SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2005 Commission file number 333-100047
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KRONOS INTERNATIONAL, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 22-2949593
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes No X
--- ---
Number of shares of the Registrant's common stock outstanding on July 29, 2005:
2,968.
The Registrant is a wholly owned subsidiary of Kronos Worldwide, Inc. (File No.
1-31763) and meets the conditions set forth in General Instructions H(1)(a) and
H(1)(b) of Form 10-Q for reduced disclosure format.
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
December 31, 2004; June 30, 2005 (Unaudited) 3
Consolidated Statements of Income -
Three and six months ended June 30,
2004 and 2005 (Unaudited) 5
Consolidated Statements of Comprehensive Income -
Six months ended June 30, 2004 and 2005 (Unaudited) 6
Consolidated Statement of Stockholder's Equity -
Six months ended June 30, 2005 (Unaudited) 7
Consolidated Statements of Cash Flows -
Six months ended June 30, 2004 and 2005 (Unaudited) 8
Notes to Consolidated Financial Statements (Unaudited) 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 4. Controls and Procedures 26
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 6. Exhibits 27
-2-
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, June 30,
2004 2005
------------ -----------
(Unaudited)
Current assets:
Cash and cash equivalents $ 17,505 $ 10,427
Restricted cash 1,529 1,047
Accounts and other receivables 130,729 145,861
Receivables from affiliates 2,517 9,236
Refundable income taxes 2,586 991
Inventories 170,261 163,343
Prepaid expenses 3,141 4,281
Deferred income taxes - 7
--------- ---------
Total current assets 328,268 335,193
--------- ---------
Other assets:
Deferred financing costs, net 10,404 8,916
Restricted marketable debt securities 2,877 2,649
Unrecognized net pension obligation 7,524 6,814
Deferred income taxes 238,284 232,644
Other 1,591 1,035
--------- ---------
Total other assets 260,680 252,058
--------- ---------
Property and equipment:
Land 34,164 30,504
Buildings 153,442 137,567
Equipment 724,904 654,279
Mining properties 71,980 65,733
Construction in progress 13,560 14,544
--------- ---------
998,050 902,627
Less accumulated depreciation and
amortization 601,815 555,515
--------- ---------
Net property and equipment 396,235 347,112
--------- ---------
$ 985,183 $ 934,363
========= =========
-3-
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDER'S EQUITY December 31, June 30,
2004 2005
------------ ------------
(Unaudited)
Current liabilities:
Current maturities of long-term debt $ 13,792 $ 156
Accounts payable and accrued liabilities 126,949 114,472
Payable to affiliates 11,042 -
Income taxes 17,080 18,553
Deferred income taxes 2,722 2,665
----------- -----------
Total current liabilities 171,585 135,846
----------- -----------
Noncurrent liabilities:
Long-term debt 519,403 461,154
Deferred income taxes 22,358 20,661
Accrued pension costs 48,441 44,944
Other 16,840 12,534
----------- -----------
Total noncurrent liabilities 607,042 539,293
----------- -----------
Minority interest 76 72
----------- -----------
Stockholder's equity:
Common stock 297 297
Additional paid-in capital 1,944,185 1,944,185
Retained deficit (1,399,118) (1,352,353)
Notes receivable from affiliate (209,526) (209,526)
Accumulated other comprehensive loss:
Currency translation (99,764) (93,857)
Pension liabilities (29,594) (29,594)
----------- -----------
Total stockholder's equity 206,480 259,152
----------- -----------
$ 985,183 $ 934,363
=========== ===========
Commitments and contingencies (Notes 9 and 11)
See accompanying notes to consolidated financial statements.
-4-
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
-------------------------- ------------------------
2004 2005 2004 2005
---- ---- ---- ----
(Restated) (Restated)
Net sales $ 208,102 $ 227,572 $ 400,275 $ 437,108
Cost of sales 156,300 157,045 298,923 304,211
--------- --------- --------- ---------
Gross margin 51,802 70,527 101,352 132,897
Selling, general and administrative expense 25,316 27,926 50,727 56,010
Other operating income (expense):
Currency transaction gains (losses), net 64 1,427 510 2,197
Disposition of property and equipment 21 (113) (2) (147)
Royalty income 1,653 1,913 3,017 3,415
Other income 70 76 87 112
--------- --------- --------- ---------
Income from operations 28,294 45,904 54,237 82,464
Other income (expense):
Trade interest income 202 118 400 192
Securities transaction gain - 5,439 - 5,439
Interest income from affiliates 2 4,815 7 9,756
Interest expense (8,432) (11,248) (17,479) (22,859)
--------- --------- --------- ---------
Income before income taxes and minority interest 20,066 45,028 37,165 74,992
Provision (benefit) for income taxes (270,388) 16,498 (266,477) 28,220
Minority interest in after-tax earnings 12 3 20 7
--------- --------- --------- ---------
Net income $ 290,442 $ 28,527 $ 303,622 $ 46,765
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
-5-
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Six months ended June 30, 2004 and 2005
(In thousands)
(Unaudited)
2004 2005
---- ----
(Restated)
Net income $ 303,622 $ 46,765
Other comprehensive income (loss), net of tax -
currency translation adjustment (3,529) 5,907
--------- ---------
Comprehensive income $ 300,093 $ 52,672
========= =========
See accompanying notes to consolidated financial statements.
-6-
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
Six months ended June 30, 2005
(In thousands)
(Unaudited)
Accumulated other
Notes comprehensive loss
Additional receivable ---------------------- Total
Common paid-in Retained from Currency Pension stockholder's
stock capital deficit affiliates translation liabilities equity
------- ----------- ---------- ----------- ----------- ----------- -------------
(Restated)
Balance at December 31, 2004 $ 297 $1,944,185 $(1,399,118) $ (209,526) $ (99,764) $(29,594) $206,480
Net income - - 46,765 - - - 46,765
Other comprehensive income - - - - 5,907 - 5,907
------ ---------- ----------- ----------- --------- -------- --------
Balance at June 30, 2005 $ 297 $1,944,185 $(1,352,353) $ (209,526) $ (93,857) $(29,594) $259,152
====== ========== =========== =========== ========= ======== ========
See accompanying notes to consolidated financial statements.
