NL INDUSTRIES INC - Annual Report: 2007 (Form 10-K)

 

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 - For the fiscal year ended December 31, 2007
Commission file number 1-640
NL INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
New Jersey	13-5267260
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas	75240-2697
(Address of principal executive offices)	(Zip Code)
Registrant's telephone number, including area code:          (972) 233-1700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Name of each exchange on     which registered
Common stock	New York Stock Exchange

ITEM 1.  BUSINESS

 

·	Future supply and demand for our products,

·	The extent of the dependence of certain of our businesses on certain market sectors,

·	The cyclicality of our businesses (such as Kronos’ TiO2 operations),

·	Customer inventory levels (such as the extent to which Kronos’ customers may, from time to time, accelerate purchases of TiO2 in advance of anticipated price increases or defer purchases of TiO2 in advance of anticipated price decreases),

·	Changes in raw material and other operating costs (such as energy and steel costs),

·	The possibility of labor disruptions,

·	General global economic and political conditions (such as changes in the level of gross domestic product in various regions of the world and the impact of such changes on demand for, among other things, TiO2 and component products),

·	Possible disruption of our business or increases in the cost of doing business resulting from terrorist activities or global conflicts,

·	Competitive products and substitute products, including increased competition from low-cost manufacturing sources (such as China),

·	Customer and competitor strategies,

·	Potential consolidation of our competitors,

·	The impact of pricing and production decisions,

·	Competitive technology positions,

·	The introduction of trade barriers,

·	Service industry employment levels,

·	Fluctuations in currency exchange rates (such as changes in the exchange rate between the U.S. dollar and each of the euro, the Norwegian kroner, the New Taiwan dollar and the Canadian dollar),

·	Operating interruptions (including, but not limited to, labor disputes, leaks, natural disasters, fires, explosions, unscheduled or unplanned downtime and transportation interruptions),

·	The timing and amounts of insurance recoveries,

·	Our ability to renew or refinance credit facilities,

·	The ultimate outcome of income tax audits, tax settlement initiatives or other tax matters,

·	Potential difficulties in integrating completed or future acquisitions,

·	Decisions to sell operating assets other than in the ordinary course of business,

·	The extent to which our subsidiaries were to become unable to pay us dividends,

·	Uncertainties associated with new product development,

·	Our ultimate ability to utilize income tax attributes, the benefits of which have been recognized under the more-likely-than-not recognition criteria (such as Kronos’ ability to utilize its German net operating loss carryforwards),

·	Environmental matters (such as those requiring compliance with emission and discharge standards for existing and new facilities as well as adjustments to environmental remediation at sites related to our former operations),

·

Government laws and regulations and possible changes therein (such as changes in government regulations which might impose various obligations on present and former manufacturers of lead pigment and lead-based paint, including us, with respect to asserted health concerns associated with the use of such products),

·	The ultimate resolution of pending litigation (such as our lead pigment litigation and litigation surrounding environmental matters), and

·	Possible future litigation.

Component Products CompX International Inc. - 86% owned at December 31, 2007	CompX is a leading manufacturer of security products, precision ball bearing slides and ergonomic computer support systems used in the office furniture, transportation, postal, tool storage, marine appliance and a variety of other industries.  CompX is also a leading manufacturer of stainless steel exhaust systems, gauges and throttle controls for the performance boat industry.  CompX has production facilities in North America and Asia.
Chemicals Kronos Worldwide, Inc. – 36% owned at December 31, 2007	Kronos is a leading global producer and marketer of value-added titanium dioxide pigments ("TiO2"), which are used for imparting whiteness, brightness and opacity to a diverse range of customer applications and end-use markets, including coatings, plastics, paper and other industrial and consumer "quality-of-life" products. Kronos has production facilities in Europe and North America.  Sales of TiO2 represented about 90% of Kronos’ total sales in 2007, with sales of other products that are complementary to Kronos’ TiO2 business comprising the remainder.

