Executive Summary / Key Takeaways

• Diversified Industrial Holdings: NL Industries operates as a holding company with a majority stake in CompX International (security products, marine components) and a significant non-controlling interest in Kronos Worldwide (titanium dioxide pigments), offering a unique blend of industrial exposure.
• CompX's Robust Performance: CompX International demonstrates strong growth and margin expansion in its specialized component markets, driven by government security, healthcare, and marine sectors, providing a stable and growing earnings stream for NL.
• Kronos Faces Headwinds: The titanium dioxide segment, through Kronos, is experiencing significant challenges from global economic uncertainty, tariff-related hesitancy, and reduced operating rates, leading to a substantial drag on NL's consolidated net income and cash flow.
• Strategic Adaptability and Shareholder Returns: NL is actively managing legacy environmental liabilities, supporting Kronos's strategic acquisitions and liquidity, and maintaining a commitment to shareholder returns through regular and special dividends, despite a recent decline in consolidated net income.
• Balancing Legacy and Growth: The investment thesis hinges on CompX's consistent performance and the long-term recovery potential of Kronos, offset by ongoing legacy litigation and environmental costs, and the broader macroeconomic uncertainties impacting global industrial demand.

A Legacy of Industrial Diversification

NL Industries, Inc., founded in 1891, has a storied history marked by evolution from direct manufacturing, including lead pigments, to its current structure as a holding company. This transformation has positioned NL with a diversified portfolio, primarily through its majority-owned subsidiary, CompX International Inc., and a substantial non-controlling interest in Kronos Worldwide, Inc. This strategic composition allows NL to participate in distinct industrial markets, balancing specialized component manufacturing with the cyclical dynamics of global chemical production.

The company's historical journey, while shaping its current operational focus, also carries legacy responsibilities. Former operations in lead pigment and lead-based paint manufacturing, as well as lead smelting, have resulted in ongoing environmental and product liability litigation. Managing these commitments, such as the remaining $16.7 million installment for the Santa Clara settlement due in September 2025 and significant environmental remediation efforts, remains a critical aspect of NL's operational and financial management.

The Dual Engines: CompX and Kronos - Business Models & Competitive Arenas

NL's strategic foundation rests on two distinct business engines, each operating in its own competitive landscape.

CompX International: Precision and Performance

CompX International is a manufacturer of engineered components, serving a variety of applications through its Security Products and Marine Components segments. The Security Products unit manufactures mechanical and electronic cabinet locks, including brands like KeSet, System 64, TuBar, Turbine, CompX eLock, and StealthLock. These are utilized in diverse applications such as postal, recreational transportation, office furniture, healthcare, and tool storage. The Marine Components segment produces wake enhancement systems, stainless steel exhaust systems, gauges, throttle controls, and related accessories for recreational marine and other industries. CompX's business model emphasizes direct sales to original equipment manufacturers (OEMs) and a network of distributors, allowing for tailored solutions and strong customer relationships.

Technological Edge at CompX: CompX's differentiation stems from its specialized engineering and proprietary locking mechanisms. While specific quantifiable performance metrics are not detailed, the company's electronic locks, such as the CompX eLock and StealthLock systems, inherently offer enhanced security features and seamless integration capabilities for various applications. This technological focus allows CompX to carve out niches in markets requiring reliable and application-specific security solutions, contributing to customer loyalty and potentially supporting premium pricing in its specialized segments. The ongoing investment in "technological and manufacturing improvements" at facilities, though broadly stated, underscores a commitment to maintaining this edge in product flexibility, quality, and cost-effectiveness. This focus on engineered solutions provides a competitive moat against broader, more commoditized offerings.

Kronos Worldwide: The Pigment Powerhouse

Kronos Worldwide, in which NL holds approximately a 31% non-controlling interest, is a global leader in titanium dioxide (TiO2) pigments. TiO2 is a foundational industrial product, essential for imparting whiteness, brightness, opacity, and durability to a wide array of products, including paints, plastics, paper, and cosmetics. Kronos's global reach and value-added product offerings position it as a significant player in this cyclical commodity market. A key strategic move for Kronos was the July 2024 acquisition of the remaining 50% joint venture interest in Louisiana Pigment Company, L.P. (LPC), making it a wholly-owned subsidiary. This acquisition was aimed at expanding product offerings, increasing sales in North America, and realizing significant commercial, overhead, and supply chain synergies, with ongoing investments in technological and manufacturing improvements at the LPC facility.

Competitive Landscape: A Tale of Two Segments

NL's competitive standing is a composite of its two primary segments. In security solutions, CompX's specialized mechanical and electronic locks compete with global giants like ASSA ABLOY AB (ASAZY) and Allegion plc (ALLE). CompX's strength lies in its durable, engineered components tailored for specific industrial applications, potentially offering a more robust solution in demanding environments. However, larger competitors like ASSA ABLOY often lead in the speed of digital innovation and integrated smart solutions, boasting stronger global distribution networks and more aggressive revenue growth (ASAZY's TTM Gross Profit Margin of 42% and ALLE's 44% significantly exceed NL's consolidated 29.85%). Allegion also presents a comprehensive security ecosystem and stronger brand recognition. NL's direct sales model to OEMs provides a unique value proposition for customization, but it may lag in broader market penetration and brand awareness compared to these larger, more diversified security players.