-7-
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2004 and 2005
(In thousands)
(Unaudited)
2004 2005
---- ----
(Restated)
Cash flows from operating activities:
Net income $ 303,622 $ 46,765
Depreciation and amortization 18,713 18,763
Noncash interest expense 1,058 1,379
Deferred income taxes (272,551) 14,575
Minority interest 20 7
Net loss from disposition of
property and equipment 2 147
Securities transaction gain - (5,439)
Pension cost, net 1,236 (1,187)
Other, net 248 (1,735)
Change in assets and liabilities:
Accounts and other receivables (30,062) (32,669)
Inventories 11,741 (11,672)
Prepaid expenses 997 (2,109)
Accounts with affiliates 308 (15,680)
Accounts payable and accrued liabilities 4,462 4,179
Income taxes 28,476 4,414
Other, net (1,000) (6,268)
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Net cash provided by operating activities 67,270 13,470
--------- ---------
Cash flows from investing activities:
Capital expenditures (8,956) (10,399)
Change in restricted cash, net 273 437
Proceeds from disposal of interest in
Norwegian smelting operation - 3,542
Other, net 84 32
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Net cash used in investing activities (8,599) (6,388)
--------- ---------
Cash flows from financing activities:
Indebtedness:
Borrowings 99,968 -
Principal payments (99,994) (13,015)
Dividends paid (60,000) -
--------- ---------
Net cash used in financing activities (60,026) (13,015)
--------- ---------
Cash and cash equivalents - net change from:
Operating, investing and financing activities (1,355) (5,933)
Currency translation 129 (1,145)
Cash and cash equivalents at beginning of period 37,121 17,505
--------- ---------
Cash and cash equivalents at end of period $ 35,895 $ 10,427
========= =========
Supplemental disclosures:
Cash paid (received) for:
Interest, net of amounts capitalized $ 16,494 $ 21,360
Income taxes, net (22,087) 9,153
Noncash investing activity - inventory
received as partial consideration for
disposal of interest in Norwegian
smelting operation $ - $ 1,897
See accompanying notes to consolidated financial statements.
-8-
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Organization and basis of presentation:
Kronos International, Inc. ("KII") is incorporated in the state of
Delaware, U.S.A., with its seat of management in Leverkusen, Germany. KII is a
wholly-owned subsidiary of Kronos Worldwide, Inc. ("Kronos") (NYSE:KRO). The
Company's sole business segment is associated with the production and sale of
titanium dioxide pigments ("TiO2"). At June 30, 2005, (i) Valhi held
approximately 57% of Kronos' outstanding common stock and NL Industries, Inc.
(NYSE:NL) held an additional 36% of Kronos' common stock, (ii) Valhi owned
approximately 83% of NL's outstanding common stock and (iii) Contran Corporation
and its subsidiaries held approximately 91% of Valhi's outstanding common stock.
Substantially all of Contran's outstanding voting stock is held by trusts
established for the benefit of certain children and grandchildren of Harold C.
Simmons, of which Mr. Simmons is sole trustee, or is held by Mr. Simmons or
persons or other entities related to Mr. Simmons. Consequently, Mr. Simmons may
be deemed to control each of Contran, Valhi, NL, Kronos and the Company.
The consolidated balance sheet of KII at December 31, 2004 has been
condensed from the Company's audited consolidated financial statements at that
date. The consolidated balance sheet at June 30, 2005, and the consolidated
statements of income, comprehensive income, stockholder's equity and cash flows
for the interim periods ended June 30, 2004 and 2005, have been prepared by the
Company, without audit, in accordance with accounting principles generally
accepted in the United States of America ("GAAP"). In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary to
state fairly the consolidated financial position, results of operations and cash
flows have been made.
The results of operations for the interim periods are not necessarily
indicative of the operating results for a full year or of future operations.
Certain information normally included in financial statements prepared in
accordance with GAAP has been condensed or omitted. The accompanying
consolidated financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 2004 (the
"2004 Annual Report").
During the fourth quarter of 2004, the Company determined that it should
have recognized an additional $26.8 million net deferred income tax benefit
during the second quarter of 2004, related to the amount of the valuation
allowance related to the Company's German operations which should have been
reversed. While the additional tax benefit is not material to the Company's
second quarter 2004 results, the Company's quarterly results of operations for
2004, as presented herein, reflects this additional income tax benefit.
The Company has not issued any stock options to purchase KII common stock.
However, certain employees of the Company have been granted options by NL to
purchase NL common stock. As disclosed in the 2004 Annual Report, the Company
accounts for stock-based employee compensation in accordance with Accounting
Principles Board Opinion ("APBO") No. 25, "Accounting for Stock Issued to
Employees," and its various interpretations. See Note 12. Under APBO No. 25, no
compensation cost is generally recognized for fixed stock options in which the
exercise price is greater than or equal to the market price on the grant date.
Prior to 2004, and following the cash settlement of certain stock options held
by employees of NL and the Company, the Company commenced accounting for its
stock options using the variable accounting method of APBO No. 25 because the
Company could not overcome the presumption that it would not similarly cash
settle the remaining stock options. Under the variable accounting method, the
intrinsic value of all unexercised stock options (including stock options with
an exercise price at least equal to the market price on the date of grant) is
accrued as an expense, with subsequent increases (decreases) in the Company's
market price resulting in the recognition of additional compensation expense
(income). Aggregate compensation expense related to NL stock options held by
employees of the Company was approximately nil and $200,000 in the second
quarter and first six months of 2004, respectively and aggregate compensation
income was approximately $500,000 in each of the second quarter and first six
months of 2005.
-9-
The following table presents what the Company's consolidated net income
would have been in the 2004 and 2005 periods presented if the Company and its
subsidiaries had each elected to account for their respective stock-based
employee compensation related to stock options in accordance with the fair
value-based recognition provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," for all
awards granted subsequent to January 1, 1995.
