View:
November
20, 2009
U.S.
Securities and Exchange Commission
100 F
Street, N.E.
Mail Stop
4631
Washington,
D.C. 20549
Attention: Mr.
Terence O’Brien, Accounting Branch Chief
Division of Corporation
Finance
CC: Ms.
Tracey Houser, Staff Accountant
Division of Corporation Finance
Mr. Edward M. Kelly, Senior
Counsel
Division of Corporation
Finance
Ms. Pamela A. Long, Associate
Director
Division of Corporation
Finance
RE: NL
Industries, Inc.
Form 10-K for the Fiscal Year Ended
December 31, 2008, Filed March 12, 2009
Forms 10-Q for the Fiscal Quarters
Ended March 31, 2009 and June 30, 2009
File No. 1-640
Dear Mr.
O’Brien
Reference
is made to the Staff’s letter dated October 27, 2009 (the “Comment Letter”),
which sets forth comments of the Staff regarding the above referenced Form 10-K
and Forms 10-Q of NL Industries, Inc. (“NL”). NL has responded to the
Comment Letter as follows. The responses are numbered to correspond
to the numbers of the Comment Letter.
Form 10-K for the Fiscal
Year Ended December 31, 2008
Item 7 – Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Net Income
Overview
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1.
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To
allow an investor to easily understand the impact of the primary items
impacting earnings per share, please quantify each factor to the extent
possible in future filings.
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We note
that each of the items we identify as impacting the comparability of our results
of operations in the Net Income Overview section of our Management’s Discussion
and Analysis of Financial Condition and Results of Operations (“MD&A”) is
discussed in more quantitative detail in subsequent sections of the
MD&A. In response to the comment of the Staff in this regard, in
our future filings with the Commission we will clarify that each of the items we
identify as impacting the comparability of our results of operations in the Net
Income Overview section of our MD&A are more fully described in subsequent
sections of the MD&A. We included such clarification in the “Net
Income (Loss) Overview” section of the MD&A included in our Quarterly Report
on Form 10-Q for the quarter ended September 30, 2009.
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Critical Accounting
Policies and Estimates
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2.
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We
note your statement that reserves for obsolete or unmarketable inventories
is a critical estimate for your component products. Given the
significance of inventories to current assets and the decline in sales
volumes in the component products business, please include disclosures of
the assumptions used and the uncertainties associated with such
assumptions when estimating the reserves for obsolete or unmarketable
inventories in future filings. Please refer to Section 501.14
of the Financial Reporting Codification for guidance as to the disclosures
that should be provided for critical accounting
estimates.
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In our
future filings with the Commission, to the extent we conclude it is reasonably
likely that changes in our reserves for obsolete or unmarketable inventories
would have a material effect on our financial condition, results of operations
or liquidity, we will expand our disclosures regarding the significant
assumptions used when we estimate our reserves for obsolete or unmarketable
inventories, and the uncertainties associated with such assumptions, including
disclosures regarding (i) the general time frame in which we estimate future
demand for our products, and how such future demand relates to our inventory
quantities on hand, when we establish our reserves, (ii) how accurate our
reserve estimates have been in the recent past, (iii) how much the reserve
estimates have changed in the recent past and (iv) whether it is reasonably
likely our reserve estimates could change in the near term future.
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Long-lived
assets
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3.
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We
note your disclosure that no impairments of your long-lived assets were
identified during fiscal year 2008, including the other intangible assets
of your Marine Components reporting unit. We further note that
you tested the assets allocated to your Marine Components reporting unit
for impairment during the second quarter of fiscal year
2009. In future filings, please disclose the carrying value of
the assets tested for impairment as of the most recent testing date by
asset group. To the extent that undiscounted cash flows are not
materially different from the carrying value, please disclose the
percentage by which undiscounted cash flows exceeded the carrying value by
asset group. Please note that disclosure of the carrying values
the business units/asset groups that are generating negative cash flows
and are at risk for impairment should be disclosed. Otherwise,
there is a concern that investors may not understand the magnitude of your
material uncertainties. Please also provide investors with the
specific factors that could lead to material impairment charges for each
group of assets that are at-risk. Item 303 of Regulation S-K
requires MD&A disclosure of material uncertainties unless management
has concluded that the uncertainty is not reasonably likely to materially
impact future operating results. Potential asset write-offs
are, inherently, uncertainties over the recoverability of recorded assets
and require disclosure prior to the period of the impairment
charge. See the guidance in Sections 501.02 and 501.12.b.3 of
the Financial Reporting Codification, as well as in SAB
5:P.4. Also, Section 216 of the Financial Reporting
Codification states that “registrants have an obligation to forewarn
public investors of the deteriorating conditions which, unless reversed,
may result in a subsequent write-off. This includes an
obligation to provide information regarding the magnitude of exposure to
loss.”
