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, 2004 Commission file number 1-31763
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KRONOS WORLDWIDE, INC.
(Exact name of Registrant as specified in its charter)
Delaware 76-0294959
- ------------------------------- --------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
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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 30, 2004:
48,946,049.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
December 31, 2003 and June 30, 2004 3
Consolidated Statements of Income -
Three months and six months ended June 30, 2003 and 2004 5
Consolidated Statements of Comprehensive Income -
Six months ended June 30, 2003 and 2004 6
Consolidated Statement of Stockholders' Equity -
Six months ended June 30, 2004 7
Consolidated Statements of Cash Flows -
Six months ended June 30, 2003 and 2004 8
Notes to Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 4. Controls and Procedures 26
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 6. Exhibits and Reports on Form 8-K 28
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, June 30,
2003 2004
------------ ------------
Current assets:
Cash and cash equivalents $ 55,876 $ 88,434
Restricted cash and cash equivalents 1,313 1,047
Accounts and other receivables 156,212 200,845
Refundable income taxes 35,336 1,332
Receivable from affiliates 1,209 -
Inventories 266,020 209,816
Prepaid expenses 4,456 4,151
Deferred income taxes 2,755 2,814
---------- ----------
Total current assets 523,177 508,439
---------- ----------
Other assets:
Investment in TiO2 manufacturing joint venture 129,011 120,711
Deferred income taxes - 179,588
Other 28,040 29,517
---------- ----------
Total other assets 157,051 329,816
---------- ----------
Property and equipment:
Land 32,339 31,530
Buildings 179,472 174,946
Equipment 765,231 752,919
Mining properties 63,701 62,542
Construction in progress 9,666 11,589
---------- ----------
1,050,409 1,033,526
Less accumulated depreciation and amortization 615,442 620,355
---------- ----------
Net property and equipment 434,967 413,171
---------- ----------
$1,115,195 $1,251,426
========== ==========
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, June 30,
2003 2004
------------ ------------
Current liabilities:
Current maturities of long-term debt $ 288 $ 148
Accounts payable 97,446 65,634
Accrued liabilities 69,218 74,844
Payable to affiliates 8,919 9,266
Income taxes 12,354 6,809
Deferred income taxes 3,436 -
---------- ----------
Total current liabilities 191,661 156,701
---------- ----------
Noncurrent liabilities:
Long-term debt 356,451 346,682
Note payable to affiliate 200,000 200,000
Accrued pension costs 68,161 66,227
Accrued postretirement benefits costs 11,176 10,677
Deferred income taxes 113,143 50,730
Other 14,727 13,408
---------- ----------
Total noncurrent liabilities 763,658 687,724
---------- ----------
Minority interest 525 505
---------- ----------
Stockholders' equity:
Common stock 489 489
Additional paid-in capital 1,060,157 1,060,247
Retained deficit (729,260) (476,442)
Accumulated other comprehensive loss:
Currency translation (133,009) (138,772)
Pension liabilities (39,026) (39,026)
---------- ----------
Total stockholders' equity 159,351 406,496
---------- ----------
$1,115,195 $1,251,426
========== ==========
Commitments and contingencies (Notes 9 and 12)
See accompanying notes to consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
------------------ --------------------
2003 2004 2003 2004
---- ---- ---- ----
Net sales $ 266,631 $ 295,789 $ 519,604 $ 559,056
Cost of sales 197,649 227,505 386,066 429,736
--------- --------- --------- ---------
Gross margin 68,982 68,284 133,538 129,320
Selling, general and administrative expense 30,975 34,970 60,354 70,214
Other operating income (expense):
Currency transaction gains (losses), net (2,743) 302 (3,841) 556
Disposition of property and equipment 17 21 (44) (2)
Other income 9 6,266 112 6,280
Corporate expense (913) (841) (1,684) (1,279)
--------- --------- --------- ---------
Income from operations 34,377 39,062 67,727 64,661
Other income (expense):
Trade interest income 198 206 361 412
Interest income from affiliates 365 - 723 -
Other interest income 38 222 74 373
Interest expense to affiliates (319) (4,476) (703) (8,951)
Interest expense (8,367) (8,594) (16,350) (17,809)
--------- --------- --------- ---------
Income before income taxes and minority interest 26,292 26,420 51,832 38,686
Income tax benefit (15,525) (241,075) (6,674) (238,625)
Minority interest in after-tax earnings 19 12 43 20
--------- --------- --------- ---------
Net income $ 41,798 $ 267,483 $ 58,463 $ 277,291
========= ========= ========= =========
Basic and diluted net income per share $ .85 $ 5.47 $ 1.19 $ 5.67
========= ========= ========= =========
Basic and diluted weighted-average shares used in
the calculation of net income per share 48,943 48,944 48,943 48,944
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Six months ended June 30, 2003 and 2004
(In thousands)
2003 2004
---- ----
Net income $ 58,463 $ 277,291
Other comprehensive income (loss), net of tax - currency
translation adjustment 12,712 (5,763)
--------- ---------
Comprehensive income $ 71,175 $ 271,528
========= =========
See accompanying notes to consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended June 30, 2004
(In thousands)
Accumulated other
comprehensive loss
Additional ----------------------------- Total
Common paid-in Retained Currency Pension stockholders'
stock capital deficit translation liabilities equity
