SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 - For the fiscal year ended December 31, 2005
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Commission file number 1-31763
KRONOS WORLDWIDE, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 76-0294959
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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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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common stock New York Stock Exchange
($.01 par value)
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark:
If the Registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act. Yes No X
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If the Registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes No X
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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
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If disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. Yes No X
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Whether the Registrant is a large accelerated filer, an accelerated filer
or a non-accelerated filer (as defined in Rule 12b-2 of the Act). Large
accelerated filer Accelerated filer X Non-accelerated filer
--- --- ---
Whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes No X
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The aggregate market value of the 3.5 million shares of voting stock held by
nonaffiliates of Kronos Worldwide, Inc. as of June 30, 2005 (the last business
day of the Registrant's most recently-completed second fiscal quarter)
approximated $104 million.
As of February 28, 2006, 48,949,549 shares of the Registrant's common stock were
outstanding.
Documents incorporated by reference
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The information required by Part III is incorporated by reference from the
Registrant's definitive proxy statement to be filed with the Commission pursuant
to Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
PART I
ITEM 1. BUSINESS
Kronos Worldwide, Inc., (NYSE: KRO) organized as a Delaware corporation, is
a leading global producer and marketer of value-added titanium dioxide pigments
("TiO2"). Approximately one-half of the Company's 2005 sales volumes were
attributable to markets in Europe. The Company believes it is the second largest
producer of TiO2 in Europe with an estimated 20% share of European TiO2 sales
volumes. The Company has an estimated 15% share of North American TiO2 sales
volume. Kronos has production facilities throughout Europe and North America.
Kronos and its consolidated subsidiaries are sometimes referred to herein
collectively as the "Company."
At December 31, 2005, (i) Valhi, Inc (NYSE: VHI) held approximately 57% of
the Company's common stock and NL Industries, Inc. (NYSE: NL) held an additional
36% of the outstanding common stock of the Company, (ii) Valhi held 83% of NL's
outstanding common stock and (iii) Contran Corporation and its subsidiaries held
approximately 92% 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 such
companies.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Annual Report on Form 10-K relating to matters that are not historical facts,
including, but not limited to, statements found in this Item 1 - "Business,"
Item 1A - "Risk Factors," Item 3 - "Legal Proceedings," Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Item 7A - "Quantitative and Qualitative Disclosures About Market Risk," 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. Among the factors that could cause actual future results to
differ materially from those described herein are the risks and uncertainties
discussed in this Annual Report and those described from time to time in the
Company's other filings with the SEC including, but 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,
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, natural disasters, fires, explosions, unscheduled or unplanned
downtime and transportation interruptions),
o The timing and amounts of insurance recoveries,
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 benefits of
which have been recognized under the "more-likely-than-not" recognition
criteria,
o Environmental matters (such as those requiring compliance with 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 currently 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.
Industry. Titanium dioxide pigments are inorganic chemical products used
for imparting whiteness, brightness and opacity to a diverse range of customer
applications and end-use markets, including coatings, plastics, paper, fibers,
food, ceramics and cosmetics. TiO2 is considered a "quality-of-life" product
with demand affected by gross domestic product in various regions of the world.
TiO2, the largest commercially used whitening pigment by volume, derives its
value from its whitening properties and opacifying ability (commonly referred to
as hiding power). As a result of TiO2's high refractive index rating, it can
provide more hiding power than any other commercially produced white pigment. In
addition, TiO2 demonstrates excellent resistance to chemical attack, good
thermal stability and resistance to ultraviolet degradation. TiO2 is supplied to
customers in either a powder or slurry form.
Per capita consumption of TiO2 in the United States and Western Europe far
exceeds that in other areas of the world and these regions are expected to
continue to be the largest consumers of TiO2. Significant markets for TiO2
consumption could emerge in Eastern Europe, the Far East or China as the
economies in these regions develop to the point that quality-of-life products,
including TiO2, experience greater demand. Geographic information is contained
in Note 2 to the Consolidated Financial Statements.
Products and operations. TiO2 is produced in two crystalline forms: rutile
and anatase. Both the chloride and sulfate production processes (discussed
below) produce rutile TiO2. Chloride process rutile is preferred for the
majority of customer applications. From a technical standpoint, chloride process
rutile has a bluer undertone and higher durability than sulfate process rutile
TiO2. Although many end-use applications can use either form of TiO2, chloride
process rutile TiO2 is the preferred form for use in coatings and plastics, the
two largest end-use markets. Anatase TiO2, which is produced only through the
sulfate production process, represents a much smaller percentage of annual
global TiO2 production and is preferred for use in selected paper, ceramics,
rubber tires, man-made fibers, food and cosmetics.
The Company believes that there are no effective substitutes for TiO2.
Extenders, such as kaolin clays, calcium carbonate and polymeric opacifiers, are
used in a number of end-use markets as white pigments, however the opacity in
these products is not able to duplicate the performance characteristics of TiO2,
and the Company believes these products are unlikely to replace TiO2.
The Company currently produces over 40 different TiO2 grades, sold under
the Kronos trademark, which provide a variety of performance properties to meet
customers' specific requirements. The Company's major customers include domestic
and international paint, plastics and paper manufacturers.
The Company and its distributors and agents sell and provide technical
services for its products to over 4,000 customers in over 100 countries with the
majority of sales in Europe and North America. TiO2 is distributed by rail and
truck in either dry or slurry form and by ocean carrier in dry form. The Company
and its predecessors have produced and marketed TiO2 in North America and Europe
for over 80 years. The Company believes that it has developed considerable
expertise and efficiency in the manufacture, sale, shipment and service of its
products in domestic and international markets.
Sales of TiO2 represented about 90% of Kronos' total sales in 2005. Sales
of other products, complementary to Kronos' TiO2 business, are comprised of the
following:
o Kronos owns an ilmenite mine in Norway and operated pursuant to a
governmental concession with an unlimited term. Ilmenite is a raw material
used directly as a feedstock by some sulfate-process TiO2 plants, including
all of Kronos' European sulfate-process plants. The mine has estimated
reserves that are expected to last at least 50 years. Ilmenite sales to
third-parties represented approximately 5% of the Company's consolidated
net sales in 2005.
o Kronos manufactures and sells iron-based chemicals, which are by-products
and processed by-products of the TiO2 pigment production process. These
co-product chemicals are marketed through Kronos' Ecochem division, and are
used primarily as treatment and conditioning agents for industrial
effluents and municipal wastewater as well as in the manufacture of iron
pigments, cement and agricultural products. Sales of iron-based chemical
products were about 4% of sales in 2005.
o Kronos manufactures and sells certain titanium chemical products (titanium
oxychloride and titanyl sulfate), which are side-stream products from the
production of TiO2. Titanium oxychloride is used in specialty applications
in the formulation of pearlescent pigments, production of electroceramic
capacitors for cell phones and other electronic devices. Titanyl sulfate
products are used primarily in pearlescent pigments. Sales of these
products were about 1% of sales in 2005.
Manufacturing process and raw materials. TiO2 is manufactured by the
Company using both the chloride process and the sulfate process. Approximately
73% of the Company's current production capacity is based on the chloride
process. The chloride process is a continuous process in which chlorine is used
to extract rutile TiO2. The chloride process typically has lower manufacturing
costs than the sulfate process due to higher yield and production of less waste
and lower energy requirements and labor costs. Because much of the chlorine is
recycled and feedstock bearing a higher titanium content is used, the chloride
process produces less waste than the sulfate process. The sulfate process is a
batch chemical process that uses sulfuric acid to extract TiO2. Sulfate
technology can produce either anatase or rutile pigment. Once an intermediate
TiO2 pigment has been produced by either the chloride or sulfate process, it is
"finished" into products with specific performance characteristics for
particular end-use applications through proprietary processes involving various
chemical surface treatments and intensive micronizing (milling). Due to
environmental factors and customer considerations, the proportion of TiO2
industry sales represented by chloride-process pigments has increased relative
to sulfate-process pigments and, in 2005, chloride-process production facilities
represented approximately 64% of industry capacity.
Kronos produced a new Company record 492,000 metric tons of TiO2 in 2005,
compared to the prior records of 484,000 metric tons in 2004 and 476,000 metric
tons in 2003. Such production amounts include the Company's one-half interest in
the joint-venture owned Louisiana plant discussed below. The Company's average
production capacity utilization rates were near full capacity in 2003, 2004 and
2005. Kronos' 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
2006 is approximately 510,000 metric tons, with some slight additional capacity
available in 2007 through Kronos' continued debottlenecking efforts.
The primary raw materials used in the TiO2 chloride production process are
titanium-containing feedstock, chlorine and coke. Chlorine and coke are
available from a number of suppliers. Titanium-containing feedstock suitable for
use in the chloride process is available from a limited but increasing number of
suppliers around the world, principally in Australia, South Africa, Canada,
India and the United States. The Company purchased approximately 430,000 metric
tons of chloride feedstock in 2005, of which the vast majority was slag. The
Company purchased chloride process grade slag in 2005 from a subsidiary of Rio
Tinto plc UK - Richards Bay Iron and Titanium Limited South Africa under a
long-term supply contract that expires at the end of 2007. Natural rutile ore is
purchased primarily from Iluka Resources, Limited (Australia) under a long-term
supply contract that expires at the end of 2009. The Company does not expect to
encounter difficulties obtaining long-term extensions to existing supply
contracts prior to the expiration of the contracts. Raw materials purchased
under these contracts and extensions thereof are expected to meet the Company's
chloride process feedstock requirements over the next several years.
The primary raw materials used in the TiO2 sulfate production process are
titanium-containing feedstock, derived primarily from rock and beach sand
ilmenite, and sulfuric acid. Sulfuric acid is available from a number of
suppliers. Titanium-containing feedstock suitable for use in the sulfate process
is available from a limited number of suppliers around the world. Currently, the
principal active sources are located in Norway, Canada, Australia, India and
South Africa. As one of the few vertically integrated producers of
sulfate-process pigments, the Company owns and operates a rock ilmenite mine in
Norway, which provided all of the Company's feedstock for its European
sulfate-process pigment plants in 2005. The Company produced approximately
816,000 metric tons of ilmenite in 2005 of which approximately 317,000 metric
tons were used internally with the remainder sold to third parties. For its
Canadian sulfate-process plant, the Company also purchases sulfate grade slag
(approximately 29,000 metric tons in 2005) primarily from Q.I.T. Fer et Titane
Inc. Canada, a subsidiary of Rio Tinto plc UK, under a long-term supply contract
that expires at the end of 2009. Raw materials purchased under these contracts
and extensions thereof are expected to meet the Company's sulfate process
feedstock requirements over the next several years.
The contracts contain fixed quantities that Kronos is required to purchase,
although these contracts allow for an upward or downward adjustment in the
quantity purchased. The quantities under these contracts do not require Kronos
to purchase feedstock in excess of amounts that Kronos would reasonably consume
in any given year. The pricing under these agreements is generally negotiated
annually.
The number of sources of, and availability of, certain raw materials is
specific to the particular geographic region in which a facility is located. As
noted above, Kronos purchases titanium-bearing ore from three different
suppliers in different countries under multiple-year contracts. Political and
economic instability in certain countries from which Kronos purchases its raw
material supplies could adversely affect the availability of such feedstock.
Should Kronos' vendors not be able to meet their contractual obligations or
should Kronos be otherwise unable to obtain necessary raw materials, Kronos may
incur higher costs for raw materials or may be required to reduce production
levels, which may have a material adverse effect on Kronos' consolidated
financial position, results of operations or liquidity.
The following table summarizes our raw materials procured or mined in 2005.
Quantities of Raw Materials
Procured or Mined
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Production Process/Raw Material (In thousands of metric tons)
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Chloride process plants -
purchased slag or natural rutile ore 433
Sulfate process plants:
Raw ilmenite ore mined internally 317
Purchased slag 29
TiO2 manufacturing joint venture. Subsidiaries of the Company and Huntsman
Holdings LLC ("Huntsman") each own a 50%-interest in a manufacturing joint
venture, Louisiana Pigment Company ("LPC"). LPC owns and operates a
chloride-process TiO2 plant located in Lake Charles, Louisiana. Production from
the plant is shared equally by the Company and Huntsman (the "Partners")
pursuant to separate offtake agreements.
A supervisory committee, composed of four members, two of whom are
appointed by each Partner, directs the business and affairs of LPC, including
production and output decisions. Two general managers, one appointed and
compensated by each Partner, manage the operations of the joint venture acting
under the direction of the supervisory committee.
Kronos is required to purchase one-half of the TiO2 produced by the joint
venture. Because Kronos does not control the joint venture, the joint venture is
not consolidated in the Company's financial statements. The Company accounts for
its interest in the joint venture by the equity method. The manufacturing joint
venture operates on a break-even basis and, accordingly, the Company reports no
equity in earnings of the joint venture. With the exception of raw material and
packaging costs for the pigment grades produced, Kronos and Huntsman share all
costs and capital expenditures of the joint venture equally. The Company's share
of net costs is reported as cost of sales as the related TiO2 acquired from the
joint venture is sold. See Notes 6 and 15 to the Consolidated Financial
Statements.
Competition. The TiO2 industry is highly competitive. The Company competes
primarily on the basis of price, product quality and technical service, and the
availability of high performance pigment grades. Although certain TiO2 grades
are considered specialty pigments, the majority of the Company's grades and
substantially all of the Company's production are considered commodity pigments
with price generally being the most significant competitive factor. The Company
believes that it is the leading seller of TiO2 in several countries, including
Germany, with an estimated 12% share of worldwide Ti02 sales volume in 2005.
Overall, Kronos is the world's fifth largest producer of TiO2.
The Company's principal competitors are E.I. du Pont de Nemours & Co.
("DuPont"); Millennium Chemicals, Inc.; Tronox Incorporated; Huntsman; and
Ishihara Sangyo Kaisha, Ltd. The Company's five largest competitors have
estimated individual shares of TiO2 production capacity ranging from 24% to 4%,
and an estimated aggregate 70% share of worldwide TiO2 production volume. DuPont
has about one-half of total North American TiO2 production capacity and is the
Company's principal North American competitor.
Worldwide capacity additions in the TiO2 market resulting from construction
of greenfield plants require significant capital expenditures and substantial
lead time (typically three to five years in Kronos' experience). The Company is
not aware of any greenfield plant under construction in the United States,
Europe or any other part of the world. However, a competitor has announced its
intention to build a greenfield facility in China, but it is not clear when
construction will begin and it is not likely that any product would be available
until 2010, at the earliest. During 2004, certain competitors either idled or
shut down facilities. However, Kronos does expect that industry capacity will
increase as Kronos and its competitors continue to debottleneck their existing
facilities. Based on the factors described above, Kronos expects that the
average annual increase in industry capacity from announced debottlenecking
projects will be less than the average annual demand growth for TiO2 during the
next three to five years. However, no assurance can be given that future
increases in the TiO2 industry production capacity and future average annual
demand growth rates for TiO2 will conform to Kronos' expectations. If actual
developments differ from Kronos' expectations, Kronos' and the TiO2 industry's
performances could be unfavorably affected.
Research and development. The Company's expenditures for research and
development, process technology and quality assurance activities were
approximately $7 million in 2003, $8 million in 2004 and $9 million in 2005.
Research and development activities are conducted principally at the Leverkusen,
Germany facility. Such activities are directed primarily toward improving both
the chloride and sulfate production processes, improving product quality and
strengthening the Company's competitive position by developing new pigment
applications.
Kronos continually seeks to improve the quality of its grades, and has been
successful at developing new grades for existing and new applications to meet
the needs of customers and increase product life cycle. Since 1999, thirteen new
grades have been added for plastics, coatings, fiber and paper laminate
applications.
