 

(4

)

 

 

18.6

 

 

 

20.5

 

 

 

10

 

 

 

 

37.5

 

 

 

40.8

 

 

9

 

 

Gross margin

 

9.1

 

 

 

8.5

 

 

 

(7

)

 

 

 

17.7

 

 

 

16.7

 

 

 

(6

)

 

 

8.5

 

 

 

9.5

 

 

 

12

 

 

 

 

16.7

 

 

 

19.2

 

 

15

 

 

Operating costs and expenses

 

4.8

 

 

 

4.8

 

 

 

(2

)

 

 

 

9.7

 

 

 

9.6

 

 

 

(1

)

 

 

4.8

 

 

 

4.9

 

 

 

3

 

 

 

 

9.6

 

 

 

10.1

 

 

5

 

 

Income from operations

$

4.3

 

 

$

3.7

 

 

 

(14

)

 

 

$

8.0

 

 

$

7.1

 

 

 

(12

)

 

$

3.7

 

 

$

4.6

 

 

 

24

 

 

 

$

7.1

 

 

$

9.1

 

 

29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage of net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

68

 

%

 

69

 

%

 

 

 

 

 

 

69

 

%

 

69

 

%

 

 

 

 

 

69

 

%

 

68

 

%

 

 

 

 

 

 

69

 

%

 

68

 

 

 

 

 

Gross margin

 

32

 

 

 

31

 

 

 

 

 

 

 

 

31

 

 

 

31

 

 

 

 

 

 

 

31

 

 

 

32

 

 

 

 

 

 

 

 

31

 

 

 

32

 

 

 

 

 

Operating costs

and expenses

 

17

 

 

 

18

 

 

 

 

 

 

 

 

17

 

 

 

18

 

 

 

 

 

 

 

18

 

 

 

16

 

 

 

 

 

 

 

 

18

 

 

 

17

 

 

 

 

 

Income from operations

 

15

 

 

 

14

 

 

 

 

 

 

 

 

14

 

 

 

13

 

 

 

 

 

 

 

14

 

 

 

15

 

 

 

 

 

 

 

 

13

 

 

 

15

 

 

 

 

 

 

Net sales Net sales decreased $1.8increased $2.9 million in the second quarter of 20162017 and $2.6$5.8 million in the first six months of 20162017 compared to the respective periods in 2015,of 2016, primarily due to CompX’shigher Security Products business sales in 2015 for avolumes to existing government security end-user that, as expected, did not recur in 2016.  For the six months ended June 2016, the decrease in CompX’s Security Products business sales wascustomers, partially offset by increased CompX Marine Components businessa decrease in sales of security products to the waterski/wakeboard boat market.an original equipment manufacturer of recreational transportation products.  Relative changes in selling prices did not have a material impact on net sales comparisons.

 


Cost of sales and gross margin Cost of salesgoods sold and resulting gross profit as a percentage of sales increased less than 1% in the second quarter andof 2017 was comparable to the same period in 2016. Cost of goods sold as a percentage of sales for the first six months of 2016 compared to the same periods in 2015.2017 was approximately 1% less than 2016.  As a result, gross margin as a percentage of net sales decreased slightlyprofit increased over the same periods. Gross margin dollars decreased due to lower sales in CompX’s Security Products business.period. The decrease inhigher gross marginprofit percentage for the most recent six month period is primarily due to decreased leverage of fixed manufacturing costs as a result of decreasedefficiencies facilitated by the higher production volumes during the second quarter and first six months of 2016 partially offset by improved variable contribution margins attributable to relative changes in customer and product mix, primarily inat CompX’s Security Products business.reporting unit.

Operating costs and expenses Operating costs and expenses consist primarily of sales and administrative relatedadministrative-related personnel costs, sales commissions and advertising expenses, as well as gains and losses on plant, property plant and equipment.  Operating costs and expenses for the second quarter and first six months of 20162017 were comparable to the same periods in 2015.  2016.

Income from operations As a percentage of net sales,income from operations for the second quarter and first six months of 2016 decreased2017 increased compared to the same periods in 2015period of 2016 and was primarily impacted by the factors impacting cost of goods sold, gross margin and operating costs discussed above.

Results by reporting unit

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

26

 


Three months ended

June 30,

 

 

%

 

 

 

Six months ended

June 30,

 

 

%

 

 

Three months ended

June 30,

 

 

%

 

 

 

Six months ended

June 30,

 

%

 

 

2015

 

 

2016

 

 

Change

 

 

 

2015

 

 

2016

 

 

Change

 

 

2016

 

 

2017

 

 

Change

 

 

 

2016

 

 

2017

 

Change

 

 

(In millions)

 

 

 

 

 

(In millions)

 

 

 

 

(In millions)

 

 

 

 

 

(In millions)

 

 

 

 

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Security Products

$

25.0

 

 

$

23.2

 

 

 

(7

)

%

 

$

49.7

 

 

$

46.6

 

 

 

(6

)

%

$

23.2

 

 

$

26.0

 

 

 

12

 

%

 

$

46.6

 

 

$

52.1

 

 

12

 

%

Marine Components

 

3.9

 

 

 

3.9

 

 

 

1

 

 

 

 

7.1

 

 

 

7.6

 

 

 

7

 

 

 

3.9

 

 

 

4.0

 

 

 

1

 

 

 

 

7.6

 

 

 

7.9

 

 

4

 

 

Total net sales

$

28.9

 

 

$

27.1

 

 

 

(6

)

 

 

$

56.8

 

 

$

54.2

 

 

 

(5

)

 

$

27.1

 

 

$

30.0

 

 

 

11

 

 

 

$

54.2

 

 

$

60.0

 

 

11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Security Products

$

8.0

 

 

$

7.4

 

 

 

(8

)

 

 

$

15.8

 

 

$

14.7

 

 

 

(7

)

 

$

7.4

 

 

$

8.4

 

 

 

14

 

 

 

$

14.7

 

 

$

17.2

 

 

17

 

 

Marine Components

 

1.1

 

 

 

1.1

 

 

 

-

 

 

 

 

1.9

 

 

 

2.0

 

 

 

6

 

 

 

1.1

 

 

 

1.1

 

 

 

(3

)

 

 

 

2.0

 

 

 

2.0

 

 

-

 

 

Total gross margin

$

9.1

 

 

$

8.5

 

 

 

(7

)

 

 

$

17.7

 

 

$

16.7

 

 

 

(6

)

 

$

8.5

 

 

$

9.5

 

 

 

12

 

 

 

$

16.7

 

 

$

19.2

 

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Security Products

$

5.3

 

 

$

4.8

 

 

 

(9

)

 

 

$

10.2

 

 

$

9.3

 

 

 

(9

)

 

$

4.8

 

 

$

5.4

 

 

 

12

 

 

 

$

9.3

 

 

$

11.0

 

 

19

 

 

Marine Components

 

.6

 

 

 

.6

 

 

 

(8

)

 

 

 

.9

 

 

 

.9

 

 

 

3

 

 

 

.6

 

 

 

.5

 

 

 

(11

)

 

 

 

.9

 

 

 

.9

 

 

(3

)

 

Corporate operating expenses

 

(1.6

)

 

 

(1.7

)

 

 

4

 

 

 

 

(3.1

)

 

 

(3.1

)

 

 

1

 

 

 

(1.7

)

 

 

(1.3

)

 

 

(23

)

 

 

 

(3.1

)

 

 

(2.8

)

 

9

 

 

Total income from

operations

$

4.3

 

 

$

3.7

 

 

 

(14

)

 

 

$

8.0

 

 

$

7.1

 

 

 

(12

)

 

$

3.7

 

 

$

4.6

 

 

 

24

 

 

 

$

7.1

 

 

$

9.1

 

 

29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Security Products

 

32

 

%

 

32

 

%

 

 

 

 

 

 

32

 

%

 

32

 

%

 

 

 

 

 

32

 

%

 

32

 

%

 

 

 

 

 

 

32

 

%

 

33

 

 

 

 

 

Marine Components

 

29

 

 

 

28

 

 

 

 

 

 

 

 

27

 

 

 

27

 

 

 

 

 

 

 

28

 

 

 

27

 

 

 

 

 

 

 

 

27

 

 

 

26

 

 

 

 

 

Total gross margin

 

32

 

 

 

31

 

 

 

 

 

 

 

 

31

 

 

 

31

 

 

 

 

 

 

 

31

 

 

 

32

 

 

 

 

 

 

 

 

31

 

 

 

32

 

 

 

 

 

Income from operations margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Security Products

 

21

 

%

 

21

 

%

 

 

 

 

 

 

21

 

%

 

20

 

%

 

 

 

 

 

21

 

%

 

21

 

%

 

 

 

 

 

 

20

 

%

 

21

 

 

 

 

 

Marine Components

 

16

 

 

 

14

 

 

 

 

 

 

 

 

12

 

 

 

12

 

 

 

 

 

 

 

14

 

 

 

13

 

 

 

 

 

 

 

 

12

 

 

 

11

 

 

 

 

 

Total income from

operations margin

 

15

 

 

 

14

 

 

 

 

 

 

 

 

14

 

 

 

13

 

 

 

 

 

 

 

14

 

 

 

15

 

 

 

 

 

 

 

 

13

 

 

 

15

 

 

 

 

 

 


SecurityProducts Security Products net sales decreased 7%increased 12% in each of the second quarter of 2016 and 6% in the first six months of 20162017 compared to the same periods last year. The decreaseincrease in sales is primarily due to a decrease of approximately $1.6$3.2 million and $3.2$6.3 million in sales for a government security end-user that did not recur in the second quarter or firstand six monthsmonth periods, respectively, in higher sales volumes to existing government security customers, partially offset by decreases of 2016, respectively. approximately $0.9 million and $1.7 million for the second quarter and six month periods, respectively, in sales to a customer serving the recreational transportation market.  