·	disc tumbler locks which provide moderate security and generally represent the lowest cost lock to produce;

·	pin tumbler locking mechanisms which are more costly to produce and are used in applications requiring higher levels of security, including CompX’s KeSet high security system, which allows the user to change the keying on a single lock 64 times without removing the lock from its enclosure; and

·	innovative eLock electronic locks which provide stand-alone security and audit trail capability for drug storage and other valuables through the use of a proximity card, magnetic stripe, or keypad credentials.

·	the patented Integrated Slide Lock which allows a file cabinet manufacturer to reduce the possibility of multiple drawers being opened at the same time;

·	the patented adjustable Ball Lock which reduces the risk of heavily-filled drawers, such as auto mechanic tool boxes, from opening while in movement;

·	the Self-Closing Slide, which is designed to assist in closing a drawer and is used in applications such as bottom-mount freezers;

·

articulating computer keyboard support arms (designed to attach to desks in the workplace and home office environments to alleviate possible strains and stress and maximize usable workspace), along with the patented LeverLock keyboard arm, which is designed to make ergonomic adjustments to the keyboard arm easier;

·	CPU storage devices which minimize adverse effects of dust and moisture; and

·	complementary accessories, such as ergonomic wrist rest aids, mouse pad supports and flat screen computer monitor support arms.

·	original equipment and aftermarket stainless steel exhaust headers, exhaust pipes, mufflers, other exhaust components and billet accessories; and

·	high performance gauges and related components such as GPS speedometers, throttles, controls, tachometers and panels.

Security Products		Furniture Components		Marine Components
Mauldin, SC Grayslake, IL		Kitchener, Ontario Byron Center, MI Taipei, Taiwan		Neenah, WI Grayslake, IL

·	zinc (used in the Security Products business for the manufacture of locking mechanisms);

·	coiled steel (used in the Furniture Components business for the manufacture of precision ball bearing slides and ergonomic computer support systems);

·	stainless steel (used in the Marine Components business for the manufacture of exhaust headers and pipes and other components); and

·	plastic resins (primarily used in the Furniture Components business for injection molded plastics in the manufacture of ergonomic computer support systems).

Furniture Components		Security Products		Marine Components
CompX Precision Slides®		CompX Security Products®		Custom Marine®
CompX Waterloo®		National Cabinet Lock®		Livorsi Marine®
CompX ErgonomX®		Fort Lock®		CMI Industrial Mufflers™
CompX DurISLide®		Timberline®		Custom Marine Stainless
Dynaslide®		Chicago Lock®		Exhaust™
Waterloo Furniture		STOCK LOCKS®		The #1 Choice in
Components Limited®		KeSet®		Performance Boating®
		TuBar®		Mega Rim™
		ACE II®		Race Rim™
				CompX Marine™

·	shifting the manufacture of some products to our lower-cost facilities;

·	working to reduce costs and gain operational efficiencies through workforce reductions and lean process improvements in all of our facilities; and

·	working with our customers to be their value-added supplier of choice by offering customer support services which Asian-based suppliers are generally unable to provide.

United States			636
Canada(1)			259
Taiwan			134
Total			1,029

·

Kronos owns and operates an ilmenite mine in Norway pursuant to a governmental concession with an unlimited term, and Kronos is currently excavating a second mine located near the first mine.  Ilmenite is a raw material used directly as a feedstock by some sulfate-process TiO2 plants, including all of Kronos’ European sulfate-process plants.  Kronos also sells ilmenite ore to third-parties, some of which are its competitors.  The mines have estimated aggregate reserves that are expected to last for at least another 60 years.

·

Kronos manufactures and sells iron-based chemicals that are co-products and processed co-products of the TiO2 pigment production process.  These co-product chemicals are marketed through Kronos’ Ecochem division and are used primarily as treatment and conditioning agents for industrial effluents and municipal wastewater as well as in the manufacture of iron pigments, cement and agricultural products.

·

Kronos manufactures and sells titanium oxychloride and titanyl sulfate which are side-stream products from the production of TiO2.  Titanium oxychloride is used in specialty applications in the formulation of pearlescent pigments and in the production of electroceramic capacitors for cell phones and other electronic devices.  Titanyl sulfate products are used primarily in pearlescent pigments.

