DALLAS, TEXAS - March 11, 2019 - NL Industries, Inc. (NYSE: NL) today reported net income attributable to NL stockholders of $2.8 million, or $.06 per share, in the fourth quarter of 2018 compared to net income attributable to NL stockholders of $49.1 million, or $1.00 per share, in the fourth quarter of 2017. For the full year of 2018, NL reported a net loss attributable to NL stockholders of $41.0 million, or $.84 per share, compared to net income attributable to NL stockholders of $116.1 million, or $2.38 per share, in 2017. NL reported a net loss in the full year of 2018 due to the recognition of a $60.9 million pre-tax loss on marketable equity securities in as well as the second quarter recognition of a $62.0 million pre-tax litigation settlement expense ($1.01 per share, net of income tax benefit) as discussed below. Net income in the 2017 periods includes the impact of a fourth quarter $37.5 million non-cash deferred income tax benefit ($.77 per diluted share) related to the revaluation of the Company's net deferred income tax liability resulting from the reduction in the U.S. federal corporate income tax rate enacted into law on December 22, 2017.
Net sales increased $2.3 million in the fourth quarter of 2018 as compared to the fourth quarter of 2017, and increased $6.2 million for the full year of 2018 over the same period in 2017. Net sales increased primarily due to higher marine component sales volumes to manufacturers of ski/waterboard boats and larger center-console boats, and to a lesser extent higher security products sales to certain markets, particularly transportation and office furniture. Income from operations attributable to CompX increased for the full year of 2018 compared to 2017 due to improved coverage of fixed costs over increased production volumes. Income from operations attributable to CompX was comparable in the fourth quarter of 2018 to the fourth quarter of 2017. For the full year of 2018, income from operations attributable to CompX increased primarily due to improved fixed cost leverage facilitated by higher production volumes for both security products and marine components.
Kronos' net sales of $349.4 million in the fourth quarter of 2018 were $103.9 million, or 23%, lower than in the fourth quarter of 2017. Kronos' net sales of $1.7 billion in the full year of 2018 were $67.1 million, or 4%, lower than in the full year of 2017. Kronos' net sales decreased in the fourth quarter of 2018 compared to the same period in 2017 due to the unfavorable effects of lower average TiO2 selling prices and lower sales volumes. Kronos' net sales decreased in the full year of 2018 compared to the full year of 2017 due to the net effect of higher average selling prices and lower sales volumes. Kronos' average TiO2 selling prices were 2% lower in the fourth quarter of 2018 as compared to the fourth quarter of 2017 and were 13% higher in the full year of 2018 as compared to 2017. Kronos' average selling prices at the end of the fourth quarter of 2018 were 4% lower than at the end of the third quarter of 2018 and were 3% lower than at the end of 2017. Lower prices in the European, Latin American and export markets were partially offset by higher prices in North America at the end of 2018 as compared to the end of 2017. Kronos' TiO2 sales volumes in the fourth quarter of 2018 were 22% lower as compared to the record fourth quarter sales volumes of 2017 primarily due to lower sales in the European and export markets reflecting the effects of reduced shipments as customer inventory levels continued to return to more normal levels partially offset by higher sales in the North American market. Kronos' sales volumes in the full year of 2018 were 16% lower than the same period in 2017 primarily due to a combination of factors including (i) lower sales in all major markets resulting from a controlled ramp-up in January 2018 as Kronos brought the second phase of its new global enterprise resource planning system online; (ii) inventory management to assure adequate supply to its customers during the spring and summer necessitated by the lower production volumes in the first three months of the year (as discussed below); (iii) product availability in the second quarter; and (iv) customer inventory level changes in the second, third and fourth quarters as discussed above. Fluctuations in currency exchange rates (primarily the euro) decreased Kronos' net sales by approximately $4 million in the fourth quarter of 2018 and increased net sales by approximately $49 million in the full year of 2018 as compared to the same periods in 2017. The table at the end of this press release shows how each of these items impacted the overall change in Kronos' net sales.
Kronos' income from operations in the fourth quarter of 2018 was $44.6 million as compared to $121.0 million in the fourth quarter of 2017. For the full year of 2018, Kronos' income from operations was $330.1 million as compared to $347.8 million in 2017. Kronos' income from operations decreased in the fourth quarter of 2018 compared to the 2017 period primarily due to the unfavorable effects of lower average TiO2 selling prices, lower sales and production volumes and higher raw materials and other production costs. Kronos' income from operations decreased in the full year of 2018 compared to the full year of 2017 primarily due to the net impact of higher average TiO2 selling prices, lower sales and production volumes and higher raw materials and other production costs. Kronos' TiO2 production volumes were 8% lower in the fourth quarter and 7% lower in the full year of 2018 as compared to the same periods in 2017. Kronos' production facilities operated at 95% of average practical capacity utilization rates in 2018 (95%, 97%, 92% and 95% in the first, second, third and fourth quarters of 2018, respectively) compared to full practical capacity utilization rates for the comparable periods in 2017. The decrease in Kronos' TiO2 production volumes in the 2018 periods compared to the production volumes in the comparable 2017 periods was primarily due to increased maintenance activities at certain facilities in 2018, and the implementation of a productivity-enhancing improvement project at Kronos' Belgian facility in the first quarter of 2018. Fluctuations in currency exchange rates also affected income from operations comparisons, which increased income from operations by approximately $7 million in the fourth quarter of 2018 and by approximately $33 million in the full year of 2018 as compared to the same periods in 2017.