Patents and trademarks. Patents held for products and production processes
are important to Kronos and its continuing business activities. Kronos seeks
patent protection for its technical developments, principally in the United
States, Canada and Europe, and from time to time enters into licensing
arrangements with third parties. Kronos' existing patents generally have a term
of 20 years from the date of filing, and have remaining terms ranging from one
to 20 years. Kronos seeks to protect its intellectual property rights, including
its patent rights, and from time to time Kronos will be involved in disputes
relating to the protection and use of intellectual property relating to its
products.
Kronos' major trademarks, including Kronos, are protected by registration
in the United States and elsewhere with respect to those products it
manufactures and sells. Kronos also relies on unpatented proprietary know-how
and continuing technological innovation and other trade secrets to develop and
maintain its competitive position. Kronos' proprietary chloride production
process is an important part of Kronos' technology, and Kronos' business could
be harmed if Kronos should fail to maintain confidentiality of its trade secrets
used in this technology.
Foreign operations. The Company's chemical businesses have operated in
non-U.S. markets since the 1920s. Most of the Company's current production
capacity is located in Europe and Canada with non-U.S. net property and
equipment aggregating approximately $416 million at December 31, 2005. Kronos'
European operations include production facilities in Germany, Belgium and
Norway. Approximately $844 million (71%) of the Company's 2005 consolidated
sales were to non-U.S. customers, including $101 million (8%) to customers in
areas other than Europe and Canada. Foreign operations are subject to, among
other things, currency exchange rate fluctuations, and the Company's results of
operations have, in the past, been both favorably and unfavorably affected by
fluctuations in currency exchange rates. Effects of fluctuations in currency
exchange rates on the Company's results of operations are discussed in Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Item 7A. "Quantitative and Qualitative Disclosures about Market
Risk."
Political and economic uncertainties in certain of the countries in which
the Company operates may expose it to risk of loss. The Company does not believe
that there is currently any likelihood of material loss through political or
economic instability, seizure, nationalization or similar event. The Company
cannot predict, however, whether events of this type in the future could have a
material effect on its operations. The Company's manufacturing and mining
operations are also subject to extensive and diverse environmental regulation in
each of the foreign countries in which they operate. See "Regulatory and
Environmental Matters."
Customer base and annual seasonality. The Company believes that neither its
aggregate sales nor those of any of its principal product groups are
concentrated in or materially dependent upon any single customer or small group
of customers. The Company's largest ten customers accounted for approximately
26% of sales in 2005. Neither the Company's business as a whole nor that of any
of its principal product groups is seasonal to any significant extent. Due in
part to the increase in paint production in the spring to meet the spring and
summer painting season demand, TiO2 sales are generally higher in the first half
of the year than in the second half of the year.
Employees. As of December 31, 2005, Kronos employed approximately 2,415
persons (excluding employees of the Louisiana joint venture), with 50 employees
in the United States, 420 employees in Canada and 1,945 employees in Europe.
Hourly employees in production facilities worldwide, including the TiO2
joint venture, are represented by a variety of labor unions, with labor
agreements having various expiration dates. In Europe, Kronos' union employees
are covered by master collective bargaining agreements in the chemicals industry
that are renewed annually. In Canada, Kronos' union employees are covered by a
collective bargaining agreement that expires in June 2007. Kronos believes its
labor relations are good.
Regulatory and environmental matters. Kronos' operations are governed by
various environmental laws and regulations. Certain of Kronos' operations are,
or have been, engaged in the handling, manufacture or use of substances or
compounds that may be considered toxic or hazardous within the meaning of
applicable environmental laws and regulations. As with other companies engaged
in similar businesses, certain past and current operations and products of
Kronos have the potential to cause environmental or other damage. Kronos has
implemented and continues to implement various policies and programs in an
effort to minimize these risks. Kronos' policy is to maintain compliance with
applicable environmental laws and regulations at all its facilities and to
strive to improve its environmental performance. It is possible that future
developments, such as stricter requirements in environmental laws and
enforcement policies thereunder, could adversely affect Kronos' production,
handling, use, storage, transportation, sale or disposal of such substances as
well as Kronos' consolidated financial position, results of operations or
liquidity.
Kronos' U.S. manufacturing operations are governed by federal environmental
and worker health and safety laws and regulations, principally the Resource
Conservation and Recovery Act ("RCRA"), the Occupational Safety and Health Act,
the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act, the Toxic
Substances Control Act and the Comprehensive Environmental Response,
Compensation and Liability Act, as amended by the Superfund Amendments and
Reauthorization Act ("CERCLA"), as well as the state counterparts of these
statutes. Kronos believes the TiO2 plant owned by the LPC joint venture and a
TiO2 slurry facility owned by Kronos in Lake Charles, Louisiana are in
substantial compliance with applicable requirements of these laws or compliance
orders issued thereunder. Kronos has no other U.S. plants.
While the laws regulating operations of industrial facilities in Europe
vary from country to country, a common regulatory framework is provided by the
European Union (the "EU"). Germany and Belgium are members of the EU and follow
its initiatives. Norway, although not a member of the EU, generally patterns its
environmental regulatory actions after the EU. Kronos believes that it has
obtained all required permits and is in substantial compliance with applicable
EU requirements.
At its sulfate plant facilities in Leverkusen and Nordenham, Germany,
Kronos recycles weak sulfuric acid either through contracts with third parties
or using its own facilities. At Kronos' Fredrikstad, Norway plant, Kronos ships
its spent acid to a third party location where it is treated and disposed.
Kronos' Canadian sulfate plant neutralizes its spent acid and sells its gypsum
by-product to a local wallboard manufacturer. Kronos has a contract with a third
party to treat certain sulfate-process effluents at its German sulfate plants.
With regard to the German plants, either party may terminate the contract after
giving three or four years advance notice, depending on the contract.
From time to time, Kronos' facilities may be subject to environmental
regulatory enforcement under U.S. and foreign statutes. Resolution of such
matters typically involves the establishment of compliance programs.
Occasionally, resolution may result in the payment of penalties, but to date
such penalties have not involved amounts having a material adverse effect on
Kronos' consolidated financial position, results of operations or liquidity.
Kronos believes that all its plants are in substantial compliance with
applicable environmental laws.
Kronos' capital expenditures related to its ongoing environmental
protection and improvement programs in 2005 were approximately $4 million, and
are currently expected to be approximately $6 million in 2006.
Website and other available information. The Company files reports, proxy
and information statements and other information with the SEC. The Company
maintains a website on the Internet with the address of www.kronostio2.com.
Copies of this Annual Report on Form 10-K for the year ended December 31, 2005,
copies of the Company's Quarterly Reports on Form 10-Q for 2004 and 2005 and any
Current Reports on Form 8-K for 2004 and 2005, and any amendments thereto, are
or will be available free of charge at such website as soon as reasonably
practical after they are filed with the SEC. Additional information regarding
the Company, including the Company's Audit Committee charter and the Company's
Code of Business Conduct and Ethics, can also be found at this website as
required. Information contained on the Company's website is not part of this
report. The Company will also provide to anyone without charge copies of such
documents upon written request to the Company. Such requests should be directed
to the attention of the Corporate Secretary at the Company's address on the
cover page of this Form 10-K.
The general public may read and copy any materials the Company files with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company is
an electronic filer, and the SEC maintains an Internet website that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC, including the Company. The
Internet address of the SEC's website is www.sec.gov.
ITEM 1A. RISK FACTORS
Listed below are certain risk factors associated with the Company and its
businesses. In addition to the potential effect of these risk factors discussed
below, any risk factor which could result in reduced earnings or operating
losses, or reduced liquidity, could in turn adversely affect our ability to
service our liabilities or pay dividends on our common stock or adversely affect
the quoted market prices for our securities.
Demand for, and prices of, certain of our products are cyclical and we may
experience prolonged depressed market conditions for our products, which may
result in reduced earnings or operating losses. Approximately 90% of our
revenues is attributable to sales of TiO2. Pricing within the global TiO2
industry over the long term is cyclical, and changes in industry economic
conditions, especially in Western industrialized nations, can significantly
impact our earnings and operating cash flows. This may result in reduced
earnings or operating losses.
Historically, the markets for many of our products have experienced
alternating periods of tight supply, causing prices and profit margins to
increase, followed by periods of capacity additions, and demand reductions
resulting in oversupply and declining prices and profit margins. Selling prices
(in billing currencies) for TiO2 were generally: increasing during the first
quarter of 2003, flat during the second quarter of 2003, decreasing during the
last half of 2003 and the first quarter of 2004, flat during the second quarter
of 2004, increasing in the last half of 2004 and the first six months of 2005
and decreasing during the second half of 2005.
Our overall average TiO2 selling prices in billing currencies:
o were 3% higher in 2003 as compared to 2002;
o were 2% lower in 2004 as compared to 2003; and
o were 8% higher in 2005 as compared to 2004.
Future growth in demand for TiO2 may not be sufficient to alleviate any
future conditions of excess industry capacity, and such conditions may not be
sustained or may be further aggravated by anticipated or unanticipated capacity
additions or other events. The demand for TiO2 during a given year is also
subject to annual seasonal fluctuations. TiO2 sales are generally higher in the
first half of the year than in the second half of the year due in part to the
increase in paint production in the spring to meet the spring and summer
painting season demand.
As a global business, we are exposed to local business risks in different
countries, which could result in operating losses. We conduct a substantial
portion of our businesses in several jurisdictions outside of the United States
and are subject to risks normally associated with international operations,
which include trade barriers, tariffs, exchange controls, national and regional
labor strikes, social and political risks, general economic risks, seizures,
nationalizations, compliance with a variety of foreign laws, including tax laws,
and the difficulty in enforcing agreements and collecting receivables through
foreign legal systems. For example, we have substantial net operating loss
carryforwards in Germany, and any change in German tax law that adversely
impacts our ability to fully utilize such carryforwards could adversely affect
us.
We may incur losses from fluctuations in currency exchange rates. We
operate our businesses in several different countries, and sell our products
worldwide. Therefore, we are exposed to risks related to the prices that we
receive for our products and the need to convert currencies that we may receive
for some of our products into the currencies required to pay some of our debt,
or into currencies in which we may purchase certain raw materials or pay for
certain services, all of which could result in future losses depending on
fluctuations in foreign currency exchange rates.
We sell several of our products in mature and highly competitive industries
and face price pressures in the markets in which we operate, which may result in
reduced earnings or operating losses. The global markets in which we operate our
business are highly competitive. Competition is based on a number of factors,
such as price, product quality and service. Some of our competitors may be able
to drive down prices for our products because their costs are lower than our
costs. In addition, some of our competitors' financial, technological and other
resources may be greater than our resources, and such competitors may be better
able to withstand changes in market conditions. Our competitors may be able to
respond more quickly than we can to new or emerging technologies and changes in
customer requirements. Further, consolidation of our competitors or customers
may result in reduced demand for our products. In addition, new competitors
could emerge by modifying their existing production facilities so they could
manufacture products that compete with our products. The occurrence of any of
these events could result in reduced earnings or operating losses.
Higher costs or limited availability of our raw materials may decrease our
liquidity. The number of sources for, and availability of, certain raw materials
is specific to the particular geographical region in which a facility is
located. For example, titanium-containing feedstocks suitable for use in our
TiO2 facilities are available from a limited number of suppliers around the
world. Political and economic instability in the countries from which we
purchase our raw material supplies could adversely affect their availability.
Should our vendors not be able to meet their contractual obligations or should
we be otherwise unable to obtain necessary raw materials, we may incur higher
costs for raw materials or may be required to reduce production levels, either
of which may decrease our liquidity as we may be unable to offset such higher
costs with increased selling prices for our products.
We are subject to many environmental and safety regulations with respect to
our operating facilities that may result in unanticipated costs or liabilities.
Our facilities are subject to extensive laws, regulations, rules and ordinances
relating to the protection of the environment, including those governing the
discharge of pollutants in the air and water and the generation, management and
disposal of hazardous substances and wastes or other materials. We may incur
substantial costs, including fines, damages and criminal penalties or civil
sanctions, or experience interruptions in our operations for actual or alleged
violations or compliance requirements arising under environmental laws. Our
operations could result in violations under environmental laws, including spills
or other releases of hazardous substances to the environment. Some of our
operating facilities are in densely populated urban areas or in industrial areas
adjacent to other operating facilities. In the event of an accidental release or
catastrophic incident, we could incur material costs as a result of addressing
such an event and in implementing measures to prevent such incidents. Given the
nature of our business, violations of environmental laws may result in
restrictions imposed on our operating activities or substantial fines,
penalties, damages or other costs, including as a result of private litigation.
Our production facilities have been used for a number of years to
manufacture products or conduct mining operations. We may incur additional costs
related to compliance with environmental laws applicable to our historic
operations and these facilities. In addition, we may incur significant
expenditures to comply with existing or future environmental laws. Costs
relating to environmental matters will be subject to evolving regulatory
requirements and will depend on the timing of promulgation and enforcement of
specific standards that impose requirements on our operations. Costs beyond
those currently anticipated may be required under existing and future
environmental laws.
If our patents are declared invalid or our trade secrets become known to
competitors, our ability to compete may be adversely affected. Protection of our
proprietary processes and other technology is important to our competitive
position. Consequently, we rely on judicial enforcement for protection of our
patents, and our patents may be challenged, invalidated, circumvented or
rendered unenforceable. Furthermore, if any pending patent application filed by
us does not result in an issued patent, or if patents are issued to us but such
patents do not provide meaningful protection of our intellectual property, then
the use of any such intellectual property by our competitors could result in
decreasing our cash flows. Additionally, our competitors or other third parties
may obtain patents that restrict or preclude our ability to lawfully produce or
sell our products in a competitive manner, which could have the same effects.
We also rely on certain unpatented proprietary know-how and continuing
technological innovation and other trade secrets to develop and maintain our
competitive position. Although it is our practice to enter into confidentiality
agreements to protect our intellectual property, because these confidentiality
agreements may be breached, such agreements may not provide sufficient
protection for our trade secrets or proprietary know-how, or adequate remedies
may not be available in the event of an unauthorized use or disclosure of such
trade secrets and know-how. In addition, others could obtain knowledge of such
trade secrets through independent development or other access by legal means.
Loss of key personnel or our ability to attract and retain new qualified
personnel could hurt our businesses and inhibit our ability to operate and grow
successfully. Our success in the highly competitive markets in which we operate
will continue to depend to a significant extent on the leadership teams of our
businesses and other key management personnel. We generally do not have binding
employment agreements with any of these managers. This increases the risks that
we may not be able to retain our current management personnel and we may not be
able to recruit qualified individuals to join our management team, including
recruiting qualified individuals to replace any of our current personnel that
may leave in the future.
Our relationships with our union employees could deteriorate. At December
31, 2005, we employed approximately 2,415 persons worldwide in our various
businesses. A significant number of our employees are subject to collective
bargaining or similar arrangements. We may not be able to negotiate labor
agreements with respect to these employees on satisfactory terms or at all. If
our employees were to engage in a strike, work stoppage or other slowdown, we
could experience a significant disruption of our operations or higher ongoing
labor costs.