Gross profit margin and operating income from operations as a percentage of sales for the second quarter of 2017 were comparable to the same period in the prior year. Gross profit margin and operating income as a percentage of sales for the first six months of 2016 decreased2017 increased compared to the same periodsperiod in 2015 primarily due to decreased leverage of fixed costs and operating costs and expenses2016 as a result of decreasedmanufacturing efficiencies, principally in the first quarter of 2017, facilitated by higher production volumes, partially offset by improved variable contribution margins attributable to changes in customer and product mix.  

volumes.

Marine Components Marine Components net sales increased 1% and 7%4% in the second quarter and first six months of 2016,2017, respectively, as compared to the same periods last year. The increase in sales for the first six months of 2016 is primarily due to2017 reflects generally improved demand for products sold to the waterski/wakeboard boat market.various markets. Gross profit margin and operating income from operations as a percentage of net sales fordecreased in the second quarter and first six months of 2016 decreased from2017 compared to the same period in 2015.  Dueperiods last year due to recent shifts ina combination of factors, including customer and product mix that temporarily reduced required stocking levels, Marine Components’ production volumes for the second quarter of 2016 were lower than the same periodas well as manufacturing inefficiencies resulting from temporary personnel turnover in 2015, resulting in decreased leverage of fixed costs and operating costs and expenses in the current period.  Gross margin and income from operations as a percentage of net sales for the first six months of 2016 were comparable to the same period in 2015.  key departments.

Outlook Security Products salesSales for the first half of 2016 were comparable2017 reflect continued strong demand for our products, particularly high-security applications for our existing government customers, partially offset by lower security product sales to the firsttransportation market, where a significant customer of the segment continues to experience weakened sales volumes. While we expect government security sales to moderate in the second half of 2015 except2017 and anticipate continued softness in transportation sales, full year sales of security products for approximately $3.2 million in 20152017 should meet or exceed 2016 levels. Similarly, we expect 2017 sales for a government security end-user project which did not recur in 2016.  We continueof marine products to meet or exceed 2016, as our growing Marine Components segment continues to benefit from innovation and diversification in our product offerings particularly with respect to the

27


recreational boat markets served by our Marine Components business.  With the exception of the nonrecurring sales of over $5 millionmarket. As in all of 2015 for the single government security end-user (including the $3.2 million in the first half of the year), and in the absence of any improvement in general economic conditions, current year sales are expected to remain relatively comparable to prior year.  Weperiods, we will continue to monitor general economic conditions and sales order rates and respond to fluctuations in customer demand through continuous evaluation of staffing levels and consistent execution of our lean manufacturing and cost improvement initiatives. Additionally, we continue to seek opportunities to gain market share in existing markets we currently serve, to expand into new markets and to further develop new and current customers, products andproduct features in order to mitigate the impact of changes in demand andas well as broaden our sales base.  Any success in these efforts could lead to sales and profitability levels in the second half of 2016 greater than otherwise anticipated.

General corporate and other items

Insurance recoveries We have agreements with certain insurance carriers pursuant to which the carriers reimburse us for a portion of our past lead pigment and asbestos litigation defense costs.  Insurance recoveries include amounts we received from these insurance carriers.  Substantially all of the $3.4 million insurance recoveries we recognized in the first six months of 2015 relate to a first quarter settlement we reached with one of our insurance carriers in which they agreed to reimburse us for a portion of our past 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 13 to our Condensed Consolidated Financial Statements.  

Corporate expense – Corporate expenses were $3.3$3.4 million in the second quarter of 2016, $2.42017, $.1 million lowerhigher than in the second quarter of 20152016 primarily due to lower environmental remediationhigher litigation and related costs in 2016.2017 mostly offset by lower administrative costs in 2017.  Included in corporate expense in the second quarter of 20152016 and 20162017 are:

·

environmental remediation and related costs of $.3 million in 2016 compared to $2.5 million in 2015, and

litigation fees and related costs of $1.3 million in 2017 compared to $.8 million in 2016, and

·

litigation fees and related costs of $.8 million in 2016 compared to $1.0 million in 2015.

environmental remediation and related costs of $.1 million in 2017 compared to $.2 million in 2016.


Corporate expenses were $9.0$8.9 million in the first six months of 2016, $.52017, $.1 million lower than in the first six months of 20152016 primarily due to lower administrative expenses in 2017 mostly offset by higher litigation feesand related costs and environmental remediation and related costs in 2016.2017.  Included in corporate expense in the first six months of 20152016 and 2017 are:

litigation fees and related costs of $1.8 million in 2017 compared to $1.6 million in 2016, are:and

·

environmental remediation and related costs of $3.1 million in 2016 compared to $2.6 million in 2015, and

·

litigation and related costs of $1.7 million in 2016 compared to $2.8 million in 2015.

environmental remediation and related costs of $3.2 million in 2017 compared to $3.1 million in 2016.

The level of our litigation fees and related costs varies from period to period depending upon, among other things, the number of cases in which we are currently involved, the nature of such cases and the current stage of such cases (e.g. discovery, pre-trial motions, trial or appeal, if applicable).  See Note 13 to our Condensed Consolidated Financial Statements.  If our current expectations regarding the number of cases in which we expect to be involved during 20162017 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 2016,2017, 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 13 to our Condensed Consolidated Financial Statements.

28


Overall, we expect that our general corporate expenses for all of 20162017 will be comparable to 2015.  2016.  If our current expectations regarding the number of cases or sites in which we expect to be involved during 2016,2017, or if the nature of such cases or sites were to change, our corporate expenses could be higher than we currently estimate and involve amounts that are material.

Interest and dividend income – Interest and dividend income increased $.5 million in the second quarter and $.8 million in the first half of 2017 compared to prior year periods primarily due to interest income earned on CompX’s revolving promissory note receivable from Valhi, which CompX entered into in August 2016.  Interest income on such note receivable from Valhi was $.4 million in the second quarter of 2017 and $.8 million in the first six months of 2017.  

Income tax expense We recognized an income tax expense of $20.3 million in the second quarter of 2017 compared to $.3 million in the second quarter of 2016 compared toand income tax benefitexpense of $20.6$22.5 million in the second quarterfirst half of 2015 and2017 compared to an income tax benefit of $.5 million in the first six monthshalf of 2016 compared to an income tax benefit of $22.0 million in the first six months of 2015.2016.  Our income tax benefit in the first six months of 2015 includes a first quarter non-cash income tax benefit of $3.0 million related to the release of a portion of our reserve for uncertain tax positions due to the expiration of the applicable statute of limitations.  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 $10.6 million in the first half of each of the first six months of 20152016 and 2016.2017.

Our effective tax rate attributable to our equity in earnings of Kronos, including the effect of the non-taxable dividends we received from Kronos was 30.9% in the first six months of 2017 and 9.7% in the first six months of 2016 and 45.9% in the first six months of 2015.  Kronos has substantial net operating losses in Germany and Belgium, the benefit of which Kronos had previously recognized under the more-likely-than-not recognition criteria.  In the second quarter of 2015, Kronos determined that such losses did not meet the more-likely-than-not recognition criteria, and as a result Kronos recognized a non-cash deferred income tax expense of $150.3 million in the second quarter of 2015 as a valuation allowance against Kronos’ net deferred income tax assets in such jurisdictions.  Kronos recognized $2.9 million of deferred tax expense in the second quarter of 2016 as additional valuation allowance against additional losses in such jurisdictions.  Our equity in losses of Kronos in the second quarter and first six months of 2015 and 2016 includes our equity in such non-cash deferred income tax expense recognized by Kronos.  2016.  See Note 11 to our Condensed Consolidated Financial Statements for more information about our 20162017 income tax items, including a tabular reconciliation of our statutory tax expense (benefit) to our actual expense (benefit).


