10-Q: NL Industries Q2 Profit Plunges on Kronos Losses

NL Industries reported a significant decline in net income for the second quarter and first half of 2025, primarily driven by losses from its investment in Kronos Worldwide, Inc., despite strong performance from its CompX subsidiary.

Summary

• Net income attributable to NL stockholders plummeted to $0.355 million ($0.01 per share) in Q2 2025, a 95.5% decrease from $7.835 million ($0.16 per share) in Q2 2024.
• For the first six months of 2025, net income attributable to NL stockholders was $1.022 million ($0.02 per share), down 93% from $14.674 million ($0.30 per share) in the same period of 2024.
• The decline was primarily due to a $2.8 million equity loss from Kronos Worldwide, Inc. in Q2 2025 (compared to a $6.0 million gain in Q2 2024) and an $8.6 million unrealized loss on marketable equity securities in H1 2025.
• CompX International Inc., the majority-owned subsidiary, showed strong performance with segment profit increasing 24% in Q2 2025 to $6.3 million and 39% in H1 2025 to $12.2 million, driven by higher sales in Security Products and Marine Components.
• Cash used in operating activities was $40.2 million in H1 2025, a significant shift from $22.3 million provided in H1 2024, largely due to a $56.1 million environmental settlement payment.

Sentiment

Score: 3

Explanation: The overall sentiment is negative due to the drastic decline in net income and cash flow from operations, primarily driven by poor performance from the significant investment in Kronos. While CompX shows positive growth, it is not enough to offset the substantial losses and challenges faced by Kronos and the impact of a large environmental settlement payment. The outlook for Kronos remains challenging due to market uncertainties and pricing pressures.

Positives

• CompX International Inc. reported a 24% increase in segment profit for Q2 2025 to $6.3 million and a 39% increase for H1 2025 to $12.2 million.
• CompX's net sales increased 12% in Q2 2025 to $40.3 million and 9% in H1 2025 to $80.6 million, driven by higher sales in government security, healthcare, government, and towboat markets.
• CompX's Marine Components segment saw a 51% increase in gross margin in Q2 2025 and a 109% increase in H1 2025, primarily due to increased coverage of fixed costs from higher sales.
• Corporate expenses decreased by $0.8 million in Q2 2025 due to lower litigation fees and environmental remediation costs.
• The U.S. pension plan termination is expected to be completed with existing plan funds.

Negatives

• Net income attributable to NL stockholders decreased by 95.5% in Q2 2025 and 93% in H1 2025 compared to the prior year periods.
• Equity in Kronos Worldwide, Inc. shifted from a $6.0 million gain in Q2 2024 to a $2.8 million loss in Q2 2025, and from an $8.5 million gain to a $2.7 million gain in H1 2025, representing a significant decline.
• An unrealized loss of $8.6 million on marketable equity securities was recognized in H1 2025, compared to a $3.2 million gain in H1 2024.
• Net cash used in operating activities was $40.2 million in H1 2025, a substantial decrease from $22.3 million provided in H1 2024, largely due to a $56.1 million environmental settlement payment.
• Kronos' income from operations decreased by 79% in Q2 2025 and 17% in H1 2025, primarily due to unfavorable fixed cost absorption from reduced operating rates (87% utilization in H1 2025 vs 93% in H1 2024).
• Kronos experienced a 4% decline in average TiO2 selling prices during the first six months of 2025.
• Kronos' distribution and warehousing costs increased due to higher finished goods inventory levels.
• Higher raw material costs and tariff-related surcharges on certain electronic components are expected to challenge CompX's gross margin and reporting unit profit margin percentages in the second half of 2025.