Three months Six months
ended June 30, ended June 30,
-------------------- --------------------
2004 2005 2004 2005
---- ---- ---- ----
(In millions)
Net income as reported $290.4 $ 28.5 $303.6 $ 46.8
Adjustments, net of applicable income
tax effects and minority interest:
Stock-based employee compensation
expense determined under APBO No. 25 - (.3) .1 (.3)
Stock-based employee compensation
expense determined under SFAS No. 123 - - - -
------ ------ ------ ------
Pro forma net income $290.4 $ 28.2 $303.7 $ 46.5
====== ====== ====== ======
Note 2 - Accounts and other receivables:
December 31, June 30,
2004 2005
------------ ----------
(In thousands)
Trade receivables $120,969 $138,295
Insurance claims 32 29
Recoverable VAT and other receivables 11,388 8,978
Allowance for doubtful accounts (1,660) (1,441)
-------- --------
$130,729 $145,861
======== ========
-10-
Note 3 - Inventories:
December 31, June 30,
2004 2005
------------ ----------
(In thousands)
Raw materials $ 34,303 $ 27,682
Work in process 13,044 11,681
Finished products 90,083 92,438
Supplies 32,831 31,542
-------- --------
$170,261 $163,343
======== ========
Note 4 - Accounts payable and accrued liabilities:
December 31, June 30,
2004 2005
------------ ----------
(In thousands)
Accounts payable $ 67,463 $ 48,441
Employee benefits 27,863 25,670
Interest 152 132
Other 31,471 40,229
-------- --------
$126,949 $114,472
======== ========
Note 5 - Long-term debt:
December 31, June 30,
2004 2005
------------ ----------
(In thousands)
8.875% Senior Secured Notes $519,225 $461,067
Bank credit facility 13,622 -
Other 348 243
-------- --------
533,195 461,310
Less current maturities 13,792 156
-------- --------
$519,403 $461,154
======== ========
As previously reported in the 2004 Annual Report, the Company has pledged
65% of the common stock or other ownership interests of certain of its
first-tier operating subsidiaries as collateral for its Senior Secured Notes.
Such operating subsidiaries are Kronos Titan GmbH, Kronos Denmark ApS, Kronos
Limited and Societe Industrielle Du Titane, S.A.
During the first six months of 2005, the Company repaid an aggregate of
euro 10 million ($12.9 million when repaid) under its Credit Facility. During
the second quarter of 2005, the Company extended the maturity date of its Credit
Facility by three years to June 2008.
-11-
Note 6 - Other noncurrent liabilities:
December 31, June 30,
2004 2005
------------ ----------
(In thousands)
Employee benefits $ 5,107 $ 4,586
Insurance claims and expenses 1,505 641
Asset retirement obligations 958 926
Other 9,270 6,381
-------- --------
$ 16,840 $ 12,534
======== ========
Note 7 - Notes receivable from affiliate:
As disclosed in the 2004 Annual Report, the Company loaned an aggregate of
euro 163.1 million ($209.5 million) to Kronos in the fourth quarter of 2004 in
return for two promissory notes. Interest on both notes is payable to the
Company on a quarterly basis at an annual rate of 9.25%, and such interest is
expected to be paid quarterly to the Company by Kronos. The notes mature on
December 31, 2010, with all principal due at that date. The notes are unsecured,
contain no financial covenants and provide for default only upon Kronos' failure
to pay any amount when due (subject to a short grace period). Due to the
long-term investment nature of these notes, settlement of the principal balance
of the notes is not contemplated within the foreseeable future. The Company
currently expects that settlement of the principal amount of the notes will
occur through a capital transaction (i.e. a non-cash dividend to Kronos in the
form of distributing such notes receivable to Kronos). Accordingly, these notes
receivable have been classified as a separate component of stockholder's equity
in accordance with GAAP. Interest income on such notes, which is expected to be
paid quarterly, is recognized in income when earned. Rather than make a
distribution to Kronos in the form of a cash dividend, the Company loaned the
euro 163.1 million to Kronos pursuant to the two promissory notes. Until such
time as the notes are settled (which, as noted above, is expected to be through
a capital transaction in the form of a non-cash dividend), the Company benefits
from the interest income earned on the promissory notes.
Note 8 - Securities transaction gain:
The securities transaction gain in the second quarter of 2005, classified
as nonoperating income, relates to the sale of the Company's passive interest in
a Norwegian smelting operation, which had a nominal carrying value for financial
reporting purposes, for aggregate consideration of approximately $5.4 million
consisting of cash of $3.5 million and inventory with a value of $1.9 million.
-12-
Note 9 - Provision for income taxes:
Six months ended
June 30,
------------------------
2004 2005
---- ----
(In millions)
Expected tax expense $ 13.0 $ 26.2
Non-U.S. tax rates (.5) .1
Change in deferred income tax valuation -
allowance, net (277.3)
Refund of prior year German income taxes (3.3) -
Nondeductible expenses 1.5 1.9
Other, net .1 -
------- -------
$(266.5) $ 28.2
======= =======
Certain of the Company's tax returns are being examined and tax authorities
have or may propose tax deficiencies, including penalties and interest. For
example:
o Kronos has received a preliminary tax assessment related to 1993 from the
Belgian tax authorities proposing tax deficiencies, including related
interest, of approximately euro 6 million ($7 million at June 30, 2005).
Kronos has filed a protest to this assessment, and believes that a
significant portion of the assessment is without merit. The Belgian tax
authorities have filed a lien on the fixed assets of Kronos' Belgian TiO2
operations in connection with this assessment. In April 2003, Kronos
received a notification from the Belgian tax authorities of their intent to
assess a tax deficiency related to 1999 that, including interest, is
expected to be approximately euro 9 million ($11 million). Kronos believes
the proposed assessment is substantially without merit, and Kronos has
filed a written response.
o The Norwegian tax authorities have notified Kronos of their intent to
assess tax deficiencies of approximately kroner 12 million ($2 million)
relating to the years 1998 through 2000. Kronos has objected to this
proposed assessment.
No assurance can be given that these tax matters will be resolved in the
Company's favor in view of the inherent uncertainties involved in settlement
initiatives and court and tax proceedings. The Company believes that it has
provided adequate accruals for additional taxes and related interest expense
which may ultimately result from all such examinations and believes that the
ultimate disposition of such examinations should not have a material adverse
effect on its consolidated financial position, results of operations or
liquidity.
Note 10 - Employee benefit plans:
The components of net periodic defined benefit pension cost are presented
in the table below.
-13-
Three months ended Six months ended
June 30, June 30,
--------------------- ----------------------
2004 2005 2004 2005
---- ---- ---- ----
(In thousands)
Service cost $1,158 $1,523 $2,446 $3,139
Interest cost 3,471 3,570 7,010 7,262
Expected return on plan assets (3,059) (3,100) (6,181) (6,304)
Amortization of prior service cost 113 122 229 248
Amortization of net transition obligations 91 77 182 158
Recognized actuarial losses 576 770 1,154 1,564
------ ------ ------ ------
$2,350 $2,962 $4,840 $6,067
====== ====== ====== ======
Note 11 - Commitments and contingencies:
Reference is made to the 2004 Annual Report for a discussion of certain
other legal proceedings to which the Company is a party.
As noted in the 2004 Annual Report, the Company's principal German
operating subsidiary, Kronos Titan GmbH, leases the land under its Leverkusen
TiO2 production facility pursuant to a lease with Bayer AG that expires in 2050.