Noncontrolling interest Noncontrolling interest in net income of CompX is consistent in the second quarter and year-to-date periods of 20152016 and 2016.2017.  The noncontrolling interest we recognize in each period is directly related to the level of earnings at CompX for the period.


29


Equity in earnings (losses) of Kronos Worldwide, Inc.

Three months ended

June 30,

 

 

%

 

Six months ended

June 30,

 

 

%

Three months ended

June 30,

 

 

%

 

Six months ended

June 30,

 

 

%

2015

 

 

2016

 

 

Change

 

2015

 

 

2016

 

 

Change

2016

 

 

2017

 

 

Change

 

2016

 

 

2017

 

 

Change

(In millions)

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

Net sales

$

360.2

 

 

$

356.1

 

 

 

(1

)

%

 

$

725.3

 

 

$

674.5

 

 

 

(7

)

%

$

356.1

 

 

$

441.4

 

 

 

24

 

%

 

$

674.5

 

 

$

811.2

 

 

 

20

 

%

Cost of sales

 

313.7

 

 

 

300.6

 

 

 

(4

)

%

 

 

601.4

 

 

 

578.6

 

 

 

(4

)

%

 

300.6

 

 

 

311.6

 

 

 

4

 

%

 

 

578.6

 

 

 

578.0

 

 

 

-

 

%

Gross margin

$

46.5

 

 

$

55.5

 

 

 

 

 

 

 

$

123.9

 

 

$

95.9

 

 

 

 

 

 

$

55.5

 

 

$

129.8

 

 

 

 

 

 

 

$

95.9

 

 

$

233.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

$

(10.4

)

 

$

10.5

 

 

 

201

 

%

 

$

21.8

 

 

$

10.2

 

 

 

(53

)

%

Income from operations

$

10.5

 

 

$

70.1

 

 

 

568

 

%

 

$

10.2

 

 

$

122.4

 

 

 

1,100

 

%

Other, net

 

.1

 

 

 

.2

 

 

 

 

 

 

 

 

.3

 

 

 

.4

 

 

 

 

 

 

 

.2

 

 

 

.1

 

 

 

 

 

 

 

 

.4

 

 

 

.3

 

 

 

 

 

 

Interest expense

 

(4.4

)

 

 

(5.1

)

 

 

 

 

 

 

 

(9.0

)

 

 

(10.2

)

 

 

 

 

 

 

(5.1

)

 

 

(4.8

)

 

 

 

 

 

 

 

(10.2

)

 

 

(9.5

)

 

 

 

 

 

Income (loss) before income taxes

 

(14.7

)

 

 

5.6

 

 

 

 

 

 

 

 

13.1

 

 

 

.4

 

 

 

 

 

 

Income tax expense

 

145.1

 

 

 

3.9

 

 

 

 

 

 

 

 

154.5

 

 

 

2.5

 

 

 

 

 

 

Income before income taxes

 

5.6

 

 

 

65.4

 

 

 

 

 

 

 

 

0.4

 

 

 

113.2

 

 

 

 

 

 

Income tax expense (benefit)

 

3.9

 

 

 

(131.1

)

 

 

 

 

 

 

 

2.5

 

 

 

(120.1

)

 

 

 

 

 

Net income (loss)

$

(159.8

)

 

$

1.7

 

 

 

 

 

 

 

$

(141.4

)

 

$

(2.1

)

 

 

 

 

 

$

1.7

 

 

$

196.5

 

 

 

 

 

 

 

$

(2.1

)

 

$

233.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage of net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

87

 

%

 

84

 

%

 

 

 

 

 

 

83

 

%

 

86

 

%

 

 

 

 

 

84

 

%

 

71

 

%

 

 

 

 

 

 

86

 

%

 

71

 

%

 

 

 

 

Income (loss) from operations

 

(3

)

%

 

3

 

%

 

 

 

 

 

 

3

 

%

 

2

 

%

 

 

 

 

 

3

 

%

 

16

 

%

 

 

 

 

 

 

2

 

%

 

15

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings (losses)

of Kronos Worldwide, Inc.

$

(48.6

)

 

$

.5

 

 

 

 

 

 

 

$

(43.0

)

 

$

(.7

)

 

 

 

 

 

$

0.5

 

 

$

59.7

 

 

 

 

 

 

 

$

(0.7

)

 

$

70.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TiO2 operating statistics:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales volumes*

 

139

 

 

 

149

 

 

 

7

 

%

 

 

270

 

 

 

287

 

 

 

6

 

%

 

149

 

 

 

157

 

 

 

6

 

%

 

 

287

 

 

 

300

 

 

 

5

 

%

Production volumes*

 

140

 

 

 

131

 

 

 

(7

)

%

 

 

265

 

 

 

262

 

 

 

(1

)

%

 

131

 

 

 

141

 

 

 

8

 

%

 

 

262

 

 

 

286

 

 

 

9

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in TiO2 net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TiO2 product pricing

 

 

 

 

 

 

 

 

 

(7

)

%

 

 

 

 

 

 

 

 

 

 

(11

)

%

 

 

 

 

 

 

 

 

 

20

 

%

 

 

 

 

 

 

 

 

 

 

19

 

%

TiO2 sales volumes

 

 

 

 

 

 

 

 

 

7

 

 

 

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

5

 

 

TiO2 product mix/other

 

 

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

Changes in currency exchange rates

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

Total

 

 

 

 

 

 

 

 

 

(1

)

%

 

 

 

 

 

 

 

 

 

 

(7

)

%

 

 

 

 

 

 

 

 

 

24

 

%

 

 

 

 

 

 

 

 

 

 

20

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* Thousands of metric tons

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The key performance indicators for Kronos are TiO2 average selling prices, its level of TiO2 sales and production volumes and the cost of third-party feedstock ore.  TiO2 selling prices generally follow industry trends and prices will increase or decrease generally as a result of market pressures.

Current industry conditions Due to competitive pressures, Kronos’ average selling prices decreased throughout 2015 and, to a much lesser extent, into the first quartersuccessful implementation of 2016.   Kronos’ average selling prices at the beginning of 2016 were 17% lower as compared to the beginning of 2015.  In the second quarter of 2016, Kronos’previously-announced price increases, average selling prices began to rise duein the second quarter of 2016 and have continued to rise through the first half of 2017.  Kronos’ average TiO2 selling prices in the second quarter of 2017 were 20% higher as compared to the implementationsecond quarter of previously-announced price increases.2016, and Kronos’ average selling prices at the end of the second quarter of 20162017 were 4%8% higher than at the end of the first quarter of 20162017, and 2%were 12% higher than at the end of 2015,2016, with higher prices in mostall major markets except Latin America.markets.  Kronos experienced higher sales volumes in European,the North American and export markets in the second quarter and first half of 20162017 as compared to the second quarter and first halfsame period of 2015,2016, partially offset by slightly lower volumes in the Latin American market in 2016 as compared to the same periods of 2015.market.


Kronos operated its production facilities at overall average capacity utilization rates of 100% in the first six months of 2017 compared to approximately 96% in the first six months of 2016.  The table below lists Kronos’ comparative quarterly capacity utilization rates.

 

Production Capacity Utilization Rates

 

 

 

2016

 

 

2017

 

 

First quarter

   97%

 

 

  100%

 

 

Second quarter

95%

 

 

100%

 

 

Throughout 2016, (approximately 97% and 95% of practical capacity in the first and second quarters, respectively) compared to approximately 97% in the first six months of 2015 (93% and 100% in the first and second quarters of

30


2015, respectively).  Kronos’ production rates in the first quarter of 2015 were impacted by the implementation of certain productivity-enhancing improvement projects at certain facilities, as well as necessary improvements to ensure continued compliance with its permit regulations, which resulted in longer-than-normal maintenance shutdowns in some instances.

Kronos experienced moderation in the cost of TiO2 feedstock ore procured from third parties in 2015 which continued into the first half of 2016.  Given the time lag between when third-party feedstock ore is purchased and when the TiO2 product produced with such ore is reflected in its cost of sales,parties.  Kronos’ cost of sales per metric ton of TiO2 sold declined throughout 20152016 and into the first halfsix months of 2017 primarily due to the moderation in the cost of TiO2  feedstock ore in 2016.  Consequently, Kronos’ cost of sales per metric ton of TiO2 sold in the first six months of 20162017 was lower than its cost of sales per metric ton of TiO2 sold in the first six months of 20152016 (excluding the effect of changes in currency exchange rates).