Risks

• Future supply and demand for products.
• Kronos' ability to realize expected cost savings from strategic and operational initiatives.
• Kronos' ability to integrate acquisitions, including Louisiana Pigment Company, L.P., and realize expected synergies.
• Dependence of certain businesses on specific market sectors.
• Cyclicality of businesses (e.g., Kronos TiO2 operations).
• Customer and producer inventory levels.
• Unexpected or earlier-than-expected industry capacity expansion (e.g., TiO2 industry).
• Changes in raw material and other operating costs (energy, ore, zinc, aluminum, steel, brass), including tariffs, and ability to pass costs to customers.
• Changes in raw material availability (e.g., ore).
• General global economic and political conditions (GDP levels, tariffs, natural disasters, terrorist acts, global conflicts, public health crises).
• Operating interruptions (labor disputes, leaks, fires, unscheduled downtime, transportation interruptions).
• Technology-related disruptions (cyber-attacks, software failures).
• Competitive products and substitute products.
• Competition from Chinese suppliers with less stringent regulatory and environmental compliance.
• Customer and competitor strategies.
• Potential consolidation of Kronos competitors or customers.
• Impact of pricing and production decisions.
• Ability to protect or defend intellectual property rights.
• Difficulties in integrating future acquisitions.
• Difficulties in upgrading or implementing accounting and manufacturing software systems.
• Introduction of new, or changes in existing, tariffs, trade barriers, or trade disputes.
• Fluctuations in currency exchange rates (USD vs. Euro, Norwegian Krone, Canadian Dollar).
• Decisions to sell operating assets outside the ordinary course of business.
• Kronos' ability to renew or refinance credit facilities or other debt instruments.
• Changes in interest rates.
• Kronos' ability to comply with covenants in its revolving bank credit facility.
• Ability to maintain sufficient liquidity.
• Timing and amounts of insurance recoveries.
• Ability of subsidiaries or affiliates to pay dividends.
• Uncertainties associated with CompX's new product development.
• Ultimate outcome of income tax audits, tax settlement initiatives, or other tax matters.
• Ability to utilize income tax attributes or changes in income tax rates.
• Environmental matters (compliance, remediation, decommissioning obligations).
• Government laws and regulations and possible changes (e.g., lead pigment, TiO2 classification).
• Ultimate resolution of pending litigation (lead pigment, environmental matters).
• Pending or possible future litigation (e.g., CompX's use of certain permitted chemicals).

Future Outlook

CompX expects Security Products net sales to improve in 2025, primarily from government security and healthcare markets, though transportation and distribution markets remain challenging. Gross margin and profit margin percentages for Security Products are expected to be in-line with prior year due to higher raw material costs and tariff-related surcharges. Marine Components net sales are expected to increase in 2025, driven by government and industrial markets, with improved gross margin and profit margin percentages due to higher sales volumes. Kronos expects demand to remain challenging due to tariff uncertainties and higher interest rates, leading to lower operating results for the full year 2025 compared to 2024, despite anticipated cost improvements in the latter half of the year. Kronos plans to operate facilities in line with current demand and reduce elevated inventory.

Management Comments

• Net income attributable to NL stockholders was $0.3 million, or $0.01 per share, in the second quarter of 2025 compared to $7.9 million, or $0.16 per share, in the second quarter of 2024.
• The decrease in net income attributable to NL stockholders from 2024 to 2025 is primarily due to the net effects of: equity in losses of Kronos of $2.8 million in 2025 compared to equity in earnings of $6.0 million in 2024; higher CompX segment profit of $6.3 million in 2025 compared to $5.1 million in 2024; lower interest and dividend income of $1.5 million in 2025 compared to $2.6 million in 2024; and an unrealized loss in the relative value of marketable equity securities of $0.1 million in 2025 compared to an unrealized gain of $0.8 million in 2024.
• CompX's sales for the first half of 2025 reflect continued robust demand across both of CompX's reporting units, surpassing the first half of 2024 sales.
• The raw material price increases CompX began experiencing in the third quarter of 2024 have continued through the first half of 2025, and it is starting to see some surcharges related to tariffs on certain components, primarily electronic components from Asia.
• Overall, net general corporate expenses in 2025 are currently expected to be higher than in 2024 primarily due to income recognized in 2024 related to the settlement of a liability for an environmental remediation site in the fourth quarter of 2024.
• Kronos expects demand to remain challenging until the uncertainty around tariffs is resolved and it remains unclear how much impact the economic uncertainty caused by global tariff and trade tensions will have on demand for the remainder of 2025.
• Kronos believes customer inventory levels remain low; however, customers continue to be hesitant to build inventory, and Kronos continues to receive orders on shorter notice than previously experienced.
• Kronos reduced its facility operating rates in the second quarter in response to the lower demand levels and it plans to operate its facilities in line with the current demand environment over the remainder of the year as it sells down elevated inventory balances.
• Kronos expects its cash on hand to improve as it reduces inventory levels over the next several quarters.
• With increased borrowing availability under Kronos' revolving credit facility and cash on hand, Kronos believes it is well-positioned to finance its working capital needs and to fully integrate the acquired LPC production capacity.
• Based upon expectations of operating performance, and the anticipated demands on cash resources, sufficient liquidity is expected to meet short-term obligations (defined as the twelve-month period ending June 30, 2026) and long-term obligations (defined as the five-year period ending June 30, 2030).