The Leverkusen facility itself, which is owned by the Company and which
represents approximately one-half of the Company's current TiO2 production
capacity, is located within Bayer's extensive manufacturing complex. Rent for
the land lease associated with the Leverkusen facility is periodically
established by agreement with Bayer for periods of at least two years at a time.
The lease agreement provides for no formula, index or other mechanism to
determine changes in the rent for such land lease; rather, any change in the
rent is subject solely to periodic negotiation between Bayer and the Company.
Any change in the rent based on such negotiations is recognized as part of lease
expense starting from the time such change is agreed upon by both parties, as
any such change in the rent is deemed "contingent rentals" under GAAP.
The Company and its affiliates are from time to time involved in various
environmental, contractual, product liability, patent (or intellectual
property), employment and other claims and disputes incidental to its past and
current operations. In certain cases, the Company has insurance coverage for
such items. The Company currently believes that the disposition of all claims
and disputes, individually or in the aggregate, should not have a material
adverse effect on its consolidated financial position, results of operations or
liquidity.
Note 12 - Accounting principles not yet implemented:
Inventory costs. The Company will adopt SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4," for inventory costs incurred on or after
January 1, 2006. SFAS No. 151 requires that the allocation of fixed production
overhead costs to inventory shall be based on normal capacity. Normal capacity
is not defined as a fixed amount; rather, normal capacity refers to a range of
production levels expected to be achieved over a number of periods under normal
circumstances, taking into account the loss of capacity resulting from planned
maintenance shutdowns. The amount of fixed overhead allocated to each unit of
production is not increased as a consequence of idle plant or production levels
below the low end of normal capacity, but instead a portion of fixed overhead
costs is charged to expense as incurred. Alternatively, in periods of production
above the high end of normal capacity, the amount of fixed overhead costs
allocated to each unit of production is decreased so that inventories are not
measured above cost. SFAS No. 151 also clarifies existing GAAP to require that
abnormal freight and wasted materials (spoilage) are to be expensed as incurred.
The Company believes its production cost accounting already complies with the
requirements of SFAS No. 151, and the Company does not expect adoption of SFAS
No. 151 will have a material effect on its consolidated financial statements.
-14-
Stock options. As permitted by regulations of the Securities and Exchange
Commission ("SEC") the Company will adopt SFAS No. 123R, "Share-Based Payment,"
as of January 1, 2006. SFAS No. 123R, among other things, eliminates the
alternative in existing GAAP to use the intrinsic value method of accounting for
stock-based employee compensation under APBO No. 25. Upon adoption of SFAS No.
123R, the Company will generally be required to recognize the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award, with the cost recognized over the period
during which an employee is required to provide services in exchange for the
award (generally, the vesting period of the award). No compensation cost will be
recognized in the aggregate for equity instruments for which the employee does
not render the requisite service (generally, if the instrument is forfeited
before it has vested). The grant-date fair value will be estimated using
option-pricing models (e.g. Black-Scholes or a lattice model). Under the
transition alternatives permitted under SFAS No. 123R, the Company will apply
the new standard to all new awards granted on or after January 1, 2006, and to
all awards existing as of December 31, 2005 which are subsequently modified,
repurchased or cancelled. Additionally, as of January 1, 2006, the Company will
be required to recognize compensation cost for the portion of any non-vested
award existing as of December 31, 2005 over the remaining vesting period.
Because the number of non-vested awards as of December 31, 2005 with respect to
options granted by NL to employees of the Company is not expected to be
material, and because the Company has not granted any options, does not expect
to grant any options prior to January 1, 2006 and does not expect that Kronos
will grant any options to employees of the Company prior to January 1, 2006, the
effect of adopting SFAS No. 123R is not expected to be significant in so far as
it relates to existing stock options. Should the Company or its subsidiaries and
affiliates, however, either grant a significant number of options to employees
of the Company or modify, repurchase or cancel existing options in the future,
the effect on the Company's consolidated financial statements could be material.
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
Executive summary
Relative changes in the Company's TiO2 sales and income from operations
during the 2004 and 2005 periods presented are primarily due to the net effects
of (i) higher average TiO2 selling prices, (ii) lower TiO2 selling volumes and
(iii) relative changes in foreign currency exchange rates. Selling prices for
TiO2 (in billing currencies) were generally decreasing during the first half of
2004 and increasing in the last half of 2004 and the first six months of 2005.
The Company reported net income of $28.5 million in the second quarter of 2005
as compared to net income of $290.4 million in the second quarter of 2004. The
Company reported net income of $46.8 million in the first six months of 2005 as
compared to net income of $303.6 million in the first six months of 2004. The
Company reported lower net income in 2005 as the favorable effect of higher
income from operations and a security transaction gain in 2005 was more than
offset by a $254.3 million income tax benefit recognized in 2004. Net income in
the first six months of 2005 includes a security transaction gain of
approximately $5.4 million related to the sale of the Company's passive interest
in a Norwegian smelting operation. Each of these items is more fully discussed
below and/or in the notes to the Consolidated Financial Statements.
Forward-looking information
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts
are forward-looking statements that represent management's beliefs and
assumptions based on currently available information. Forward-looking statements
can be identified by the use of words such as "believes," "intends," "may,"
"should," "could," "anticipates," "expected" or comparable terminology, or by
discussions of strategies or trends. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
cannot give any assurances that these expectations will prove to be correct.
Such statements by their nature involve substantial risks and uncertainties that
could significantly impact expected results, and actual future results could
differ materially from those described in such forward-looking statements. While
it is not possible to identify all factors, the Company continues to face many
risks and uncertainties. The factors that could cause actual future results to
differ materially are the risks and uncertainties discussed in this Quarterly
Report and those described from time to time in the Company's other filings with
the SEC include, but are not limited to, the following:
o Future supply and demand for the Company's products,
o The extent of the dependence of certain of the Company's businesses on
certain market sectors,
o The cyclicality of the Company's businesses,
o Customer inventory levels (such as the extent to which the Company's
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),
o Changes in raw material and other operating costs (such as energy costs),
o The possibility of labor disruptions,
-16-
o 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 TiO2),
o Competitive products and substitute products,
o Customer and competitor strategies,
o The impact of pricing and production decisions,
o Competitive technology positions,
o The introduction of trade barriers,
o 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 and
the Canadian dollar),
o Operating interruptions (including, but not limited to, labor disputes,
leaks, fires, explosions, unscheduled or unplanned downtime and
transportation interruptions),
o The ability of the Company to renew or refinance credit facilities,
o The ultimate outcome of income tax audits, tax settlement initiatives or
other tax matters,
o The ultimate ability to utilize income tax attributes, the benefit of which
has been recognized under the "more-likely-than-not" recognition criteria,
o Environmental matters (such as those requiring emission and discharge
standards for existing and new facilities),
o Government laws and regulations and possible changes therein,
o The ultimate resolution of pending litigation, and
o Possible future litigation.