Net sales – Kronos’ net-Net sales in the second quarter of 2016 decreased 1%2017 increased 24%, or $4.1$85.3 million, compared to the second quarter of 20152016 primarily due to the net effectfavorable effects of a 7% decrease20% increase in average TiO2 selling prices (which decreasedincreased net sales by approximately $25$71 million) and a 7%6% increase in sales volumes (which increased net sales by approximately $25$21 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 increased 7%6% in the second quarter of 20162017 as compared to the second quarter of 20152016 primarily due to higher sales in European,the North American and exportEuropean markets, partially offset by lower sales in the Latin America.American market.  Kronos’ sales volumes in the second quarter of 20162017 set a new overall record for a second quarter.  In addition to the impact of changes in average TiO2 selling prices and sales volumes, Kronos estimates that changes in currency exchange rates (primarily the euro) increaseddecreased its net sales by approximately $5$8 million as compared to the second quarter of 2015.2016.

Kronos’ netNet sales in the first six months of 2016 decreased 7%2017 increased 20%, or $50.8$136.7 million, compared to the first six months of 20152016 primarily due to the net effectfavorable effects of an 11% decreasea 19% increase in average TiO2 selling prices (which decreasedincreased net sales by approximately $80$128 million) and a 6%5% increase in sales volumes (which increased net sales by approximately $44$34 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 increased 6%5% in the first six months of 20162017 as compared to the first six months of 20152016 primarily due to higher sales in European,the North American and export markets, partially offset by lower sales in the Latin America.American market.  Kronos’ sales volumes in the first half of 20162017 set a new overall record for a first-six-monthsfirst-six-month period.  In addition to the impact of changes in average TiO2 selling prices and sales volumes, Kronos estimates that changes in currency exchange rates decreased its net sales by approximately $6$15 million as compared to the first six months of 2015.2016.  

Cost of sales Kronos’ cost of sales decreased $13.1increased $11.0 million or 4% in the second quarter of 20162017 compared to the second quarter of 20152016 due to the net impact of lower raw materials and other production costs of approximately $17 million (primarily lower third-party feedstock ore costs), approximately $2.0 million in savings resulting from workforce reductions implemented in 2015 as part of a restructuring plan designed to improve Kronos’ long-term cost structure, a 7%6% increase in sales volumes, a 7% decreaseefficiencies related to an 8% increase in TiO2 production volumes, lower raw materials and production costs of approximately $1 million and currency fluctuations (primarily the euro).  Kronos’ cost of sales in 2015 includes approximately $10.7 million of severance costs related to workforce reductions.  Kronos’ cost of sales as a percentage of net sales decreased to 84%71% in the second quarter of 20162017 compared to 87%84% in the same period of 2015, as2016 primarily due to the favorable effectsimpact of higher average selling prices, and to a lesser extent lower raw materials and other production costs and the impact of the $10.7 million second quarter 2015 workforce reduction charge classified in cost of sales, and associated cost savings from such workforce reduction realized in the second quarter of 2016, more than offset the unfavorable impact of lower average selling prices and lowerefficiencies related to higher production volumes, as discussed above.volumes.  

Kronos’ cost of sales decreased $22.8$.6 million or 4% in the first six months of 20162017 compared to the same period in 20152016 primarily due to the net impact of a 5% increase in sales volumes, efficiencies related to a 9% increase in TiO2 production volumes, lower raw materials and other production costs of approximately $23$14 million (primarily lower third-party feedstock ore costs), approximately $4.0 million in savings resulting from

31


workforce reductions implemented in 2015, a 6% increase in sales volumes, and currency fluctuations (primarily the euro).  Kronos’ cost of sales in 2015 includes approximately $10.7 million of severance costs related to workforce reductions.

Kronos’ cost of sales as a percentage of net sales increaseddecreased to 86%71% in the first six


months of 20162017 compared to 83%86% in the same period of 2015, as2016 due to the unfavorablefavorable impact of lowerhigher average selling prices, more than offset the favorable effects of lower raw materials and other production costs and the impact of the $10.7 million second quarter 2015 workforce reduction charge classified in cost of sales and associated cost savings from such workforce reduction realized in the first six months of 2016, as discussed above.efficiencies related to higher production volumes.

Other operating income and expense, netKronos’ other operating income and expense, net in the second quarter of 2016 was $45.0 million, a decrease of $11.9 million compared to the second quarter of 2015.  Kronos’ other operating expense in the second quarter of 2015 includes $10.4 million of severance costs related to workforce reductions classified in selling, general and administrative expense.  In addition, Kronos’ other operating expense decreased in the second quarter of 2016 due to approximately $3.0 million in cost savings realized in 2016 from workforce reductions implemented in 2015, and other operating income and expense in the second quarterfirst six months of 2016 includes an insurance settlement gain of $1.4 million and $3.4 million in the second quarter and first six months of 2016, respectively, related to a 2014 business interruption claim.

Kronos’ other operating income and expense, net in the first six months of 2016 was $85.7 million, a decrease of $16.4 million compared to the first six months of 2015.  Kronos’ other operating expense in the second quarter of 2015 includes $10.4 million of severance costs related to workforce reductions classified in selling, general and administrative expense.  In addition, Kronos’ other operating expense decreased in the first six months of 2016 due to approximately $5.5 million in cost savings realized in 2016 from workforce reductions implemented in 2015, and other operating income and expense in the first six months of 2016 also includes an insurance settlement gain of $3.4 million related to a 2014 business interruption claim.

Gross margin and income (loss) from operationsKronos’ income from operations increased by $20.9$59.6 million compared to the second quarter of 2015.2016.  Income (loss) from operations as a percentage of net sales increased to 3%16% in the second quarter of 20162017 from (3)%3% in the same period of 2015.2016.  This increase was driven by the increase in gross margin percentage, which increased to 29% for the second quarter of 2017 compared to 16% for the second quarter of 2016 compared to 13% for the second quarter of 2015, and the impact of the $10.4 million second quarter 2015 workforce reduction charge classified in selling, general and administrative expense and the associated cost savings from such workforce reduction realized in the second quarter of 2016 of $3.0 million.2016.  As discussed and quantified above, Kronos’ gross margin percentage increased primarily due to the net effecteffects of higher average selling prices, higher sales and production volumes and lower raw materialmaterials and other production costs (including 2015 workforce reduction charges of $10.7 million classified as cost of sales and the associated $2.0 million of cost savings from such workforce reduction realized in 2016), higher sales volumes, lower selling prices and lower production volumes.costs.  Kronos estimates that changes in currency exchange rates increaseddecreased income from operations by approximately $4$5 million in the second quarter of 20162017 as compared to the same period in 2015,2016, as discussed below.

Kronos’ incomeIncome from operations decreasedincreased by $11.6$112.2 million in the first six months of 2017 compared to the first six months of 2015.2016.  Income from operations as a percentage of net sales decreasedincreased to 2%15% in the first six months of 20162017 from 3%2% in the same period of 2015.2016.  This decreaseincrease was driven by the declineincrease in gross margin, which decreasedincreased to 29% for the first six months of 2017 compared to 14% for the first six months of 2016 compared to 17% for the first six months of 2015, partially offset by the impact of the $10.4 million second quarter 2015 workforce reduction charge classified in selling, general and administrative expense and the associated cost savings from such workforce reductions realized in the first six months of 2016 of $5.5 million.2016.  As discussed and quantified above, Kronos’ gross margin decreasedincreased primarily due to the net effecteffects of lowerhigher average selling prices, higher sales and production volumes and lower raw materialmaterials and other production costs (including 2015 workforce reduction charges of $10.7 million classified as cost of sales and the associated $4.0 million of cost savings from such workforce reduction realized in 2016), and higher sales volumes.costs.  Kronos estimates that changes in currency exchange rates increaseddecreased income from operations by approximately $11$13 million in the first six months of 20162017 as compared to the same period in 2015.2016.

Other non-operating income (expense)– Kronos’ interest expense increased $.7decreased $.3 million, or 16%6%, in the second quarter of 20162017 compared to the second quarter of 2015.  Kronos’ interest2016.  Interest expense increased $1.2decreased $.7 million, or 13%7%, in the first six months of 20162017 compared to 2015 primarily due to higher average debt levels in 2016.  Kronos currently expectsexpect its interest expense for all of 20162017 will be comparable to 2015.2016.  

32


Income tax expense (benefit) - Kronos recognized income tax benefit of $131.1 million in the second quarter of 2017 compared to an income tax expense of $3.9 million in the second quarter of 20162016.  Kronos recognized income tax benefit of $120.1 million in the first six months of 2017 compared to an income tax expense of $145.1$2.5 million in the second quarterfirst six months of 2015.  As discussed below, Kronos’ income tax expense in the second quarter of 2016 and 2015 includes a non-cash deferred income tax expense of $2.9 million and $150.3 million, respectively, related2016.  The difference is primarily due to the recognitioneffect of athe reversal of Kronos’ deferred income tax asset valuation allowance for itsassociated with Kronos’ German and Belgian operations.operations in 2017, as discussed below.  Kronos’ earnings are subject to income tax in various U.S. and non-U.S. jurisdictions, and the income tax rates applicable to its pre-tax earnings (losses) of its non-U.S. operations is generally lower than the income tax rates applicable to Kronos’its U.S. operations.  Excluding the effect of any increase or decrease in its deferred income tax asset valuation allowance, Kronos would generally expect its overall effective tax rate to be lower than the U.S. federal statutory tax rate of 35% primarily because of its non-U.S. operations.  