Our leverage may impair our financial condition or limit our ability to
operate our businesses. We currently have a significant amount of debt. As of
December 31, 2005, our total consolidated debt was approximately $465 million,
substantially all of which relates to KII's Senior Secured Notes. Our level of
debt could have important consequences to our stockholders and creditors,
including:
o making it more difficult for us to satisfy our obligations with respect to
our liabilities;
o increasing our vulnerability to adverse general economic and industry
conditions;
o requiring that a portion of our cash flow from operations be used for the
payment of interest on our debt, therefore reducing our ability to use our
cash flow to fund working capital, capital expenditures, dividends on our
common stock acquisitions and general corporate requirements;
o limiting our ability to obtain additional financing to fund future working
capital, capital expenditures, acquisitions and general corporate
requirements;
o limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate; and
o placing us at a competitive disadvantage relative to other less leveraged
competitors.
In addition to our indebtedness, we are party to various lease and other
agreements pursuant to which, along with our indebtedness, we are committed to
pay approximately $272.1 million in 2006. Our ability to make payments on and
refinance our debt, and to fund planned capital expenditures, depends on our
future ability to generate cash flow. To some extent, this is subject to general
economic, financial, competitive, legislative, regulatory and other factors that
are beyond our control. In addition, our ability to borrow funds under our
subsidiaries' credit facilities in the future will in some instances depend in
part on these subsidiaries' ability to maintain specified financial ratios and
satisfy certain financial covenants contained in the applicable credit
agreement. Our business may not generate cash flows from operating activities
sufficient to enable us to pay our debts when they become due and to fund our
other liquidity needs. As a result, we may need to refinance all or a portion of
our debt before maturity. We may not be able to refinance any of our debt on
favorable terms, if at all. Any inability to generate sufficient cash flows or
to refinance our debt on favorable terms could have a material adverse effect on
our financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES
During 2005, the Company operated four TiO2 plants in Europe (one in each
of Leverkusen, Germany, Nordenham, Germany, Langerbrugge, Belgium, and
Fredrikstad, Norway). In North America, the Company has a TiO2 plant in
Varennes, Quebec, Canada and, through the manufacturing joint venture described
above, a one-half interest in a TiO2 plant in Lake Charles, Louisiana. See Note
6 to the Consolidated Financial Statements. TiO2 is produced using the chloride
process at the Leverkusen, Langerbrugge, Varennes and Lake Charles facilities
and is manufactured using the sulfate process in Nordenham, Leverkusen,
Fredrikstad and Varennes. The Company owns an ilmenite ore mine in Hauge i
Dalane, Norway and operates it pursuant to a governmental concession with an
unlimited term, and Kronos also owns a TiO2 slurry plant in Lake Charles,
Louisiana. Kronos' co-products are produced at its Norwegian, Belgian and German
facilities and its titanium chemicals are produced at its Belgian and Canadian
facilities.
The Company owns all of its principal production facilities described
above, except for the land under the Fredrikstad and Leverkusen facilities. The
Norwegian plant is located on public land and is leased until 2013, with an
option to extend the lease for an additional 50 years. The Company's principal
German operating subsidiary leases the land under its Leverkusen TiO2 production
facility pursuant to a lease with Bayer AG that expires in 2050. The Leverkusen
facility, which is owned by the Company and which represents approximately
one-third of the Company's current TiO2 production capacity, is located within
an extensive manufacturing complex. Rent for such land lease associated with the
Leverkusen facility is periodically established by agreement with Bayer for
periods of at least two years at a time. Under a separate supplies and services
agreement expiring in 2011, Bayer provides some raw materials, including
chlorine, auxiliary and operating materials, utilities and services necessary to
operate the Leverkusen facility.
The Company has under lease various corporate and administrative offices
located in the U.S. and various sales offices located in the U.S., France, the
Netherlands, Denmark and the U.K.
The Company believes the transportation access to its facilities, which are
generally maintained by the applicable local government, are adequate for the
Company's purposes.
ITEM 3. LEGAL PROCEEDINGS
Kronos is involved in various environmental, contractual, product liability
and other claims and disputes incidental to its business. Certain information
called for by this Item is included in Note 16 to the Consolidated Financial
Statements, which information is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 2005.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed and traded on the New York Stock
Exchange (symbol: KRO). As of February 28, 2006, there were approximately 5,100
holders of record of common stock. The following table sets forth the high and
low closing per share sales price for Kronos common stock for the periods
indicated according to Bloomberg, and dividends paid during such periods. On
February 28, 2006 the closing price of Kronos common stock according to the NYSE
Composite Tape was $29.10.
Cash
dividends
High Low paid
---- --- ---------
Year ended December 31, 2004
First Quarter $33.25 $22.22 $ .25
Second Quarter 34.20 29.11 .25
Third Quarter 39.70 30.80 .25
Fourth Quarter 48.48 38.50 .25
Year ended December 31, 2005
First Quarter $48.56 $40.27 $ .25
Second Quarter 43.06 29.37 .25
Third Quarter 33.05 27.60 .25
Fourth Quarter 33.26 29.01 .25
The Company paid four quarterly $.25 per share cash dividends in each of
2004 and 2005. On February 21, 2006, the Company's Board of Directors declared a
regular quarterly dividend of $.25 per share to stockholders of record as of
March 10, 2006 to be paid on March 27, 2006. However, the declaration and
payment of future dividends, and the amount thereof, is discretionary, and the
amount, if any, will be dependent upon the Company's results of operations,
financial condition, contractual restrictions and other factors deemed relevant
by the Company's Board of Directors. The amount and timing of past dividends is
not necessarily indicative of the amount and timing of any future dividends
which might be paid.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's Consolidated Financial Statements and Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
earnings per share and cash dividends per share data presented below has been
restated to give effect to the September 2003 change in Kronos' capital
structure discussed in Note 1 to Kronos' Consolidated Financial Statements in
which the 1,000 shares of Kronos' common stock previously outstanding were
reclassified in the form of a stock split into approximately 48.9 million shares
of Kronos' common stock.
Years ended December 31,
------------------------------------------------------------
2001 2002 2003 2004 2005
---- ---- ---- ---- ----
(In millions, except per share data and TiO2 operating statistics)
STATEMENTS OF OPERATIONS DATA:
Net sales $ 835.1 $ 875.2 $1,008.2 $1,128.6 $1,196.7
Net income 154.5 66.3 87.5 314.9 71.0
Net income per share 3.16 1.35 1.79 6.43 1.45
Cash dividends per share (1) .62 2.27 .14 1.00 1.00
BALANCE SHEET DATA (at year end):
Total assets 910.1 988.5 1,121.9 1,353.3 1,298.9
Notes payable and long-term debt including
current maturities 242.7 370.5 556.7 533.2 465.3
Common stockholders' equity 378.5 314.2 159.4 470.8 410.0
STATEMENTS OF CASH FLOW DATA:
Net cash provided (used) by:
Operating activities $ 135.7 $ 111.1 $ 107.7 $ 151.0 $ 97.8
Investing activities (33.7) (34.6) (35.4) (39.8) (39.7)
Financing activities (99.0) (93.9) (61.8) (108.8) (44.8)
TiO2 OPERATING STATISTICS:
Average selling price
Index (1990=100) 89 81 84 82 89
Sales volume* 402 455 462 500 478
Production volume* 412 442 476 484 492
Production capacity at beginning of year* 450 455 470 480 495
Production rate as a percentage of capacity 91% 96% Full Full 99%
__________________________________
* Metric tons in thousands
(1) Excludes Kronos' December 2003 dividend to NL in the form of a $200 million
long-term note payable. See Note 10 to the Consolidated Financial
Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Critical accounting policies and estimates
The accompanying "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are based upon the Company's consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). The
preparation of these financial statements requires the Company to make estimates
and judgments that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the reported
period. On an on-going basis, the Company evaluates its estimates, including
those related to bad debts, inventory reserves, impairments of investments in
marketable securities and investments accounted for by the equity method, the
recoverability of other long-lived assets (including goodwill and other
intangible assets), pension and other post-retirement benefit obligations and
the underlying actuarial assumptions related thereto, the realization of
deferred income tax assets and accruals for litigation, income tax and other
contingencies. The Company bases its estimates on historical experience and on
various other assumptions that it believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the reported amounts of assets, liabilities, revenues and expenses. Actual
results may differ from previously-estimated amounts under different assumptions
or conditions.
The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements:
o The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments and
other factors. The Company takes into consideration the current financial
condition of its customers, the age of the outstanding balance and the
current economic environment when assessing the adequacy of the allowance.
If the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. During 2003, 2004 and 2005 the net amount
written off against the allowance for doubtful accounts as a percentage of
the balance of the allowance for doubtful accounts as of the beginning of
the year ranged from 17% to 38%.
o The Company provides reserves for estimated obsolescence or unmarketable
inventories equal to the difference between the cost of inventory and the
estimated net realizable value using assumptions about future demand for
its products and market conditions. If actual market conditions are less
favorable than those projected by management, additional inventory reserves
may be required. The Company also provides reserves for tools and supplies
inventory based generally on both historical and expected future usage
requirements.
o The Company recognizes an impairment charge associated with its long-lived
assets, including property and equipment, whenever it determines that
recovery of such long-lived asset is not probable. Such determination is
made in accordance with the applicable GAAP requirements associated with
the long-lived asset, and is based upon, among other things, estimates of
the amount of future net cash flows to be generated by the long-lived asset
and estimates of the current fair value of the asset. Adverse changes in
such estimates of future net cash flows or estimates of fair value could
result in an inability to recover the carrying value of the long-lived
asset, thereby possibly requiring an impairment charge to be recognized in
the future.
Under applicable GAAP (SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets"), property and equipment is not assessed for
impairment unless certain impairment indicators, as defined, are present.
During 2005, no such impairment indicators, as defined, were present.
o The Company maintains various defined benefit pension plans and
postretirement benefits other than pensions ("OPEB"). The amounts
recognized as defined benefit pension and OPEB expenses, and the reported
amounts of prepaid and accrued pension costs and accrued OPEB costs, are
actuarially determined based on several assumptions, including discount
rates, expected rates of returns on plan assets and expected health care
trend rates. Variances from these actuarially assumed rates will result in
increases or decreases, as applicable, in the recognized pension and OPEB
obligations, pension and OPEB expenses and funding requirements. These
assumptions are more fully described below under " Assumptions on defined
benefit pension plans and OPEB plans."
o The Company records a valuation allowance to reduce its deferred income tax
assets to the amount that is believed to be realized under the
"more-likely-than-not" recognition criteria. While the Company has
considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for a valuation allowance, it is
possible that in the future the Company may change its estimate of the
amount of the deferred income tax assets that would "more-likely-than-not"
be realized in the future, resulting in an adjustment to the deferred
income tax asset valuation allowance that would either increase or
decrease, as applicable, reported net income in the period such change in
estimate was made. For example, the Company has substantial net operating
loss carryforwards in Germany (the equivalent of $593 million for German
corporate purposes and $104 million for German trade tax purposes at
December 31, 2005). During 2004, the Company concluded that the
more-likely-than-not recognition criteria had been met with respect to the
income tax benefit associated with the Company's net operating loss
carryforwards in Germany. 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.
In addition, the Company makes an evaluation at the end of each reporting
period as to whether or not some or all of the undistributed earnings of
its foreign subsidiaries are permanently reinvested (as that term is
defined in GAAP). While the Company may have concluded in the past that
some of such undistributed earnings are permanently reinvested, facts and
circumstances can change in the future, and it is possible that a change in
facts and circumstances, such as a change in the expectation regarding the
capital needs of its foreign subsidiaries, could result in a conclusion
that some or all of such undistributed earnings are no longer permanently
reinvested. In such an event, the Company would be required to recognize a
deferred income tax liability in an amount equal to the estimated
incremental U.S. income tax and withholding tax liability that would be
generated if all of such previously-considered permanently reinvested
undistributed earnings were distributed to the U.S.
o The Company records accruals for legal, income tax and other contingencies
and commitments when estimated future expenditures associated with such
contingencies become probable, and the amounts can be reasonably estimated.
However, new information may become available, or circumstances (such as
applicable laws and regulations) may change, thereby resulting in an
increase or decrease in the amount required to be accrued for such matters
(and therefore a decrease or increase in reported net income in the period
of such change).
Income from operations are impacted by certain of these significant
judgments and estimates, such as allowance for doubtful accounts, reserves for
obsolete or unmarketable inventories, impairment of equity method investees, and
other long-lived assets, defined benefit pension and OPEB plans and loss
accruals. In addition, other income and expense items are impacted by the
significant judgments and estimates for deferred income tax asset valuation
allowances and loss accruals.
Executive summary
The Company reported net income of $71.0 million, or $1.45 per diluted
share, in 2005 compared to $314.9 million, or $6.43 per diluted share, in 2004
and $87.5 million, or $1.79 per diluted share, in 2003. The Company's diluted
earnings per share increased from 2003 to 2004 as the unfavorable effect of
lower income from operations and higher interest expense in 2004 was more than
offset by the favorable effect of a non-cash income tax benefit in 2004. The
Company's diluted earnings per share decreased from 2004 to 2005 as the
favorable effect of higher income from operations and lower interest expense in
2005 was more than offset by the favorable effect of the non-cash income tax
benefit recognized in 2004.
Net income in 2005 includes (i) a third quarter non-cash income tax charge
of $.13 per diluted share for recent developments with respect to ongoing
non-U.S. income tax audits, primarily in Germany, Belgium and Canada and (ii) a
second quarter securities transaction gain of $.07 per diluted share related to
the sale of the Company's passive interest in a Norwegian smelting operation.
Net income in 2004 includes (i) a second quarter income tax benefit related to
the reversal of Kronos' deferred income tax asset valuation allowance in Germany
of $5.49 per diluted share and (ii) income in the second quarter related to
Kronos' contract dispute settlement of $.08 per diluted share. Net income in
2003 includes an income tax benefit relating to the refund of prior year German
income taxes of $.50 per diluted share. Each of these items is more fully
discussed below and/or in the notes to the Consolidated Financial Statements.
The Company currently expects income from operations will be lower in 2006
compared to 2005, as the favorable effect of anticipated modest improvements in
sales volumes and average TiO2 selling prices are expected to be more than
offset by the effect of higher production costs, particularly raw material and
energy costs.
Relative changes in the Company's TiO2 sales and operating income during
the past three years are primarily due to (i) relative changes in TiO2 sales and
production volumes, (ii) relative changes in TiO2 average selling prices and
(iii) relative changes in foreign currency exchange rates.
Selling prices (in billing currencies) for TiO2, the Company's principal
product, were generally: increasing during the first quarter of 2003, flat
during the second quarter of 2003, decreasing during the third and fourth
quarters of 2003 and the first quarter of 2004, flat during the second quarter
of 2004, increasing during the last half of 2004 and first half of 2005 and
decreasing during the last half of 2005.
Results of operations
Years ended December 31, % Change
------------------------------------- -----------------------
2003 2004 2005 2003-04 2004-05
---- ---- ---- ------- -------
(In millions, except selling price data)
Net sales $1,008.2 $1,128.6 $1,196.7 +12% +6%
Cost of sales 739.2 866.3 869.9 +17% **
-------- -------- --------
Gross margin 269.0 262.3 326.8 - 2% +25%
Selling, general and administrative
expense (124.4) (145.4) (150.7) +17% +4%
Currency transaction gains (losses), net (7.7) (3.9) 5.2
Contract dispute settlement - 6.3 -
Corporate expense (4.2) (3.5) (5.0)
Other operating income (expense), net (.2) (.8) (1.0)
-------- -------- --------
Income from operations $ 132.5 $ 115.0 $ 175.3 -13% +52%
======== ======== ========
TiO2 operating statistics:
Percent change in average selling
prices:
Using actual foreign currency
exchange rates + 4% + 9%
Impact of changes in foreign
currency exchange rates - 6% - 1%
---- ----
In billing currencies - 2% + 8%
==== ====
Sales volumes* 462 500 478 + 8% - 4%
Production volumes* 476 484 492 + 2% + 2%
Production rate as 99%
percent of capacity Full Full
___________________________________
* Thousands of metric tons
** less than 1%
Year ended December 31, 2005 compared to year ended December 31, 2004
Kronos' sales increased $68.1 million (6%) in 2005 as compared to 2004 due
primarily to the net effects of higher average TiO2 selling prices, lower TiO2
sales volumes and the favorable effect of fluctuations in foreign currency
exchange rates, which increased sales by approximately $16 million as further
discussed below. Excluding the effect of fluctuations in the value of the U.S.
dollar relative to other currencies, Kronos' average TiO2 selling prices in
billing currencies were 8% higher in 2005 as compared to 2004. 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 2005 increased 9% as compared to 2004. See " - Effects of foreign
currency exchange rates" below for a discussion of the impact of relative
changes in currency exchange rates on Kronos' operations.