-------- ----------- ---------- ----------- ----------- --------------
Balance at December 31, 2003 $ 489 $1,060,157 $(729,260) $(133,009) $(39,026) $159,351
Net income - - 277,291 - - 277,291
Dividends - - (24,473) - - (24,473)
Issuance of common stock - 90 - - - 90
Other comprehensive loss - - - (5,763) - (5,763)
------ ---------- --------- --------- -------- --------
Balance at June 30, 2004 $ 489 $1,060,247 $(476,442) $(138,772) $(39,026) $406,496
====== ========== ========= ========= ======== ========
See accompanying notes to consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2003 and 2004
(In thousands)
2003 2004
---- ----
Cash flows from operating activities:
Net income $ 58,463 $277,291
Depreciation and amortization 19,287 21,806
Noncash interest expense 1,102 1,222
Deferred income taxes 5,852 (245,059)
Minority interest 43 20
Net loss from disposition of property and equipment 44 2
Pension cost, net (1,410) 227
Distributions from TiO2 manufacturing joint venture, net 800 8,300
Other postretirement benefits, net (555) (427)
Other, net - 949
Change in assets and liabilities:
Accounts and other receivables (36,570) (48,004)
Inventories 25,301 51,362
Prepaid expenses 2,901 414
Accounts payable and accrued liabilities (27,168) (26,059)
Income taxes (24,131) 28,016
Accounts with affiliates 5,244 1,858
Other, net 128 (4,461)
-------- --------
Net cash provided by operating activities 29,331 67,457
-------- --------
Cash flows from investing activities:
Capital expenditures (13,766) (10,828)
Change in restricted cash equivalents (1,005) 273
Other, net 47 84
-------- --------
Net cash used in investing activities (14,724) (10,471)
-------- --------
Cash flows from financing activities:
Indebtedness:
Borrowings 16,106 99,968
Principal payments (11,615) (99,994)
Loans to affiliates 8,000 -
Repayment of loans from affiliates (52,600) -
Dividends paid (7,000) (24,473)
Other capital transactions with affiliates, net 19,700 -
-------- --------
Net cash used in financing activities (27,409) (24,499)
-------- --------
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Six months ended June 30, 2003 and 2004
(In thousands)
2003 2004
---- ----
Cash and cash equivalents - net change from:
Operating, investing and financing activities $ (12,802) $ 32,487
Currency translation 1,682 71
Cash and cash equivalents at beginning of period 40,685 55,876
-------- --------
Cash and cash equivalents at end of period $ 29,565 $ 88,434
======== ========
Supplemental disclosures - cash paid (received) for:
Interest, net of amounts capitalized $ 17,048 $ 25,638
Income taxes, net 7,534 (22,208)
See accompanying notes to consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
Kronos Worldwide, Inc. ("Kronos") (NYSE: KRO) is a 50.5% owned subsidiary
of NL Industries, Inc. (NYSE: NL) at June 30, 2004. NL conducts its titanium
dioxide pigments ("TiO2") operations through Kronos. At June 30, 2004, Valhi,
Inc. and a wholly-owned subsidiary of Valhi held approximately 83% of NL's
outstanding common stock, and Contran Corporation and its subsidiaries held
approximately 90% of Valhi's outstanding common stock. At June 30, 2004, Valhi
and a wholly-owned subsidiary of Valhi held an additional 43.6% of Kronos'
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. Mr.
Simmons, the Chairman of the Board of Valhi, Contran, NL and the Company, may be
deemed to control each of such companies.
The consolidated balance sheet of Kronos at December 31, 2003 has been
condensed from the Company's audited consolidated financial statements at that
date. The consolidated balance sheet at June 30, 2004, and the consolidated
statements of income, comprehensive income, stockholders' equity and cash flows
for the interim periods ended June 30, 2003 and 2004, 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
present 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, and certain prior year
amounts have been reclassified to conform to the current year presentation. 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,
2003 (the "2003 Annual Report").
The Company has complied with the consolidation requirements of FASB
Interpretation ("FIN") No. 46R, "Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51," as amended, as of March 31, 2004. See Note 13.
The Company has not issued any stock options to purchase Kronos common
stock. However, certain employees of the Company have been granted options by NL
to purchase NL common stock. As disclosed in the 2003 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. 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 2003,
the Company commenced accounting for its stock options using the variable
accounting method of APBO No. 25, which requires 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) to be accrued as an
expense, with subsequent increases (decreases) in the Company's market price
resulting in recognition of additional compensation expense (income). Aggregate
compensation income related to NL stock options held by employees of the Company
was approximately $200,000 and nil in the second quarter and first six months of
2003, respectively, and aggregate compensation expense was approximately
$200,000 and $900,000 in the second quarter and first six months of 2004,
respectively.
The following table presents what the Company's consolidated net income,
and related per share amounts, would have been in the 2003 and 2004 periods
presented if the Company and its subsidiaries and affiliates 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 SFAS
No. 123, "Accounting for Stock-Based Compensation," for all awards granted
subsequent to January 1, 1995.