Kronos has substantial net operating loss (NOL) carryforwards in Germany (the equivalent of $683$638 million for German corporate purposes and $96$71 million for German trade tax purposes respectively, at December 31, 2015)2016) and in Belgium (the equivalent of $86$93 million for Belgian corporate tax purposes at December 31, 2015)2016), all of which have an indefinite carryforward period.  As a result, Kronos has net deferred income tax assets with respect to these two jurisdictions, primarily related to these NOL carryforwards.  The German corporate tax is similar to the U.S. federal income tax, and the German trade tax is similar to the U.S. state income tax.  Prior to June 30, 2015, and using all available evidence, Kronos had concluded no deferred income tax asset valuation allowance was required to be recognized with respect to these net deferred income tax assets under the more-likely-than-not recognition criteria, primarily because (i) the carryforwards have an indefinite carryforward period, (ii) Kronos utilized a portion of such carryforwards during the most recent three-year period, and (iii) Kronos expected to utilize the remainder of the carryforwards over the long term.  Kronos had also previously indicated that facts and circumstances could change, which might in the future result in the recognition of a valuation allowance against some or all of such deferred income tax assets.  However, as of June 30, 2015, and given Kronos’ operating results during the second quarter of 2015 and Kronos’its expectations at that time for its operating results for the remainder of 2015, which had been driven in large part by the trend in Kronos’ average TiO2 selling prices over such periods as well as the $21.1 million pre-tax


charge recognized in the second quarter of 2015 in connection with the implementation of certain workforce reductions, Kronos did not have sufficient positive evidence to overcome the significant negative evidence of having cumulative losses in the most recent twelve consecutive quarters in both its German and Belgian jurisdictions at June 30, 2015 (even considering that the carryforward period of its German and Belgian NOL carryforwards is indefinite, one piece of positive evidence).  Accordingly, at June 30, 2015, Kronos concluded that it was required to recognize a non-cash deferred income tax asset valuation allowance under the more-likely-than-not recognition criteria with respect to its German and Belgian net deferred income tax assets at such date.  Kronos recognized an additional non-cash deferred income tax asset valuation allowance during the second half of 2015 due to losses recognized by its German and Belgian operations during such period.  During 2016, Kronos recognized an aggregate $2.2 million non-cash tax benefit as the result of a net decrease in such deferred income tax valuation allowance, as the impact of utilizing a portion of its German NOLs during such period more than offset the impact of additional losses recognized by its Belgian operations during such period.  Such valuation allowance aggregated $168.9approximately $173 million at December 31, 2015.2016 ($153 million with respect to Germany and $20 million with respect to Belgium).  During the first six months of 2017, Kronos recognized an additionalaggregate non-cash income tax benefit of $12.7 million as a result of a net decrease in such deferred income tax asset valuation allowance, due to utilizing a portion of both the German and Belgian NOLs during the first half of 2016 of $2.9such period, including $7.7 million all of which was recognized in the second quarter.quarter of 2017.  Kronos continues to believe it will ultimately realize the full benefit of these German and Belgian NOL carryforwards, in part because of their indefinite carryforward period.  However,As previously disclosed, Kronos’ ability to reverse all or a portion of sucheither the German or Belgian valuation allowance in the future is dependent on the presence of sufficient positive evidence, such as the existence of cumulative profits in the most recent twelve consecutive quarters or profitability in recent quarters during which such profitability was trending upward throughout such period, and the ability to demonstrate future profitability for a sustainable period.  UntilAs noted below, Kronos determined such time as Kronos is able to reverse the valuation allowance in full, to the extent Kronos generates additional losses in Germany or Belgiumconditions were satisfied at June 30, 2017.  

Although Kronos’ Belgian operations were profitable in the intervening periods, Kronos’ effective income tax rate would be impacted by the existencefirst quarter of such valuation allowance, because such losses would effectively be recognized without any associated net income tax benefit, as such losses would result in a further increase in the deferred income tax asset valuation allowance.  Alternatively, until such time as Kronos is able to reverse the valuation allowance in full, to the extent Kronos generates income in Germany or Belgium in the intervening periods, its effective income tax rate would also be impacted by the existence of such valuation allowance, because such income may be recognized without any associated net income tax expense, subject to certain NOL usage limitations, as Kronos would reverse2017 and it utilized a portion of the Belgian NOLs during such period, Kronos’ Belgian operations continued to have cumulative losses in the most recent twelve quarters at March 31, 2017.  Although the results of Kronos’ German operations had improved during 2016 and the first quarter of 2017, indicating a change in the negative trend in earnings that existed at December 31, 2015, and Kronos utilized a portion of its German NOLs during 2016 and the first quarter of 2017, and Kronos had cumulative income with respect to its German operations for the most recent twelve consecutive quarters at March 31, 2017, the sustainability of such positive trend in earnings had not yet been demonstrated at such date.  As previously disclosed, while neither Kronos’ business as a whole nor any of its principal product groups is seasonal to any significant extent, TiO2 sales are generally higher in the second and third quarters of the year, due in part to the increase in paint production in the spring to meet demand during the spring and summer painting seasons.  While Kronos has some insight into the overall demand expected to be generated by a particular year’s paint season and TiO2 pricing at the end of the first quarter (the start of the paint season), it has much greater insight and certainty regarding overall demand and TiO2 pricing for a particular year’s paint season by the end of the second quarter of the year, in part because some factors, such as weather, can have an impact on both overall demand and pricing each year.  Accordingly, at March 31, 2017 Kronos did not have sufficient positive evidence to support a sustainable profit trend and consequently, it did not have sufficient positive evidence under the more-likely-than-not recognition criteria to support reversal of the entire valuation allowance related to offsetKronos’ German or Belgian operations at such date.  During the second quarter of 2017, Kronos’ German and Belgian operations continued to be profitable, and both reported levels of profitability higher as compared to the first quarter of 2017.   As discussed above, Kronos’ consolidated results of operations in general, and its German and Belgian operations in particular, were favorably impacted during the quarter by, among other things, continued higher average TiO2 selling prices and higher sales volumes.  Kronos’ German operations had cumulative income tax expense attributablefor the most recent twelve consecutive quarters at June 30, 2017.  While Kronos’ Belgian operations had cumulative losses in the most recent twelve consecutive quarters at June 30, 2017, such operations generated income in both the first and second quarters of 2017, with higher income in the second quarter as compared to such income.the first quarter, the amount of cumulative losses of Kronos’ Belgian operations for the most recent twelve consecutive quarters was lower as of June 30, 2017 as compared to both March 31, 2017 and December 31, 2016 and Kronos expects to have cumulative profits in the third and fourth quarters.   Kronos’ production facilities have been operating at near practical capacity utilization rates in the first six months of 2017.  In addition, any change in tax law related to the indefinite carryforward period of these NOLs could adversely impact Kronos’ ability to reverse the valuation allowance in full.  Consistentconsistent with Kronos’ expectation regarding its consolidated results of operations infor the remainder of 20162017 (as discussed below under the “Outlook” subsection), Kronos currently believes it is likely its German and Belgian operations will continue to report improved operating results in 20162017 as compared to 2015.  However2016.  Accordingly, at June 30, 2017 Kronos currently does concluded it now has sufficient positive evidence under the more-likely-than-


not expect that its German and Belgian operating results would improverecognition criteria to such an extent in 2016 thatsupport reversal of the entire valuation allowance in full would be supported by the presence of sufficient positive evidence.  