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In our
future filings with the Commission, we will disclose the carrying value of each
asset group we tested for impairment as of the most recent testing date
(including any asset group which is generating negative cash
flows). In addition, to the extent the undiscounted cash flows
associated with such asset group are not materially different from the carrying
value of the asset group (and therefore such asset group would be at risk for a
possible future impairment charge), we will disclose (i) the maximum percentage
by which such undiscounted cash flows could decrease before we would conclude
recognition of a material impairment charge would be reasonably likely and (ii)
any material uncertainties or other specific factors that could cause such cash
flows to decrease and therefore lead to recognition of such material impairment
charge. For example, in our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2009, we expanded our disclosures regarding the asset groups
within our Marine Components reporting unit which were tested for impairment,
including providing the asset carrying values of the asset groups tested for
impairment, in the “Income (loss) From Operations – CompX International Inc. –
Outlook” section of our MD&A. We also note that although the
operating performance of our Marine Components reporting unit has been below our
expectations, the reporting unit has generated positive cash flows in
2009.
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Goodwill
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4.
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We
note that in addition to testing the Furniture Components reporting unit’s
goodwill for impairment at the annual testing period in the third quarter,
you also tested this reporting unit’s goodwill for impairment during the
fourth quarter of fiscal year 2008 and the second quarter of fiscal
2009. In future filings, please provide investors with a more
specific explanation as to why you needed to test Furniture Components’
goodwill for impairment at an interim date. For example,
disclosure that states an interim testing was required because actual cash
flows fell below estimated cash flows with an indication that future cash
flows would also fall below estimated cash flows, if correct, provides
investors with a better understanding as to why management was required to
test goodwill for this reporting unit at an interim
date.
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In our
future filings with the Commission, to the extent we test the goodwill
associated with any of our reporting units for impairment at an interim date, we
will include a more detailed discussion of the reasons that led management to
conclude such an interim impairment test was required (e.g. sales and
operating income for a reporting unit falling materially below our projections,
or a reporting unit that has generated significant negative cash flows or
operating losses for a sustained period). For example, in our
Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, we note that
we tested our Furniture Component reporting unit’s goodwill “due to continued
unfavorable economic conditions and lower than expected results.” In
our future filings with the Commission, we would clarify that “lower than
expected results” refers to actual sales and operating income falling materially
below our projections for the reporting unit. We did not specifically
include any of these disclosures in our Quarterly Report on Form 10-Q for the
quarter ended September 30, 2009, as we completed our annual goodwill impairment
analysis during this quarter (i.e. the impairment analysis we most recently
completed was not an interim impairment analysis).
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5.
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To
the extent that the estimated fair value of any of your reporting units
does not significantly exceed the carrying value, please disclose the
percentage by which fair value exceeds the carrying value as of the most
recent step one testing date. For those reporting units, please
also provide a more detailed discussion of the degree of uncertainty
associated with the key assumptions used in the cash flow
analysis. An example would be to discuss when your cash flow
analysis assumes recovery from the current downturn within a defined
period of time. In addition, please discuss the potential
events and/or changes in circumstances specific to the reporting unit that
could reasonably be expected to negatively affect the key
assumptions. Please refer to Item 303 of Regulation S-K and
Sections 216 and 501.14 of the Financial Reporting Codification for
guidance. Please provide us with the disclosures you intend to
include in future filings.
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In our
future filings with the Commission, to the extent the estimated fair value of
any of our reporting units does not significantly exceed the carrying value of
such reporting unit, we will expand the quantitative disclosures regarding the
goodwill associated with such reporting unit to disclose (i) the percentage by
which the estimated fair value of such reporting unit exceeds our carrying value
of such reporting unit and (ii) the amount of goodwill we have recognized for
such reporting unit. We will also disclose the degree of uncertainty
associated with the key assumptions used in our cash flow analysis and potential
events and/or changes in circumstances that could reasonably be expected to
negatively impact such key assumptions by disclosing (i) the maximum percentage
by which our estimated future cash flows from operations less capital
expenditures for such reporting unit could decrease before it would be
reasonably likely to conclude an impairment of the goodwill associated with such
reporting unit would be present and (ii) the percentage increase in the rate
used to discount such cash flows that would reduce the enterprise
value for such reporting unit sufficiently to indicate a potential impairment
was present. Please see the “Income (loss) From Operations – CompX
International Inc. – Outlook” section of our MD&A included in our Quarterly
Report on Form 10-Q for the quarter ended September 30, 2009 for such expanded
disclosures regarding the potential for a goodwill impairment at our Furniture
Components reporting unit. We also note that the estimated fair value
of our remaining reporting units with goodwill at September 30, 2009 exceeds the
carrying value of the reporting unit by a substantial amount.
