Business Overview A Legacy of Diversification and Innovation
NL Industries, Inc. (NYSE:NL) is a diversified holding company with a rich history spanning decades. Anchored by its majority-owned subsidiary, CompX International Inc., and its significant stake in Kronos Worldwide, Inc., NL has navigated the ever-changing market landscape, showcasing resilience and adaptability.
NL Industries traces its roots back to 1891 when it was originally incorporated as the National Lead Company. For many years, the company was a major producer of lead and lead-based products. However, the company faced significant challenges in the 1970s and 1980s related to legal proceedings seeking damages for the use of lead-based paints. Despite denying liability, NL Industries had to devote substantial resources to defending against these claims.
In response to these challenges and changing market conditions, NL Industries began a strategic transition away from lead-based products in the 1990s and 2000s. A key milestone in this transformation was the acquisition of CompX International Inc. in 1996, which became NL’s majority-owned subsidiary and a leading manufacturer of engineered components.
Throughout its history, NL Industries has had to navigate numerous regulatory and legal challenges related to its operations. The company has faced environmental litigation and cleanup costs associated with its former lead smelting and mining operations. Despite these obstacles, NL has remained focused on creating value for its shareholders and has successfully diversified its business to reduce reliance on lead-based products.
Today, NL Industries stands as a diversified holding company with strategic investments in CompX International and Kronos Worldwide. This transformation has allowed the company to adapt to changing industry trends and position itself for long-term success in the face of evolving market dynamics.
Financial Snapshot Resilience and Adaptability
Over the past five years, NL has demonstrated its resilience and adaptability in the face of market challenges. The company’s annual net income has fluctuated between $0.6 million and $36.5 million, reflecting the cyclical nature of its core businesses and the volatility of its equity investments.
NL’s annual revenue has ranged from $161.3 million to $166.6 million during this period, showcasing the relative stability of its operations. The company’s annual operating cash flow has ranged from $17.6 million to $37.0 million, providing a solid foundation for its ongoing investments and capital allocation decisions.
Free cash flow, a crucial metric for evaluating a company’s financial health, has been equally impressive, ranging from $13.5 million to $35.9 million over the past five years. This strong cash flow generation has enabled NL to maintain a healthy balance sheet, with a debt-to-equity ratio consistently below 0.15, indicating a prudent approach to financial management.
For the most recent fiscal year (2023), NL Industries reported revenue of $161.29 million, net income of -$2.31 million, operating cash flow (OCF) of $37.00 million, and free cash flow (FCF) of $35.87 million.
In the most recent quarter (Q3 2024), NL Industries recorded revenue of $33.67 million, net income of $36.01 million, OCF of -$5.69 million, and FCF of -$6.15 million. This represents a 17% decrease in revenue compared to the same quarter last year, driven primarily by lower sales in the Security Products and Marine Components reporting units. Net income improved significantly from a net loss of $0.07 million in the prior year quarter, due to an unrealized gain of $18.6 million on marketable equity securities and higher equity earnings from the company’s investment in Kronos Worldwide.
Liquidity
NL Industries has maintained a strong liquidity position, as evidenced by its healthy balance sheet and consistent cash flow generation. The company’s prudent financial management has allowed it to navigate market challenges while maintaining flexibility for future investments and potential acquisitions.
As of September 30, 2024, NL Industries’ debt-to-equity ratio stood at a remarkably low 0.0012, indicating minimal leverage. The company had $176.22 million in cash, cash equivalents, and restricted cash. NL also has access to a $50 million revolving credit facility with Valhi, of which $5.00 million was outstanding and $49.50 million was available for future borrowing as of the latest quarter.
The company’s current ratio was 6.72 and quick ratio was 5.89 as of September 30, 2024, further underscoring its ample liquidity position.
Quarterly Performance Navigating Challenges and Seizing Opportunities
In the latest quarter, ending September 30, 2024, NL reported net income attributable to NL stockholders of $36.0 million, or $0.74 per share, compared to a net loss of $0.1 million, or $0.00 per share, in the same period of the previous year. This remarkable turnaround was driven by several factors, including a significant unrealized gain of $18.6 million on the change in value of the company’s marketable equity securities, a stark contrast to the $0.4 million gain recorded in the prior-year quarter.
For the first nine months of 2024, NL reported net income attributable to NL stockholders of $50.7 million, or $1.04 per share, a significant improvement over the $9.9 million net loss, or $0.20 per share, recorded in the corresponding period of 2023. This positive performance was largely attributed to higher equity earnings from Kronos Worldwide, increased interest and dividend income, and the impact of insurance recoveries.