In marine components, CompX's performance and aftermarket parts face competition from large automotive suppliers such as Magna International Inc. (MGA). CompX differentiates itself through a focus on specialized accessories and customization for niche applications like performance boats. Magna, with its vast scale and deep integration into the global automotive supply chain, often benefits from superior efficiency and supply chain reliability (MGA's TTM Gross Profit Margin of 14% is lower than NL's consolidated, but its scale and diversified revenue streams provide resilience). NL's smaller scale can lead to higher operational costs, and its focus on specific accessory markets means it may not participate as strongly in broader industry shifts like electric vehicle component innovation.

Kronos, in the TiO2 market, competes on a global scale, where pricing and volumes are heavily influenced by competitive market pressures, supply-demand dynamics, and raw material costs. The industry is characterized by significant capital investment and exposure to global economic cycles. Kronos's acquisition of LPC aims to strengthen its North American position and realize synergies, but it operates in an environment where competition from Chinese suppliers with less stringent regulatory requirements is a persistent factor.

Overall, NL maintains a moderate market position, leveraging its long history and diversified portfolio to serve specific niches. Its strengths lie in specialized, durable products and proprietary technology within CompX, but it faces challenges in matching the innovation speed and scale of larger, more financially dynamic competitors.

Recent Financial Performance: A Mixed Picture

NL Industries' recent financial performance reflects a dichotomy between its growing CompX segment and the challenging environment for Kronos. For the second quarter of 2025, net income attributable to NL stockholders significantly decreased to $0.3 million, or $0.01 per share, compared to $7.9 million, or $0.16 per share, in the second quarter of 2024. The first six months of 2025 saw a similar trend, with net income at $1.0 million, or $0.02 per share, down from $14.7 million, or $0.30 per share, in the comparable prior year period.

The primary drivers for this decline were a shift to equity in losses from Kronos ($2.8 million loss in Q2 2025 versus $6.0 million earnings in Q2 2024), an unrealized loss on marketable equity securities ($0.1 million in Q2 2025), and lower interest and dividend income. This was partially offset by the robust performance of CompX.

CompX's Resilience and Growth: CompX International demonstrated strong operational execution. Its segment profit increased by 24% to $6.3 million in Q2 2025 and by 39% to $12.2 million for the first six months of 2025. Net sales for CompX rose 12% to $40.3 million in Q2 and 9% to $80.6 million for the first half of the year. This growth was primarily fueled by higher sales in the government security and healthcare markets for Security Products, and the government and towboat markets for Marine Components. Gross margin as a percentage of sales also improved, particularly in Marine Components, reflecting better fixed cost coverage on higher sales volumes and a favorable product mix. While selling, general, and administrative expenses increased due to higher employee-related costs, the overall operating costs as a percentage of net sales decreased due to the higher sales volume.

Kronos's Headwinds: In stark contrast, Kronos Worldwide faced significant headwinds. NL's equity in Kronos's earnings declined sharply, turning into a $2.8 million loss in Q2 2025 and a reduced $2.7 million in earnings for the first six months. Kronos's consolidated net sales decreased 1% in Q2 2025, primarily due to lower average TiO2 selling prices and product mix, despite a slight 1% increase for the first six months driven by higher volumes. Crucially, Kronos's gross margin percentage plummeted from 20% to 13% in Q2 2025. This was largely due to unfavorable fixed cost absorption resulting from reduced operating rates (81% in Q2 2025 vs. 99% in Q2 2024, and 87% in H1 2025 vs. 93% in H1 2024), leading to approximately $20.0 million in unabsorbed fixed costs in Q2 and $18.0 million in H1. Higher distribution and warehousing costs, partly due to strategic inventory prepositioning in anticipation of tariffs, further impacted profitability.

Corporate and Other Impacts: Corporate expenses saw a reduction in Q2 and H1 2025, primarily due to lower litigation fees and environmental remediation costs. However, the significant cash payment of $56.1 million (plus interest) in Q1 2025 for the Raritan Bay Slag Superfund Site settlement, despite a $9.6 million recovery from other parties, contributed to a net cash use of $40.2 million from operating activities in the first six months of 2025, a substantial shift from the $22.3 million provided in the prior year.

Outlook and Strategic Responses: Adapting to Market Shifts

NL's outlook for the remainder of 2025 is shaped by the divergent trajectories of its two core segments and the broader macroeconomic environment.