Kronos' TiO2 sales volumes in 2005 decreased 4% compared to 2004, with
volumes lower in all regions of the world. Approximately one-half of Kronos'
2005 TiO2 sales volumes were attributable to markets in Europe, with 38%
attributable to North America and the balance to export markets. Overall
worldwide demand for TiO2 in 2005 is estimated to have declined by approximately
5% from the exceptionally strong demand levels in 2004. The Company attributes
the decline in overall sales and its own sales to slower overall economic growth
in 2005 and inventory destocking by its customers. Kronos' income from
operations comparisons were favorably impacted by higher production levels,
which increased 2%. Kronos' operating rates were near full capacity in both
periods, and Kronos' production volumes in 2005 set a new record for Kronos,
which was the fourth consecutive year record production volumes were achieved.
The Company's cost of sales increased $3.6 million (less than 1%) in 2005
compared to 2004 as the effect of lower sales volumes was offset by higher raw
material and maintenance costs. However, the Company's cost of sales, as a
percentage of net sales, decreased from 77% in 2004 to 73% in 2005 due primarily
to the effects of higher average selling prices which more than offset higher
costs.
The Company's gross margins increased $64.5 million (25%) from 2004 to 2005
due to the net effects of the aforementioned changes in sales and cost of sales
during such periods.
As a percentage of net sales, selling, general and administrative expenses
were relatively consistent at 13% for both 2004 and 2005.
Kronos' income from operations increased $60.3 million (52%) in 2005 as
compared to 2004, as the effect of higher average TiO2 selling prices and higher
production volumes more than offset the impact of lower sales volumes, higher
raw material and maintenance costs in 2005 and the $6.3 million of income
related to a contract dispute settlement with a customer recognized in 2004, as
further discussed below. See also " - Effects of foreign currency exchange
rates" below for a discussion of the impact of relative changes in currency
exchange rates on Kronos' operations.
On September 22, 2005, the chloride-process TiO2 facility operated by
Kronos' 50%-owned joint venture, Louisiana Pigment Company ("LPC"), temporarily
halted production due to Hurricane Rita. Although storm damage to core
processing facilities was not extensive, a variety of factors, including loss of
utilities, limited access and availability of employees and raw materials,
prevented the resumption of partial operations until October 9, 2005 and full
operations until late 2005. The joint venture expects the majority of its
property damage and unabsorbed fixed costs for periods in which normal
production levels were not achieved will be covered by insurance, and Kronos
believes insurance will cover its lost profits (subject to applicable
deductibles) resulting from its share of the lost production from LPC. Insurance
proceeds from the lost profit for product that Kronos was not able to sell as a
result of the loss of production from LPC, are expected to be recognized by
Kronos during 2006, although the amount and timing of such insurance recoveries
is not presently determinable. The effect on Kronos' financial results will
depend on the timing and amount of insurance recoveries.
Year ended December 31, 2004 compared to year ended December 31, 2003
Kronos' sales increased $120.4 million (12%) in 2004 as compared to 2003 as
higher sales volumes and the favorable effect of fluctuations in foreign
currency exchange rates, which increased sales by approximately $60 million as
further discussed below, 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, Kronos' average TiO2 selling prices in
billing currencies were 2% lower in 2004 as compared to 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 2004 increased 4% as compared to 2003. See " - Effects of foreign
currency exchange rates" below for a discussion of the impact of relative
changes in currency exchange rates on Kronos' operations.
Kronos' TiO2 sales volumes in 2004 increased 8% compared to 2003, as higher
volumes in European and export markets more than offset lower volumes in Canada.
Approximately one-half of Kronos' 2004 TiO2 sales volumes were attributable to
markets in Europe, with 38% attributable to North America and the balance to
export markets. Demand for TiO2 has remained strong throughout 2004, and while
Kronos believes that the strong demand is largely attributable to the end-use
demand of its customers, it is possible that some portion of the strong demand
resulted from customers increasing their inventory levels of TiO2 in advance of
implementation of announced or anticipated price increases. Kronos' income from
operations comparisons were also favorably impacted by higher production levels,
which increased 2%. Kronos' operating rates were near full capacity in both
periods, and Kronos' sales and production volumes in 2004 were both new records
for Kronos.
The Company's cost of sales increased $127.1 million (17%) in 2004 compared
to 2003 due to higher raw material and maintenance costs as well as higher sales
volumes and related effects of translating foreign currencies into the U.S.
dollar. The Company's cost of sales, as a percentage of net sales, increased
from 73% in 2003 to 77% in 2004 due primarily to the effects of lower average
selling prices and higher costs.
The Company's gross margins decreased $6.7 million (2%) from 2003 to 2004
due to the net effects of the aforementioned changes in sales and cost of sales
during such periods.
As a percentage of net sales, selling, general and administrative expenses
were relatively consistent from 2003 to 2004, increasing marginally from 12% to
13%, and increasing proportionately with the increased sales and production
volume.
Kronos' income from operations in 2004 includes $6.3 million of income
related to the settlement of a 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 gain recognized represents the
present value of the future payments to be made by the customer to Kronos. The
dispute with the customer concerned the customer's alleged past failure to
purchase the required amount of TiO2 from Kronos under the terms of Kronos'
contract with the customer. Under the settlement, the customer agreed to pay an
aggregate of $7.3 million to Kronos through 2007 to resolve such dispute. See
Note 12 to the Consolidated Financial Statements.
Kronos' income from operations decreased $17.5 million (13%) in 2004 as
compared to 2003, as the effect of lower average TiO2 selling prices and higher
raw material and maintenance costs more than offset the impact of higher sales
and production volumes and the income from the contract dispute settlement. See
also " - Effects of foreign currency exchange rates" below for a discussion of
the impact of relative changes in currency exchange rates on Kronos' operations.
Effects of foreign currency exchange rates
Kronos' 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 Kronos' 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 Kronos' 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"). Kronos discloses percentage changes in its average TiO2 prices in
billing currencies because Kronos 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 4% and 9%
increases in Kronos' average TiO2 selling prices during 2004 and 2005,
respectively, as compared to the respective prior year using actual foreign
currency exchange rates prevailing during the respective periods (the GAAP
measure), and the 2% decrease and 8% increase in Kronos' average TiO2 selling
prices in billing currencies (the non-GAAP measure) during such periods is due
to the effect of changes in foreign currency exchange rates. The above table
presents (i) the percentage change in Kronos' average TiO2 selling prices using
actual foreign currency exchange rates prevailing during the respective periods
(the GAAP measure), (ii) the percentage change in Kronos' 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).
Kronos has substantial operations and assets located outside the United
States (primarily in Germany, Belgium, Norway and Canada). A significant amount
of Kronos' sales generated from its non-U.S. operations are denominated in
currencies other than the U.S. dollar, principally the euro, other major
European currencies and the Canadian dollar. A portion of Kronos' 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
Kronos' 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 a net $16 million in 2005 as
compared to 2004, and increased sales by a net $60 million in 2004 as compared
to 2003. Fluctuations in the value of the U.S. dollar relative to other
currencies similarly impacted Kronos' foreign currency-denominated operating
expenses. Kronos' operating costs that are not denominated in the U.S. dollar,
when translated into U.S. dollars, were higher in 2005, 2004 and 2003 compared
to the same periods of the respective prior years. Overall, currency exchange
rate fluctuations resulted in net increases of $6 million in Kronos' income from
operations in each of 2004 and 2005 as compared to the respective prior year.
Outlook
Kronos expects its income from operations in 2006 will be somewhat lower
than 2005, as the favorable effect of anticipated modest improvements in sales
volumes and average TiO2 selling prices are expected to be more than offset by
the effect of higher production costs, particularly raw material and energy
costs. Kronos' expectations as to the future prospects of Kronos and the TiO2
industry are based upon a number of factors beyond Kronos' 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 Kronos' expectations, Kronos'
results of operations could be unfavorably affected.
Kronos' 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 finishing capacity in the German facility
and equipment upgrades and enhancements in several locations to allow for
reduced downtime for maintenance activities. Kronos' production capacity has
increased by approximately 30% over the past ten years due to debottlenecking
programs, with only moderate capital expenditures. Kronos believes its annual
attainable production capacity for 2006 is approximately 510,000 metric tons,
with some slight additional capacity expected to be available in 2007 through
its continued debottlenecking efforts.
Other income (expense).
The following table sets forth certain information regarding other income
and expense items.
Years ended December 31, Change
----------------------------------- -----------------------
2003 2004 2005 2003-04 2004-05
---- ---- ---- ------- -------
(In millions)
Interest income from affiliates $ .7 $ - $ - $ (.7) $ -
Trade interest income .7 1.1 1.2 .4 .1
Other interest income .2 1.0 .9 .8 (.1)
Securities transaction gain - - 5.4 - 5.4
Interest expense to affiliates (1.8) (15.2) - (13.4) 15.2
Other interest expense (33.0) (37.4) (44.7) (4.4) (7.3)
------ ------ ------ ------ ------
$(33.2) $(50.5) $(37.2) $(17.3) $ 13.3
====== ====== ====== ====== ======
Interest income fluctuates in part based upon the amount of funds invested
and yields thereon. Aggregate interest income decreased slightly in 2005
compared to 2004 due to lower average funds available for investment. As
compared to 2003, aggregate interest income in 2004 increased $500,000 due to
higher average yields on invested funds. The Company expects interest income
will be slightly higher in 2006 than 2005 due to higher average yields expected
on invested funds.
Securities transaction gain in 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 12 to the Consolidated Financial Statements.
The Company has a significant amount of indebtedness denominated in the
euro, including KII's euro-denominated 8.875% Senior Secured Notes ("Senior
Secured Notes"). Accordingly, the reported amount of interest expense will vary
depending on relative changes in foreign currency exchange rates. Interest
expense on indebtedness to third parties in 2005 was higher than 2004 due
primarily to higher levels of outstanding indebtedness resulting from the
issuance of an additional euro 90 million principal amount of KII Senior Secured
Notes in November 2004. In addition, the increase in interest expense was due to
relative changes in foreign currency exchange rates, which increased the U.S.
dollar equivalent of interest expense on the euro 285 million principal amount
of KII Senior Secured Notes outstanding during all of 2003, 2004 and 2005 by
approximately $3 million and by approximately $1 million in 2005 as compared to
2004.
The Company did not report any interest expense to affiliates in 2005 as
the $200 million long-term note payable to affiliates was fully repaid in 2004.
See Note 10 to the Consolidated Financial Statements. The Company does not
currently expect to report any material interest expense to affiliates in 2006.
Assuming interest rates and foreign currency exchange rates do not increase
significantly from current levels, interest expense on third party indebtedness
in 2006 is expected to be comparable to 2005.
At December 31, 2005, approximately $454 million of consolidated
indebtedness, principally KII's Senior Secured Notes, bears interest at fixed
interest rates averaging 8.9% (2004 - $519 million with a weighted average
interest rate of 8.9%; 2003 - $356 million with a weighted average fixed
interest rate of 8.9%). The weighted average interest rate on $12 million of
outstanding variable rate borrowings at December 31, 2005 was 7.0% (2004 - $14
million outstanding at 3.9%; 2003 - none outstanding). See Note 8 to the
Consolidated Financial Statements.
As noted above, KII has a significant amount of indebtedness denominated in
currencies other than the U.S. dollar. See Item 7A, "Quantitative and
Qualitative Disclosures About Market Risk."
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 13 to the Consolidated Financial
Statements.
The Company's income tax expense in 2005 includes the net non-cash effects
of (i) the aggregate favorable effects of recent developments with respect to
certain non-U.S. income tax audits of Kronos, principally in Belgium and Canada,
of $11.5 million ($.23 per diluted share) and (ii) the unfavorable effect with
respect to the loss of certain income tax attributes of Kronos in Germany of
$17.5 million ($.36 per diluted share).
At December 31, 2005, Kronos had the equivalent of $593 million and $104
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 Note 13 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 met the "more-likely-than-not" recognition criteria.
Under applicable GAAP related to accounting for income taxes at interim periods,
a change in estimate at an interim period resulting in a decrease in the
valuation allowance is segregated into two components, the portion related to
the remaining interim periods of the current year and the portion related to all
future years. The portion of the valuation allowance reversal related to the
former is recognized over the remaining interim periods of the current year, and
the portion of the valuation allowance related to the latter is recognized at
the time the change in estimate is made. Accordingly, as of June 30, 2004,
Kronos reversed $268.6 million of the valuation allowance (the portion related
to future years), and Kronos reversed the remaining $3.4 million during the last
six months of 2004. 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.
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 upon the level of taxable income earned in Germany.
During 2003, Kronos reduced its deferred income tax asset valuation
allowance by an aggregate of approximately $6.7 million, primarily as a result
of utilization of certain income tax attributes for which the benefit had not
previously been recognized. In addition, Kronos recognized a $38.0 million
income tax benefit related to the net refund of certain prior year German income
taxes.
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law provided for a special 85% deduction for certain dividends
received from a controlled foreign corporation in 2005. In the third quarter of
2005, the Company completed its evaluation of this new provision and determined
that it would not benefit from such special dividends received deduction.
Related party transactions. The Company is a party to certain transactions
with related parties. See Note 15 to the Consolidated Financial Statements. It
is the policy of the Company to engage in transactions with related parties on
terms, in the opinion of the Company, no less favorable to the Company than
could be obtained from unrelated parties.
Accounting principles newly adopted in 2003 and 2004. See Note 19 to the
Consolidated Financial Statements.
Accounting principles not yet adopted. See Note 20 to the Consolidated
Financial Statements.
Defined benefit pension plans. The Company maintains various defined
benefit pension plans in the U.S., Europe and Canada. See Note 14 to the
Consolidated Financial Statements.
The Company accounts for its defined benefit pension plans using SFAS No.
87, "Employer's Accounting for Pensions." Under SFAS No. 87, defined benefit
pension plan expense and prepaid and accrued pension costs are each recognized
based on certain actuarial assumptions, principally the assumed discount rate,
the assumed long-term rate of return on plan assets and the assumed increase in
future compensation levels. The Company recognized consolidated defined benefit
pension plan expense of $8.4 million in 2003, $13.2 million in 2004 and $14.1
million in 2005. The amount of funding requirements for these defined benefit
pension plans is generally based upon applicable regulations (such as ERISA in
the U.S.), and will generally differ from pension expense recognized under SFAS
No. 87 for financial reporting purposes. Contributions made by the Company to
all of its plans aggregated $13.6 million in 2003, $17.1 million in 2004 and
$18.6 million in 2005.