33


Kronos recognized income tax expense of $2.5 million in the first six months of 2016 compared to income tax expense of $154.5 million in the same period last year.  As discussed above, Kronos’ income tax expense in the first six months of 2016 and 2015 includes a second quarter non-cash deferred income tax expense of $2.9 million and $150.3 million, respectively, related to the recognition of a deferred income tax asset valuation allowance for its German and Belgian operations.  As discussed below, a large portion of the remaining valuation allowance is reversed as of June 30, 2017, but a portion of the remaining valuation allowance will be reversed in the second half of 2017.  Such sufficient positive evidence includes, among other things, the existence of cumulative profits in the most recent twelve consecutive quarters (Germany) or profitability in recent quarters during which such profitability was trending upward throughout such period (Belgium), the ability to demonstrate future profitability in Germany and Belgium for a sustainable period (as supported by, among other things, recent trends in profitability, driven in large part by increases in TiO2 selling prices, and continued strong demand indicating that such profitability trends will continue in the future), and the indefinite carryforward period for the German and Belgian NOLs.  Kronos’ earnings are subject to income tax benefit in various U.S. and non-U.S. jurisdictions, and the second quarter of 2017 includes an aggregate non-cash income tax rates applicablebenefit of $149.9 million related to its pre-tax earnings (losses) of its non-U.S. operations are generally lower than thesuch reversal at June 30, 2017 ($141.9 million related to Germany, and $8.0 million related to Belgium).  Such second quarter 2017 income tax rates applicablebenefit associated with reversal of the entire German and Belgian valuation allowance excludes the non-cash income tax benefit of $7.7 million discussed above.  In addition to Kronos’ U.S. operations.  Excluding the effect of any increase or decrease inabove amounts, Kronos’ deferred income tax asset valuation allowance Kronos would generally expect its overall effective tax rate to be lower than the U.S. federal statutory rate of 35% primarily because of its non-U.S. operations.  Kronos’ effective income tax rate inincreased by $9.5 million during the first six months of 2015, excluding2017 as a result of changes in currency exchange rates, which was recognized as part of other comprehensive income (loss).

In accordance with the impactASC 740-270 guidance regarding accounting for income taxes at interim dates, the amount of the valuation allowance reversed at June 30, 2017 ($149.9 million) relates to Kronos’ change in judgment regarding the realizability of the related deferred income tax asset valuation allowances Kronos recognized, was lower thanas it relates to future years (i.e. 2018 and after).  A change in judgment regarding the U.S. federal statutoryrealizability of deferred tax rate of 35%.However,assets as a result of Kronos’it relates to the current year is considered in determining the estimated annual effective tax rate at June 30, 2015, Kronos’ non-U.S. rate reconciling items increased its effective tax rate but this increase was more than offset by tax benefits related to nondeductible expenses and its reserve for uncertain tax positions.  Kronos’ effective income tax rate in the first six months of 2016, excluding the impactyear. Accordingly, of the deferred income tax asset valuation allowances Kronos recognized, was higher than the U.S. federal statutory rate of 35%.  Although Kronos reported positive pre-tax earnings in the first six months of 2016, Kronos recognized a net income tax benefit in the first six months of 2016, excluding the impact of the deferred income tax asset valuation it recognized, primarily becauseKronos is required under ASC 740-270 to compute the interim tax provision by calculating an estimated annual effective tax rate.  Because the estimate is based on full year income, the tax rate differences may not have a meaningful relationship to quarterly or year-to-date interim pre-tax income and may produce unusual and unexpected relationships to other tax rate reconciling items.  Excluding the impact of theaggregate $173 million deferred income tax asset valuation allowance Kronos recognized its effectiveat December 31, 2016, approximately $163 million has been reversed through June 30, 2017, and the remaining $20 million will be reversed during the third and fourth quarters of 2017 (such aggregate reversal amount includes the $9.5 million increase to our deferred income tax rate and the netasset valuation allowance as a result of changes in currency exchange rates recognized as part of other comprehensive income tax benefit recognized in the first six months of 2016 is not indicative of the effective income tax rate or income tax expense (benefit) Kronos would expect for the full year of 2016, in part given the near break-even pre-tax results Kronos recognized in the first six months of 2016. (loss)).  

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 its 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.  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 Kronos holds from time to time serves in part to mitigate the currency transaction gains or losses it would otherwise recognize from the first two items described above.  Overall, Kronos estimates that fluctuations in currency exchange rates had the following effects on its sales and income from operations for the periods indicated.

34


 


Impact of changes in currency exchange rates

three months ended June 30, 2016 vs. June 30, 2015

Impact of changes in currency exchange rates

three months ended June 30, 2017 vs June 30, 2016

Impact of changes in currency exchange rates

three months ended June 30, 2017 vs June 30, 2016

 

Transaction gains/(losses)
recognized

 

 

Translation
gain/loss-
impact of
rate changes

 

 

Total
currency
impact
2016 vs. 2015

 

Transaction gains/losses

recognized

 

Translation

gain/loss –

impact of

rate changes

 

Total currency

impact

2017 vs 2016

 

2015

 

  

2016

 

 

Change

2016

 

2017

 

Change

 

 

(In millions)

 

(In millions)

 

Impact on:

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

-

  

  

$

-

  

 

$

-

  

 

$

5

 

 

$

5

 

$

-

 

 

$

-

 

 

$

-

 

 

$

(8

)

 

$

(8

)

Income from operations

 

-

 

  

 

2

 

 

 

2

 

 

 

2

 

 

 

4

 

 

2

 

 

 

(4

)

 

 

(6

)

 

 

1

 

 

 

(5

)

The $5$8 million increasereduction in Kronos’ net sales (translation gain)loss) was caused primarily by a weakeningstrengthening of the U.S. dollar relative to the euro, as itsour euro-denominated sales were translated into morefewer U.S. dollars in 20162017 as compared to 2015.2016.  The strengthening of the U.S. dollar relative to the Canadian dollar and the Norwegian krone in 20162017 did not have a significant effect on the reported amount of Kronos’ net sales, as a substantial portion of the sales generated by itsKronos’ Canadian and Norwegian operations are denominated in the U.S. dollar.

The $4$5 million net increasedecrease in Kronos’ income from operations was comprised of the following:

·

approximately $2 million from net currency transaction gains

Approximately $6 million from net currency transaction losses primarily caused primarily by a strengthening of the U.S. dollar relative to the Norwegian krone and the Canadian dollar, as U.S. dollar-denominated receivables and U.S. dollar currency held by Kronos’ non-U.S. operations became equivalent to a greater amount of local currency in the 2016 period as compared to the 2015 period, and

·

approximately $2 million from net currency translation gains caused primarily by a strengthening of the U.S. dollar relative to the Canadian dollar and the Norwegian krone, as their local currency denominated operating costs were translated into fewer U.S. dollars in 2016 as compared to 2015, (and such translation, as it related to the U.S. dollar relative to the euro, had a negative effect on Kronos’ income from operations in 2016 as compared to 2015, as the positive impact of the weaker U.S. dollar on euro-denominated sales was more than offset by the unfavorable effect of euro-denominated operating costs being translated into more U.S. dollars in 2016 as compared to 2015).

Impact of 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

six months ended June 30,Approximately $1 million from net currency translation gains primarily caused by a strengthening of the U.S. dollar relative to the Canadian dollar, as its local currency-denominated operating costs were translated into fewer U.S. dollars in 2017 as compared to 2016, vs. June 30, 2015and such translation, as it related to the U.S. dollar relative to the euro, had a negative effect on income from operations in 2017 as compared to 2016, as the negative impact of the stronger U.S. dollar on euro-denominated sales more than offset the favorable effect of euro-denominated operating costs being translated into fewer U.S. dollars in 2017 compared to 2016.

Impact of changes in currency exchange rates

six months ended June 30, 2017 vs June 30 2016

Impact of changes in currency exchange rates

six months ended June 30, 2017 vs June 30 2016

 

Transaction gains/(losses)
recognized

 

 

Translation
gain/loss-
impact of
rate changes

 

 

Total
currency
impact
2016 vs. 2015

 

Transaction gains/losses

recognized

 

 

Translation

gain/loss –

impact of

rate changes

 

 

Total currency

impact

2017 vs 2016

 

2015

 

  

2016

 

 

Change

2016

 

 

2017

 

 

Change

 

 

 

 

 

(In millions)

 

(In millions)

 

Impact on:

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

-

  

  

$

-

  

 

$

-

  

 

$

(6)

 

 

$

(6)

 

$

-

 

 

$

-

 

 

$

-

 

 

$

(15

)

 

$

(15

)

Income from operations

 

1

 

  

 

4

 

 

 

3

 

 

 

8

 

 

 

11

 

 

4

 

 

 

(4

)

 

 

(8

)

 

 

(5

)

 

 

(13

)

The $6$15 million reduction in Kronos’ net sales (translation loss) was caused primarily by a strengthening of the U.S. dollar relative to the euro, as Kronos’our euro-denominated sales were translated into fewer U.S. dollars in 20162017 as compared to 2015.2016.  The strengthening of the U.S. dollar relative to the Canadian dollar and the Norwegian krone in 20162017 did not have a significant effect on the reported  amount of Kronos’ net sales, as a substantial portion of the sales generated by itsKronos’ Canadian and Norwegian ooperationsoperations are denominated in the U.S. Dollar.dollar.      