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CompX International
Inc.
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6.
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As
CompX International Inc. represents substantially all of your net sales
and gross margin as the primary consolidated entity, please include a more
detailed analysis of CompX’s income from operations. Further,
to the extent that there are factors specific to any of CompX’s three
primary markets that are materially impacting net sales and other
components of income from continuing operations, a discussion and analysis
of those factors should be provided by primary market. Please
refer to the discussion and analysis CompX provides in the MD&A
section of their Form 10-K. Refer to Item 303(A)(3) of
Regulation S-K and Section 501.12 of the Financial Reporting Codification
for guidance.
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In our
future filings with the Commission, we will include a more detailed analysis of
CompX’s income from operations, including making reference to any factors
specific to CompX’s three primary markets (i.e. security products, furniture
components and marine components) that are materially impacting NL’s net sales
and income from operations attributable to CompX.
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Assumptions on defined
benefit pension plans and OPEB
plans
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7.
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We
note that the U.S. plan assets were invested in The Combined Master
Retirement Trust (CMRT) during fiscal year 2008. We further
note that 53% of the CMRT assets were invested in equity securities with
43% invested in fixed income securities. Finally, we note your
disclosure that the 20-year rate of return is 11%. Based on
Valhi, Inc.’s fiscal year 2008 Form 10-K, we note that this 20-year rate
of return is excluding the TIMET investment. Please tell us and
disclose in future filings the 20-year rate of return for the CMRT assets
including the TIMET investment. To the extent that this rate is
lower than the expected long-term rate of return that you are using to
estimate your periodic defined pension cost, please provide investors with
a detailed explanation as to why you believe the assumption is
reasonable.
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As
disclosed in Note 16 to NL’s consolidated financial statements included in its
Annual Report on Form 10-K for the year ended December 31, 2008, the CMRT is a
collective investment trust sponsored by Contran Corporation (“Contran”) to
permit the collective investment by certain master trusts which fund certain
employee benefit plans sponsored by Contran and certain of its affiliates,
including NL’s U.S. defined benefit pension plan. Our U.S. defined
benefit pension plan does not invest in the portion of the CMRT that holds
Titanium Metals Corporation (“TIMET”) common stock. Therefore, for
purposes of disclosure in NL’s consolidated financial statements, we do not
believe it would be relevant or meaningful to disclose the 20-year rate of
return for the CMRT, inclusive of the CMRT’s investment in TIMET. For
the benefit of the Staff, we note that the 20-year rate of return for the CMRT
at December 31, 2008, inclusive of the CMRT’s investment in TIMET, is
approximately 290 basis points higher than such 20-year rate of return,
exclusive of the CMRT’s investment in TIMET.
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In
response to the Staff’s comment, in our future filings with the Commission we
will clarify that (i) the CMRT holds an investment in TIMET common stock, (ii)
NL’s plan assets are not invested in the portion of the CMRT that holds TIMET
common stock and (iii) the 20-year rate of return we disclose for the CMRT is
exclusive of the CMRT’s investment in TIMET.
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Liquidity and Capital
Resources
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8.
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We
note that the Kronos European credit facility was not in compliance with
its financial covenant as of March, 31, 2009 and June 30, 2009, for which
you obtained waivers from the lenders. In future filings,
please disclose the financial covenants required to be met for each of
your debt instruments to the extent that you have determined that it is
reasonably likely you will not meet these financial
covenants. This disclosure should include the minimum/maximum
ratios and amounts permitted under the financial covenants in addition to
the actual ratios and amounts achieved for the current reporting
period. This disclosure will allow an investor to easily
understand your current status in meeting your financial
covenants. Refer to Sections 501.13.b.2 and 501.13.c. of the
Financial Reporting Codification for
guidance.
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In our
future filings with the Commission, if we have concluded a violation of any of
the financial covenants required to be met under each of our debt instruments is
reasonably likely, we will disclose and discuss the specific terms of any such
financial covenant, including the maximum/minimum ratios/amounts permitted under
the debt instruments and the actual ratios/amounts achieved for the current
reporting period. With respect to Kronos’ European credit facility,
effective September 15, 2009 Kronos entered into an amendment to such credit
facility that, among other things, added two additional financial covenants and
temporarily eliminated the financial covenant for which Kronos had obtained
waivers from the lenders, as more fully described on the Current Report on Form
8-K dated September 15, 2009, filed by Kronos International, Inc. We
also disclosed the amendment to such credit facility in the “Consolidated cash
flows – Investing and financing activities” section of the MD&A included in
NL’s Quarterly Report on Form 10-Q for the quarter ended September 30,
2009. Kronos believes it will be able to comply with the new
financial covenants through the maturity date of the facility.