The discount rates the Company utilizes for determining defined benefit
pension expense and the related pension obligations are based on current
interest rates earned on long-term bonds that receive one of the two highest
ratings given by recognized rating agencies in the applicable country where the
defined benefit pension benefits are being paid. In addition, the Company
receives advice about appropriate discount rates from the Company's third-party
actuaries, who may in some cases utilize their own market indices. The discount
rates are adjusted as of each valuation date (September 30th) to reflect
then-current interest rates on such long-term bonds. Such discount rates are
used to determine the actuarial present value of the pension obligations as of
December 31st of that year, and such discount rates are also used to determine
the interest component of defined benefit pension expense for the following
year.
At December 31, 2005, approximately 65%, 14%, 14% and 4% of the projected
benefit obligation related to Company plans in Germany, Norway, Canada and the
U.S., respectively. The Company uses several different discount rate assumptions
in determining its consolidated defined benefit pension plan obligations and
expense because the Company maintains defined benefit pension plans in several
different countries in North America and Europe and the interest rate
environment differs from country to country.
The Company used the following discount rates for its defined benefit
pension plans:
Discount rates used for:
--------------------------------------------------------------------------------------------------
Obligations at Obligations at Obligations at
December 31, 2003 and expense December 31, 2004 and expense December 31, 2005 and
in 2004 in 2005 expense in 2006
--------------------------------- ------------------------------- ------------------------------
Germany 5.3% 5.0% 4.0%
Norway 5.5% 5.0% 4.5%
Canada 6.3% 6.0% 5.0%
U.S. 5.9% 5.8% 5.5%
The assumed long-term rate of return on plan assets represents the
estimated average rate of earnings expected to be earned on the funds invested
or to be invested in the plans' assets provided to fund the benefit payments
inherent in the projected benefit obligations. Unlike the discount rate, which
is adjusted each year based on changes in current long-term interest rates, the
assumed long-term rate of return on plan assets will not necessarily change
based upon the actual, short-term performance of the plan assets in any given
year. Defined benefit pension expense each year is based upon the assumed
long-term rate of return on plan assets for each plan and the actual fair value
of the plan assets as of the beginning of the year. Differences between the
expected return on plan assets for a given year and the actual return are
deferred and amortized over future periods based either upon the expected
average remaining service life of the active plan participants (for plans for
which benefits are still being earned by active employees) or the average
remaining life expectancy of the inactive participants (for plans for which
benefits are not still being earned by active employees).
At December 31, 2005, approximately 51%, 19%, 18% and 7% of the plan assets
related to the Company's plans in the Germany, Norway, Canada and the U.S.,
respectively. The Company uses several different long-term rates of return on
plan asset assumptions in determining its consolidated defined benefit pension
plan expense because the Company maintains defined benefit pension plans in
several different countries in North America and Europe, the plan assets in
different countries are invested in a different mix of investments and the
long-term rates of return for different investments differ from country to
country.
In determining the expected long-term rate of return on plan asset
assumptions, the Company considers the long-term asset mix (e.g. equity vs.
fixed income) for the assets for each of its plans and the expected long-term
rates of return for such asset components. In addition, the Company receives
advice about appropriate long-term rates of return from the Company's
third-party actuaries. Such assumed asset mixes are summarized below:
o In Germany, the composition of the Company's plan assets is established to
satisfy the requirements of the German insurance commissioner. The plan
asset allocation at December 31, 2005 was 23% to equity managers, 48% to
fixed income managers and 29% to real estate (2004 - 23%, 48% and 29%,
respectively).
o In Norway, the Company currently has a plan asset target allocation of 14%
to equity managers and 64% to fixed income managers and the remainder
primarily to cash and liquid investments. The expected long-term rate of
return for such investments is approximately 8% and 4.5% to 6% and 2.5%,
respectively. The plan asset allocation at December 31, 2005 was 16% to
equity managers and 62% to fixed income managers and the remainder
primarily to cash and liquid investments (2004 - 16%, 64% and 20%,
respectively).
o In Canada, the Company currently has a plan asset target allocation of 65%
to equity managers and 35% to fixed income managers, with an expected
long-term rate of return for such investments to average approximately 125
basis points above the applicable equity or fixed income index. The current
plan asset allocation at December 31, 2005 was 64% to equity managers, 32%
to fixed income managers and 4% to other investments (2004 - 60%, 40% and
nil, respectively).
o During 2005, the plan assets in the U.S. were invested in the Combined
Master Retirement Trust ("CMRT"), a collective investment trust sponsored
by Contran to permit the collective investment by certain master trusts
which fund certain employee benefits plans sponsored by Contran and certain
of its affiliates. Harold Simmons is the sole trustee of the CMRT. The
CMRT's long-term investment objective is to provide a rate of return
exceeding a composite of broad market equity and fixed income indices
(including the S&P 500 and certain Russell indices) utilizing both
third-party investment managers as well as investments directed by Mr.
Simmons. During the 18-year history of the CMRT through December 31, 2005,
the average annual rate of return has been approximately 14% (with a 36%
return for 2005). At December 31, 2005 the asset mix of the CMRT was 86% in
U.S. equity securities, 3% in U.S. fixed income securities, 7% in
international equity securities and 4% in cash and other investments. At
December 31, 2004, the asset mix of the CMRT was 77% in U.S. equity
securities, 14% in U.S. fixed income securities, 7% in international equity
securities and 2% in cash and other investments.
The Company regularly reviews its actual asset allocation for each of its
plans, and will periodically rebalance the investments in each plan to more
accurately reflect the targeted allocation when considered appropriate.
The Company's assumed long-term rates of return on plan assets for 2003,
2004 and 2005 were as follows:
2003 2004 2005
---- ---- ----
Germany 6.5% 6.0% 5.5%
Norway 6.0% 6.0% 5.5%
Canada 7.0% 7.0% 7.0%
U.S. 10.0% 10.0% 10.0%
The Company currently expects to utilize the same long-term rate of return
on plan asset assumptions in 2006 as it used in 2005 for purposes of determining
the 2006 defined benefit pension plan expense.
To the extent that a plan's particular pension benefit formula calculates
the pension benefit in whole or in part based upon future compensation levels,
the projected benefit obligations and the pension expense will be based in part
upon expected increases in future compensation levels. For all of the Company's
plans for which the benefit formula is so calculated, the Company generally
bases the assumed expected increase in future compensation levels upon average
long-term inflation rates for the applicable country.
In addition to the actuarial assumptions discussed above, because the
Company maintains defined benefit pension plans outside the U.S., the amount of
recognized defined benefit pension expense and the amount of prepaid and accrued
pension costs will vary based upon relative changes in foreign currency exchange
rates.
As discussed above, assumed discount rates and rate of return on plan
assets are re-evaluated annually. A reduction in the assumed discount rate
generally results in an actuarial loss, as the actuarially-determined present
value of estimated future benefit payments will increase. Conversely, an
increase in the assumed discount rate generally results in an actuarial gain. In
addition, an actual return on plan assets for a given year that is greater than
the assumed return on plan assets results in an actuarial gain, while an actual
return on plan assets that is less than the assumed return results in an
actuarial loss. Other actual outcomes that differ from previous assumptions,
such as individuals living longer or shorter than assumed in mortality tables
which are also used to determine the actuarially-determined present value of
estimated future benefit payments, changes in such mortality table themselves or
plan amendments, will also result in actuarial losses or gains. Under GAAP, all
of such actuarial gains and losses are not recognized in earnings currently, but
instead are deferred and amortized into income in the future as part of net
periodic defined benefit pension cost. However, any actuarial gains generated in
future periods would reduce the negative amortization effect of any cumulative
unrecognized actuarial losses, while any actuarial losses generated in future
periods would reduce the favorable amortization effect of any cumulative
unrecognized actuarial gains.
During 2005, all of the Company's defined benefit pension plans generated a
net actuarial loss of $95.3 million. This actuarial loss resulted primarily from
the general overall reduction in the assumed discount rates as well as the
unfavorable effect of using updated mortality tables (which generally reflect
individuals living longer than prior mortality tables used), partially offset by
an actual return on plan assets in excess of the assumed return.
While actuarial gains and losses are deferred and amortized into income in
future periods, as discussed above, GAAP also requires that a minimum amount of
accrued pension cost be recognized in a statement of financial position for any
plans for which the accumulated benefit obligation is less than the fair value
of plan assets. To the extent GAAP accounting would otherwise result in an
accrued pension cost balance for such plans that was less than the excess of the
aggregate accumulated benefit obligation over the value of the related plan
assets, GAAP then requires that such excess be recognized as a component of the
consolidated accrued pension cost, with the offset to such additional accrued
pension cost (commonly referred to as an "additional minimum liability")
recognized (i) first as an intangible asset up to specified amounts (referred to
as "unrecognized net pension obligations" in the Company's balance sheet and
then (ii) second as part of accumulated other comprehensive income (loss). At
December 31, 2005, and primarily as a result of the aggregate $95.3 million
actuarial loss generated during 2005 as discussed above, the amount of the
additional minimum liability required to be recognized by the Company increased
by approximately $87 million at December 31, 2005 as compared to December 31,
2004, resulting in the Company recognized aggregate accrued pension cost
(current and noncurrent) of $140.2 million at December 31, 2005 as compared to
$57.0 million at December 31, 2004.
Based on the actuarial assumptions described above and the Company's
current expectation for what actual average foreign currency exchange rates will
be during 2006, the Company expects its defined benefit pension expense will
approximate $19 million in 2006. In comparison, the Company expects to be
required to make approximately $18 million of contributions to such plans during
2006.
As noted above, defined benefit pension expense and the amounts recognized
as accrued pension costs are based upon the actuarial assumptions discussed
above. The Company believes all of the actuarial assumptions used are reasonable
and appropriate. If the Company had lowered the assumed discount rate by 25
basis points for all of its plans as of December 31, 2005, the Company's
aggregate projected benefit obligations would have increased by approximately
$15.2 million at that date, and the Company's defined benefit pension expense
would be expected to increase by approximately $2.0 million during 2006.
Similarly, if the Company lowered the assumed long-term rate of return on plan
assets by 25 basis points for all of its plans, the Company's defined benefit
pension expense would be expected to increase by approximately $600,000 during
2006.
OPEB plans. Certain subsidiaries of the Company in the U.S. and Canada
currently provide certain health care and life insurance benefits for eligible
retired employees. See Note 14 to the Consolidated Financial Statements. The
Company accounts for such OPEB costs under SFAS No. 106, "Employers Accounting
for Postretirement Benefits other than Pensions." Under SFAS No. 106, OPEB
expense and accrued OPEB costs are based on certain actuarial assumptions,
principally the assumed discount rate and the assumed rate of increases in
future health care costs. The Company recognized consolidated OPEB income of
approximately $133,000 in 2003 and consolidated OPEB cost of approximately
$455,000 in 2004 and $239,000 in 2005. Similar to defined benefit pension
benefits, the amount of funding will differ from the expense recognized for
financial reporting purposes, and contributions to the plans to cover benefit
payments aggregated $1.0 million in each of 2003 and 2004 and approximately $1.3
million in 2005. Substantially all of the Company's accrued OPEB cost relates to
benefits being paid to current retirees and their dependents, and no material
amount of OPEB benefits are being earned by current employees. As a result, the
amount recognized for OPEB expense for financial reporting purposes has been,
and is expected to continue to be, significantly less than the amount of OPEB
benefit payments made each year. Accordingly, the amount of accrued OPEB expense
has been, and is expected to continue to, decline gradually.
The assumed discount rates the Company utilizes for determining OPEB
expense and the related accrued OPEB obligations are generally based on the same
discount rates the Company utilizes for its U.S. and Canadian defined benefit
pension plans.
In estimating the health care cost trend rate, the Company considers its
actual health care cost experience, future benefit structures, industry trends
and advice from its third-party actuaries. During each of the past three years,
the Company has assumed that the relative increase in health care costs will
generally trend downward over the next several years, reflecting, among other
things, assumed increases in efficiency in the health care system and
industry-wide cost containment initiatives. For example, at December 31, 2005,
the expected rate of increase in future health care costs ranges from 9% in
2006, declining to 5% to 5.5% in 2009 and thereafter.
Based on the actuarial assumptions described above and the Company's
current expectation for what actual average foreign currency exchange rates will
be during 2006, the Company expects its consolidated OPEB expense will
approximate $800,000 in 2006. In comparison, the Company expects to be required
to make approximately $790,000 of contributions to such plans during 2006.
As noted above, OPEB expense and the amount recognized as accrued OPEB
costs are based upon the actuarial assumptions discussed above. The Company
believes all of the actuarial assumptions used are reasonable and appropriate.
If the Company had lowered the assumed discount rate by 25 basis points for all
of its OPEB plans as of December 31, 2005, the Company's aggregate projected
benefit obligations would have increased by approximately $400,000 at that date,
and the Company's OPEB expense would be expected to increase by less than
$50,000 during 2006. Similarly, if the assumed future health care cost trend
rate had been increased by 100 basis points, the Company's accumulated OPEB
obligations would have increased by approximately $1.4 million at December 31,
2005, and OPEB expense would have increased by $100,000 in 2005.
LIQUIDITY AND CAPITAL RESOURCES
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 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 will 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) fund major capital expenditures or
the acquisition of other assets outside the ordinary course of business or (iii)
pay dividends.
At December 31, 2005, the Company's indebtedness was substantially
comprised of $449 million related to KII's Senior Secured Notes due in 2009 and
$11.5 million related to Kronos' U.S. $50 million revolving credit facility
("U.S. Credit Facility") due in September 2008. Accordingly, the Company does
not currently expect that a significant amount of its cash flows from operating
activities generated during 2006 will be required to be used to repay
indebtedness during 2006.
Consolidated cash flows
The Company's consolidated cash flows for each of the past three years are
presented below:
Years ended December 31,
------------------------------------------
2003 2004 2005
---- ---- ----
(in millions)
Operating activities $ 107.6 $ 151.0 $ 97.8
Investing activities (35.4) (39.8) (39.6)
Financing activities (61.8) (108.8) (44.8)
------- ------- -------
Net cash provided by operating,
investing and financing activities $ 10.4 $ 2.4 $ 13.4
======= ======= =======
Operating cash flows. 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, non-cash interest expense and deferred
income taxes. Non-cash interest expense relates to 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
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. In addition, the amount of such periodic
expense generally differs from the outflows of cash required to be currently
paid for such benefits.
Certain other items included in the determination of net income have no
impact on cash flows from operating activities, but such items do impact cash
flows from investing activities (although their impact on such cash flows
differs from their impact on net income). For example, realized gains and losses
from the disposal of long-lived assets are included in the determination of net
income, although the proceeds from any such disposal are shown as part of cash
flows from investing activities.
Changes in product pricing, production volumes and customer demand, among
other things, can significantly affect the liquidity of the Company. 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. Relative changes in accounts receivable are affected by, among other
things, the timing of sales and the collection of the resulting receivable.
Relative changes in inventories, 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.
Cash flows provided from operating activities decreased from $151.0 million
in 2004 to $97.8 million in 2005. This $53.2 million decrease was due primarily
to the net effect of (i) lower net income of $243.8 million, (ii) higher
deferred income taxes of $289.8 million, (iii) lower depreciation and
amortization expense of approximately $500,000, (iv) lower net distributions
from Kronos' TiO2 manufacturing joint venture of $3.8 million, (v) a higher
amount of net cash used to fund changes in the Company's inventories,
receivables, payables, accruals and accounts with affiliates of $67.9 million
and (vi) higher cash paid for income taxes of $53.7 million, due primarily to
aggregate income tax refunds of $44.7 million received in 2004.
