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| NL > SEC Filings for NL > Form 10-Q on 3-Nov-2008 | All Recent SEC Filings |
3-Nov-2008
Quarterly Report
RESULTS OF OPERATIONS
Business and results of operations 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: CIX) and Kronos (NYSE: KRO) file periodic reports with the Securities and Exchange Commission ("SEC").
CompX is a leading manufacturer of security products, precision ball bearing slides and ergonomic computer support systems used in the office furniture, transportation, tool storage and a variety of other industries. CompX is also a leading manufacturer of stainless steel exhaust systems, gauges and throttle controls for the performance marine industry.
We account for our 36% 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 plastics, paints, paper and other industrial products.
Forward-looking information
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking in nature. Statements found in this report including, but not limited to, the statements found in Item 2 - "Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements that represent our beliefs and assumptions based on currently available information. In some cases you can identify these forward-looking statements by the use of words such as "believes," "intends," "may," "should," "could," "anticipates," "expected" 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. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly impact expected results. Actual future results could differ materially from those predicted. While it is not possible to identify all factors, we continue to face many risks and uncertainties. Among 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 not limited to, the following:
· Future supply and demand for our products,
· The extent of the dependence of certain of our businesses on certain market sectors,
· The cyclicality of our businesses (such as Kronos' TiO2 operations),
· Customer inventory levels (such as the extent to which Kronos' customers may, from time to time, accelerate purchases of TiO2 in advance of anticipated price increases or defer purchases of TiO2 in advance of anticipated price decreases),
· Changes in raw material and other operating costs (such as steel and energy costs),
· The possibility of labor disruptions,
· 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, including increased competition from low-cost manufacturing sources (such as China),
· Customer and competitor strategies,
· Potential consolidation or solvency of our competitors,
· Demand for high performance marine components,
· The impact of pricing and production decisions,
· Competitive technology positions,
· Service industry employment levels,
· Possible disruption of our business or increases in the cost of doing business resulting from terrorist activities or global conflicts,
· The introduction of trade barriers,
· Fluctuations in currency exchange rates (such as changes in the exchange rate between the U.S. dollar and each of the euro, the Norwegian kroner and the Canadian dollar),
· Operating interruptions (including, but not limited to, labor disputes, leaks, natural disasters, fires, explosions, unscheduled or unplanned downtime and transportation interruptions),
· The timing and amounts of insurance recoveries,
· The ability to renew or refinance credit facilities,
· Our ability to maintain sufficient liquidity,
· The extent to which our subsidiaries were to become unable to pay us
dividends,
· Potential difficulties in integrating completed or future acquisitions,
· Decisions to sell operating assets other than in the ordinary course of business,
· Uncertainties associated with new product development,
· The ultimate outcome of income tax audits, tax settlement initiatives or other tax matters,
· The ultimate ability to utilize income tax attributes or changes in income tax rates related to such attributes, the benefit of which has been recognized under the more likely than not recognition criteria (such as Kronos' ability to utilize its German net operating loss carryforwards),
· 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 present and former manufacturers, including us, of lead pigment and lead-based paint, 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 litigation) and
· Possible future litigation.
Should one or more of these risks materialize or if the consequences of such a development worsen, or should the underlying assumptions prove incorrect, actual results could differ materially from those currently forecasted or expected. We disclaim any intention or obligation to update or revise any forward-looking statement whether as a result of changes in information, future events or otherwise.
Results of Operations
Net Income (Loss) Overview
Quarter Ended September 30, 2008 Compared to Quarter Ended September 30, 2007
Our net loss was $6.7 million, or $.14 per diluted share, in the third quarter
of 2008 compared to a net loss of $16.0 million, or $.33 per diluted share, in
the third quarter of 2007. Our diluted loss per share decreased from 2007 to
2008 due primarily to the net effects of:
· lower equity in losses from Kronos in 2008,
· lower litigation and related expenses in 2008, and
· a goodwill impairment charge incurred in 2008 of $.21 per diluted share related to the marine business line of our component products operations.