Should one or more of these risks materialize (or the consequences of such
a development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or expected. The
Company disclaims any intention or obligation to update or revise any
forward-looking statement whether as a result of changes in information, future
events or otherwise.
-17-
Three months ended Six months ended
June 30, June 30,
-------------------------------- -------------------------------
2004 2005 % Change 2004 2005 % Change
---- ---- -------- ---- ---- --------
(In millions, except percentages and volumes)
Net sales $208.1 $227.6 + 9% $400.3 $437.1 + 9%
Cost of sales 156.3 157.1 ** 298.9 304.2 + 2%
------ ------ ------ ------
Gross margin 51.8 70.5 +36% 101.4 132.9 +31%
Selling, general and administrative
expense (25.3) (27.9) +10% (50.7) (56.0) +10%
Currency transaction gains, net .1 1.4 .5 2.2
Royalty income 1.7 1.9 3.0 3.4
------ ------ ------ ------
Income from operations $ 28.3 $ 45.9 +62% $ 54.2 $ 82.5 +52%
====== ====== ====== ======
TiO2 operating statistics:
Percent change in average selling
prices:
Using actual foreign currency
exchange rates +14% +13%
Impact of changes in foreign
currency exchange rates - 5% - 6%
---- ----
In billing currencies + 9% + 7%
==== ====
Sales volumes* 90 86 - 4% 171 162 - 5%
Production volumes* 83 86 + 4% 162 167 + 3%
________________________________
* Thousands of metric tons
** less than 1%
The Company's sales increased $19.5 million (9%) in the second quarter of
2005 compared to the second quarter of 2004 and increased $36.8 million (9%) in
the first six months of 2005 as compared to the same period in 2004 due to the
net effects of higher average TiO2 selling prices, lower TiO2 selling volumes
and the favorable effect of fluctuations in foreign currency exchange rates,
which increased sales by approximately $10 million and $21 million,
respectively, as further discussed below. Excluding the effect of fluctuations
in the value of the U.S. dollar relative to other currencies, the Company's
average TiO2 selling prices in billing currencies in the second quarter and
first six months of 2005 were 9% higher as compared to the second quarter of
2004 and 7% higher as compared to the first six months of 2004. When translated
from billing currencies to U.S. dollars using actual foreign currency exchange
rates prevailing during the respective periods, the Company's average TiO2
selling prices in the second quarter of 2005 increased 14% compared to the
second quarter of 2004 and were 13% higher for the first six months of 2005
compared to the first six months of 2004.
-18-
The Company's sales are denominated in various currencies, including the
U.S. dollar, the euro and other major European currencies. The disclosure of the
percentage change in the Company's average TiO2 selling prices in billing
currencies (which excludes the effects of fluctuations in the value of the U.S.
dollar relative to other currencies) is considered a "non-GAAP" financial
measure under regulations of the SEC. The disclosure of the percentage change in
the Company's average TiO2 selling prices using actual foreign currency exchange
rates prevailing during the respective periods is considered the most directly
comparable financial measure presented in accordance with GAAP ("GAAP measure").
The Company discloses percentage changes in its average TiO2 prices in billing
currencies because the Company believes such disclosure provides useful
information to investors to allow them to analyze such changes without the
impact of changes in foreign currency exchange rates, thereby facilitating
period-to-period comparisons of the relative changes in average selling prices
in the actual various billing currencies. Generally, when the U.S. dollar either
strengthens or weakens against other currencies, the percentage change in
average selling prices in billing currencies will be higher or lower,
respectively, than such percentage changes would be using actual exchange rates
prevailing during the respective periods. The difference between the 14% and 13%
increases in the Company's average TiO2 selling prices during the second quarter
and first six months of 2005 as compared to the second quarter and first six
months of 2004 using actual foreign currency exchange rates prevailing during
the respective periods (the GAAP measure), and the 9% and 7% increases in the
Company's average TiO2 selling prices in billing currencies (the non-GAAP
measure) during each of such periods is due to the effect of changes in foreign
currency exchange rates. The above table presents in a tabular format (i) the
percentage change in the Company's average TiO2 selling prices using actual
foreign currency exchange rates prevailing during the respective periods (the
GAAP measure), (ii) the percentage change in the Company's average TiO2 selling
prices in billing currencies (the non-GAAP measure) and (iii) the percentage
change due to changes in foreign currency exchange rates (or the reconciling
item between the non-GAAP measure and the GAAP measure).
The Company's TiO2 sales volumes in the second quarter and first six months
of 2005 decreased 4% and 5%, respectively, compared to the same periods of 2004,
due primarily to lower volumes in European markets. The Company's income from
operations comparisons were favorably impacted by higher production levels,
which increased 4% and 3%, respectively, in the second quarter and first six
months of 2005 as compared to the same period in 2004. The Company's operating
rates were near full capacity in those periods, and the Company's production
volume in the first six months of 2005 was a new record for the Company.
The Company's cost of sales increased less than 1% in the second quarter of
2005 compared to the second quarter of 2004, and increased $5.3 million (2%) in
the year-to-date period largely due to the increase in net sales. As a result of
the higher average TiO2 selling prices in billing currencies the Company's cost
of sales, as a percentage of net sales, decreased from 75% in the second quarter
of 2004 to 69% in the second quarter of 2005 and decreased from 75% in the first
six months of 2004 to 70% in the first six months of 2005.
The Company's gross margins for the second quarter of 2005 increased $18.7
million (36%) from the second quarter of 2004 and increased $31.5 million (31%)
in the first six months of 2005 as compared to the first six months of 2004, due
to the net effects of the aforementioned increases in sales and cost of sales.
Selling, general and administrative expenses increased $2.6 million (10%)
and $5.3 million (10%), respectively, in the second quarter and first six months
of 2005 as compared to the corresponding periods in 2004. These increases are
largely attributable to the impact of translating foreign currencies (primarily
the euro) into U.S. dollars.