Three months ended Six months ended
June 30, June 30,
------------------ --------------------
2003 2004 2003 2004
---- ---- ---- ----
(In millions, except per share amounts)
Net income as reported $41.8 $267.5 $58.5 $277.3
Adjustments, net of applicable income tax effects and
minority interest, of stock-based employee
compensation determined under:
APBO No. 25 (.2) .1 - .6
SFAS No. 123 (.1) - (.2) -
----- ------ ----- ------
Pro forma net income $41.5 $267.6 $58.3 $277.9
===== ====== ===== ======
Basic and diluted net income per share:
As reported $ .85 $ 5.47 $1.19 $ 5.67
Pro forma .85 5.47 1.19 5.68
Note 2 - Accounts and other receivables:
December 31, June 30,
2003 2004
------------ ------------
(In thousands)
Trade receivables $147,029 $192,788
Recoverable VAT and other receivables 12,103 10,906
Allowance for doubtful accounts (2,920) (2,849)
-------- --------
$156,212 $200,845
======== ========
Note 3 - Inventories:
December 31, June 30,
2003 2004
------------ ------------
(In thousands)
Raw materials $ 61,959 $ 35,409
Work in process 19,855 17,078
Finished products 147,270 121,659
Supplies 36,936 35,670
-------- --------
$266,020 $209,816
======== ========
Note 4 - Other noncurrent assets:
December 31, June 30,
2003 2004
------------ ------------
(In thousands)
Deferred financing costs, net $ 10,417 $ 9,100
Restricted marketable debt securities 2,586 2,548
Unrecognized net pension obligations 13,747 13,426
Other 1,290 4,443
-------- --------
$ 28,040 $ 29,517
======== ========
Note 5 - Accrued liabilities:
December 31, June 30,
2003 2004
------------ ------------
(In thousands)
Employee benefits $ 31,732 $ 28,217
Interest 207 306
Other 37,279 46,321
-------- --------
$ 69,218 $ 74,844
======== ========
Note 6 - Long-term debt:
December 31, June 30,
2003 2004
------------ ------------
(In thousands)
Kronos International, Inc. and subsidiaries:
Senior Secured Notes $356,136 $346,446
Other 603 384
-------- --------
356,739 346,830
Less current maturities 288 148
-------- --------
$356,451 $346,682
======== ========
During the first quarter of 2004, certain of Kronos' operating subsidiaries
in Europe borrowed a net euro 26 million ($32 million when borrowed) under the
European revolving credit facility at an interest rate of 3.8%. Such amounts
were repaid in the second quarter of 2004.
Note 7 - Other noncurrent liabilities:
December 31, June 30,
2003 2004
------------ ------------
(In thousands)
Employee benefits $ 4,849 $ 4,622
Insurance 1,673 1,047
Other 8,205 7,739
-------- --------
$ 14,727 $ 13,408
======== ========
Note 8 - Other income:
Six months ended
June 30,
---------------------------
2003 2004
---- ----
(In thousands)
Contract dispute settlement $ - $ 6,289
Other income (expense) 112 (9)
-------- --------
$ 112 $ 6,280
======== ========
The contract dispute settlement relates to the Company's settlement with a
customer. As part of the settlement, the customer agreed to make payments to the
Company through 2007 aggregating $7.3 million. The $6.3 million gain recognized
represents the present value of the future payments to be paid by the customer
to the Company.
Note 9 - Income tax benefit:
Six months ended
June 30,
---------------------------
2003 2004
---- ----
(In millions)
Expected tax expense $18.1 $ 13.5
Change in deferred income tax valuation (254.3)
allowance, net (.1)
Refund of prior year income taxes (24.6) (3.1)
Incremental U.S. tax and rate differences on -
equity in earnings of non-tax group companies .1
Non-U.S. tax rates - .1
Other, net (.2) 5.2
----- -------
$(6.7) $(238.6)
===== =======
Certain of the Company's U.S. and non-U.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, 2004).
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 13 million ($16 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 at
June 30, 2004) relating to the years 1998 to 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, 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.
At December 31, 2003, Kronos had a significant amount of net operating loss
carryforwards for German corporate and trade tax purposes, all of which have no
expiration date. These net operating loss carryforwards were generated by Kronos
International, Inc. ("KII") principally during the 1990's when KII had a
significantly higher level of outstanding indebtedness than is currently
outstanding. For financial reporting purposes, however, the benefit of such net
operating loss carryforwards had not previously been recognized because Kronos
did not believe they met the "more-likely-than-not" recognition criteria, and
accordingly Kronos had a deferred income tax asset valuation allowance
offsetting the benefit of such net operating loss carryforwards and Kronos'
other tax attributes in Germany. Prior to the end of 2003, Kronos believed there
was significant uncertainty regarding its ability to utilize such net operating
loss carryforwards under German tax law and, principally because of this
uncertainty, Kronos had concluded the benefit of the net operating loss
carryforwards did not meet the "more-likely-than-not" criteria. By the end of
2003, and primarily as a result of a favorable German court ruling in 2003 and
the procedures Kronos had completed during 2003 with respect to the filing of
certain amended German tax returns (as discussed below), Kronos had concluded
that the significant uncertainty regarding its ability to utilize such net
operating loss carryforwards under German tax law had been eliminated. However,
at the end of 2003, Kronos believed that it would generate a taxable loss in
Germany during 2004. Such expectation was based primarily upon then current
levels of prices for TiO2, and the fact that Kronos was experiencing a downward
trend in its TiO2 selling prices and Kronos did not have any indication that the
downward trend would improve. Accordingly, Kronos continued to conclude at the
end of 2003 that the benefit of the German net operating loss carryforwards did
not meet the "more-likely-than-not" criteria. The expectation for a taxable loss
in Germany continued through the end of the first quarter of 2004. By the end of
the second quarter of 2004, however, Kronos' TiO2 selling prices had started to
increase, and Kronos believes its selling prices will continue to increase
during the second half of 2004 after Kronos and its major competitors announced
an additional round of price increases. Consequently, Kronos' revised
projections now reflect taxable income for Germany in 2004 as well as 2005.