Our net loss in 2007 includes:
· a charge included in our equity in earnings of Kronos of $.43 per diluted
share, related to a reduction in Kronos' net deferred income tax asset
resulting from a change in German income tax rates as discussed below, and
· income of $.03 per diluted share due to a net reduction in our reserve for uncertain tax positions.
Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
Our net loss was $3.1 million, or $.06 per diluted share, in the first nine months of 2008 compared to a net loss of $11.8 million, or $.24 per diluted share, in the first nine months of 2007.
The decrease in our diluted loss per share from 2007 to 2008 is due primarily to
the net effects of:
· higher equity in net income of Kronos in 2008,
· a goodwill impairment charge incurred in 2008,
· lower litigation and related expenses in 2008,
· lower insurance recoveries in 2008, and
· higher interest income in 2008.
Our 2008 net loss includes:
· a goodwill impairment charge of $.21 per diluted share related to the marine
business line of our component products operations,
· interest income of $.06 per diluted share related to certain escrow funds,
· income included in our equity in earnings of Kronos of $.03 per diluted share related to an adjustment of certain income tax attributes of Kronos in Germany, and
· income of $.03 per diluted share related to certain insurance recoveries.
Our net loss in 2007 includes:
· a charge included in our equity in earnings of Kronos of $.43 per diluted
share, related to a reduction in Kronos' net deferred income tax asset
resulting from a change in German income tax rates as discussed below,
· a charge included in our equity in earnings of Kronos of $.04 per diluted share, related to an adjustment of certain income tax attributes of Kronos in Germany,
· income of $.03 per diluted share due to a net reduction in our reserve for uncertain tax positions, and
· income of $.05 per diluted share related to certain insurance recoveries.
Loss from Operations
The following table shows the components of our income (loss) from operations.
Three months ended Nine months ended
September 30, % September 30, %
2007 2008 Change 2007 2008 Change
(In millions) (In millions)
CompX $ 4.2 $ (5.2 ) (224 )% $ 14.1 $ 2.2 (84 )%
Insurance recoveries 1.2 .7 (40 )% 3.8 2.4 (37 )%
Corporate expense and
other, net (6.0 ) (3.0 ) (50 )% (19.4 ) (13.8 ) (29 )%
Income (loss) from
operations $ (.6 ) $ (7.5 ) (1,222 )% $ (1.5 ) $ (9.2 ) (522 )%
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Amounts attributable to CompX relate to our components products business, while the other amounts generally relate to NL. Each of these items is more fully discussed below.
CompX International Inc.
Three months ended Nine months ended
September 30, % September 30, %
2007 2008 Change 2007 2008 Change
(In millions) (In millions)
Net sales $ 46.4 $ 43.9 (5 )% $ 135.1 $ 128.1 (5 )%
Cost of sales 34.4 32.7 (5 )% 99.2 96.5 (3 )%
Gross margin $ 12.0 $ 11.2 $ 35.9 $ 31.6
Income (loss) from
operations $ 4.2 $ (5.2 ) (224 )% $ 14.1 $ 2.2 (84 )%
Percentage of net
sales:
Cost of sales 74 % 74 % 73 % 75 %
Income (loss) from
operations 9 % (12 )% 10 % 2 %
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Net sales - Our net sales decreased 5% in both the third quarter and first nine months of 2008 compared to the same periods in 2007. Net sales decreased principally due to lower order rates from many of our customers resulting from unfavorable economic conditions in North America, offset in part by the effect of sales price increases for certain products to mitigate the effect of higher raw material costs.