Production Process/Raw Material		Raw Materials Procured or Mined
		(In thousands of metric tons)
Chloride process plants:
Purchased slag or natural rutile ore			470
Sulfate process plants:
Raw ilmenite ore mined & used internally			311
Purchased slag			25

·	the identification of suitable growth opportunities;

·	an inaccurate assessment of acquired liabilities;

·	the entry into markets in which we may have limited or no experience;

·	the diversion of management’s attention from our core businesses;

·	the potential loss of key employees or customers of the acquired businesses;

·	difficulties in realizing projected efficiencies, synergies and cost savings; and

·	an increase in our indebtedness and a limitation in our ability to access additional capital when needed.

·	making it more difficult for us to satisfy our obligations with respect to our liabilities;

·	increasing our vulnerability to adverse general economic and industry conditions;

·	limiting our ability to obtain additional financing to fund future working capital, capital expenditures, dividends on our common stock, acquisitions or general corporate requirements;

·	limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and

·	placing us at a competitive disadvantage relative to other less leveraged competitors.

ITEM 2.

PROPERTIES

·	complexity and differing interpretations of governmental regulations;

·	number of PRPs and their ability or willingness to fund such allocation of costs;

·	financial capabilities of the PRPs and the allocation of costs among them;

·	solvency of other PRPs;

·	multiplicity of possible solutions; and

·	number of years of investigatory, remedial and monitoring activity required.

		High				Low				Cash dividends  paid
Year ended December 31, 2006
First Quarter		$	14.60			$	10.34			$	.125
Second Quarter			15.00				9.54				.125
Third Quarter			11.09				9.18				.125
Fourth Quarter			11.76				9.92				.125
Year ended December 31, 2007
First Quarter		$	12.09			$	10.02			$	.125
Second Quarter			13.52				10.02				.125
Third Quarter			13.05				9.49				.125
Fourth Quarter			12.33				9.34				.125
January 1, 2008 through February 29, 2008		$	11.63			$	8.65				.125

		2002				2003				2004				2005				2006				2007
NL common stock		$	100			$	107			$	213			$	144			$	111			$	128
S&P 500 Composite Stock Price Index			100				129				143				150				173				183
S&P 500 Industrial Conglomerates Index			100				135				161				155				168				176

 

 

ITEM 6.  SELECTED FINANCIAL DATA

 

(1)	We ceased to consolidate the Kronos chemicals segment effective July 1, 2004, at which time we commenced to account for our interest in Kronos by the equity method.

(2)	Excludes the distribution of shares of Kronos common stock at December 8, 2003.  Amounts paid in 2003, 2005 (last three quarters), 2006 and 2007 were cash dividends, while amounts paid in 2004 and the first quarter of 2005 were in the form of shares of Kronos common stock.

(3)	Long-term debt in 2007 represents a promissory note payable to an affiliate.  See Note 17 to the Consolidated Financial Statements.

·	lower equity in earnings from Kronos in 2007;

·	lower insurance recoveries in 2007;

·	higher legal defense costs in 2007;

·	higher securities transaction gains in 2007; and

·	lower component products income from operations in 2007.

·	certain securities transactions gains in 2005;

·	higher environmental and legal defense costs in 2006;

·	higher equity in earnings of Kronos in 2006; and

·	higher component products income from operations in 2006.

·	a charge included in our equity in earnings of Kronos of $.43 per diluted share related to a reduction in Kronos’ net deferred income tax asset resulting from a change in German income tax rates as discussed below;

·	a charge included in our equity in earnings of Kronos of $.04 per diluted share related to an adjustment of certain income tax attributes of Kronos in Germany;

·	income of $.30 per diluted share from a gain on sale of TIMET common stock;

·	income of $.08 per diluted share related to certain insurance recoveries we received; and

·	income of $.03 per diluted share due to a net reduction in our reserve for uncertain tax positions.