Cash flows from operating activities increased from $107.7 million in 2003
to $151.0 million in 2004. This $43.3 million increase was due primarily to the
effect of (i) higher net income of $227.3 million, (ii) a larger deferred income
tax benefit of $299.8 million, (iii) higher depreciation and amortization
expense of $4.6 million, (iv) higher net distributions from the TiO2
manufacturing joint venture of $7.7 million, (v) a higher amount of net cash
generated from relative changes in the Company's inventories, receivables,
payables and accruals and accounts with affiliates of $34.9 million in 2004 as
compared to 2003 and (vi) higher cash received for income taxes of $25.3
million.
The Company's average days sales outstanding ("DSO") decreased from 60 days
at December 31, 2004 to 55 days at December 31, 2005, due to the timing of
collections. At December 31, 2005, the average number of days in inventory
("DII") increased to 102 days from 97 days at December 31, 2004 due to the
effects of higher production volume and lower sales volume.
Investing cash flows. The Company's capital expenditures were $35.2
million, $39.3 million and $43.4 million in 2003, 2004 and 2005, respectively.
In addition, the Company purchased additional shares of its majority-owned
French subsidiary for $575,000 in 2004, and the Company received $3.5 million in
2005 from the sale of its passive interest in a Norwegian smelting operations.
The Company's capital expenditures during the past three years include an
aggregate of approximately $15 million ($4 million in 2005) for the Company's
ongoing environmental protection and compliance programs. The Company's
estimated 2006 capital expenditures are $41 million and include approximately $6
million in the area of environmental protection and compliance.
Financing cash flows. During 2005, the Company (i) repaid euro 10 million
($12.9 million when repaid) under its European Credit Facility, (ii) borrowed
$47.3 million and repaid $35.8 million under its U.S. credit facility and (iii)
entered into additional capital lease agreements for certain mining equipment
for the equivalent of approximately $4.4 million. During 2004, (i) KII issued an
additional euro 90 million principal amount of it Senior Secured Notes at 107%
of par (equivalent to $130 million when issued) and (ii) KII's operating
subsidiaries in Germany and Belgium borrowed an aggregate of euro 90 million
($112 million when borrowed) of borrowings under its European Credit Facility,
of which euro 80 million ($100 million when repaid) were subsequently repaid.
On September 24, 2004, NL completed the acquisition of the shares of common
stock of CompX International Inc. previously held by Valhi and Valcor, Inc., a
wholly-owned subsidiary of Valhi. The purchase price for these shares was paid
by NL's transfer to Valhi and Valcor of an aggregate $168.6 million of NL's $200
million long-term note receivable from Kronos. In October 2004, Valcor
distributed its note receivable from Kronos to Valhi, and subsequently Kronos
prepaid $100.0 million on the note payable to Valhi (including accrued interest)
principally using available cash on hand. In November 2004, the remaining
balances due under these notes were repaid primarily using the funds raised from
the issuance of euro 90 million principal amount of KII's Senior Secured Notes,
and the notes were cancelled.
In March 2003, the Company's operating subsidiaries in Germany, Belgium and
Norway borrowed euro 15 million ($16.1 million when borrowed), in April 2003,
repaid NOK 80 million ($11.0 million when repaid) and in the third quarter of
2003, repaid euro 30.0 million ($33.9 million when repaid) under its European
Credit Facility.
Deferred financing costs of $2.0 million paid in 2004 for the Senior
Secured Notes, the European Credit Facility and the Company's U.S. revolving
credit facility are being amortized over the life of the respective agreements
and are included in other noncurrent assets as of December 31, 2005.
Cash dividends paid during 2003, 2004 and 2005 totaled $7.0 million, $48.9
million and $48.9 million, respectively. On February 21, 2006, the Company's
Board of Directors declared a regular quarterly dividend of $.25 per share to
stockholders of record as of March 10, 2006 to be paid on March 27, 2006. The
declaration and payment of future dividends is discretionary, and the amount, if
any, will be dependent upon the Company's results of operations, financial
condition, contractual restrictions and other factors deemed relevant by the
Company's Board of Directors.
Cash flows related to capital contributions and other transactions with
affiliates aggregated a net cash inflow of $19.7 million in 2003. Such amounts
related principally to loans that Kronos made to affiliates (such notes
receivable from affiliates being reported as reductions to Kronos' stockholders'
equity, and therefore considered financing cash flows). Additionally, settlement
of the above-mentioned notes receivable from affiliates was not then currently
contemplated in the foreseeable future.
Provisions contained in certain of Kronos' credit agreements could result
in the acceleration of the applicable indebtedness prior to its stated maturity.
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.
KII's assets consist primarily of investments in its operating
subsidiaries, and its 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 obligation, or otherwise. None of its
subsidiaries have guaranteed the Senior Secured Notes, although KII 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.
Off-balance sheet financing. Other than operating lease commitments
disclosed in Note 16 to the Consolidated Financial Statements, the Company is
not party to any material off-balance sheet financing arrangements.
Cash, cash equivalents, restricted cash and restricted marketable debt
securities and borrowing availability. At December 31, 2005, the Company had
current cash and cash equivalents aggregating $72.0 million ($67.5 million held
by non-U.S. subsidiaries). At December 31, 2005, the Company's U.S. and non-U.S.
subsidiaries had current restricted cash equivalents of $1.4 million and
noncurrent restricted marketable debt securities of $2.6 million. At December
31, 2005, certain of the Company's subsidiaries had approximately $139 million
available for borrowing with approximately $105 million available under non-U.S.
credit facilities (including approximately $92 million under the European Credit
Facility and $13 million under its Canadian credit facility) and approximately
$34 million available under the U.S. Credit Facility (based on borrowing
availability). At December 31, 2005, KII had approximately $92 million available
for payment of dividends and other restricted payments as defined in the
indenture for the Senior Secured Notes.
Based upon the Company's expectations for the TiO2 industry and anticipated
demands on the Company's cash resources as discussed herein, (including debt
refinancing expectations) the Company expects to have sufficient liquidity to
meet its short-term obligations (defined as the twelve-month period ending
December 31, 2006) and its long-term obligations (defined as the five-year
period ending December 31, 2010, the time period for which the Company generally
does long-term budgeting), including operations, capital expenditures, debt
service and current dividend policy. To the extent that actual developments
differ from the Company's expectations, the Company's liquidity could be
adversely affected.
Legal proceedings and environmental matters. See Note 16 to the
Consolidated Financial Statements for certain legal proceedings and
environmental matters with respect to the Company.
Foreign operations. As discussed above, the Company has substantial
operations located outside the United States for which the functional currency
is not the U.S. dollar. As a result, the reported amount 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. At December 31, 2005, the Company had substantial net assets denominated
in the euro, Canadian dollar, Norwegian kroner and United Kingdom pound
sterling.
Other. 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 in the past has sought, and in the future may seek,
to reduce, refinance, repurchase or restructure indebtedness; raise additional
capital; issue additional securities; 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, the Company may review opportunities for the acquisition, divestiture,
joint venture or other business combinations in the chemicals or other
industries, as well as the acquisition of interests in related companies. In the
event of any such transaction, the Company may consider using available cash,
issuing equity securities or increasing its indebtedness to the extent permitted
by the agreements governing the Company's existing debt. See Note 8 to the
Consolidated Financial Statements.
Non-GAAP financial measures. In an effort to provide investors with
additional information regarding the Company's results as determined by GAAP,
Kronos has disclosed certain non-GAAP information which the Company believes
provides useful information to investors. As discussed above, the Company
discloses percentage changes in its average TiO2 prices in billing currencies,
which excludes the effects of foreign currency translation. Such disclosure of
the percentage change in Kronos' average TiO2 selling price in billing
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 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 using actual exchange rates
prevailing during the respective periods.
Summary of debt and other contractual commitments
As more fully described in the notes to the Consolidated Financial
Statements, the Company is a party to various debt, lease and other agreements
which contractually and unconditionally commit the Company to pay certain
amounts in the future. See Notes 8, 15 and 16 to the Consolidated Financial
Statements. The Company's obligation for the purchase of TiO2 feedstock is more
fully described in Note 16 to the Consolidated Financial Statements and above in
"Business - raw materials." The following table summarizes such contractual
commitments of the Company and its consolidated subsidiaries as of December 31,
2005 by the type and date of payment.
Payment due date
----------------------------------------------------------------------
2011 and
Contractual commitment 2006 2007/2008 2009/2010 after Total
---------------------- ---- --------- --------- --------- ------
(In millions)
Third-party indebtedness(1) $ 1.0 $ 13.2 $ 451.1 $ - $ 465.3
Interest payments on third-party
indebtedness 39.9 79.2 38.8 - 157.9
Operating leases 4.8 6.6 3.7 21.1 36.2
Fixed asset acquisitions 7.4 - - - 7.4
Long-term supply contracts for the
purchase of TiO2 feedstock 194.6 312.7 173.5 - 680.8
Estimated tax obligations 24.4 - - - 24.4
------- -------- ------- ------- --------
$ 272.1 $ 411.7 $ 667.1 $ 21.1 $1,372.0
======= ======== ======= ======= ========
_____________________________
(1) Primarily relates to KII's Senior Secured Notes. See Item 7A, "Quantitative
and Qualitative Disclosures about Market Risk" and Note 8 to the
Consolidated Financial Statements.
The timing and amount shown for the Company's commitments related to
indebtedness (principal and interest), operating leases, fixed asset
acquisitions, long-term supply contracts and other are based upon the
contractual payment amount and the contractual payment date for such
commitments. With respect to revolving credit facilities, the amount shown for
indebtedness is based upon the actual amount outstanding at December 31, 2005,
and the amount shown for interest for any outstanding variable-rate indebtedness
is based upon the December 31, 2005 interest rate and assumes that such
variable-rate indebtedness remains outstanding until the maturity of the
facility. The amount shown for income taxes is the consolidated amount of income
taxes payable at December 31, 2005, which is assumed to be paid during 2006. A
significant portion of the amount shown for indebtedness relates to KII's Senior
Secured Notes ($449.3 million at December 31, 2005). Such indebtedness is
denominated in euro. See Item 7A - "Quantitative and Qualitative Disclosures
About Market Risk" and Note 8 to the Consolidated Financial Statements.
Kronos' contracts for the purchase of TiO2 feedstock contain fixed
quantities that Kronos is required to purchase, although certain of these
contracts allow for an upward or downward adjustment in the quantity purchased,
generally no more than 10%, based on the Company's feedstock requirements. The
pricing under these agreements is generally based on a fixed price with price
escalation clauses primarily based on consumer price indices, as defined in the
respective contracts. The timing and amount shown for the Company's commitments
related to the long-term supply contracts for TiO2 feedstock is based upon the
Company's current estimate of the quantity of material that will be purchased in
each time period shown, and the payment that would be due based upon such
estimated purchased quantity and an estimate of the effect of the price
escalation clause. The actual amount of material purchased, and the actual
amount that would be payable by the Company, may vary from such estimated
amounts.
The above table does not reflect any amounts that the Company might pay to
fund its defined benefit pension plans and OPEB plans, as the timing and amount
of any such future fundings are unknown and dependent on, among other things,
the future performance of defined benefit pension plan assets, interest rate
assumptions and actual future retiree medical costs. Such defined benefit
pension plans and OPEB plans are discussed above in greater detail. The table
also does not reflect any amounts that the Company might pay related to its
asset retirement obligations as the terms and amounts of such future fundings
are unknown. See Notes 14 and 19 to the Consolidated Financial Statements.
The above table also does not reflect any amounts the Company might pay to
acquire TiO2 from its TiO2 manufacturing joint venture, as the timing and amount
of such purchases are unknown and dependent on, among other things, the amount
of TiO2 produced by the joint venture in the future and the joint venture's
future cost of producing such TiO2. However, the table does include amounts
related to Kronos' share of the joint venture's ore requirements necessary to
produce TiO2 for Kronos. See Item 1, "Business" and Note 6 to the Consolidated
Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General. The Company is exposed to market risk from changes in foreign
currency exchange rates, interest rates and equity security prices. In the past,
the Company has periodically entered into currency forward contracts, interest
rate swaps or other types of contracts in order to manage a portion of its
interest rate market risk. Otherwise, the Company does not generally enter into
forward or option contracts to manage such market risks, nor does the Company
enter into any such contract or other type of derivative instrument for trading
or speculative purposes. Other than as described below, the Company was not a
party to any material forward or derivative option contract related to foreign
exchange rates, interest rates or equity security prices at December 31, 2004
and 2005. See Notes 1 and 17 to the Consolidated Financial Statements.
Interest rates. The Company is exposed to market risk from changes in
interest rates, primarily related to indebtedness. At December 31, 2004 and
2005, substantially all of the Company's aggregate indebtedness was comprised of
fixed-rate instruments. The large percentage of fixed-rate debt instruments
minimizes earnings volatility that would result from changes in interest rates.
The following table presents principal amounts and weighted average interest
rates for the Company's aggregate outstanding indebtedness at December 31, 2005.
At December 31, 2004 and 2005, all outstanding fixed-rate indebtedness was
denominated in U.S. dollars or the euro and the outstanding variable rate
borrowings were denominated in euros. Information shown below for such foreign
currency denominated indebtedness is presented in its U.S. dollar equivalent at
December 31, 2005 using an exchange rate of 1.18 U.S. dollars per euro. Certain
Norwegian kroner denominated capital leases totaling $4.5 million in 2005 have
been excluded from the table below.
Amount
-----------------------
Carrying Fair Interest Maturity
Indebtedness value value rate date
------------ --------- ------- --------- ----------
(In millions)
Fixed-rate indebtedness -
euro-denominated KII
Senior Secured Notes $ 449.3 $ 463.6 8.9% 2009
======== ========
Variable rate indebtedness -
dollar-denominated U.S.
Credit Facility $ 11.5 $ 11.5 7.0% 2008
======== ========
At December 31, 2004, fixed rate indebtedness aggregated $519.2 million
(fair value - $549.1 million) with a weighted-average interest rate of 8.9%. All
of such fixed rate indebtedness was denominated in euros. Variable indebtedness
at December 31, 2004 was $13.6 million with a weighted-average interest rate of
3.99%.
Foreign currency exchange rates. The Company is exposed to market risk
arising from changes in foreign currency exchange rates as a result of
manufacturing and selling its products worldwide. Earnings are primarily
affected by fluctuations in the value of the U.S. dollar relative to the euro,
the Canadian dollar, the Norwegian kroner and the United Kingdom pound sterling.
As described above, at December 31, 2005, the Company had the equivalent of
$449.3 million of outstanding euro-denominated indebtedness (2004 - the
equivalent of $532.8 million of euro-denominated indebtedness). The potential
increase in the U.S. dollar equivalent of the principal amount outstanding
resulting from a hypothetical 10% adverse change in exchange rates at such date
would be approximately $44.4 million at December 31, 2005 (2004 - $52.4
million).
Certain of the Company's sales generated by its non-U.S. operations are
denominated in U.S. dollars. The Company periodically uses currency forward
contracts to manage a very nominal portion of foreign exchange rate risk
associated with receivables denominated in a currency other than the holder's
functional currency or similar exchange rate risk associated with future sales.
The Company has not entered into these contracts for trading or speculative
purposes in the past, nor does the Company currently anticipate entering into
such contracts for trading or speculative purposes in the future. Derivatives
used to hedge forecasted transactions and specific cash flows associated with
foreign currency denominated financial assets and liabilities which meet the
criteria for hedge accounting are designated as cash flow hedges. Consequently,
the effective portion of gains and losses is deferred as a component of
accumulated other comprehensive income and is recognized in earnings at the time
the hedged item affects earnings. Contracts that do not meet the criteria for
hedge accounting are marked-to-market at each balance sheet date with any
resulting gain or loss recognized in income currently as part of net currency
transactions. During 2004 and 2005, the Company has not used hedge accounting
for any of its contracts. At December 31, 2005, the Company held a series of
short-term currency forward contracts, which mature at various dates through
March 31, 2006, to exchange an aggregate of U.S. $7.5 million for an equivalent
amount of Canadian dollars at an exchange rate of Cdn. $1.19 per U.S. dollar. At
December 31, 2005, the actual exchange rate was Cdn. $1.16 per U.S. dollar. The
estimated fair value of such foreign currency forward contracts was not material
at December 31, 2005. The Company held no such currency forward contracts at
December 31, 2004 and held no other significant derivative contracts at December
31, 2004 or 2005.