Cost of sales and gross margin - Our cost of sales decreased in both the third quarter and first nine months of 2008 as compared to the same periods in 2007 due to decreased sales volumes. As a percentage of sales, gross margin was flat for the quarter and decreased approximately 2% for the first nine months of 2008 compared to the same periods in 2007 primarily due to higher raw material costs, not all of which could be recovered through sales price increases or surcharges, combined with reduced coverage of fixed manufacturing costs from lower sales volume.
Goodwill impairment - During the third quarter of 2008, we recorded a non-cash goodwill impairment charge of $10.1 million for CompX's marine components reporting unit. See Note 6 to the Condensed Consolidated Financial Statements.
Income from operations - Excluding the goodwill impairment charge discussed above, our income from operations increased 17% for the third quarter of 2008 as compared to the third quarter of 2007. The increase in income from operations as a percentage of sales for the quarter is primarily the result of facility consolidation costs incurred during the third quarter of 2007, cost reductions and improved product mix. Excluding the goodwill impairment charge, income from operations as a percentage of sales was flat for the comparative nine-month period.
Currency - CompX has substantial operations and assets located outside the United States (in Canada and Taiwan). The majority of sales generated from CompX's non-U.S. operations are denominated in the U.S. dollar with the remainder denominated in foreign currencies, principally the Canadian dollar and the New Taiwan dollar. Most raw materials, labor and other production costs for these non-U.S. operations are denominated primarily in local currencies. Consequently, the translated U.S. dollar values of 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 comparability of period-to-period operating results. Overall, fluctuations in foreign currency exchange rates had the following effects on our net sales and income from operations in 2008 as compared to 2007.
Three months ended Nine months ended
September 30, 2008 September 30, 2008
vs. 2007 vs. 2007
(In thousands)
Impact on:
Net sales $ 34 $ 1,045
Income from operations 300 (60 )
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The positive impact on sales relates to sales denominated in non-U.S. dollar currencies translated into higher U.S. dollar sales due to a strengthening of the local currency in relation to the U.S. dollar. The negative impact on income from operations for the nine-month period results from the U.S. dollar denominated sales of non-U.S. operations converting into lower local currency amounts due to the weakening of the U.S. dollar. This negatively impacted our gross margin as it results in less local currency generated from sales to cover the costs of non-U.S. operations which are primarily denominated in local currency. The negative impact on the nine-month comparison was partially offset by lower currency exchange losses in the third quarter of 2008 as compared to 2007. This also resulted in the net positive impact of currency on third quarter income from operations.
Outlook - Demand continues to be slow across all of CompX's product lines as customers react to the condition of the overall economy. However, we are experiencing a greater softness in demand in the industries that we serve which are more directly connected to lower consumer spending, as further explained below.
· Our security products line is the least affected by the softness in consumer demand, because we sell products to a diverse number of business customers across a wide range of markets, most of which are not directly impacted by changes in consumer demand. While demand within this line is not as affected by softness in the overall economy, we expect sales to be lower in the short term.
· Our furniture components sales are primarily concentrated in the office furniture, toolbox, home appliance and a number of other industries. Several of these industries are more directly affected by consumer demand than those served by our security products line. We expect many of the markets served by furniture components to continue to experience low demand in the short term.
· Our marine line has been affected the most by the slowing economy as the decrease in consumer confidence, the decline in home values, a tighter credit market and higher fuel costs have resulted in a significant reduction in consumer spending in the marine market. The marine market is not currently expected to recover until consumer confidence returns and home values stabilize.
While changes in market demand are not within our control, we are focused on the areas that we can impact. We expect our lean manufacturing and cost cutting initiatives to continue to improve our productivity and result in a more efficient infrastructure that we can leverage when demand growth returns. Additionally, we continue to seek opportunities to gain market share in markets we currently serve, expand into new markets and develop new products in order to mitigate the impact of reduced demand as well as broaden our sales base.
In addition to challenges with overall demand, volatility in the cost of raw materials is ongoing. We currently expect this to be a challenge for the remainder of 2008. We may not be able to fully recover these costs through price increases or surcharges due to the competitive nature of the markets we serve.