Accordingly, based on all available evidence, Kronos concluded that the benefit
of the net operating loss carryforwards and other German tax attributes now meet
the "more-likely-than-not" recognition criteria, and Kronos reversed the
deferred income tax asset valuation allowance related to Germany. Accordingly,
in the first six months of 2004, Kronos recognized a $254.3 million income tax
benefit related to the reversal of such deferred income tax asset valuation
allowance attributable to Kronos' income tax attributes in Germany (principally
the net operating loss carryforwards). Of such $254.3 million, $8.7 million
relates primarily to the utilization of the German net operating loss
carryforwards during the first six months of 2004, the benefit of which had
previously not met the "more-likely-than-not" recognition criteria, and $245.6
million relates to the German deferred income tax asset valuation allowance
attributable to the remaining German net operating loss carryforwards and other
tax attributes as of June 30, 2004, the benefit of which Kronos has concluded
now meet the "more-likely-than-not" recognition criteria. At June 30, 2004, the
net operating loss carryforwards for German corporate and trade tax purposes
aggregated the equivalent of $594 million and $255 million, respectively, all of
which have no expiration date.
In the first quarter of 2003, KII was notified by the German Federal Fiscal
Court that the Court had ruled in KII's favor concerning a claim for refund suit
in which KII sought refunds of prior taxes paid during the periods 1990 through
1997. KII and KII's German operating subsidiary were required to file amended
tax returns with the German tax authorities to receive refunds for such years,
and all of such amended returns were filed during 2003. Such amended returns
reflected an aggregate net refund of taxes and related interest to KII and its
German operating subsidiary of euro 26.9 million ($32.1 million), and the
Company recognized the benefit for these net refunds in its 2003 results of
operations. During the first six months of 2004, the Company recognized a
benefit of euro 2.5 million ($3.1 million) related to additional net interest
which has accrued on the outstanding refund amounts. Assessments and refunds
will be processed by year as the respective returns are reviewed by the tax
authorities. Certain interest components may also be refunded separately. The
German tax authorities have reviewed and accepted the amended returns with
respect to the 1990 and 1991 tax years. Through June 2004, KII's German
operating subsidiary had received net refunds of euro 24.5 million ($28.4
million when received). KII believes it will receive the remainder of the net
refunds of taxes and related interest for the remaining years during the
remainder of 2004. In addition to the refunds for the 1990 to 1997 periods, the
court ruling also resulted in a refund of 1999 income taxes and interest for
which KII received euro 21.5 million ($24.6 million) in 2003, and the Company
recognized the benefit of this refund in the second quarter of 2003.
Note 10 - Employee benefit plans:
The components of net periodic defined benefit pension cost are presented
in the table below.
Three months ended Six months ended
June 30, June 30,
------------------ --------------------
2003 2004 2003 2004
---- ---- ---- ----
(In thousands)
Service cost benefits $ 1,279 $1,446 $ 2,518 $3,057
Interest cost on projected benefit obligations 3,836 4,287 7,528 8,615
Expected return on plan assets (3,713) (3,788) (7,855) (7,620)
Amortization of prior service cost 88 140 175 281
Amortization of net transition obligations 197 163 384 323
Recognized actuarial losses 312 746 619 1,488
------- ------- ------- -------
$ 1,999 $ 2,994 $ 3,369 $ 6,144
======= ======= ======= =======
The components of net periodic postretirement benefits other than pensions
("OPEB") cost are presented in the table below.
Three months ended Six months ended
June 30, June 30,
------------------ --------------------
2003 2004 2003 2004
---- ---- ---- ----
(In thousands)
Service cost $ 38 $ 56 $ 73 $ 113
Interest cost 170 179 336 360
Amortization of prior service credit (264) (183) (528) (366)
Recognized actuarial losses 22 39 42 78
------- ------- ------- -------
$ (34) $ 91 $ (77) $ 185
======= ======= ======= =======
The Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the "Medicare 2003 Act") introduced a prescription drug benefit under Medicare
(Medicare Part D) as well as a federal subsidy to sponsors of retiree health
care benefit plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D. Detailed regulations necessary to implement the
Medicare 2003 Act have not been issued, including those that would specify the
manner in which actuarial equivalency would be determined, the evidence required
to demonstrate actuarial equivalence and the documentation requirements
necessary to receive the subsidy. Until such definitive regulations are issued,
the Company is unable to determine whether the prescription drug benefit offered
under its postretirement benefit plans is at least actuarially equivalent to
Medicare Part D. Accordingly, the Company's accumulated postretirement benefit
obligation and net periodic postretirement benefit cost, as reflected in the
accompanying consolidated financial statements, do not reflect any effect of the
federal subsidy. When such definitive regulations are issued or at such other
time that the Company can determine whether the prescription drug benefit
offered under its postretirement benefit plans is at least actuarially
equivalent to Medicare Part D, the Company would account for the effect of the
federal subsidy, if any, prospectively from that date, as permitted by and in
accordance with FASB Staff Position No. 106-2.