                                                                                                                                                                                                                                                                                                        

The $11$13 million net increasedecrease in Kronos’ income from operations comprised the following:

·

approximately $3 million from net currency transaction gains caused primarily by a strengthening of the U.S. dollar relative to

Approximately $8 million from net currency transaction losses caused primarily by relative changes in currency exchange rates at each applicable balance sheet date between the U.S. dollar and the euro, the Norwegian krone and the 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, became equivalent to a greater amount of local currency in the 2016 period as compared to the 2015 period, and

35Approximately $5 million of net currency translation losses caused primarily by a strengthening of the U.S. dollar relative to the euro, as such translation had a negative effect on income from operations in 2017 as compared to 2016, as the negative impact of the stronger U.S. dollar on euro-denominated sales more than offset the favorable effect of euro-denominated operating costs being translated into fewer U.S. dollars in 2017 as compared to 2016, along with the effects of a slight strengthening of the U.S. dollar relative to the Canadian dollar and the Norwegian krone in 2017 as compared to 2016.


·

approximately $8 million of net currency translation gains caused primarily by a strengthening of the U.S. dollar relative to the Canadian dollar and the Norwegian krone, as their local currency denominated operating costs were translated into fewer U.S. dollars in 2016 as compared to 2015, (and such translation, as it related to the U.S. dollar relative to the euro, had a negative effect on Kronos’ income from operations in 2016 as compared to 2015, as the negative impact of the stronger U.S. dollar on euro-denominated sales more than offset the favorable effect of euro-denominated operating costs being translated into fewer U.S. dollars in 2016 as compared to 2015).

Outlook

During the first half of 20162017 Kronos operated its production facilities at 96%100% of practical capacity.  Kronos expects its production volumes to be slightly higher in 20162017 as compared to 2015,2016, as its production rates in 2015 were2017 will be positively impacted by the implementation of certain productivity-enhancing improvement projects at certain facilities, as well as necessary improvements to ensure continued compliance with its permit regulations, which resulted in longer-than-normal maintenance shutdowns in some instances.facilities.  Assuming global economic conditions do not deteriorate, Kronos expects its 2017 sales volumes to be higher incomparable to 2016 as compared to 2015.sales volumes.  Kronos will continue to monitor current and anticipated near-term customer demand levels and align its production and inventories accordingly. Kronos believes it is reasonably likely we will set a new record for production volumes in 2017 (its prior record was 550,000 metric tons in 2011).

Kronos experienced moderation in the cost of TiO2 feedstock ore procured from third parties in 2015 which continued into2016.  However, the first halfcost of 2016.  Given the time lag between when third-party feedstock ore is purchased and when the TiO2 product produced with such ore is reflected in its cost of sales, Kronos’ cost of sales per metric ton of TiO2 soldKronos procured in the first half of 20162017 was lower than its cost of sales per metric ton of TiO2 sold incomparable to slightly higher as compared to the first half of 2015 (excluding2016, and such higher cost feedstock ore is expected to be reflected in Kronos’ results of operations beginning in the effectthird quarter of changes in currency exchange rates).2017.  Kronos expects its cost of sales per metric ton of TiO2 sold for the remainderfull year of 20162017 will be lowerslightly higher than its per-metric ton cost in the comparable periods of 2015, due in part to the favorable effect of the workforce reductions and other cost reduction initiatives Kronos implemented beginning in the second quarter of 2015 as well as some expected additional modest improvement in the cost of feedstock ore.2016.

Kronos started 20162017 with average selling prices 17% lower11% higher than the beginning of 2015,2016, and average selling prices declinedincreased by an additional 1%12% in the first quartersix months of 2016.  In the second quarter of 2016, Kronos’ average selling prices began to rise due to the implementation of previously-announced price increases.  Kronos’ average selling prices at the end of the second quarter of 2016 were 4% higher than at the end of the first quarter of 2016, and 2% higher than at the end of 2015.2017.  Industry data indicates that overall TiO2 inventory held by producers declined significantly during 2015.2016.  In addition, Kronos believesbelieve most customers hold very low inventories of TiO2 with many operating on a just-in-time basis.  With the strong sales volumes experienced in the first half of 2016,2017, Kronos continuescontinue to see evidence of strengthening demand for its TiO2 products in certain of its primary markets.  Kronos and its major competitors have announced price increases, which Kronos began implementing in the second quarter of 2016, as contracts have allowed.  The extent to which Kronos will be able to achieve any additional price increases in the near term will depend on market conditions.  

Kronos initiated a restructuring plan in 2015 designed to improve its long-term cost structure.  As part of such plan, Kronos implemented certain voluntary and involuntary workforce reductions during 2015 at certain of its facilities impacting approximately 160 individuals.  Such workforce reductions are expected to result in approximately $19 million of annual cost savings, including $9.4 million realized during the first six months of 2016.  These workforce reductions are not expected to negatively impact Kronos’ ability to operate its production facilities at their practical capacity rates.  In addition to the workforce reductions implemented in 2015, Kronos is also in the process of implementing other cost reduction initiatives throughout the organization, including the implementation of continued process productivity improvements.

Overall, Kronos expectsexpect income from operations in 20162017 will be higher as compared to 20152016, principally as a result of:of expected higher average selling prices in 2017 as compared to 2016 and to a lesser extent from the favorable effects of anticipated higher production volumes in 2017.  In addition, and as discussed above, Kronos recognized a non-cash tax benefit of $162.6 million in the first six months of 2017 (including $157.6 million in the second quarter of 2017) related to Kronos’ deferred income tax asset valuation allowance associated with Kronos’ German and Belgian operations, and Kronos expect the remaining valuation allowance of $20 million will be reversed during the third and fourth quarters of 2017.

·

the favorable effects of anticipated higher sales and production volumes in 2016,

·

the favorable effect of lower-cost third party feedstock ore,

36


·

the expected cost savings from workforce reductions and other cost reduction initiatives throughout the organization, and

·

the expected implementation of price increases.

Due to the constraints of high capital costs and extended lead time associated with adding significant new TiO2 production capacity, especially for premium grades of TiO2 products produced from the chloride process, Kronos believes increased and sustained profit margins will be necessary to financially justify major expansions of TiO2 production capacity required to meet expected future growth in demand.  As a result of relative customer inventory levels during the recent past and the resulting adverse effect on global TiO2 pricing, some industry projects to increase TiO2 production capacity have been cancelled or deferred indefinitely, and announcements have been made regarding the closure of certain facilities.  Given the lead time required for production capacity


expansions, a shortage of TiO2 could occur if economic conditions improve and global demand levels for TiO2 increase sufficiently.

Kronos’ expectations for its future operating results are based upon a number of factors beyond its control, including worldwide growth of gross domestic product, competition in the marketplace, continued operation of competitors, unexpected or earlier-than-expected capacity additions or reductions and technological advances.  If actual developments differ from Kronos’ expectations, its results of operations could be unfavorably affected.

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.  Changes in working capital are primarily related to changes in receivables and inventories (as discussed below) and payables and accrued liabilities.  

Net cash provided by operating activities was $7.5$10.1 million in the first six months of 20162017 compared to $12.7$7.6 million in the first six months of 2015.2016.  The $5.2$2.5 million net decreaseincrease in cash provided by operating activities includes the net effects of:

·

higher amount of net cash used for relative changes in receivables (excluding insurance recoveries), inventories, payables and accrued liabilities in 2016 of $2.7 million,

higher income from operations of CompX in 2017 of $2.0 million;

·

lower cash received for insurance recoveries in 2016 of $3.2 million,

higher cash paid for income taxes primarily as a result of increased operating income at CompX of $2.1 million in 2017;

·

lower cash paid for income taxes in 2016 of $1.5 million, due to lower taxable earnings, and

lower cash used for environmental remediation and related costs in 2017 of $.4 million; and

·

lower income from operations of CompX in 2016 of $.9 million.

higher interest and dividend income in 2017 of $.8 million.

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.

 

Six months ended

June 30,

 

Six months ended

June 30,

 

2015

 

 

2016

 

2016

 

 

2017

 

(In millions)

 

(In millions)

 

Net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CompX

$

.6

 

 

$

1.9

 

$

1.9

 

 

$

4.3

 

NL Parent and wholly-owned subsidiaries

 

13.2

 

 

 

6.7

 

 

6.8

 

 

 

6.9

 

Eliminations

 

(1.1

)

 

 

(1.1

)

 

(1.1

)

 

 

(1.0

)

Total

$

12.7

 

 

$

7.5

 

$

7.6

 

 

$

10.2

 

37


Changes in working capital can have a significant effect on cash flows from operating activities. Generally, we expect our average days sales outstanding to increase from December to June as the result of a seasonal increase in sales during the second quarter as compared to the fourth quarter. Overall, our June 30, 20162017 days sales outstanding compared to December 31, 20152016 is in line with our expectations. As shown below,expected, our total average number of days in inventory decreased from December 31, 20152016 to June 30, 20162017 primarily as a result of the seasonal increase in sales during the second quarter of 20162017 as compared to the fourth quarter 2015 and the temporary reduction in stocking levels at CompX’s Marine Components business.of 2016.  For comparative purposes, we have provided information for December 31, 20142015 and June 30, 20152016 below.