-19-
The Company's operations and assets are located outside the United States
(particularly in Germany, Belgium and Norway). A significant amount of the
Company's sales generated from its operations are denominated in currencies
other than the U.S. dollar, principally the euro and other major European
currencies. Certain raw materials, primarily titanium-containing feedstocks, are
purchased in U.S. dollars, while labor and other production costs are
denominated primarily in local currencies. Consequently, the translated U.S.
dollar value of the Company's foreign sales and operating results are subject to
currency exchange rate fluctuations which may favorably or adversely impact
reported earnings and may affect the comparability of period-to-period operating
results. Overall, fluctuations in the value of the U.S. dollar relative to other
currencies, primarily the euro, increased TiO2 sales by approximately a net $10
million in the second quarter of 2005 as compared to the same period in 2004 and
increased TiO2 sales in the first six months of 2005 by approximately $21
million compared to the same period in 2004. Fluctuations in the value of the
U.S. dollar relative to other currencies similarly impacted the Company's
foreign currency-denominated operating expenses. The Company's operating costs
that are not denominated in the U.S. dollar, when translated into U.S. dollars,
were higher in the second quarter and first six months of 2005 compared to the
second quarter and first six months of 2004. Overall, the net impact of currency
exchange rate fluctuations on the Company's operating income comparisons
resulted in a net $4 million increase and a net $5 million increase in the
Company's income from operations in the second quarter and first six months of
2005, respectively, as compared to the corresponding periods in 2004.
Outlook
The Company expects its income from operations in 2005 will be
significantly higher than 2004, due primarily to higher average selling prices.
The quarterly price improvements in average selling prices since the third
quarter of 2004 are the key to the Company's anticipation that second half
income from operations in 2005 will be significantly higher than the second half
of 2004. Average prices in the second half of 2005 will likely decline from the
second quarter of 2005. Production volumes in the second half of 2005 will
likely be similar to those achieved in the second half of 2004 and are expected
to be below the production volumes in the first half of 2005, due primarily to
certain finishing capacity being taken temporarily offline in order to complete
debottlenecking projects at the Company's Leverkusen, Germany facility. Sales
volumes in the second half of 2005 are expected to be lower than those in the
second half of 2004, and are likely to be similar to the sales volumes in the
first half of 2005. While the Company expects its income from operations in
calendar 2005 will be higher than calendar 2004, the Company expects its income
from operations in the second half of 2005 will be below the first half of 2005.
The Company's expectations as to the future prospects of the Company and the
TiO2 industry are based upon a number of factors beyond the Company's control,
including worldwide growth of gross domestic product, competition in the
marketplace, unexpected or earlier-than-expected capacity additions and
technological advances. If actual developments differ from the Company's
expectations, the Company's results of operations could be unfavorably affected.
The Company's efforts to debottleneck its production facilities to meet
long-term demand continue to prove successful. Such debottlenecking efforts
included, among other things, the addition of back-end finishing capacity to be
able to process a larger quantity of the base TiO2 produced and equipment
upgrades and enhancements to allow for reduced downtime for maintenance
activities. The Company's production capacity has increased by approximately 30%
over the past ten years due to debottlenecking programs, with only moderate
capital expenditures. The Company believes its annual attainable production
capacity for 2005 is approximately 334,000 metric tons, with approximately
10,000 metric tons additional capacity available in 2006 through its continued
debottlenecking efforts.
-20-
Other income (expense)
Three months ended Six months ended
June 30, June 30,
----------------------------------- ----------------------------------
2004 2005 Difference 2004 2005 Difference
(In millions)
Trade interest income $ .2 $ .1 $ (.1) $ .4 $ .2 $ (.2)
Securities transaction gain - 5.4 5.4 - 5.4 5.4
Interest income from affiliates - 4.8 4.8 - 9.8 9.8
Interest expense (8.4) (11.2) (2.8) (17.5) (22.9) (5.4)
------ ------ ------ ------ ------ ------
$ (8.2) $ (.9) $ 7.3 $(17.1) $ (7.5) $ 9.6
====== ====== ====== ====== ====== ======
Securities transaction gains in the second quarter of 2005 relates to the
sale of the Company's passive interest in a Norwegian smelting operation, which
had a nominal carrying value for financial reporting purposes, for aggregate
consideration of approximately $5.4 million consisting of cash of $3.5 million
and inventory with a value of $1.9 million. See Note 8 to the Consolidated
Financial Statements.
Interest income from affiliates increased $4.8 million in the second
quarter of 2005 as compared to the second quarter of 2004 and increased $9.8
million in the first six months of 2005 as compared to the first six months of
2004 as a result of the Company's notes receivable from Kronos. The Company
expects interest income will continue to be higher in 2005 as compared to 2004
as these notes receivable from Kronos are expected to be outstanding during the
full year.
The Company has a significant amount of outstanding indebtedness
denominated in the euro, including its euro 375 million Senior Secured Notes.
Accordingly, the reported amount of interest expense will vary depending on
relative changes in foreign currency exchange rates. Interest expense in the
second quarter and first six months of 2005 was $11.2 million and $22.9 million,
respectively which are increases of $2.8 million and $5.4 million from the
second quarter and first six months of 2004, respectively. The increases were
due primarily to higher levels of outstanding indebtedness resulting from the
issuance of an additional euro 90 million principal amount of KII's Senior
Secured Notes in November 2004. In addition, the increases in interest expense
were due to relative changes in foreign currency exchange rates, which increased
the U.S. dollar equivalent of interest expense on the Company's euro 285 million
Senior Secured Notes outstanding during both periods by approximately $400,000
in the second quarter of 2005 and $1.0 million in the first six months of 2005
as compared to the second quarter and first six months of 2004. Assuming no
significant change in interest rates or foreign currency exchange rates,
interest expense for the full-year 2005 is expected to be higher than amounts
for the same periods in 2004 due primarily to the effect of the additional euro
90 million Senior Secured Notes issued in November 2004.
Provision for income taxes
The principal reasons for the difference between the Company's effective
income tax rates and the U.S. federal statutory income tax rates are explained
in Note 9 to the Consolidated Financial Statements.
-21-
At June 30, 2005, the Company has the equivalent of $590 million and $178
million of income tax loss carryforwards for German corporate and trade tax
purposes, respectively, all of which have no expiration date. As more fully
described in the 2004 Annual Report, during 2004 the Company concluded the
benefit of such net carryforwards met the "more-likely-than-not" recognition
criteria of GAAP, and accordingly in 2004 the Company reversed the deferred
income tax asset valuation allowance related to such German carryforwards and
other net deductible temporary differences related to Germany. Because the
benefit of such net operating loss carryforwards and other deductible temporary
differences in Germany has now been recognized, the Company's effective income
tax rate in the second quarter and first six months of 2005 is higher than its
effective income tax rate in the second quarter and first six months of 2004,
although its current and future cash income tax rate was not affected by the
reversal of the valuation allowance. Prior to the complete utilization of such
carryforwards, it is possible that the Company might conclude in the future that
the benefit of such carryforwards would no longer meet the
"more-likely-than-not" recognition criteria, at which point the Company would be
required to recognize a valuation allowance against the then-remaining tax
benefit associated with the carryforwards. The Company's income tax benefit in
the second quarter of 2004 includes a $268.6 million tax benefit related to
reversal of the German deferred income tax asset valuation allowance.