Note 11 - Accounts with affiliates:
December 31, June 30,
2003 2004
------------ ------------
(In thousands)
Current receivables from affiliates -
NL - income taxes $ 1,209 $ -
======== ========
Current payables to affiliates:
NL $ 359 $ 117
Income taxes payable to Valhi - 119
Louisiana Pigment Company 8,560 9,030
-------- --------
$ 8,919 $ 9,266
======== ========
Note payable to affiliate - NL $200,000 $200,000
======== ========
Note 12 - Commitments and contingencies:
The Company is from time to time involved in various environmental,
contractual, product liability, patent (or intellectual property), employment
and other claims and disputes incidental to its present and former businesses.
In certain cases, the Company has insurance coverage for such items. The Company
currently believes the disposition of all of these claims and disputes
individually or in the aggregate, should not have a material adverse effect on
the Company's consolidated financial condition, results of operations or
liquidity.
Note 13 - Accounting principle newly adopted in 2004:
The Company complied with the consolidation requirements of FIN No. 46R,
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,"
as amended, as of March 31, 2004. The Company does not have any involvement with
any variable interest entity (as that term is defined in FIN No. 46R) covered by
the scope of FIN No. 46R which had not already been consolidated under prior
applicable GAAP, and therefore the impact to the Company of adopting the
consolidation requirements of FIN No. 46R was not material.
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 second quarter and the first six months of 2003 and 2004 are
primarily due to (i) relative changes in average TiO2 selling prices, (ii)
relative changes in TiO2 sales volumes and (iii) relative changes in foreign
currency exchange rates. Selling prices were generally increasing during the
first quarter of 2003, were generally flat during the second quarter of 2003,
were generally decreasing during the third and fourth quarters of 2003 and the
first quarter of 2004 and were generally flat during the second quarter of 2004.
The Company reported net income of $267.5 million, or $5.47 per diluted
share, in the second quarter of 2004 compared to net income of $41.8 million, or
$.85 per diluted share, in the second quarter of 2003. For the first six months
of 2004, the Company reported net income of $277.3 million, or $5.67 per diluted
share, compared to net income of $58.5 million, or $1.19 per diluted share, in
the first six months of 2003. The increase in the Company's diluted earnings per
share from the first quarter and first six months of 2003 to the same periods in
2004 is due primarily to the net effects of (i) significantly higher tax benefit
generated from the reversal of the Company's German deferred income tax asset
valuation allowance, (ii) lower gross margins, (iii) higher selling, general and
administrative expense, (iv) income from a contract dispute settlement and (v)
higher interest expense to affiliates. Overall, the Company believes its net
income in 2004 will be higher than 2003 as the impact of the reversal of the
Company's deferred income tax asset valuation allowance is expected to more than
offset the effect of expected lower income from operations.
The Company believes the analysis presented in the following table is
useful in understanding the comparability of its results of operations for the
periods presented. Each of these items are more fully discussed below in the
applicable sections of this "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Results of Operations" or in the 2003
Annual Report.
Net income - diluted earnings per share
---------------------------------------
Three months ended Six months ended
June 30, June 30,
------------------ --------------------
2003 2004 2003 2004
---- ---- ---- ----
German valuation allowance adjustments(1) $ - $ 5.02 $ - $ 5.02
Contract dispute settlement(2) - .08 - .08
Refund of prior year
German income taxes(3) .50 - .50 -
Operations and other, net .35 .37 .69 .57
----- ------ ------ ------
$ .85 $ 5.47 $ 1.19 $ 5.67
===== ====== ====== ======
_________________________
1) Reversal of the Company's German deferred income tax asset valuation
allowance as of June 30, 2004.
2) Income from settlement of customer contract.
3) Refund of prior year German income taxes received.
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," "expects" 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. Among 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 Securities and Exchange Commission ("SEC") including, but not
limited to, the following:
o Future supply and demand for the Company's products,
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,
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 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 forecast or expected. The
Company disclaims any intention or obligation to update or revise any
forward-looking statement whether as a result of new information, future events
or otherwise.