·	a charge included in our equity in earnings of Kronos of $.07 per diluted share related to Kronos’ redemption of its 8.875% Senior Secured Notes;

·

income included in our equity in earnings of Kronos of $.16 per diluted share related to Kronos’ aggregate income tax benefit associated with the net effects of the withdrawal of certain income tax assessments previously made by the Belgian and Norwegian tax authorities, the resolution of certain income tax issues related to German and Belgian operations and the enactment of a reduction in the Canadian federal income tax rate; and

·	income of $.10 per diluted share related to certain insurance recoveries we received.

·	income related to our sale of Kronos common stock in market transactions of $.17 per diluted share;

·	income from Kronos’ second quarter sale of its passive interest in a Norwegian smelting operation of $.03 per diluted share;

·	a net non-cash income tax expense of $.03 per diluted share related to the aggregate effects of developments with respect to certain non-U.S. income tax audits of Kronos (principally in Germany, Belgium and Canada); and

·	a net non-cash income tax expense of $.02 per diluted share related to the aggregate effects of developments with respect to certain U.S. income tax audits of NL and a change in CompX’s permanent reinvestment conclusion regarding certain non-U.S. subsidiaries.

·	slightly higher income from operations in 2008 as a result of lower legal costs and improved component products results;

·	higher equity in earnings from Kronos as the unfavorable effect of lower income from operations for Kronos in 2008 is expected to be more than offset by the unfavorable effect of the reduction in German income taxes rates in 2007; and

·	lower securities transaction gains in 2008.

 

 

·

Investments - We own investments in certain companies that we account for as marketable securities carried at fair value or that we account for under the equity method.  For all such investments, we record an impairment charge when we believe that an investment has experienced a decline in fair value below its cost basis (for marketable securities) or below its carrying value (for equity method investees) that is other than temporary.  Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment's current carrying value, thereby possibly requiring an impairment charge in the future.

·

Long-lived assets - We account for our long-lived assets, in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.  We assess property and equipment for impairment when circumstances indicate an impairment may exist.  Our determination is based upon, among other things, our estimates of the amount of future net cash flows to be generated by the long-lived asset and our estimates of the current fair value of the asset.  During 2007, CompX consolidated certain of its operations and as a result no longer utilizes one of its owned manufacturing facilities.  In November of 2007, this facility and related assets met the criteria for “assets held for sale” and we concluded that the carrying amount of the assets exceeded estimated fair value less costs to sell such assets, which resulted in a loss of $600,000 during the fourth quarter of 2007.  See Note 22 to the Consolidated Financial Statements.  No other impairment indicators were present during 2007.

·

Goodwill - In accordance with SFAS No. 142, Goodwill and other Intangible Assets, we review goodwill for impairment at least on an annual basis.  We also review goodwill for impairment when circumstances indicate an impairment may exist.  No goodwill impairments were deemed to exist as a result of our annual impairment review completed during the third quarter of 2007, as the estimated fair value of each CompX reporting unit exceeded the net carrying value of the respective reporting unit and the estimated fair value of EWI exceeded its net carrying value.  See Note 8 to the Consolidated Financial Statements.  The estimated fair values of CompX’s three reporting units are determined based on discounted cash flow projections.  Significant judgment is required in estimating cash flows.  Considerable management judgment is necessary to evaluate the impact of operating changes and to estimate future cash flows.  Assumptions used in our impairment evaluations, such as forecasted growth rates and cost of capital, are consistent with our internal projections and operating plans.

·

Benefit plans - We maintain various defined benefit pension plans and postretirement benefits other than pensions (“OPEB”).  The amounts recognized as defined benefit pension and OPEB expenses, and the reported amounts of prepaid and accrued pension and OPEB costs, are actuarially determined based on several assumptions, including discount rates, expected rates of return on plan assets and expected health care trend rates.  Variances from these actuarially assumed rates will result in increases or decreases, as applicable, in the recognized pension and OPEB obligations, pension and OPEB expenses and funding requirements.  These assumptions are more fully described below under “Defined Benefit Pension Plans” and “OPEB Plans.”