Accounting principles not yet implemented
See Note 12 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES:
Consolidated cash flows
The Company's consolidated cash flows from operating, investing and
financing activities for the six months ended June 30, 2004 and 2005 are
presented below:
Six months ended
June 30,
------------------------
2004 2005
---- ----
(In millions)
Net cash provided (used) by:
Operating activities $ 67.2 $ 13.5
Investing activities (8.6) (6.4)
Financing activities (60.0) (13.0)
------ ------
Net cash used in operating, investing
and financing activities $ (1.4) $ (5.9)
====== ======
Summary
The Company's primary source of liquidity on an ongoing basis is its cash
flows from operating activities, which is generally used to (i) fund capital
expenditures, (ii) repay any short-term indebtedness incurred primarily for
working capital purposes and (iii) provide for the payment of dividends. In
addition, from time-to-time the Company may incur indebtedness, generally to (i)
fund short-term working capital needs, (ii) refinance existing indebtedness or
(iii) fund major capital expenditures or the acquisition of other assets outside
the ordinary course of business. Also, the Company may from time-to-time sell
assets outside the ordinary course of business, the proceeds of which are
generally used to (i) repay existing indebtedness (including indebtedness which
may have been collateralized by the assets sold), (ii) make investments in
marketable and other securities, (iii) fund major capital expenditures or the
acquisition of other assets outside the ordinary course of business or (iv) pay
dividends.
-22-
Operating activities
The TiO2 industry is cyclical and changes in economic conditions within the
industry significantly impact the earnings and operating cash flows of the
Company. Cash flow from operations is considered the primary source of liquidity
for the Company. Changes in TiO2 pricing, production volume and customer demand,
among other things, could significantly affect the liquidity of the Company.
Trends in cash flows from operating activities (excluding the impact of
significant asset dispositions and relative changes in assets and liabilities)
are generally similar to trends in the Company's earnings. However, certain
items included in the determination of net income are non-cash, and therefore
such items have no impact on cash flows from operating activities. Non-cash
items included in the determination of net income include depreciation and
amortization expense, deferred income taxes and non-cash interest expense.
Non-cash interest expense consists of amortization of original issue discount or
premium on certain indebtedness and amortization of deferred financing costs.
Certain other items included in the determination of net income may have an
impact on cash flows from operating activities, but the impact of such items on
cash flows from operating activities will differ from their impact on net
income. For example, the amount of periodic defined benefit pension plan expense
depends upon a number of factors, including certain actuarial assumptions, and
changes in such actuarial assumptions will result in a change in the reported
expense. In addition, the amount of such periodic expense generally differs from
the outflows of cash required to be currently paid for such benefits.
Relative changes in assets and liabilities generally result from the timing
of production, sales, purchases and income tax payments. Such relative changes
can significantly impact the comparability of cash flow from operations from
period to period, as the income statement impact of such items may occur in a
different period from when the underlying cash transaction occurs. For example,
raw materials may be purchased in one period, but the payment for such raw
materials may occur in a subsequent period. Similarly, inventory may be sold in
one period, but the cash collection of the receivable may occur in a subsequent
period.
Cash flows provided by operating activities decreased from $67.3 million in
the first six months of 2004 to $13.5 million in the first six months of 2005.
This $53.8 million decrease was due primarily to the net effects of (i) lower
net income of $256.9 million, (ii) higher deferred income taxes of $287.1
million, (iii) a higher amount of net cash used from relative changes in the
Company's inventories, receivables, payables and accruals of $42.3 million in
the first six months of 2005 as compared to the first six months of 2004 and
(iv) higher cash paid for income taxes of $31.2 million, due in large part to a
$20.1 million tax refund received during the first three months of 2004.
Relative changes in accounts receivable are affected by, among other things, the
timing of sales and the collection of the resulting receivables. Relative
changes in inventories and accounts payable and accrued liabilities are affected
by, among other things, the timing of raw material purchases and the payment for
such purchases and the relative difference between production volumes and sales
volumes. The Company's average days sales outstanding ("DSO") of 58 days at June
30, 2005 was consistent with the Company's DSO at December 31, 2004. At June 30,
2005, the average number of days in inventory ("DII") decreased from 99 days at
December 31, 2004 to 93 days at June 30, 2005, due to the impact of currency
exchange rates which resulted in lower inventory values when translated into US
dollars at June 30, 2005 as compared to December 31, 2004.
-23-
Investing and financing activities
The Company's capital expenditures were $9.0 million and $10.4 million in
the first six months of 2004 and 2005, respectively. During the second quarter
of 2005, the Company received $3.5 million from the sale of its passive interest
in a Norwegian smelting operation.
During the first six months of 2005, the Company repaid euro 10 million
($12.9 million when repaid) under its Credit Facility.
At June 30, 2005, unused credit available under the Company's existing
credit facilities approximated $98 million, including approximately $95 million
under its revolving credit facility. At June 30, 2005, KII had approximately $84
million available for payment of dividends and other restrictive payments as
defined in the Senior Secured Notes indenture.
Provisions contained in certain of the Company's credit agreements could
result in the acceleration of the applicable indebtedness prior to its stated
maturity for reasons other than defaults from failing to comply with typical
financial covenants. For example, certain credit agreements allow the lender to
accelerate the maturity of the indebtedness upon a change of control (as
defined) of the borrower. In addition, certain credit agreements could result in
the acceleration of all or a portion of the indebtedness following a sale of
assets outside the ordinary course of business. Other than operating leases
discussed in the 2004 Annual Report, neither the Company nor any of its
subsidiaries or affiliates are parties to any off-balance sheet financing
arrangements.
Other
At June 30, 2005, the Company and its subsidiaries had (i) current cash and
cash equivalents aggregating $10.4 million, (ii) current restricted cash
equivalents of $1.0 million and (iii) noncurrent restricted marketable debt
securities of $2.6 million.
At June 30, 2005, the Company's outstanding debt was comprised of (i)
$461.1 million related to KII's Senior Secured Notes and (ii) approximately
$200,000 of other indebtedness. During the second quarter of 2005, the Company
extended the maturity date of its Credit Facility by three years to June 2008.