General corporate and other items
Insurance recoveries - Insurance recoveries relate to amounts we received from certain of our former insurance carriers, and relate principally to recovery of prior lead pigment litigation defense costs incurred by us. We have agreements with two former insurance carriers pursuant to which the carriers reimburse us for a portion of our past and future lead pigment litigation defense costs. The insurance recoveries we recognized in all periods presented include amounts we received from these carriers. We are not able to determine how much we will ultimately recover from these carriers for the past defense costs we incurred because of certain issues that arise regarding which past defense costs qualify for reimbursement.
While we continue to seek additional insurance recoveries for lead pigment and asbestos litigation matters, we do not know if we will be successful in obtaining additional reimbursement for either defense costs or indemnity. We have not considered any additional potential insurance recoveries in determining accruals for lead pigment litigation matters. Any additional insurance recoveries would be recognized when the receipt is probable and the amount is determinable.
Corporate expense - Corporate expenses were $3.0 million in the third quarter of 2008, $2.9 million or 49% lower than in the third quarter of 2007. Included in corporate expense are:
· litigation and related costs of $2.2 million in 2008 compared to $4.5 million in 2007 and
· environmental expenses of $87,000 in 2008, compared to $79,000 in 2007.
Corporate expenses were $13.8 million in the first nine months of 2008, $5.6 million or 29% lower, compared to the first nine months of 2007. Included in corporate expense are:
· litigation and related costs of $10.8 million in 2008 compared to $16.2 million in 2007, and
· environmental expenses of $495,000 in 2008 compared to a credit of $163,000 in 2007.
We expect corporate expenses in 2008 will continue to be lower than in 2007, in part due to lower expected litigation and related expenses. The level of our litigation and related expenses 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).
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 the remainder of 2008, our corporate expenses would be higher than we currently estimate. See Note 11 to the Condensed Consolidated Financial Statements.
Other income - In the fourth quarter of 2008, we expect to recognize a pre-tax gain of at least approximately $48 million related to the initial closing contained in a settlement agreement related to condemnation proceedings on certain real property we owned in New Jersey. See Note 11 to the Condensed Consolidated Financial Statements.
Equity in earnings of Kronos Worldwide, Inc.
Three months ended Nine months ended
September 30, % September 30, %
2007 2008 Change 2007 2008 Change
(In millions) (In millions)
Kronos historical:
Net sales $ 343.3 $ 345.6 1 % $ 999.9 $ 1,070.0 7 %
Cost of sales 276.4 295.2 7 % 799.0 903.3 13 %
Gross margin $ 66.9 $ 50.4 $ 200.9 $ 166.7
Income from
operations $ 22.1 $ 7.9 (64 )% $ 75.0 $ 27.3 (64 )%
Other, net .7 .3 1.7 .9
Interest expense (10.0 ) (11.3 ) (29.3 ) (33.0 )
12.8 (3.1 ) 47.4 (4.8 )
Provision for income
taxes (benefit) 94.0 .5 115.7 (6.6 )
Net income (loss) $ (81.2 ) $ (3.6 ) $ (68.3 ) $ 1.8
Percentage of net
sales:
Cost of sales 81 % 85 % 80 % 84 %
Income from
operations 6 % 3 % 7 % 3 %
Equity in earnings
(losses) of Kronos
Worldwide, Inc. $ (29.1 ) $ (1.3 ) $ (24.5 ) $ .7
TiO2 operating
statistics:
Sales volumes* 138 121 (12 )% 400 389 (3 )%
Production volumes* 126 126 - % 386 390 1 %
Change in Ti02 net
sales:
Ti02 product pricing 6 % - %
Ti02 sales volume (12 )% (3 )%
Ti02 product mix - % 2 %
Changes in currency
exchange rates 7 % 8 %
Total 1 % 7 %
_______________________________
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* Thousands of metric tons
The key performance indicators for Kronos are TiO2 average selling prices and TiO2 sales and production volumes.