 

December 31,

 

June 30,

 

December 31,

 

June 30,

 

2015

 

2016

 

2016

 

2017

Days sales outstanding

31 days

 

42 days

 

36 days

 

37 days

Days in inventory

76 days

 

69 days

 

79 days

 

68 days


Investing activities

 

December 31,

 

June 30,

 

December 31,

 

June 30,

 

2014

 

2015

 

2015

 

2016

Days sales outstanding

32 days

 

41 days

 

31 days

 

42 days

Days in inventory

90 days

 

74 days

 

76 days

 

69 days

Investing and financingNet cash used in investing activities

In totaled $13.7 million in the first six months of 2016, we spent2017 and $1.7 million in the first six months of 2016.  During the third quarter of 2016, CompX entered into an unsecured revolving demand promissory note with Valhi whereby CompX agreed to loan Valhi up to $40 million.  During the first half of 2017, CompX loaned to Valhi a net $12.1 million under the promissory note receivable ($39.3 million of gross borrowings and $27.2 million of gross repayments).  

We spent $1.6 million in capital expenditures during the first half of 2017 and $1.7 million in the first half of 2016, substantially all of which related to CompX.  

Financing activities

Cash flows from financing activities in the first six monthshalf of each of 2016 and 2017 consist of CompX dividends paid to its stockholders other than us.

Outstanding debt obligations

At June 30, 2016, NL2017, 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 of the covenants contained in our secured revolving credit facility with Valhi at June 30, 2017.  See Note 8 to our Condensed Consolidated Financial Statements.

Kronos’ North American and European revolvers and its term loan contain a number of covenants and restrictions which, among other things, restrict its ability to incur additional debt, incur liens, pay dividends or merge or consolidate with, or sell or transfer substantially all of itsour assets to, another entity, and contains other provisions and restrictive covenants customary in lending transactions of this type.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 June 30, 2016.2017.  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 and banks 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 June 30, 2016,2017, we had aggregate cash, cash equivalents and restricted cash of $106.7$94.5 million, substantially all of which was held in the U.S.  A detail by entity is presented in the table below.  

 

Amount

 

Amount

 

(In millions)

 

(In millions)

 

CompX

$

51.3

 

$

22.5

 

NL Parent and wholly-owned subsidiaries

 

55.4

 

 

72.0

 

Total

$

106.7

 

$

94.5

 

38

 


In addition, at June 30, 20162017 we owned 14.4 million shares of Valhi common stock with an aggregate market value of $22.6$18.5 million.  See Note 4 to our Condensed Consolidated Financial Statements.  We also owned 35.2


million shares of Kronos common stock at June 30, 20162017 with an aggregate market value of $184.9$641.7 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 June 30, 2017)2018) including any amounts CompX might loan from time to time under the terms of its new revolving loan to Valhi discussed in Note 14 to our Condensed Consolidated Financial Statements (which loans would be solely at CompX’s discretion).  If actual developments differ materially from our expectations, our liquidity could be adversely affected.  In this regard, Valhi has agreed to loan us up to $40$50 million on a revolving basis.  At June 30, 2016,2017, we had no$.5 million in outstanding borrowings under this facility, and the full $40we had $49.5 million was available for future borrowing.  The amount of any such outstanding loan Valhi would makeSee Note 8 to us is at Valhi’s discretion.  We currently do not expect to be required to borrow any amounts from Valhi during the remainder of 2016 under this facility.our Condensed Consolidated Financial Statements.

Capital Expenditures

Firm purchase commitments for capital projects in process at June 30, 20162017 approximated $.4$.6 million.  CompX’s 20162017 capital investments are limited to those expenditures required to meet expected customer demand and those required to properly maintain our facilities and technology infrastructure.

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.  A detail of annual dividends we expect to receive from our subsidiaries and affiliates in 2016,2017, based on the number of shares of common stock of these affiliates we own as of June 30, 20162017 and their current regular quarterly dividend rate, is presented in the table below.

Shares held at
June 30, 2016

 

  

Current
Quarterly
Dividend Rate

 

  

Annual Expected
Dividend

 

Shares held 

 

  

Current
Quarterly
Dividend Rate

 

  

Annual Expected
Dividend

 

(In millions)

 

  

 

 

  

(In millions)

 

(In millions)

 

  

 

 

  

(In millions)

 

Kronos

 

35.2

  

  

$

.15

  

  

$

21.1

  

 

35.2

  

  

$

.15

  

  

$

21.1

  

CompX

 

10.8

  

  

 

.05

  

  

 

2.2

  

 

10.8

  

  

 

.05

  

  

 

2.2

  

Valhi

 

14.4

  

  

 

.02

  

  

 

1.1

  

 

14.4

  

  

 

.02

  

  

 

1.1

  

Total expected annual dividends

 

 

 

  

 

 

 

  

$

24.4

  

 

 

 

  

 

 

 

  

$

24.4

  

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

39


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

Other than operating lease commitments discussed in our 20152016 Annual Report, 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 20152016 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 20152016 Annual Report, or in Note 13 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 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 1615 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 20152016 Annual Report.  There have been no changes in our critical accounting policies during the first six months of 2016.2017.

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 20152016 Annual Report, and we refer you to Part I, Item 7A. –“Quantitative and Qualitative Disclosure about Market Risk” in our 20152016 Annual Report.  See also Note 1514 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 President and Chief Executive Officer and Gregory M. Swalwell, our Executive Vice President and Chief Financial Officer, have evaluated the design and effectiveness of our disclosure controls and procedures as of June 30, 2016.2017.  Based upon

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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,

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 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.

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.

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, 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 June 30, 20162017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

In addition to the matters discussed below, refer to Note 13 to our Condensed Consolidated Financial Statements and our 20152016 Annual Report and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 for descriptions of certain legal proceedings.

EPEC Polymers, Inc.,

United States v. NL Industries, Inc. (United States District Court, Western District of New York, Case No. 17-cv-124).   In July 2017, the District Court entered the Consent Decree and NL paid the settlement amount to the United States.

In August 2017, we were served in Refined Metals Corporation  v.  NL Industries, Inc., (United States District Court for the Southern District of New Jersey,Indiana, Case 3:12-cv-03842-PGS-TJB)1:17-cv-2565)In April 2016,This is a CERCLA and state law contribution action brought by the case was stayedcurrent owner of a former secondary lead smelting facility located in Beech Grove, Indiana.  We intend to deny liability and administratively terminated pending court-ordered mediation.  If the mediation is unsuccessful, the case will become active and we will continue to defend vigorously against all of the claims.

In June 2016, NL and one other party received special notice from EPA for Operable Unit 2 of the Madison County Mines Superfund Site near Fredericktown, Missouri.  The Site includes several mining properties in Madison County, Missouri.  Operable Unit 2 is a former cobalt mine and refinery that is now owned by another mining company.  In the special notice, EPA requested that NL and the other mining company agree to perform a Remedial Investigation/Feasibility Study for Operable Unit 2.  NL initiated a dialog with EPA regarding the special notice.

Item 1A.

Risk Factors

For a discussion of the risk factors related to our businesses, refer to Part I, Item 1A., “Risk Factors,” in our 20152016 Annual Report.  

Item 6.

Exhibits

 

10.1  31.1

Unsecured Revolving Demand Promissory Note dated August 3, 2016 in the original principal amount of $40.0 million executed by Valhi, Inc. and payable to the order of CompX International Inc. – incorporated by reference to Exhibit 10.1 to the Quarterly Report of CompX International Inc. (File No. I-13905) for the quarter ended June 30, 2016.Certification

 

 

10.2  31.2

Ninth Amended and Restated Unsecured Revolving Demand Promissory Note dated August 3, 2016 in the original principal amount of $60.0 million executed by Valhi, Inc. and payable to the order of Kronos Worldwide, Inc. – incorporated by reference to Exhibit 10.1 to the Quarterly Report of Kronos Worldwide, Inc. (File No. 001-31763) for the quarter ended June 30, 2016.Certification

 

 

31.1

Certification

31.2

Certification

32.1

Certification

 

 

101.INS

XBRL Instance Document

 

 

101.SCH

XBRL Taxonomy Extension Schema

 

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase

 

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase

 

 

101.LAB

XBRL Taxonomy Extension Label Linkbase

 

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase

 


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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.

 

NL INDUSTRIES, INC.

(Registrant)

 

Date:  August 5, 20167, 2017

/s/ Gregory M. Swalwell

 

Gregory M. Swalwell

 

(Executive Vice President and

Chief Financial Officer,

Principal Financial Officer)

 

Date:  August 5, 20167, 2017

 

 

 /s/ Tim C. Hafer/s/ Amy Allbach Samford

 

Tim C. HaferAmy Allbach Samford

 

(Vice President and Controller,

Principal Accounting Officer)

 

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