The Company's assets consist primarily of investments in its operating
subsidiaries, and the Company's ability to service its parent level obligations,
including the Senior Secured Notes, depends in large part upon the distribution
of earnings of its subsidiaries, whether in the form of dividends, advances or
payments on account of intercompany obligations, or otherwise. None of the
Company's subsidiaries have guaranteed the Senior Secured Notes, although the
Company has pledged 65% of the common stock or other ownership interest of
certain of its first-tier operating subsidiaries as collateral of such Senior
Secured Notes.
Pricing within the TiO2 industry is cyclical, and changes in industry
economic conditions significantly impact the Company's earnings and operating
cash flows. Cash flows from operations is considered the primary source of
liquidity for the Company. Changes in TiO2 pricing, production volumes and
customer demand, among other things, could significantly affect the liquidity of
the Company.
-24-
Based upon the Company's expectations for the TiO2 industry and anticipated
demand for the Company's cash resources as discussed herein, the Company expects
to have sufficient short-term (defined as the twelve-month period ending June
30, 2006) and long-term (defined as the five-year period ending December 31,
2009, the time period for which the Company generally does long-term budgeting)
liquidity to meet its obligations including operations, capital expenditures,
debt service and dividends. To the extent that actual developments differ from
the Company's expectations, the Company's liquidity could be adversely affected.
See Note 9 to the Consolidated Financial Statements for certain income tax
examinations currently underway with respect to certain of the Company's income
tax returns in various U.S. and non-U.S. jurisdictions, and see Note 11 to the
Consolidated Financial Statements with respect to certain legal proceedings with
respect to the Company.
The Company periodically evaluates its liquidity requirements, alternative
uses of capital, capital needs and availability of resources in view of, among
other things, its dividend policy, its debt service and capital expenditure
requirements and estimated future operating cash flows. As a result of this
process, the Company has in the past and may in the future seek to reduce,
refinance, repurchase or restructure indebtedness, raise additional capital,
modify its dividend policy, restructure ownership interests, sell interests in
subsidiaries or other assets, or take a combination of such steps or other steps
to manage its liquidity and capital resources. In the normal course of its
business, the Company may review opportunities for acquisitions, divestitures,
joint ventures or other business combinations in the chemicals or other
industries, as well as the acquisition of interests in, and loans to, related
entities. In the event of any such transaction, the Company may consider using
its available cash, issuing its equity securities or increasing its indebtedness
to the extent permitted by the agreements governing the Company's existing debt.
The Company's operations are located outside the United States where the
functional currency is not the U.S. dollar. As a result, the reported amounts of
the Company's assets and liabilities related to its non-U.S. operations, and
therefore the Company's consolidated net assets, will fluctuate based upon
changes in currency exchange rates.
Non-GAAP financial measures
In an effort to provide investors with additional information regarding the
Company's results of operations as determined by GAAP, the Company has disclosed
certain non-GAAP information which the Company believes provides useful
information to investors.
o The Company discloses percentage changes in its average TiO2 selling prices
in billing currencies, which excludes the effects of foreign currency
translation. The Company believes disclosure of such percentage changes
allows investors to analyze such changes without the impact of changes in
foreign currency exchange rates, thereby facilitating period-to-period
comparisons of the relative changes in average selling prices in the actual
various billing currencies. Generally, when the U.S. dollar either
strengthens or weakens against other currencies, the percentage change in
average selling prices in billing currencies will be higher or lower,
respectively, than such percentage changes would be using actual exchange
rates prevailing during the respective periods. See page 19.
-25-
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. The Company maintains a
system of disclosure controls and procedures. The term "disclosure controls and
procedures," as defined by regulations of the SEC, means controls and other
procedures that are designed to ensure that information required to be disclosed
in the reports that the Company files or submits to the SEC under the Securities
Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits to the SEC under the Act is
accumulated and communicated to the Company's management, including its
principal executive officer and its principal financial officer, or persons
performing similar functions, as appropriate to allow timely decisions to be
made regarding required disclosure. Each of Harold C. Simmons, the Company's
Chief Executive Officer, and Gregory M. Swalwell, the Company's Vice President,
Finance and Chief Financial Officer, has evaluated the Company's disclosure
controls and procedures as of June 30, 2005. Based upon their evaluation, these
executive officers have concluded that the Company's disclosure controls and
procedures are effective as of the date of such evaluation.
Internal Control Over Financial Reporting. The Company also maintains
internal control over financial reporting. The term "internal control over
financial reporting," as defined by regulations of the SEC, means a process
designed by, or under the supervision of, the Company's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the Company's board of directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with GAAP, and includes those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the assets of the
Company,
o Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP, and
that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company,
and
o Provide reasonable assurance regarding prevention or timely detection of an
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the Company's Consolidated Financial
Statements.
There has been no change to the Company's internal control over financial
reporting during the quarter ended June 30, 2005 that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to the 2004 Annual Report and Note 11 to the Consolidated
Financial Statements for descriptions of certain legal proceedings.
-26-
Item 6. Exhibits
10.1 - Second Agreement Relating to a Facility Agreement dated
June 25, 2002 executed as of June 14, 2005 by and among
Deutsche Bank AG, as mandated lead arranger, Deutsche Bank
Luxembourg S.A. as agent, the participating lenders, Kronos
Titan GmbH, Kronos Europe S.A./N.V, Kronos Titan AS, Kronos
Norge AS, Titania AS and Kronos Denmark ApS - incorporated
by reference to Exhibit 10.1 to the Registrant's Form 8-K
dated June 14, 2005. Certain schedules, exhibits, annexes
and similar attachments to this Exhibit 10.1 have not been
filed; upon request, the Reporting Persons will furnish
supplementally to the Commission a copy of any omitted
exhibit, annex or attachment.
31.1 - Certification
31.2 - Certification
32.1 - Certification
The Company has retained a signed original of any of the above exhibits
that contains signatures, and the Company will provide such exhibit to the
Commission or its staff upon request. The Company will also furnish, without
charge, a copy of Kronos' Code of Business Conduct and Ethics, its Audit
Committee Charter and its Corporate Governance Guidelines, each as adopted by
Kronos' board of directors, upon request. Such requests should be directed to
the attention of Kronos' Corporate Secretary at Kronos' corporate offices
located at 5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KRONOS INTERNATIONAL, INC.
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(Registrant)
Date August 3, 2005 By /s/ Gregory M. Swalwell
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Gregory M. Swalwell
Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
Date August 3, 2005 By /s/ James W. Brown
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James W. Brown
Vice President and Controller
(Principal Accounting Officer)
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