Other. The Company believes there may be a certain amount of incompleteness
in the sensitivity analyses presented above. For example, the hypothetical
effect of changes in exchange rates discussed above ignores the potential effect
on other variables which affect the Company's results of operations and cash
flows, such as demand for the Company's products, sales volumes and selling
prices and operating expenses. Accordingly, the amounts presented above are not
necessarily an accurate reflection of the potential losses the Company would
incur assuming the hypothetical changes in exchange rates were actually to
occur.
The above discussion and estimated sensitivity analysis amounts include
forward-looking statements of market risk which assume hypothetical changes in
currency exchange rates. Actual future market conditions will likely differ
materially from such assumptions. Accordingly, such forward-looking statements
should not be considered to be projections by the Company of future events,
gains or losses.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item is contained in a separate section
of this Annual Report. See "Index of Financial Statements and Schedules" (page
F-1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 Exchange Act Rule 13a-15(e), 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, have evaluated the Company's disclosure
controls and procedures as of December 31, 2005. Based upon their evaluation,
these executive officers have concluded that the Company's disclosure controls
and procedures are effective as of December 31, 2005.
Scope of Management's Report on Internal Control Over Financial Reporting.
The Company also maintains internal control over financial reporting. The term
"internal control over financial reporting," as defined by Exchange Act Rule
13a-15(f), 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.
Section 404 of the Sarbanes-Oxley Act of 2002 requires the Company to
include a management report on internal control over financial reporting in this
Annual Report on Form 10-K for the year ended December 31, 2005. The Company's
independent registered public accounting firm is also required to audit the
Company's internal control over financial reporting as of December 31, 2005.
As permitted by the SEC, the Company's assessment of internal control over
financial reporting excludes (i) internal control over financial reporting of
its equity method investees and (ii) internal control over the preparation of
the Company's financial statement schedules required by Article 12 of Regulation
S-X. See Note 6 to the Consolidated Financial Statements and the index of
financial statements and schedules on page F-1 of this Annual Report. However,
our assessment of internal control over financial reporting with respect to the
Company's equity method investees did include our controls over the recording of
amounts related to our investments that are recorded in our consolidated
financial statements, including controls over the selection of accounting
methods for our investments, the recognition of equity method earnings and
losses and the determination, valuation and recording of our investment account
balances.
Changes in Internal Control Over Financial Reporting. There has been no
change to the Company's internal control over financial reporting during the
quarter ended December 31, 2005 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
Management's Report on Internal Control Over Financial Reporting. The
Company's management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rules 13a-15(f) and 15d-15(f). The Company's evaluation of the effectiveness
of its internal control over financial reporting is based upon the criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (commonly referred to as
the "COSO" framework). Based on the Company's evaluation under that framework,
management of the Company has concluded that the Company's internal control over
financial reporting was effective as of December 31, 2005.
PricewaterhouseCoopers LLP, the independent registered public accounting
firm that has audited the Company's consolidated financial statements included
in this Annual Report, has audited management's assessment of the effectiveness
of the Company's internal control over financial reporting as of December 31,
2005, as stated in their report which is included in this Annual Report on Form
10-K.
Certifications. The Company's chief executive officer is required to
annually file a certification with the New York Stock Exchange ("NYSE"),
certifying the Company's compliance with the corporate governance listing
standards of the NYSE. During 2005, the Company's chief executive officer filed
such annual certification with the NYSE. The 2005 certification was qualified in
that, while the Company had publicly disclosed in its latest proxy statement
that the audit committee chairman presided at meetings of its independent
directors and how its stockholders might communicate directly with the audit
committee chairman, it had not publicly disclosed how other interested parties
could communicate with the presiding director of the non-management directors
and had not established procedures as to who presided at meeting of the
non-management directors. The Company remediated this qualification by amending
its corporate governance guidelines on October 20, 2005 and filing a Current
Report on Form 8-K with the SEC on November 30, 2005 disclosing that the audit
committee chairman presided at meetings of the non-management directors and how
stockholders and other interested parties might communicate with the presiding
director. The Company's chief executive officer and chief financial officer are
also required to, among other things, quarterly file certifications with the SEC
regarding the quality of the Company's public disclosures, as required by
Section 302 of the Sarbanes-Oxley Act of 2002. The certifications for the
quarter ended December 31, 2005 have been filed as exhibits 31.1 and 31.2 to
this Annual Report on Form 10-K.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to the
Company's definitive Proxy Statement to be filed with the SEC pursuant to
Regulation 14A within 120 days after the end of the fiscal year covered by this
report (the "Kronos Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Kronos Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Kronos Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Kronos Proxy Statement. See also Note 15 to the Consolidated Financial
Statements.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by the Item is incorporated by reference to the
Kronos Proxy Statement.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) and (c) Financial Statements and Schedules
The Registrant
The consolidated financial statements and schedules of the Registrant
listed on the accompanying Index of Financial Statements and Schedules (see
page F-1) are filed as part of this Annual Report.
(b) Exhibits
Included as exhibits are the items listed in the Exhibit Index. The Company
will furnish a copy of any of the exhibits listed below upon payment of
$4.00 per exhibit to cover the costs to the Company of furnishing the
exhibits. Pursuant to Item 601(b)(4)(iii) of Regulation S-K, any instrument
defining the rights of holders of long-term debt issues and other
agreements related to indebtedness which do not exceed 10% of consolidated
total assets as of December 31, 2005 will be furnished to the Commission
upon request.
The Company will also furnish, without charge, a copy of its Code of
Business Conduct and Ethics, as adopted by the board of directors on
February 19, 2004, 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, TX 75240.
Item No. Exhibit Index
- -------- -------------
2.1 Form of Distribution Agreement between NL Industries, Inc. and Kronos
Worldwide, Inc. - incorporated by reference to Exhibit 2.1 of the
Registration Statement on Form 10 of the Registrant (File No.
001-31763).
3.1 First Amended and Restated Certificate of Incorporation of Kronos
Worldwide, Inc. - incorporated by reference to Exhibit 3.1 of the
Registration statement on Form 10 of the Registrant (File No.
001-31763).
3.2 Amended and Restated Bylaws of Kronos Worldwide, Inc. - incorporated
by reference to Exhibit 3.2 of the Registration statement on Form 10
of the Registrant (File No. 001-31763).
4.1 Indenture governing the 8.875% Senior Secured Notes due 2009 dated as
of June 28, 2002, between Kronos International, Inc. and The Bank of
New York, as trustee - incorporated by reference to Exhibit 4.1 to the
Quarterly Report on Form 10-Q of NL Industries, Inc. for the quarter
ended June 30, 2002.
4.2 Form of certificate of 8.875% Senior Secured Note due 2009 (included
as Exhibit A to Exhibit 4.1) - incorporated by reference to Exhibit
4.1 to the Quarterly Report on Form 10-Q of NL Industries, Inc. (File
No. 1-640) for the quarter ended June 30, 2002.
4.3 Form of certificate of 8.875% Senior Secured Note due 2009 (included
as Exhibit B to Exhibit 4.1) - incorporated by reference to Exhibit
4.1 to the Quarterly Report on Form 10-Q of NL Industries, Inc. (File
No. 1-640) for the quarter ended June 30, 2002.
4.4 Purchase Agreement, dated as of June 19, 2002, among Kronos
International, Inc., Deutsche Bank AG London, Dresdner Bank AG, London
Branch, and Commerzbank Aktiengesellschaft, London Branch -
incorporated by reference to Exhibit 4.4 to the Quarterly Report on
Form 10-Q of NL Industries, Inc. for the quarter ended June 30, 2002.
4.5 Purchase Agreement dated November 18, 2004 between Kronos
International, Inc. and Deutsche Bank AG London (incorporated by
reference to Exhibit 4.4 to the Current Report on Form 8-K of Kronos
International, Inc. (File No. 333-100047) dated November 24, 2004.
4.6 Form of Registration Rights Agreement, dated as of November 26, 2004
between Kronos International, Inc. and Deutsche Bank AG London
(incorporated by reference to Exhibit 4.5 to the Current Report on
Form 8-K of Kronos International, Inc. (File No. 333-100047) dated
November 24, 2004.
4.7 Collateral Agency Agreement, dated as of June 28, 2002, among The Bank
of New York, U.S. Bank, N.A. and Kronos International, Inc. (filed
herewith only with respect to Sections 2, 5, 6 and 8 thereof) -
incorporated by reference to Exhibit 4.6 to the Quarterly Report on
Form 10-Q of NL Industries, Inc. for the quarter ended June 30, 2002.
4.8 Security Over Shares Agreement (shares of Kronos Limited), dated June
28, 2002, between Kronos International, Inc. and The Bank of New York,
U.S., as trustee - incorporated by reference to Exhibit 4.7 to the
Quarterly Report on Form 10-Q of NL Industries, Inc. for the quarter
ended June 30, 2002.
4.9 Pledge of Shares (shares of Kronos Denmark ApS), dated June 28, 2002,
between Kronos International, Inc. and U.S. Bank, N.A., as collateral
agent - incorporated by reference to Exhibit 4.8 to the Quarterly
Report on Form 10-Q of NL Industries, Inc. for the quarter ended June
30, 2002.
4.10 Pledge Agreement (pledge of shares of Societe Industrielle du Titane,
S.A.), dated June 28, 2002, between Kronos International, Inc. and
U.S. Bank, N.A., as collateral agent - incorporated by reference to
Exhibit 4.9 to the Quarterly Report on Form 10-Q of NL Industries,
Inc. for the quarter ended June 30, 2002.
4.11 Partnership Interest Pledge Agreement (pledge of fixed capital
contribution in Kronos Titan GmbH & Co. OHG), dated June 28, 2002,
between Kronos International, Inc. and U.S. Bank, N.A., as collateral
agent - incorporated by reference to Exhibit 4.10 to the Quarterly
Report on Form 10-Q of NL Industries, Inc. for the quarter ended June
30, 2002.
10.1 Form of Tax Agreement between Valhi, Inc. and Kronos Worldwide, Inc. -
incorporated by reference to Exhibit 10.1 of the Registration
statement on Form 10 of the Registrant (File No. 001-31763).
10.2 Intercorporate Services Agreement by and between Contran Corporation
and Kronos Worldwide, Inc., effective as of January 1, 2004 -
incorporated by reference to Exhibit 10.2 to the Quarterly Report on
Form 10-Q of the Registrant (File No. 001-31763) for the quarter ended
March 31, 2004.
10.3 Promissory Note, dated September 24, 2004, made by Kronos Worldwide,
Inc. in favor of NL Industries, Inc. - incorporated by reference to
Exhibit 10.2 to a Current Report on Form 8-K of NL Industries, Inc.
(File No. 1-640) dated September 24, 2004.
10.4 Promissory Note, dated September 24, 2004, made by Kronos Worldwide,
Inc. in favor of Valcor, Inc. - incorporated by reference to Exhibit
99.1 to a Current Report on Form 8-K of NL Industries, Inc. (File No.
1-640) dated September 24, 2004.
10.5 Promissory Note, dated September 24, 2004, made by Kronos Worldwide,
Inc. in favor of Valhi, Inc. - incorporated by reference to Exhibit
99.2 to a Current Report on Form 8-K of NL Industries, Inc. (File No.
1-640) dated September 24, 2004.
10.6** Form of Kronos Worldwide, Inc. Long-Term Incentive Plan -
incorporated by reference to Exhibit 10.4 of the Registration
statement on Form 10 of the Registrant (File No. 001-31763).
10.7 Euro 80,000,000 Facility Agreement, dated June 25, 2002, among Kronos
Titan GmbH & Co. OHG, Kronos Europe S.A./N.V., Kronos Titan A/S and
Titania A/S, as borrowers, Kronos Titan GmbH & Co. OHG, Kronos Europe
S.A./N.V. and Kronos Norge AS, as guarantors, Kronos Denmark ApS, as
security provider, Deutsche Bank AG, as mandated lead arranger,
Deutsche Bank Luxembourg S.A., as agent and security agent, and KBC
Bank NV, as fronting bank, and the financial institutions listed in
Schedule 1 thereto, as lenders - incorporated by reference to Exhibit
10.1 to the Quarterly Report on Form 10-Q of NL Industries, Inc. for
the quarter ended June 30, 2002.
10.8 First Amendment Agreement, dated September 3, 2004, Relating to a
Facility Agreement dated June 25, 2002 among Kronos Titan GmbH, Kronos
Europe S.A./N.V., Kronos Titan AS and Titania A/S, as borrowers,
Kronos Titan GmbH, Kronos Europe S.A./N.V. and Kronos Norge AS, as
guarantors, Kronos Denmark ApS, as security provider, with Deutsche
Bank Luxembourg S.A., acting as agent - incorporated by reference to
Exhibit 10.1 of the Current Report on Form 8-K of the Registrant dated
November 17, 2004 (File No. 333-119639).
10.9 Second Amendment 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 of Kronos International,
Inc.s' Form 8-K dated June 14, 2005. Certain schedules, exhibits,
annexes and similar attachments to this Exhibit 10.9 have not been
filed; upon request, the Reporting Persons will furnish supplementally
to the Commission a copy of any omitted exhibit, annex or attachment.
10.10 Lease Contract, dated June 21, 1952, between Farbenfabrieken Bayer
Aktiengesellschaft and Titangesellschaft mit beschrankter Haftung
(German language version and English translation thereof)-
incorporated by reference to Exhibit 10.14 to the Annual Report on
Form 10-K of NL Industries, Inc. for the year ended December 31, 1985.
10.11 Contract on Supplies and Services, dated as of June 30, 1995, among
Bayer AG, Kronos Titan-GmbH & Co. OHG and Kronos International, Inc.
(English translation from German language document) - incorporated by
reference to Exhibit 10.1 to Quarterly Report on Form 10-Q of NL
Industries, Inc. for the quarter ended September 30, 1995.
10.12 Amendment dated August 11, 2003 to the Contract on Supplies and
Services among Bayer AG, Kronos Titan-GmbH & Co. OHG and Kronos
International (English translation of German language document) -
incorporated by reference to Exhibit 10.32 of the Registration
statement on Form 10 of the Registrant (File No. 001-31763).
10.13 Master Technology Exchange Agreement, dated as of October 18, 1993,
among Kronos Worldwide, Inc. (f/k/a Kronos, Inc.), Kronos Louisiana,
Inc., Kronos International, Inc., Tioxide Group Limited and Tioxide
Group Services Limited - incorporated by reference to Exhibit 10.8 to
the Quarterly Report on Form 10-Q of NL Industries, Inc. for the
quarter ended September 30, 1993.
10.14 Form of Assignment and Assumption Agreement, dated as of January 1,
1999, between Kronos Inc. (formerly known as Kronos (USA), Inc.) and
Kronos International, Inc. - incorporated by reference to Exhibit 10.9
to Kronos International, Inc.'s Registration Statement on Form S-4
(File No. 333-100047).