Net sales and income from operations
Three months ended Six months ended
June 30, June 30,
---------------------------------- ------------------------------------
2003 2004 % Change 2003 2004 % Change
---- ---- -------- ---- ---- --------
(In millions, except percentages and volumes)
Net sales $266.6 $295.8 +11% $519.6 $559.1 +8%
Cost of sales 197.6 227.5 +15% 386.1 429.8 +11%
------ ------ ------ ------
Gross margin 69.0 68.3 -1% 133.5 129.3 -3%
Selling, general and administrative (35.0) (70.2)
expense (31.0) (60.4)
Currency transaction gains (losses), .3 .6
net (2.7) (3.8)
Contract dispute settlement - 6.3 - 6.3
Other income - - .1 -
Corporate expense (.9) (.8) (1.7) (1.3)
------ ------ ------ ------
Income from operations $ 34.4 $ 39.1 +14% $ 67.7 $ 64.7 -4%
====== ====== ====== ======
TiO2 data:
Percent change in average selling
prices:
Using actual foreign currency
exchange rates **% +2%
Impact of changes in foreign
currency exchange rates -5% -7%
---- ----
In billing currencies -5% -5%
==== ====
Sales volumes* 121 137 240 255
Production volumes* 120 123 237 240
________________________________
* Thousands of metric tons
** Less than 1% decrease
Kronos' sales increased $29.2 million (11%) in the second quarter of 2004
compared to the second quarter of 2003 and increased $39.5 million (8%) in the
first six months of 2004 compared to the same period in 2003, as the favorable
effect of fluctuations in foreign currency exchange rates, which increased sales
by approximately $13 million and $35 million, respectively, (as more fully
discussed below) and increased sales volumes, more than offset the impact of
lower average TiO2 selling prices. 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 each of the second quarter and
first six months of 2004 were 5% lower than the comparable periods in 2003. When
translated from billing currencies into U.S. dollars using actual foreign
currency exchange rates prevailing during the respective periods, Kronos'
average TiO2 selling prices in the second quarter of 2004 were comparable to the
second quarter of 2003 and 2% higher for the first six months of 2004 compared
to the first six months of 2003. Kronos' TiO2 sales volumes in the second
quarter and first six months of 2004 increased 13% and 6%, respectively,
compared to the same periods of 2003, as higher volumes in European and export
markets more than offset lower volumes in Canada. Kronos' TiO2 sales volumes in
the first six months of 2004 were a new record for Kronos.
The Company's sales are denominated in various currencies, including the
U.S. dollar, the euro, other major European currencies and the Canadian dollar.
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 accounting principles generally accepted in the United States
("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 less than 1% decrease and 2% increase in the Company's average TiO2 selling
prices during the second quarter and first six months of 2004, as compared to
the same periods in 2003 using actual foreign currency exchange rates prevailing
during the respective periods (the GAAP measure) and the 5% decrease in the
Company's average TiO2 selling price 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 (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 cost of sales increased $29.9 million (15%) in the second
quarter of 2004 compared to the second quarter of 2003, and increased $43.7
million (11%) in the year-to-date period largely due to the increased sales
volumes and the effects of translating foreign currencies (primarily the euro)
into U.S. dollars. As a result of the lower average TiO2 selling prices in
billing currencies, the Company's cost of sales, as a percentage of net sales
increased from 74% in each of the second quarter and first six months of 2003 to
77% in each of the second quarter and first six months of 2004. Kronos' TiO2
production volumes in the second quarter of 2004 increased 3% compared to the
second quarter of 2003, and increased 1% in the first six months of 2004, with
operating rates near full capacity in those periods. Kronos' TiO2 production
volumes in the first six months of 2004 were also a new record for Kronos.
Despite the increase in net sales, the Company's gross margins for the
second quarter of 2004 decreased $700,000 (1%) from the second quarter of 2003
and decreased $4.2 million (3%) from the first six months of 2003 as compared to
the first six months of 2004, as the unfavorable effect of lower average TiO2
selling prices more than offset the favorable effect on gross margin resulting
from relative changes in foreign currency exchange rates.
Reflecting the impact of partial implementation of prior price increase
announcements, Kronos' average TiO2 selling prices in the second quarter of 2004
were generally flat as compared to the first quarter of 2004. Kronos has also
recently announced additional price increases of 4 cents per pound in the U.S.,
Canadian 6 cents per pound in Canada and euro 120 per metric ton in Europe, all
of which are targeted to be implemented later in 2004. The extent to which all
of such price increase announcements will be realized will depend on, among
other things, economic factors.
Selling, general and administrative expenses increased $4.0 million (13%)
and $9.8 million (16%), respectively, in the second quarter and first six months
of 2004 as compared to the corresponding periods in 2003. These increases are
largely attributable to the higher sales volumes as well as the impact of
translating foreign currencies (primarily the euro) into U.S. dollars.
Kronos' income from operations in the second quarter of 2004 also includes
$6.3 million of income related to the settlement of a certain contract dispute
with a customer. As part of the settlement, the customer agreed to make payments
to Kronos through 2007 aggregating $7.3 million. The $6.3 million recognized
gain represents the present value of the future payments to be paid by the
customer to Kronos.
The Company has substantial operations and assets located outside the
United States (particularly in Germany, Belgium, Norway and Canada). A
significant amount of the Company's sales generated from its non-U.S. operations
are denominated in currencies other than the U.S. dollar, primarily the euro,
other major European currencies and the Canadian dollar. In addition, a portion
of the Company's sales generated from its non-U.S. operations are denominated in
the U.S. dollar. 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 in the second quarter of 2004 by approximately $13 million compared to the
same period in 2003 and increased TiO2 sales in the first six months of 2004 by
approximately $35 million compared to the same period in 2003. 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
2004 compared to the second quarter and first six months of 2003. Overall,
currency exchange rate fluctuations resulted in net increases in the Company's
income from operations of approximately $6 million and $8 million in the second
quarter and first six months of 2004, respectively, as compared to the same
periods in 2003.