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9.
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In
future filings, please disclose the amount of the cash dividends received
from Kronos and TIMET during fiscal year 2008. This disclosure
will allow investors to understand the impact of Kronos and TIMET
suspending its cash dividend for fiscal year 2009 to your
liquidity.
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In our
future filings with the Commission, we will disclose the amount of cash
dividends we received from Kronos and TIMET during fiscal year
2008. We disclosed such dividends received in the “Liquidity –
Dividends” section of the MD&A included in NL’s Quarterly Report on Form
10-Q for the quarter ended September 30, 2009.
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Note 1 – Organization
and base of presentation
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Inventories and cost
of goods sold
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10.
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In
future filings, please revise your accounting policy to state all material
methods of determining costs related to your inventories, including the
amounts of each major inventory category that each method relates along
with any other required disclosures for the corresponding cost
methods.
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In our
future filings with the Commission, we will revise our accounting policy related
to our inventories to disclose all material methods of determining cost for our
raw materials, work in process and finished products inventory, and provide any
required disclosures related to such cost methods.
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Note 15 – Income
taxes
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11.
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We
note your disclosure regarding the Canadian tax authorities’ proposed
adjustments for the years 2002 – 2004 for Kronos. In future
filings, please disclose the amount of the adjustments the Canadian tax
authorities are proposing along with the impact such adjustment would have
to your consolidated financial statements. Otherwise, please
disclose that the impact is
immaterial.
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In our
future filings with the Commission, we will disclose (i) the impact the Canadian
tax authorities’ proposed adjustments for the years 2002 – 2004 would have on
Kronos’ consolidated financial statements if the full amount of the proposed
adjustments were ultimately to be assessed against Kronos and (ii) the impact
any future tax adjustments that any tax authority may propose against us would
have on our consolidated financial statements if the full amount of such
proposed adjustments were ultimately to be assessed against us, in both cases to
the extent such impact would be material. Alternatively, if such
impact would not be material, we will disclose that such impact would be
immaterial.
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Note 19 – Commitments
and contingencies
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Environmental matters
and litigation
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12.
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We
note that you were unable to reasonably estimate your liability for 20 NL
sites as of December 31, 2008, and 25 NL sites as of June 30,
2009. In future filings, please disclose the number of sites
that you were able to reasonably estimate the probable loss and the number
of sites that you were able to reasonably estimate the reasonably possible
loss.
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In our
future filings with the Commission, and in addition to our current disclosures
with respect to our environmental matters and litigation, we will disclose the
approximate number of environmental sites for which we have concluded liability
to NL is probable and reasonably estimable (i.e. the approximate number of sites
inherent in NL’s accrued environmental cost). We disclosed such
number of sites in Note 10 to our consolidated financial statements included in
NL’s Quarterly Report on Form 10-Q for the quarter ended September 30,
2009.
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Exhibit 10.23, 10.25,
10.31, 10.32, 10.35, 10.36, 10.37 and
10.41
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13.
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We
note the statements that some schedules, exhibit, annexes, and similar
attachments have not been filed and that NL Industries will furnish them
supplementally to the Commission. Unlike Item 601(b)(2) of
Regulation S-K, there is no provision in Item 601(b)(10) of Regulation S-K
for excluding schedules or similar attachments. Please revise
in future filings.
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We did
not file the schedules, exhibits, annexes and similar attachments to the
indicated Exhibits as we believe such schedules, exhibits, annexes and similar
attachments do not contain any additional information that is material in
relation to the documents that were filed as Exhibits. We also
concluded that the guidance of Exchange Act Rule 12b-31 would support such an
exclusion from filing.
In
response to the comment of the Staff in this regard, in our future filings with
the Commission we will include any material schedule, exhibit, annex or similar
attachment to any new document that we file as an Exhibit pursuant to Item
601(b)(10) of Regulation S-K.
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NL
acknowledges that:
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NL
is responsible for the adequacy and accuracy of the disclosure in our
filings with the Commission;
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Staff
comments or changes to disclosure in response to Staff comments do not
foreclose the Commission from taking any action with respect to our
filings with the Commission; and
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NL
may not assert Staff comments as a defense in any proceeding initiated by
the Commission or any other person under the federal securities laws of
the United States.
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If you
have any questions regarding our responses to the Comment Letter, please feel
free to call me at (972) 450-4228. I can also be reached via
facsimile at (972) 448-1445 or via email at gswalwell@valhi.net.
Sincerely,
NL
Industries, Inc.
By: _/s/ Gregory M.
Swalwell
Gregory M. Swalwell,
Vice President, Finance
and
Chief
Financial Officer
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