Net sales - Kronos' net sales in the third quarter of 2008 increased 1% or $2.3 million compared to the third quarter of 2007 due to a 6% increase in average TiO2 selling prices and to the favorable effect of changes in currency exchange rates which were almost completely offset by a 12% decrease in sales volumes. Kronos estimates the favorable effect of changes in currency exchange rates increased net sales by approximately $24 million, or 7%, compared to the third quarter 2007.
Kronos' net sales increased 7% or $70.1 million in the nine months ended September 30, 2008 compared to the same period in 2007 as the favorable effect of changes in foreign currency exchange rates more than offset the unfavorable impact of a 3% decrease in sales volumes. Kronos estimates the favorable effect of changes in currency exchange rates increased net sales by approximately $77 million, or 8%, compared to the same period in 2007.
Kronos' sales volumes in the third quarter of 2008 were 12% lower compared to 2007 as a result of lower demand due to the general downturn in economic growth in all markets. Kronos expects sales volumes in the fourth quarter of 2008 to be lower than the third quarter of 2008, and sales volumes for the full year 2008 to be lower than the full year 2007. Kronos' 3% decrease in sales volumes for the nine months ended September 30, 2008 is primarily due to the net effect of lower demand due to the general downturn in economic growth in European and North American markets somewhat offset by higher demand in export markets.
Cost of sales - Kronos' cost of sales increased $18.8 million or 7% in the third quarter of 2008 compared to 2007 due to the impact of a 27% increase in utility costs (primarily energy costs), a 12% increase in raw material costs and to currency fluctuations (primarily the euro). Cost of sales as a percentage of net sales increased to 85% in the third quarter of 2008 compared to 81% in the third quarter of 2007 as higher average selling prices were not able to offset the unfavorable effects of higher operating costs. TiO2 production volumes in the third quarter of 2008 were comparable to the same period in 2007, with operating rates near full capacity in both periods.
In the nine months ended September 30, 2008, cost of sales increased $104.3 million or 13% compared to the same period in 2007, due to the impact of a 17% increase in utility costs (primarily energy costs), a 9% increase in raw material costs and currency fluctuations (primarily the euro). Cost of sales as a percentage of net sales increased to 84% in the nine months ended September 30, 2008 compared to 80% in the same period of 2007 primarily due to the unfavorable effects of higher operating costs and flat average selling prices. TiO2 production volumes increased 1% in the first nine months of 2008 compared to the same period in 2007, with operating rates near full capacity in both periods. Production volumes in the first nine months of 2008 were a new record for Kronos.
Income from operations - Kronos' income from operations for the third quarter of 2008 declined by 64% to $7.9 million compared to the same period in 2007. Income from operations as a percentage of net sales declined to 3% in the third quarter of 2008 from 6% in the same period for 2007. This decrease is driven by the decline in gross margin, which fell to 15% for the third quarter of 2008 compared to 19% for the third quarter of 2007. Gross margin has decreased as Kronos' increased operating costs (primarily energy costs and raw materials) and lower sales volumes have more than offset the favorable impact of higher average selling prices. Changes in currency rates have positively affected Kronos' gross margin and income from operations. Kronos estimates the positive effect of changes in foreign currency exchange rates increased income from operations by approximately $1 million in the third quarter of 2008 as compared to the same period in 2007.
Kronos' income from operations for the nine months ended September 30, 2008 declined by 64% to $27.3 million compared to the same period in 2007. Income from operations as a percentage of net sales declined to 3% in the nine months ended September 30, 2008 from 7% in the same period for 2007. This decrease is driven by the decline in gross margin, which fell to 16% in 2008 compared to 20% in 2007. Gross margin has decreased primarily due to increased operating costs (primarily energy costs and raw materials) and lower sales volumes. Changes in . . .
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