Outlook
The Company expects its TiO2 sales and production volumes in calendar 2004
will be higher for the full year 2004 as compared to 2003. The Company's average
TiO2 selling price, which declined during the second half of 2003 and first
quarter of 2004, commenced to begin to rise during the second quarter of 2004,
and should continue to rise during the remainder of the year. Nevertheless, the
Company expects its average TiO2 selling prices, in billing currencies, will be
lower in calendar 2004 as compared to 2003 and expects its gross margin in 2004
to be lower than 2003. The Company's expectations as to the future prospects of
the Company and the TiO2 industry are based upon a number of factors beyond its
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.
Other income (expense)
Three months ended Six months ended
June 30, June 30,
---------------------------------- -----------------------------------
2003 2004 Difference 2003 2004 Difference
---- ---- ---------- ---- ---- ----------
(In millions)
Trade interest income $ .2 $ .2 $ - $ .4 $ .4 $ -
Interest income from affiliates .3 - (.3) .7 - (.7)
Other interest income .1 .2 .1 .1 .4 .3
Interest expense to affiliates (.3) (4.4) (4.1) (.7) (9.0) (8.3)
Other interest expense (8.3) (8.6) (.3) (16.4) (17.8) (1.4)
------ ------ ----- ------ ------ ------
$ (8.0) $(12.6) $(4.6) $(15.9) $(26.0) $(10.1)
====== ====== ===== ====== ====== ======
Interest expense to affiliates increased $4.1 million from the second
quarter of 2003 to $4.4 million in the second quarter of 2004, and increased
$8.3 million in the first six months of 2004 to $9.0 million in the first six
months of 2004, due to the $200 million long-term note payable to NL which the
Company distributed to NL in December 2003. Because of this distribution,
interest expense to affiliates is expected to continue to be higher during the
remainder of 2004 as compared to the same periods in 2003.
Kronos has a significant amount of outstanding indebtedness denominated in
the euro, including KII's euro 285 million Senior Secured Notes. Accordingly,
the reported amount of interest expense will vary depending on relative changes
in foreign currency exchange rates. Other interest expense in the second quarter
and first six months of 2004 was $8.6 million and $17.8 million, respectively,
increases of $300,000 and $1.4 million, respectively, from the second quarter
and first six months of 2003. The increases were due primarily to relative
changes in foreign currency exchange rates, which increased the U.S. dollar
equivalent of interest expense on the KII Senior Secured Notes by approximately
$600,000 in the second quarter and $1.7 million in the first six months of 2004
as compared to the second quarter and first six months of 2003. Assuming no
significant change in interest rates or foreign currency exchange rates, other
interest expense for the full-year 2004 is expected to be slightly higher than
amounts for the same periods in 2003.
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.
At June 30, 2004, Kronos had the equivalent of $594 million and $255
million, respectively, of net operating loss carryforwards for German corporate
and trade tax purposes, all of which have no expiration date. As more fully
described in Note 9 to the Consolidated Financial Statements, Kronos had
previously provided a deferred income tax asset valuation allowance against
substantially all of these tax loss carryforwards and other deductible temporary
differences in Germany because Kronos did not believe they met the
"more-likely-than-not" recognition criteria. During the first six months of
2004, Kronos reduced its deferred income tax asset valuation allowance by
approximately $8.7 million, primarily as a result of utilization of these German
net operating loss carryforwards, the benefit of which had not previously been
recognized. At June 30, 2004, after considering all available evidence, Kronos
concluded that these German tax loss carryforwards and other deductible
temporary differences now meet the "more-likely-than-not" recognition criteria.
Accordingly, as of June 30, 2004, Kronos reversed the remaining $245.6 million
valuation allowance related to such items. Because the benefit of such net
operating loss carryforwards and other deductible temporary differences in
Germany has now been recognized, the Company's future effective income tax rate
will be higher than what it would have otherwise been, although its future cash
income tax rate would not be affected.
In January 2004, the German federal government enacted new tax law
amendments that limit the annual utilization of income tax loss carryforwards
effective January 1, 2004 to 60% of taxable income after the first euro 1
million of taxable income. The new law will have a significant effect on Kronos'
cash tax payments in Germany going forward, the extent of which will be
dependent on the level of income earned in Germany.
Recently adopted accounting principle
See Note 13 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, 2003 and 2004 are
presented below:
Six months ended
June 30,
-----------------------
2003 2004
---- ----
(In millions)
Net cash provided (used) by:
Operating activities $ 29.3 $ 67.5
Investing activities (14.7) (10.5)
Financing activities (27.4) (24.5)
------ ------
Net cash provided (used) by operating, investing and financing
activities $(12.8) $ 32.5
====== ======
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 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
and periodic OPEB 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. 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 from operating activities increased from $29.3 million provided
in the first six months of 2003 to $67.5 million of cash provided by operating
activities in the first six months of 2004. This $38.2 million increase was due
primarily to the net effects of (i) higher net income of $218.8 million, (ii)
higher depreciation expense of $2.5 million, (iii) lower deferred income taxes
of $250.9 million, (iv) higher net distributions from the TiO2 manufacturing
joint venture of $8.3 million in the first half of 2004 compared to an $800,000
distribution in the first half of 2003, (v) a lower amount of net cash used in
relative changes in the Company's inventories, receivables, payables and
accruals and accounts with affiliates of $12.4 million in the first half of 2004
as compared to the first half of 2003 and (vi) lower cash paid for income taxes
of $29.7 million. 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.