 

·

Income taxes - Deferred taxes are recognized for future tax effects of temporary differences between financial and income tax reporting in accordance with the recognition criteria of SFAS No. 109, Accounting for Income Taxes. We record a reserve for uncertain tax positions in accordance with Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertain Tax Positions for tax positions where we believe that it is more-likely-than-not our position will not prevail with the applicable tax authorities. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance, it is possible that in the future we may change our estimate of the amount of the deferred income tax assets that would more-likely-than-not be realized in the future resulting in an adjustment to the deferred income tax asset valuation allowance that would either increase or decrease, as applicable, reported net income in the period such change in estimate was made.

 

 

·

Accruals - We record accruals for environmental, legal and other contingencies and commitments when estimated future expenditures associated with such contingencies become probable, and the amounts can be reasonably estimated.  However, new information may become available, or circumstances (such as applicable laws and regulations) may change, thereby resulting in an increase or decrease in the amount required to be accrued for such matters (and therefore a decrease or increase in reported net income in the period of such change).

·	Chemicals – allowance for doubtful accounts, reserves for obsolete or unmarketable inventories, impairment of equity method investees; goodwill and other long-lived assets, defined benefit pension and OPEB plans and loss accruals; and

·	Component products – reserves for obsolete or unmarketable inventories, impairment of long-lived assets and loss accruals.

		Year ended December 31,												% Change
		2005				2006				2007					2005-06				2006-07
		(Dollars in millions)
CompX		$	19.3			$	20.5			$	15.4				6	%			(25	)%
Insurance recoveries			3.0				7.7				5.6				157	%			(27	)%
Corporate expense and other, net			(19.7	)			(24.3	)			(31.3	)			23	%			29	%
Income (loss) from operations		$	2.6			$	3.9			$	(10.3	)			50	%			(364	)%

		Year ended December 31,												% Change
		2005				2006				2007					2005-06				2006-07
		(Dollars in millions)
Net sales		$	186.3			$	190.1			$	177.7				2	%			(7	)%
Cost of goods sold			142.6				143.6				132.5				1	%			(8	)%
Gross margin			43.7				46.5				45.2				6	%			(3	)%
Operating costs and expenses			24.4				26.0				29.8				7	%			15	%
Income from operations		$	19.3			$	20.5			$	15.4				6	%			(25	)%
Percentage of net sales:
Cost of goods sold			77	%			76	%			75	%
Gross margin			23	%			24	%			25	%
Operating costs and expenses			13	%			14	%			16	%
Income from operations			10	%			11	%			9	%

		Increase (decrease) –  Year ended December 31,
		2005 vs. 2006				2006 vs. 2007
Impact on:		(In thousands)
Net sales		$	1,138			$	886
Income from operations			(1,132	)			(2,384	)

		Years ended December 31,												% Change
		2005				2006				2007					2005-06				2006-07
		(Dollars in millions)
Net sales		$	1,196.7			$	1,279.4			$	1,310.3				7	%			2	%
Cost of sales			869.2				968.9				1,058.9				11	%			9	%
Gross margin		$	327.5			$	310.5			$	251.4
Income from operations		$	176.0			$	143.2			$	84.9				(19	%)			(41	%)
Other general corporate, net			7.6				3.6				2.5
Loss on prepayment of debt			-				(22.3	)			-
Interest expense			(44.7	)			(43.2	)			(39.4	)
Income before income taxes			138.9				81.3				48.0
Provision for income taxes			67.4				(.7	)			114.7
Net income (loss)		$	71.5			$	82.0			$	(66.7	)
Percentage of net sales:
Cost of sales			73	%			76	%			81	%
Income from operations			14	%			11	%			6	%
Equity in earnings (losses) of Kronos Worldwide, Inc.		$	25.7			$	29.3			$	(23.9	)
TiO2 operating statistics:
Sales volumes*			478				511				519				7	%			1	%
Production volumes*			492				516				512				5	%			(1	%)
Change in Ti02 net sales:
Ti02 product pricing															-				(4	%)
Ti02 sales volume															7	%			1	%
Ti02 product mix															-				-
Changes in currency exchange rates															-				5	%
Total															7	%			2	%