Overview

NL Industries, Inc. (NYSE: NL) is a diversified holding company with operations primarily in the component products industry through its majority-owned subsidiary, CompX International Inc. The company also holds a significant non-controlling interest in Kronos Worldwide, Inc., a leading global producer and marketer of value-added titanium dioxide pigments.

Business Overview

NL Industries operates through two main business segments - CompX and Kronos Worldwide. 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 postal, recreational transportation, office and institutional furniture, cabinetry, tool storage and healthcare applications. CompX's Marine Components operations manufacture wake enhancement systems, stainless steel exhaust systems, gauges, throttle controls, trim tabs and related hardware and accessories for the recreational marine and other industries. NL's investment in Kronos Worldwide represents approximately 31% of the outstanding common stock of Kronos. Kronos is a leading global producer and marketer of value-added titanium dioxide pigments (TiO2), which are used for a variety of manufacturing applications including paints, plastics, paper and other industrial and specialty products.

Financials

For the full year 2023, NL Industries reported annual net income of -$2.3 million, annual revenue of $161.3 million, annual operating cash flow of $37.0 million, and annual free cash flow of $35.9 million. In the first quarter of 2024, NL Industries generated net sales of $38.0 million, down 8% from the $41.2 million reported in the first quarter of 2023. The decrease was primarily due to lower sales at the company's Marine Components segment, which saw a 41% decline in net sales compared to the prior year period. This was partially offset by a 9% increase in net sales at the Security Products segment. Gross margin for the first quarter of 2024 was 25%, down from 31% in the same period of 2023. The decrease was driven by lower gross margins at both the Security Products and Marine Components segments. Security Products gross margin declined due to a less favorable customer and product mix, while Marine Components gross margin was impacted by higher cost inventory produced in the prior quarter. Income from operations for the first quarter of 2024 was $1.4 million, down from $4.2 million in the prior year period. This decrease was primarily attributable to the lower gross margins, as well as a $0.5 million increase in operating costs and expenses. Equity in earnings from Kronos Worldwide, Inc. was $2.5 million in the first quarter of 2024, compared to equity in losses of $4.6 million in the same period of 2023. Kronos experienced improved customer demand across all major markets in the first quarter of 2024, although overall demand levels remain below historical averages.

Liquidity

As of March 31, 2024, NL Industries had $197.9 million in aggregate restricted and unrestricted cash, cash equivalents and current marketable securities, all of which was held in the U.S. The company also owned approximately 1.2 million shares of its parent company, Valhi, Inc., with a market value of $20.6 million, as well as 35.2 million shares of Kronos Worldwide, Inc. with a market value of $415.6 million. NL's wholly-owned subsidiary, NLKW Holding, LLC, had $0.5 million in outstanding borrowings under its $50 million secured revolving credit facility with Valhi, with $49.5 million available for future borrowing at March 31, 2024.

Outlook

Looking ahead, CompX expects Security Products sales in 2024 to be lower than 2023 as the sluggishness it has experienced across a variety of the markets it serves has continued through the first quarter of 2024. CompX also does not expect 2024 Security Products sales to benefit from the pilot project to a government security customer it completed largely in the fourth quarter of 2023. At CompX's Marine Components segment, the decline in sales to the towboat market as a result of the contraction in the recreational marine industry that began late in the first quarter of 2023 has continued. CompX is focused on aligning its resources with current demand levels and particularly at Marine Components, it is adjusting inventory levels, operating expenses and labor resources to align with current demand while also preserving its ability to respond quickly when demand increases. Kronos expects sales volumes in 2024 to exceed 2023 levels due to improved customer demand across all major markets, although overall demand remains below historical averages. Kronos has increased production rates in line with the current and expected near-term improved demand and believes its production rates for the remainder of 2024 will continue to be higher than comparable periods in 2023. Kronos has also implemented TiO2 selling price increases which will need to be realized to achieve margins more in-line with historical levels.

Risks and Challenges

NL Industries faces a number of risks and challenges, including: - Cyclicality of its businesses, particularly Kronos' TiO2 operations - Volatility in raw material and energy costs - Global economic and political conditions that could impact demand for its products - Potential consolidation of customers and competitors - Ongoing legal and environmental matters Despite these challenges, NL Industries has maintained a strong liquidity position, with significant cash and investments on its balance sheet. The company's diversified business model, with exposure to both the component products and TiO2 industries, provides some stability during periods of market volatility.

Conclusion

NL Industries is navigating a period of stability and challenges. While its component products business faces headwinds in certain markets, the company's investment in Kronos Worldwide has provided a boost to earnings in the first quarter of 2024. NL's strong liquidity position and diversified business model position it to weather near-term challenges, though the company will need to closely monitor market conditions and align its operations accordingly. Investors should closely follow NL's progress as it works to optimize its business and capitalize on opportunities in the years ahead.