Investing and financing activities
The Company's capital expenditures were $13.8 million and $10.8 million in
the first six months of 2003 and 2004, respectively.
In the first quarter of 2004 KII's operating subsidiaries in Germany,
Belgium and Norway borrowed a net euro 26 million ($32 million when borrowed)
under the European revolving credit facility at an interest rate of 3.8%. Such
amounts were repaid in the second quarter of 2004.
In each of the first and second quarters of 2004, the Company paid a
regular quarterly dividend to stockholders of $.25 per share, aggregating $24.5
million.
At June 30, 2004, unused credit available under Kronos' existing credit
facilities approximated $150 million, which was comprised of: $95 million under
its European revolving credit facility, $11 million under its Canadian credit
facility, $40 million under its U.S. credit facility and $4 million under other
non-US facilities. At June 30, 2004, KII had approximately $220 million
available for payment of dividends and other restrictive payments as defined in
the Senior Secured Notes indenture.
Provisions contained in certain of Kronos' 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 2003 Annual Report, neither Kronos nor any of its subsidiaries or
affiliates are parties to any off-balance sheet financing arrangements.
Cash, cash equivalents, restricted cash and restricted marketable debt
securities
At June 30, 2004, the Company and its subsidiaries had (i) current cash and
cash equivalents aggregating $88.4 million ($37.1 million held by non-U.S.
subsidiaries), (ii) current restricted cash equivalents of $1.0 million and
(iii) noncurrent restricted marketable debt securities of $2.5 million.
At June 30, 2004, Kronos' outstanding debt was comprised of (i) $346.4
million related to KII's Senior Secured Notes and (ii) approximately $400,000 of
other indebtedness. In addition, Kronos had a $200 million long-term note
payable to NL due in 2010.
Pricing within the TiO2 industry is cyclical, and changes in industry
economic conditions significantly impact Kronos' earnings and operating cash
flows. Cash flows from operations is considered the primary source of liquidity
for Kronos. Changes in TiO2 pricing, production volumes and customer demand,
among other things, could significantly affect the liquidity of Kronos.
See Note 9 to the Consolidated Financial Statements for certain income tax
examinations currently underway with respect to certain of Kronos' income tax
returns in various U.S. and non-U.S. jurisdictions, and see Note 12 to the
Consolidated Financial Statements with respect to certain legal proceedings with
respect to Kronos.
Kronos 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, Kronos has in the past and may in the future seek to reduce, refinance,
repurchase or restructure indebtedness, raise additional capital, repurchase
shares of its common stock, 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, Kronos 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, Kronos may
consider using its available cash, issuing its equity securities or increasing
its indebtedness to the extent permitted by the agreements governing Kronos'
existing debt.
Kronos has substantial operations located outside the United States for
which the functional currency is not the U.S. dollar. As a result, the reported
amounts of Kronos' assets and liabilities related to its non-U.S. operations,
and therefore Kronos' 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.
ITEM 4. 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, 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, have evaluated the Company's disclosure controls and
procedures as of June 30, 2004. 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.
The Company also maintains a system of internal controls 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
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 system of internal controls over
financial reporting during the quarter ended June 30, 2004 that has materially
affected, or is reasonably likely to materially affect, the Company's system of
internal controls over financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 12 of the Consolidated Financial Statements, the
2003 Annual Report and the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004 for descriptions of certain legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 2004 Annual Meeting of Shareholders was held on May 20, 2004.
C.H. Moore, Jr., George E. Poston, Glenn R. Simmons, Harold C. Simmons, R.
Gerald Turner and Steven L. Watson were elected as directors, each receiving
votes "For" their election from at least 97.7% of the 48.9 million common shares
eligible to vote at the Annual Meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Company has retained a signed original of any exhibit listed below
that contains signatures, and the Company will provide any such
exhibit to the SEC or its staff upon request. The Company will also
furnish, without charge, a copy of its Code of Business Conduct and
Ethics, its Audit Committee Charter and its Corporate Governance
Guidelines, each as approved by the Company's board of directors and
each of which are also available at the Company's website at
www.kronosww.com, upon request. Such requests should be directed to
the attention of the Company's corporate secretary at the Company's
corporate offices located at 5430 LBJ Freeway, Suite 1700, Dallas,
Texas 75240.
31.1 - Certification
31.2 - Certification
32.1 - Certification
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended June 30, 2004.
May 6, 2004 - Reported Item 9.
May 21, 2004 - Reported Item 9.
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 Worldwide, Inc.
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(Registrant)
Date August 5, 2004 By /s/ Gregory M. Swalwell
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Gregory M. Swalwell
Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer)
Date August 5, 2004 By /s/ James W. Brown
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James W. Brown
Vice President and Controller
(Principal Accounting Officer)