In September 2017, Kronos voluntarily prepaid and terminated its term loan indebtedness using a portion of the proceeds from its September 2017 issuance of €400 million principal amount of 3.75% Senior Secured Notes due September 2025. Kronos' results in the third quarter of 2017 include a non-operating pre-tax charge of $7.1 million (NL's equity interest was $.9 million, or $.02 per share, net of income tax benefit) related to such prepayment.
Kronos' income tax benefit in 2017 includes (i) a non-cash deferred income tax benefit of $186.7 million (NL's equity interest was $36.9 million, or $.76 per share) as a result of the reversal of its deferred income tax asset valuation allowances associated with its German and Belgian operations (including $16.3 million in the fourth quarter, of which NL's equity interest was $3.2 million or $.07 per share), (ii) a fourth quarter non-cash deferred income tax benefit of $18.7 million (NL's equity interest was $3.7 million or $.08 per share) as a result of the reversal of Kronos' deferred income tax asset valuation allowance related to certain U.S. deferred income tax assets of one of its non-U.S. subsidiaries (which subsidiary is treated as a dual resident for U.S. income tax purposes), (iii) a fourth quarter provisional current income tax expense of $76.2 million (NL's equity interest was $15.1 million or $.31 per share) as a result of a change in the 2017 Tax Act enacted on December 22, 2017 for the one-time repatriation tax imposed on the undistributed earnings of Kronos' non-U.S. subsidiaries, (iv) an aggregate current income tax benefit of $11.8 million (NL's equity interest was $2.3 million or $.05 per share) related to the execution and finalization of an Advance Pricing Agreement between Canada and Germany, mostly in the third quarter, and (v) a fourth quarter non-cash deferred income tax expense of $4.5 million (NL's equity interest was $.9 million or $.02 per share) related to a change in Kronos' conclusions regarding its permanent reinvestment assertion with respect to the undistributed earnings of its European subsidiaries.
Kronos' income tax expense in 2018 includes a fourth quarter current cash income tax expense of $3.7 million (NL's equity interest was $0.9 million, or $.02 per share) related to tax on global intangible low-tax income and an aggregate $2.1 million non-cash income expense (NL's equity interest was $0.5 million, or $.01 per share) related to an increase in Kronos' reserve for uncertain tax positions, recognized in the first and fourth quarters.
Corporate expenses increased by $1.0 million in the fourth quarter 2018 compared to the same period of 2017, and increased by $4.3 million in the full year of 2018 compared to the same period of 2018, due to higher litigation fees and related costs and higher administrative expenses. In May 2018, we entered into a settlement agreement with the plaintiffs in the California lead pigment ligation, and in connection with such settlement agreement, as supplemented, we recognized a $62.0 million pre-tax litigation settlement expense in the second quarter of 2018. The settlement agreement is subject to a number of conditions.
Interest and dividend income increased $.4 million in the fourth quarter and $1.5 million in the full year of 2018 primarily due to interest income earned on CompX's revolving promissory note receivable from Valhi. As noted above, marketable equity securities in the 2018 periods represent unrealized losses on our marketable equity securities during such periods which are now recognized as a component of other income (expense) beginning in 2018 as a result of the January 2018 adoption of a new accounting standard.
The statements in this release relating to matters that are not historical facts are forward-looking statements that represent management's beliefs and assumptions based on currently available information. Although NL believes that the expectations reflected in such forward-looking statements are reasonable, we cannot give any assurances that these expectations will prove to be correct. Such statements by their nature involve substantial risks and uncertainties that could significantly impact expected results, and actual future results could differ materially from those described in such forward-looking statements. While it is not possible to identify all factors, we continue to face many risks and uncertainties. Among the factors that could cause actual future results to differ materially include, but are not limited to:
Future supply and demand for our products
The extent of the dependence of certain of our businesses on certain market sectors
The cyclicality of our businesses (such as Kronos' TiO2 operations)
Customer and producer inventory levels
Unexpected or earlier-than-expected industry capacity expansion (such as the TiO2 industry)
Changes in raw material and other operating costs (such as 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)
General global economic and political conditions (such as changes in the level of gross domestic product in various regions of the world and the impact of such changes on demand for, among other things, TiO2 and component products)
Competitive products and substitute products
Price and product competition from low-cost manufacturing sources (such as China)
Customer and competitor strategies
Potential consolidation of Kronos' competitors
Potential consolidation of Kronos' customers
The impact of pricing and production decisions
Competitive technology positions
Our ability to protect or defend intellectual property rights
Potential difficulties in integrating future acquisitions
Potential difficulties in upgrading or implementing 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, including future tax reform
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), including new environmental health and safety regulations
The ultimate resolution of pending litigation (such as our lead pigment and environmental matters)
Possible future litigation.
Should one or more of these risks materialize (or 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.
NL Industries, Inc. is engaged in the component products (security products and performance marine components), chemicals (TiO2) and other businesses.
NL INDUSTRIES, INC.COMPONENTS OF INCOME (LOSS) FROM OPERATIONS(In millions)(Unaudited)
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