NL INDUSTRIES INC - Annual Report: 2008 (Form 10-K)

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
X FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 - For the fiscal year ended December 31, 2008
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’ titanium dioxide pigments (“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),

·	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 or solvency of our competitors,

·	Demand for office furniture,

·	Demand for high performance marine components,

·	Substitute products,

·	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 Canadian dollar and the New Taiwan 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 maintain sufficient liquidity,

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

·	CompX’s and Kronos’ 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,

·	Uncertainties associated with new product development,

·	The ultimate ability to utilize income tax attributes or changes in income tax rates related to such attributes, the benefits of which have been recognized under the more-likely-than-not recognition criteria,

·	Environmental matters (such as those requiring compliance with emission and discharge standards for existing and new facilities or new developments regarding 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 and environmental matters), and

·	Possible future litigation.

Component Products CompX International Inc. - 87% owned at December 31, 2008	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, 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 marine industry.  CompX has production facilities in North America and Asia.
Chemicals Kronos Worldwide, Inc. – 36% owned at December 31, 2008	Kronos is a leading global producer and marketer of value-added TiO2 pigments, 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 2008, 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 user 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 and other exhaust components; and

·	high performance gauges such as GPS speedometers and tachometers;

·	controls, throttles, steering wheels and other billet accessories; and

·	dash panels, LED lighting, rigging and other accessories.

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

·	zinc, copper and brass (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, 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™
		CompX eLock®		Race Rim™
		Lockview® Software		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.

(1)	Approximately 75% of the Canadian employees are represented by a labor union covered by a collective bargaining agreement.  A new collective bargaining agreement, providing for wage increases from 0% to 1%, was ratified in January 2009 and expires January 2012.

·

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 TiO2 pigment production.  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	422
Sulfate process plants:
Raw ilmenite ore mined & used internally	305
Purchased slag	30

·	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 Kronos to satisfy its obligations with respect to its liabilities;

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

·	requiring that a portion of Kronos’ cash flows from operations be used for the payment of interest on its debt, which reduces its ability to use cash flow to fund working capital, capital expenditures, dividends on our common stock, acquisitions or general corporate requirements;

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

·	limiting its flexibility in planning for, or reacting to, changes in Kronos’ business and the industry in which it operates; and

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

 

 

 

 

 

 

 

 

·	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.

 

 

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)	Amounts paid in 2005 (last three quarters), 2006, 2007 and 2008 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 and 2008 represents a promissory note payable to an affiliate.  See Note 17 to the Consolidated Financial Statements.

·	a litigation settlement pre-tax gain of $48.8 million in 2008;

·	a goodwill impairment charge of $10.1 million in 2008;

·	higher equity in earnings from Kronos in 2008;

·	lower litigation and related expenses in 2008;

·	higher environmental costs in 2008; and

·	higher insurance recoveries in 2008.

·	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.

·	a litigation settlement gain of $.65 per diluted share related to the settlement of condemnation proceedings on real property we owned;

·	a goodwill impairment charge of $.21 per diluted share related to the marine business line of our component products operations;

·	interest income of $.06 per diluted share related to certain escrow funds;

·	income included in our equity in earnings of Kronos of $.03 per diluted share related to an adjustment of certain income tax attributes of Kronos in Germany; and

·	income of $.13 per diluted share related to certain insurance recoveries.

·	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.

·	lower income from operations in 2009 as a result of higher legal defense costs;

·	lower equity in earnings from Kronos in 2009; and

·	lower litigation settlement gains in 2009.

 

 

·

Investments - We own investments in certain companies that we account for as marketable securities carried at fair value (Level 1 inputs) 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 recognize an impairment charge associated with our long-lived assets, including property and equipment, whenever we determine that recovery of such long-lived asset is not probable.  Such determination is made in accordance with the applicable GAAP requirements of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, and is based upon, among other things, estimates of the amount of future net cash flows to be generated by the long-lived asset (Level 3 inputs) and estimates of the current fair value of the asset.  Significant judgment is required in estimating such cash flows.  Assumptions used in our impairment evaluations, such as forecasted growth rates and our cost of capital, are consistent with our internal projections and operating plans.  We do not assess our property and equipment for impairment unless certain impairment indicators specified in SFAS No. 144 are present. We did not evaluate any long-lived assets for impairment during 2008 because no such impairment indicators were present.

 

·

Goodwill - In accordance with SFAS No. 142, Goodwill and other Intangible Assets, we review goodwill for impairment at least on an annual basis.  We are also required to review goodwill for impairment at other times during each year when impairment indicators, as defined, are present.  The estimated fair values of CompX’s three reporting units are determined based on discounted cash flow projections (Level 3 inputs).  See Note 8 to the Consolidated Financial Statements.  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 our 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, long-lived assets, defined benefit pension and OPEB plans and loss accruals, and

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

·	a negative impact of approximately $5.4 million relating to lower order rates from many of our customers resulting from unfavorable economic conditions in North America,

·	increased raw material costs that we were not able to fully recover through sales price increases by approximately $1 million due to the competitive nature of the markets we serve,

·	the one-time $2.7 million charge for facility consolidation costs incurred in 2007,

·	$1.8 million in lower depreciation expense in 2008 due to a reduction in capital expenditures for shorter lived assets over the last several years in response to lower sales, and

·	$1.3 million favorable effect on operating income from changes in foreign currency exchange rates.

·	a higher portion of the sales decline in 2007 occurring among lower margin products,

·	an increased percentage of sales from our higher margin Marine business,

·	the $2.7 million charge for facility consolidation costs,

·	a $2.4 million unfavorable effect of relative changes in foreign currency exchange rates (including the $1.2 million related to foreign exchange transaction losses noted above),

·	lower sales to the office furniture industry due to competition from lower priced Asian manufacturers, and

·	lower order rates from many of our customers due to unfavorable economic conditions.

·

Our Security Products business is the least affected by the softness in consumer demand, because we sell products to a diverse number of customers across a wide range of markets, most of which are not directly impacted by changes in consumer demand.  While demand within this business is not as significantly affected by softness in the overall economy, we do expect sales to be lower over the next twelve months.

·

Our Furniture Components sales are primarily concentrated in the office furniture, toolbox, home appliance and a number of other industries.  Several of these industries, primarily toolbox and home appliance, are more directly affected by consumer demand than those served by our Security Products business.  We expect many of the markets served by Furniture Components to continue to experience low demand over the next twelve months.

·

Our Marine business has been the most affected by the slowing economy as the decrease in consumer confidence, the decline in home values, a tighter credit market and volatile fuel costs have resulted in a significant reduction in consumer spending in the marine market.  We do not expect the marine market to recover until consumer confidence returns and home values stabilize.