CompX's Forward Path: Management anticipates continued improvement in Security Products net sales for 2025, driven by sustained demand from the government security and healthcare markets. However, challenges in the transportation and distribution markets are expected to temper these gains. Gross margin and reporting unit profit margins for Security Products are projected to be in-line with prior year, facing pressure in the second half of 2025 from higher raw material costs and tariff-related surcharges on electronic components. Marine Components is expected to see increased net sales in 2025, particularly from the government and industrial markets in the second half, leading to improved gross margin and reporting unit profit margin percentages due to better fixed cost coverage. CompX's proactive strategy of increasing electronic component purchases in Q1 2025 to mitigate tariff impacts demonstrates its operational agility, though the full recovery of these costs remains uncertain.

Kronos's Cautious Forecast: The TiO2 market remains challenging. Kronos expects demand to persist in its current state until global tariff and trade uncertainties are resolved. Customer hesitancy to build inventories, coupled with lower demand and favorable TiO2 availability, continues to pressure selling prices downward. In response, Kronos reduced operating rates in Q2 2025 and plans to align production with demand to reduce elevated U.S. inventory balances. While raw material, energy, and other input costs are trending lower, with moderation expected in the second half of 2025, Kronos anticipates these cost improvements to be reflected in operating results in Q3 and Q4. Despite the strategic benefits of the LPC acquisition, Kronos expects to report lower operating results for the full year 2025 compared to 2024 due to weaker demand, pricing pressures, and lower fixed cost absorption. To bolster liquidity and manage near-term debt maturities, Kronos increased its revolving credit facility from $300.0 million to $350.0 million in July 2025.

Broader Industry and Regulatory Environment: Global economic uncertainty and geopolitical tensions are significant factors impacting customer demand and inventory decisions, particularly for Kronos. New tax legislation also plays a role. The U.S. One Big Beautiful Bill Act (OBBBA), signed in July 2025, is being evaluated, but NL does not expect a material impact on its tax provision. However, German legislation enacted in July 2025, which includes a phased reduction of the corporate tax rate, is expected to result in Kronos recording deferred income tax expense of $20.0 million to $23.0 million in Q3 2025.

Liquidity and Shareholder Returns

NL maintains a solid liquidity position, with $132.5 million in aggregate cash and cash equivalents at June 30, 2025.

While operating cash flow was a net use of funds in the first half of 2025 due to significant environmental settlement payments and lower dividends from Kronos, management expects sufficient liquidity to meet both short-term and long-term obligations.

The company also holds marketable securities, including approximately $19.4 million in Valhi (VHI) common stock and $218.4 million in Kronos common stock, providing additional financial flexibility.

NL's commitment to shareholder returns remains evident. In August 2025, the board declared a special cash dividend of $0.21 per share, funded from excess cash flows, alongside a quarterly dividend of $0.09 per share. CompX also declared a special dividend of $1.00 per share, from which NL will receive $10.8 million. This consistent return of capital, including special dividends that contribute to a trailing yield above 12%, highlights a key aspect of NL's investment appeal, particularly for income-focused investors.

Key Investment Risks

Investing in NL Industries carries several pertinent risks. The company's legacy lead pigment and environmental litigation remains a significant overhang. While a $16.7 million payment for the Santa Clara settlement is covered, the inherent uncertainties in court rulings mean NL cannot guarantee it will not incur future liabilities. Accrued environmental remediation costs stand at $13.0 million for 29 sites, with a reasonably possible upper range of $38.0 million, and approximately five sites exist where costs cannot be reasonably estimated, posing a risk of material adverse impact on financials. The ability to secure additional insurance recoveries for these matters is also uncertain.

Furthermore, both CompX and Kronos are exposed to global economic conditions, supply chain disruptions, and the impact of tariffs. Kronos, in particular, faces ongoing challenges from customer hesitancy, pricing pressures in the TiO2 market, and the effects of geopolitical tensions. While CompX has implemented tariff mitigation strategies, the full recovery of increased raw material and tariff-related costs is not guaranteed. These factors introduce volatility and uncertainty into NL's future earnings and cash flow generation.

Conclusion

NL Industries presents a compelling, albeit complex, investment narrative centered on its diversified industrial holdings. The company's core investment thesis rests on the consistent, specialized growth delivered by CompX International, which continues to expand its market presence in security products and marine components through engineered solutions and direct OEM relationships. This segment's technological differentiation, though not always quantitatively expressed, underpins its ability to capture and retain niche market share.

However, the significant headwinds faced by Kronos Worldwide, driven by global macroeconomic uncertainty and intense competitive pressures in the TiO2 market, currently overshadow CompX's strength, leading to a notable decline in NL's consolidated net income and operating cash flow. The company's strategic responses, including Kronos's facility improvements and credit facility expansion, aim to stabilize and improve the chemical segment's performance. Simultaneously, NL continues to manage its substantial legacy environmental and litigation liabilities, which, while costly in the short term, are being addressed with a clear strategy. For investors, NL offers a unique blend of industrial exposure and a commitment to shareholder returns through dividends. The long-term value proposition will depend on CompX's sustained growth, Kronos's ability to recover from current market pressures, and the effective resolution of legacy obligations, all within a dynamic global economic and competitive landscape.