Industry Context

The filing highlights a challenging global economic environment marked by U.S. trade policies, geopolitical tensions, higher interest rates, and inflation, which are impacting customer inventory building and pricing momentum, particularly for Kronos's TiO2 business. The TiO2 industry is experiencing lower demand and pricing pressures, leading Kronos to reduce operating rates. In contrast, CompX's component products business is seeing robust demand in specific markets like government security, healthcare, and towboats, indicating a more resilient or specialized market position. The mention of tariffs on electronic components from Asia reflects broader supply chain and trade policy impacts affecting manufacturing costs.

Legal Proceedings

• One installment payment of $16.7 million remaining for the County of Santa Clara v. Atlantic Richfield Company, et al. global settlement, due September 2025.
• In February 2025, the U.S. District Court for the District of New Jersey approved a consent decree for the Raritan Bay Slag Superfund Site, requiring a total payment of $151.1 million plus interest from various parties, including NL. NL paid $56.1 million plus $0.5 million interest in Q1 2025 and received $9.6 million from other private companies.
• The Philip Palmeri v. NL Industries, Inc. case was dismissed in May 2025.
• Ongoing involvement in various environmental, contractual, product liability, patent, employment, and other claims and disputes.
• Involvement in legal proceedings with former insurance carriers regarding coverage for lead pigment and asbestos lawsuits.

Related Party Transactions

• Valhi, Inc. (immediate parent company) held approximately 83% of NL's outstanding common stock at June 30, 2025.
• A wholly-owned subsidiary of Contran Corporation held approximately 91% of Valhi's outstanding common stock.
• NL owns approximately 1.2 million shares of Valhi common stock.
• NLKW Holding, LLC (wholly-owned subsidiary of NL) has a $50 million secured revolving credit facility with Valhi, with $0.5 million outstanding at June 30, 2025.
• Valhi repaid a net $0.4 million under a promissory note from NL in H1 2025.
• NL owns approximately 31% of Kronos Worldwide, Inc.
• Kronos' credit agreements contain provisions for acceleration of indebtedness upon a change of control of the borrower.

Stakeholder Impact

• Shareholders: Significant decrease in net income and EPS, but special dividends declared by both NL and CompX. Potential for future capital raises could dilute equity.
• Employees: Workforce reductions mentioned in Kronos' Q2 2024 cost of sales. Higher employee-related costs (salaries, benefits, medical expenses) at CompX. Pension plan termination process initiated.
• Customers: Kronos customers are hesitant to build inventories due to global uncertainties, impacting sales volumes and pricing. CompX customers in government security and healthcare markets show robust demand.
• Suppliers: CompX is experiencing higher raw material costs and tariff-related surcharges, particularly for electronic components from Asia. Kronos' raw material costs are trending lower.
• Creditors: Kronos increased its credit facility to $350 million to support liquidity and near-term debt maturities. NL is in compliance with debt covenants.

Next Steps

• Complete the termination process for the U.S. pension plan, expected to take between six and twelve months.
• Kronos plans to operate its facilities in line with current demand over the remainder of the year to sell down elevated inventory balances.
• Kronos expects cost improvements from lower raw material, energy, and input costs to be reflected in operating results in Q3 and Q4 2025.
• Kronos is investing in technological and manufacturing improvements to the LPC facility.
• NL Industries' board of directors declared a special dividend of $0.21 per share payable on August 28, 2025.
• CompX's board of directors declared a special dividend of $1.00 per share payable on August 27, 2025.
• NL Industries may seek to raise additional capital, incur debt, repurchase indebtedness, modify dividend policies, or sell interests in subsidiaries/affiliates/assets in the future.
• NL Industries periodically evaluates acquisitions of interests in or combinations with companies.
• NL Industries may evaluate the restructuring of ownership interests among its subsidiaries and related companies.

Key Dates

Recommendation

The significant decline in net income and EPS, coupled with a substantial negative shift in cash flow from operations, indicates severe underperformance. The primary driver of this decline is the poor performance of the Kronos Worldwide, Inc. investment, which shifted to a loss in the quarter and saw a sharp drop in earnings for the half-year, alongside a large unrealized loss on marketable securities. While CompX shows some positive operational improvements, it is insufficient to offset the broader financial deterioration. The outlook for Kronos remains challenging due to market uncertainties and pricing pressures. The large environmental settlement payment further strained liquidity. These factors suggest a deteriorating financial position and significant headwinds, warranting a 'sell' recommendation for a seasoned investor.

Keywords

NL Industries, CompX International, Kronos Worldwide, SEC Filing, 10-Q, Quarterly Report, Financial Results, Titanium Dioxide, TiO2, Engineered Components, Security Products, Marine Components, Environmental Remediation, Lead Pigment Litigation, Corporate Governance, Financial Performance, Earnings, Cash Flow, Dividends, Marketable Securities, Debt Covenants, Supply Chain, Tariffs, Currency Exchange Rates