10-Q: NL Industries Reports Strong Q2 Earnings Driven by Kronos and Marketable Securities Gains

NL Industries saw a significant turnaround in the second quarter of 2024, reporting a net income of $7.8 million compared to a net loss in the same period last year, primarily due to gains from its investment in Kronos and marketable securities.

Summary

• NL Industries reported a net income attributable to NL stockholders of $7.8 million, or $0.16 per share, for the second quarter of 2024, a significant improvement from a net loss of $3.1 million, or $0.06 per share, in the same quarter of 2023.
• The company's six-month net income attributable to NL stockholders was $14.7 million, or $0.30 per share, compared to a net loss of $9.8 million, or $0.20 per share, for the same period in 2023.
• The improved results were primarily driven by a $6.0 million gain from equity in earnings of Kronos in Q2 2024 compared to a $2.6 million loss in Q2 2023, and an $8.5 million gain for the six months compared to a $7.2 million loss in the prior year.
• Unrealized gains on marketable equity securities also contributed, with an $0.8 million gain in Q2 2024 compared to a $5.4 million loss in Q2 2023, and a $3.2 million gain for the six months compared to a $10.9 million loss in the prior year.
• CompX International, a majority-owned subsidiary, saw a decrease in income from operations for the first six months of 2024, with $8.8 million compared to $11.4 million in 2023, but an increase in Q2 2024 with $5.1 million compared to $4.4 million in Q2 2023.
• Interest and dividend income increased to $2.6 million in Q2 2024 from $2.1 million in Q2 2023, and to $5.2 million for the six months from $4.1 million in the prior year.
• Kronos Worldwide, in which NL Industries holds a 31% stake, saw a 13% increase in net sales in both the second quarter and first six months of 2024, driven by a 29% and 28% increase in sales volumes respectively, despite a decrease in average TiO2 selling prices.
• Kronos also acquired the remaining 50% interest in Louisiana Pigment Company (LPC) for $185 million upfront and a potential $15 million earn-out, aiming to enhance its North American TiO2 market position.

Sentiment

Score: 7

Explanation: The document shows a positive turnaround in NL Industries' financial performance, driven by strong results from Kronos and gains in marketable securities. However, there are some concerns about the performance of CompX's Marine Components division and the cyclical nature of the TiO2 industry. The overall sentiment is positive, but with some caution.

Positives

• NL Industries experienced a significant increase in net income, driven by improved performance at Kronos and gains in marketable securities.
• CompX's Security Products division saw increased sales, particularly to the government security market.
• Kronos' sales volumes increased significantly, indicating a recovery in demand for TiO2.
• Kronos' acquisition of the remaining stake in LPC is expected to enhance its market position and create synergies.
• Interest and dividend income increased due to higher average interest rates and investment balances.

Negatives

• CompX's Marine Components division experienced a significant decrease in sales, particularly in the towboat market.
• CompX's overall income from operations decreased for the first six months of 2024 compared to 2023.
• Kronos' average TiO2 selling prices decreased, partially offsetting the increase in sales volumes.
• Corporate expenses increased due to higher environmental remediation and related costs.
• Kronos' interest expense increased due to recent debt transactions.

Risks

• The cyclical nature of the TiO2 industry and the dependence of certain businesses on specific market sectors pose risks.
• Changes in raw material and operating costs, as well as supply chain disruptions, could impact profitability.
• Competitive pressures and the potential for consolidation in the TiO2 industry could affect Kronos' performance.
• The outcome of pending litigation, particularly lead pigment and environmental matters, remains uncertain.
• Fluctuations in currency exchange rates could impact the reported earnings of Kronos' international operations.
• CompX faces uncertainty regarding the sustainability of current demand levels and potential further declines in the towboat market.

Future Outlook

NL Industries expects CompX's Security Products net sales to be lower in the second half of 2024 due to the non-repeat of a pilot project, while Marine Components sales are expected to decline further due to weakness in the towboat market. Kronos expects sales volumes to exceed 2023 levels and anticipates improved operating results for the full year of 2024, driven by increased demand, higher selling prices, and lower production costs. The acquisition of LPC is expected to positively impact Kronos' earnings, although this will be partially offset by increased debt service costs.

Management Comments

• CompX is focused on aligning its resources with current demand levels, and particularly at Marine Components, CompX 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 believes the LPC acquisition is a unique opportunity to immediately add value to its customers and better serve the North American marketplace by allowing Kronos to expand its product offerings and increase sales to new and existing customers while recognizing significant synergies including commercial, overhead and supply chain optimization.

Industry Context

The report highlights the cyclical nature of the TiO2 industry, with Kronos experiencing a recovery in demand after a period of reduced sales. The recreational marine industry is facing headwinds, impacting CompX's Marine Components division. The acquisition of LPC by Kronos reflects a strategic move to consolidate and strengthen its position in the North American TiO2 market.

Comparison to Industry Standards

• NL Industries' performance is heavily influenced by the performance of its key investments, particularly Kronos Worldwide. Kronos' results are compared to its own historical performance and industry trends, with a focus on TiO2 sales volumes and pricing.
• The report notes that Kronos' production capacity utilization rates increased from 64% in Q2 2023 to 99% in Q2 2024, indicating a significant improvement in operational efficiency and demand.
• The report mentions that Kronos' average TiO2 selling prices were 9% lower in the first six months of 2024 compared to the same period in 2023, reflecting broader market pricing pressures.
• The acquisition of LPC by Kronos is a strategic move to gain full control of a key production facility, similar to other consolidation activities seen in the chemical industry.
• CompX's performance is compared to its own historical results, with a focus on sales and gross margin by reporting unit. The decline in Marine Components sales reflects broader challenges in the recreational marine industry, which is experiencing reduced demand due to higher interest rates and market weakness.

Legal Proceedings

• NL Industries was served in a lawsuit, Philip Palmeri v. NL Industries, Inc., related to alleged radioactive material.
• The complaint against NL in Sunset Commercial, LLC v. Stauffer Management Co. was dismissed.
• CompX was served in a lawsuit, City of Columbia d/b/a Columbia Water v. 3M Company, Inc., et al., related to PFAS.

Related Party Transactions

• NLKW Holding, LLC has a $50 million secured revolving credit facility with Valhi.
• Kronos entered into a $53.7 million unsecured term loan from Contran Corporation.
• Kronos and Contran amended the Unsecured Subordinated Term Promissory Note, changing the interest rate to 9.54%.

Stakeholder Impact

• Shareholders will benefit from the improved financial performance and the special dividend.
• Employees at CompX may experience adjustments in labor resources due to changes in demand.
• Customers of Kronos will benefit from the increased production capacity and expanded product offerings.
• Suppliers of Kronos may see increased demand for raw materials.
• Creditors of Kronos may be impacted by the recent debt transactions.

Next Steps

• CompX will continue to align its resources with current demand levels, particularly at Marine Components.
• Kronos will focus on integrating the acquired LPC production capacity and realizing synergies.
• Kronos will continue to implement TiO2 selling price increases to improve margins.
• NL Industries will continue to monitor and manage its investments in Kronos and CompX.
• NL Industries will continue to evaluate potential acquisitions and restructurings.

Key Dates

Keywords

NL Industries, Kronos Worldwide, CompX International, TiO2, Titanium Dioxide, Marketable Securities, Component Products, Marine Components, Security Products, Environmental Remediation, Lead Pigment Litigation