Subsidiary and Affiliate Performance Diverse Drivers of Growth
CompX International, NL’s majority-owned subsidiary, has navigated the challenges of the past year with mixed results. The company’s Security Products division reported lower sales in the third quarter of 2024 compared to the same period in 2023, primarily due to reduced orders from a government security customer. However, the Marine Components division experienced a more pronounced decline in sales, particularly in the towboat market, reflecting the broader challenges facing the recreational marine industry.
Kronos Worldwide, NL’s publicly traded affiliate, has demonstrated a remarkable turnaround in its performance. In the third quarter of 2024, Kronos reported a significant increase in net sales, driven by a 21% jump in sales volumes across all major markets. This surge in demand, coupled with lower production costs, resulted in a substantial improvement in Kronos’ gross margin and operating income.
Product Segments Performance and Analysis
NL Industries operates in two main product segments: Security Products and Marine Components.
Security Products This segment manufactures mechanical and electronic cabinet locks and other locking mechanisms used in various applications such as postal, recreational transportation, office and institutional furniture, cabinetry, tool storage, and healthcare. In the third quarter of 2024, Security Products net sales decreased 15% compared to the same period in 2023, primarily due to lower sales for a government security customer related to a pilot project that began shipping in the third quarter of 2023 but did not repeat in 2024. For the first nine months of 2024, Security Products net sales were comparable to the same period in 2023, as higher sales to the healthcare and tool storage markets offset lower sales to the transportation, distributor, and government security markets.
Gross margin as a percentage of net sales for Security Products decreased in the third quarter of 2024 compared to 2023, primarily due to lower sales, higher material and labor costs, and decreased coverage of fixed costs. Operating income as a percentage of net sales also decreased in the third quarter of 2024 due to the factors impacting gross margin as well as decreased coverage of operating costs and expenses on lower sales. For the first nine months of 2024, Security Products gross margin as a percentage of net sales was comparable to 2023, but operating income as a percentage of net sales decreased due to higher employee salaries and benefits.
Marine Components This segment manufactures wake enhancement systems, stainless steel exhaust systems, gauges, throttle controls, trim tabs, and related hardware and accessories for the recreational marine and other industries. Marine Components net sales decreased 21% in the third quarter of 2024 and 32% in the first nine months of 2024 compared to the respective prior year periods, primarily due to lower sales to the towboat market. Gross margin as a percentage of sales decreased in the third quarter and first nine months of 2024 compared to 2023, primarily due to lower sales and decreased coverage of fixed costs, partially offset by a more favorable customer and product mix as well as lower employee costs. Operating income as a percentage of net sales also decreased in the third quarter and first nine months of 2024 for similar reasons.
Geographic Performance
NL Industries operates primarily in the United States through its majority-owned subsidiary CompX International. As a small-cap company, NL does not have significant international operations.
Outlook and Risks Navigating Evolving Market Dynamics
As NL Industries looks to the future, the company faces both opportunities and challenges. The continued recovery in Kronos Worldwide’s operations, coupled with the ongoing diversification efforts at CompX, provide a solid foundation for NL’s long-term growth. However, the company must also navigate various risks, including fluctuations in demand across its diverse business segments, uncertainty surrounding the global economic environment, and the potential impact of regulatory changes or litigation.
NL’s management team has demonstrated its ability to adapt to changing market conditions, leveraging the company’s diversified portfolio to weather periods of volatility. The successful integration of the recently acquired Louisiana Pigment Company by Kronos Worldwide, for example, highlights NL’s strategic vision and ability to capitalize on emerging opportunities.
Industry Trends and Stock Performance
Over the past 5 years, NL Industries has generated a compounded annual growth rate (CAGR) of 23% for its stock price. This strong performance has outpaced the broader market during this period, reflecting investor confidence in the company’s strategic direction and operational execution.
Conclusion A Resilient Conglomerate Positioned for the Future
NL Industries, with its rich history, diversified operations, and strategic investments, has proven its ability to navigate the ever-evolving market landscape. By leveraging the strengths of its subsidiaries and affiliates, the company has demonstrated a remarkable resilience and adaptability, positioning itself for continued success in the years to come. As NL Industries navigates the challenges and opportunities ahead, investors will undoubtedly watch closely to see how this diversified conglomerate continues to shape its future.
The company’s strong balance sheet, with minimal debt and ample liquidity, provides a solid foundation for future growth and strategic initiatives. While recent financial results have been mixed, with lower revenue but improved profitability in the latest quarter driven by gains on marketable securities, NL Industries remains focused on aligning its resources and operations with current demand levels in both its Security Products and Marine Components segments.
As NL Industries continues to adapt to changing market conditions and leverage its diversified portfolio, it remains well-positioned to capitalize on emerging opportunities and deliver long-term value to its shareholders.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.