10.15 Form of Cross License Agreement, effective as of January 1, 1999,
between Kronos Inc. (formerly known as Kronos (USA), Inc.) and Kronos
International, Inc. - incorporated by reference to Exhibit to Kronos
International, Inc.'s Registration Statement on Form S-4 (File No.
333-100047).
10.16* Richards Bay Slag Sales Agreement dated May 1, 1995, between
Richards Bay Iron and Titanium (Proprietary) Limited and Kronos, Inc.
- incorporated by reference to Exhibit 10.17 to the Annual Report on
Form 10-K for NL Industries, Inc. for the year ended December 31,
1995.
10.17* Amendment to Richards Bay Slag Sales Agreement, dated May 1, 1999,
between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit 10.4 to the Annual
Report on Form 10-K for NL Industries, Inc. for the year ended
December 31, 1999.
10.18* Amendment to Richards Bay Slag Sales Agreement, dated June 1, 2001,
between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit 10.5 to the Annual
Report on Form 10-K for NL Industries, Inc. for the year ended
December 31, 2001.
10.19* Amendment to Richards Bay Slag Sales Agreement dated December 20,
2002 between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit 10.7 to the Annual
Report on Form 10-K for NL Industries, Inc. for the year ended
December 31, 2002.
10.20* Amendment to Richards Bay Slag Sales Agreement dated October 31,
2003 between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit 10.17 to the
Annual Report on Form 10-K of Kronos Worldwide, Inc. (File No.
001-31763) for the year ended December 31, 2003.
10.21 Agreement between Sachtleben Chemie GmbH and Kronos Titan-GmbH
effective December 30, 1986 - incorporated by reference to Exhibit
10.1 of Kronos International, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2002.
10.22 Supplementary Agreement to the Agreement of December 30, 1986 between
Sachtleben Chemie GmbH and Kronos Titan-GmbH dated May 3, 1996 -
incorporated by reference to Exhibit 10.2 of Kronos International,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended September
30, 2002.
10.23 Second Supplementary Agreement to the Contract dated December 30,
1986 between Sachtleben Chemie GmbH and Kronos Titan-GmbH dated
January 8, 2002 - incorporated by reference to Exhibit 10.3 of Kronos
International, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002.
10.24 Formation Agreement dated as of October 18, 1993 among Tioxide
Americas Inc., Kronos Louisiana, Inc. and Louisiana Pigment Company,
L.P. - incorporated by reference to Exhibit 10.2 to NL Industries,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended September
30, 1993.
10.25 Joint Venture Agreement dated as of October 18, 1993 between Tioxide
Americas Inc. and Kronos Louisiana, Inc. - incorporated by reference
to Exhibit 10.3 to NL Industries, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended September 30, 1993.
10.26 Kronos Offtake Agreement dated as of October 18, 1993 between Kronos
Louisiana, Inc. and Louisiana Pigment Company, L.P. - incorporated by
reference to Exhibit 10.4 to NL Industries, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993.
10.27 Amendment No. 1 to Kronos Offtake Agreement dated as of December 20,
1995 between Kronos Louisiana, Inc. and Louisiana Pigment Company,
L.P. - incorporated by reference to Exhibit 10.22 to NL Industries,
Inc.'s Annual Report on Form 10-K for the year ended December 31,
1995.
10.28 Tioxide Americas Offtake Agreement dated as of October 18, 1993
between Tioxide Americas Inc. and Louisiana Pigment Company, L.P. -
incorporated by reference to Exhibit 10.5 to NL Industries, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.29 Amendment No. 1 to Tioxide Americas Offtake Agreement dated as of
December 20, 1995 between Tioxide Americas Inc. and Louisiana Pigment
Company, L.P. - incorporated by reference to Exhibit 10.24 to NL
Industries, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1995.
10.30 TCI/KCI Output Purchase Agreement dated as of October 18, 1993
between Tioxide Canada Inc. and Kronos Canada, Inc. - incorporated by
reference to Exhibit 10.6 to NL Industries, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993.
10.31 TAI/KLA Output Purchase Agreement dated as of October 18, 1993
between Tioxide Americas Inc. and Kronos Louisiana, Inc. -
incorporated by reference to Exhibit 10.7 to NL Industries, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.32 Master Technology Exchange Agreement dated as of October 18, 1993
among Kronos Worldwide, Inc. (f/k/a Kronos, Inc.), Kronos Louisiana,
Inc., Kronos International, Inc., Tioxide Group Limited and Tioxide
Group Services Limited - incorporated by reference to Exhibit 10.8 to
NL Industries, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended September 30, 1993.
10.33 Parents' Undertaking dated as of October 18, 1993 between ICI
American Holdings Inc. and Kronos Worldwide, Inc. (f/k/a Kronos, Inc.)
- incorporated by reference to Exhibit 10.9 to NL Industries, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.34 Allocation Agreement dated as of October 18, 1993 between Tioxide
Americas Inc., ICI American Holdings, Inc., Kronos Worldwide, Inc.
(f/k/a Kronos, Inc.) and Kronos Louisiana, Inc. - incorporated by
reference to Exhibit 10.10 to NL Industries, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended September 30, 1993.
10.35 Insurance sharing agreement dated October 30, 2003 by and among CompX
International Inc., Contran Corporation, Keystone Consolidated
Industries, Inc., Titanium Metals Corp., Valhi, Inc., NL Industries,
Inc. and Kronos Worldwide, Inc. - incorporated by reference to Exhibit
10.48 to NL Industries, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 2003.
10.36** Summary of Consulting Arrangement beginning on August 1, 2003, as
amended between Lawrence A. Wigdor and Kronos Worldwide, Inc. -
incorporated by reference to Exhibit 10.2 to the Quarterly Report on
Form 10-Q of the Registrant for the quarter ended March 31, 2004.
21.1 Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP.
31.1 Certification.
31.2 Certification.
32.1 Certification.
___________________________________
* Portions of the exhibit have been omitted pursuant to a request for
confidential treatment.
** Management contract, compensatory plan or arrangement
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant)
By:/s/ Harold C. Simmons
-------------------------
Harold C. Simmons
March 16, 2006
(Chairman of the Board and
Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Harold C. Simmons /s/ Steven L. Watson
- --------------------------------- ---------------------------------------
Harold C. Simmons, March 16, 2006 Steven L. Watson, March 16, 2006
(Chairman of the Board and Chief (Director)
Executive Officer)
/s/ George E. Poston /s/ Glenn R. Simmons
- --------------------------------- ---------------------------------------
George E. Poston, March 16, 2006 Glenn R. Simmons, March 16, 2006
(Director) (Director)
/s/ C. H. Moore, Jr. /s/ Keith R. Coogan
- --------------------------------- ---------------------------------------
C. H. Moore, Jr., March 16, 2006 Keith R. Coogan, March 16, 2006
(Director) (Director)
/s/ R. Gerald Turner /s/ Gregory M. Swalwell
- --------------------------------- ---------------------------------------
R. Gerald Turner, March 16, 2006 Gregory M. Swalwell, March 16, 2006
(Director) (Vice President, Chief Financial
Officer, Principal Financial
Officer)
/s/ James W. Brown
---------------------------------------
James W. Brown, March 16, 2006
(Vice President, Controller,
Principal Accounting Officer)
KRONOS WORLDWIDE, INC.
Annual Report on Form 10-K
Items 8, 15(a) and 15(d)
Index of Financial Statements and Schedules
Financial Statements Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets - December 31, 2004 and 2005 F-4
Consolidated Statements of Income -
Years ended December 31, 2003, 2004 and 2005 F-6
Consolidated Statements of Comprehensive Income (Loss) -
Years ended December 31, 2003, 2004 and 2005 F-7
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 2003, 2004 and 2005 F-8
Consolidated Statements of Cash Flows -
Years ended December 31, 2003, 2004 and 2005 F-9
Notes to Consolidated Financial Statements F-11
Financial Statement Schedules
Schedule I - Condensed Financial Information of Registrant S-1
Schedule II - Valuation and Qualifying Accounts S-6
Schedules III and IV are omitted because they are not applicable.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Kronos Worldwide, Inc.:
We have completed integrated audits of Kronos Worldwide, Inc.'s 2004 and
2005 consolidated financial statements and of its internal control over
financial reporting as of December 31, 2005, and an audit of its 2003
consolidated financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Our opinions on Kronos
Worldwide, Inc.'s 2003, 2004 and 2005 consolidated financial statements and on
its internal control over financial reporting as of December 31, 2005, based on
our audits, are presented below.
Consolidated financial statements and financial statement schedules
- -------------------------------------------------------------------
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Kronos Worldwide, Inc. and its subsidiaries at December 31, 2004 and
2005, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2005 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedules listed in the accompanying index
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit of
financial statements includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
Internal control over financial reporting
- -----------------------------------------
Also, in our opinion, management's assessment, included in Management's
Report on Internal Control Over Financial Reporting appearing under Item 9A,
that the Company maintained effective internal control over financial reporting
as of December 31, 2005 based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO"), is fairly stated, in all material respects, based
on those criteria. Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal Control -
Integrated Framework issued by the COSO. The Company's management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audits of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company, (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) 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 financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Dallas, Texas
March 16, 2006
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2005
(In thousands, except per share data)
ASSETS
2004 2005
---- ----
Current assets:
Cash and cash equivalents $ 60,790 $ 72,029
Restricted cash 1,529 1,355
Accounts and other receivables 190,319 184,584
Receivables from affiliate 16 2
Refundable income taxes 3,272 1,053
Inventories 233,858 259,844
Prepaid expenses 4,529 4,290
Deferred income taxes 1,205 2,187
---------- ----------
Total current assets 495,518 525,344
---------- ----------
Other assets:
Investment in TiO2 manufacturing joint venture 120,251 115,308
Deferred income taxes 238,284 213,722
Other 32,340 25,638
---------- ----------
Total other assets 390,875 354,668
---------- ----------
Property and equipment:
Land 35,511 31,678
Buildings 196,983 184,800
Equipment 857,714 786,953
Mining properties 71,980 68,165
Construction in progress 16,753 13,457
---------- ----------
1,178,941 1,085,053
Less accumulated depreciation and amortization 712,051 666,133
---------- ----------
Net property and equipment 466,890 418,920
---------- ----------
$1,353,283 $1,298,932
========== ==========
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 2004 and 2005
(In thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
2004 2005
---- ----
Current liabilities:
Current maturities of long-term debt $ 13,792 $ 958
Accounts payable and accrued liabilities 170,009 165,545
Payable to affiliates 9,231 10,382
Income taxes 17,129 24,014
Deferred income taxes 2,722 4,211
---------- ----------
Total current liabilities 212,883 205,110
---------- ----------
Noncurrent liabilities:
Long-term debt 519,403 464,365
Deferred income taxes 60,081 53,383
Accrued pension cost 61,300 139,786
Accrued postretirement benefits cost 11,288 10,174
Other 17,407 16,055
---------- ----------
Total noncurrent liabilities 669,479 683,763
---------- ----------
Minority interest 76 75
---------- ----------
Stockholders' equity:
Preferred stock, $.01 par value; 100 shares
authorized; no shares issued or outstanding - -
Common stock, $.01 par value; 60,000 shares
authorized; 48,946 and 48,950 shares issued 489 489
Additional paid-in capital 1,060,643 1,061,539
Retained deficit (463,352) (441,295)
Accumulated other comprehensive loss:
Currency translation (88,181) (114,930)
Pension liabilities (38,754) (95,819)
---------- ----------
Total stockholders' equity 470,845 409,984
---------- ----------
$1,353,283 $1,298,932
========== ==========
Commitments and contingencies (Notes 13 and 16)
See accompanying notes to consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2003, 2004 and 2005
(In thousands, except per share data)
2003 2004 2005
---- ---- ----
Net sales $1,008,177 $1,128,600 $1,196,729
Cost of sales 739,237 866,313 869,877
---------- ---------- ----------
Gross margin 268,940 262,287 326,852
Selling, general and administrative expense 124,446 145,433 150,729
Other operating income (expense):
Currency transaction gains (losses), net (7,743) (3,949) 5,235
Disposition of property and equipment (480) (1,120) (1,506)
Other income 490 6,715 576
Corporate expense (4,140) (3,474) (4,985)
Other expense (128) (73) (108)
---------- ---------- ----------
Income from operations 132,493 114,953 175,335
Other income (expense):
Trade interest income 771 1,212 1,181
Interest income from affiliates 723 - -
Other interest income 180 961 874
Securities transaction gain - - 5,439
Interest expense to affiliates (1,887) (15,210) -
Other interest expense (33,002) (37,399) (44,686)
---------- ---------- ----------
Income before income taxes and
minority interest 99,278 64,517 138,143
Provision (benefit) for income taxes 11,657 (250,389) 67,125
---------- ---------- ----------
Income before minority interest 87,621 314,906 71,018
Minority interest 72 53 12
---------- ---------- ----------
Net income $ 87,549 $ 314,853 $ 71,006
========== ========== ==========
Net income per basic and diluted share $ 1.79 $ 6.43 $ 1.45
========== ========== ==========
Basic and diluted weighted average shares used in the
calculation of net income per share 48,943 48,945 48,948
========== ========== ==========
See accompanying notes to consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years ended December 31, 2003, 2004 and 2005
(In thousands)
2003 2004 2005
---- ---- ----
Net income $ 87,549 $ 314,853 $ 71,006
---------- ---------- ----------
Other comprehensive income (loss), net of tax:
Minimum pension liabilities adjustment (25,545) 272 (57,065)
Currency translation adjustment 15,073 44,828 (26,749)
---------- ---------- ----------
Total other comprehensive income (loss) (10,472) 45,100 (83,814)
---------- ---------- ----------
Comprehensive income (loss) $ 77,077 $ 359,953 $ (12,808)
========== ========== ==========
See accompanying notes to consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2003, 2004 and 2005
(In thousands)
Accumulated other
comprehensive
income (loss)
Additional Retained --------------------------
Common paid-in earnings Currency Pension
stock capital (deficit) translation liabilities Total
-------- ----------- ---------- ------------ ------------ -------
Balance at December 31, 2002 $489 $1,060,157 $(584,909) $(148,082) $(13,481) $ 314,174
Net income - - 87,549 - - 87,549
Other comprehensive income (loss),
net of tax - - - 15,073 (25,545) (10,472)
Dividends declared:
Cash - $.14 per share - - (7,000) - - (7,000)
Noncash - - (224,900) - - (224,900)
---- ---------- --------- --------- -------- ---------
Balance at December 31, 2003 489 1,060,157 (729,260) (133,009) (39,026) 159,351
Net income - - 314,853 - - 314,853
Other comprehensive income,
net of tax - - - 44,828 272 45,100
Issuance of common stock - 90 - - - 90
Cash dividends declared -
$1.00 per share - - (48,945) - - (48,945)
Other - 396 - - - 396
---- ---------- --------- --------- -------- ---------
Balance at December 31, 2004 489 1,060,643 (463,352) (88,181) (38,754) 470,845
Net income - - 71,006 - - 71,006
Other comprehensive loss,
net of tax - - - (26,749) (57,065) (83,814)
Issuance of common stock - 108 - - - 108
Cash dividends declared -
$1.00 per share - - (48,949) - - (48,949)
Other - 788 - - - 788
---- ---------- --------- --------- -------- ---------
Balance at December 31, 2005 $489 $1,061,539 $(441,295) $(114,930) $(95,819) $ 409,984
==== ========== ========= ========= ======== =========
See accompanying notes to consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2003, 2004 and 2005
(In thousands)
2003 2004 2005
---- ---- ----
Cash flows from operating activities:
Net income $ 87,549 $ 314,853 $ 71,006
Depreciation and amortization 39,421 44,053 43,539
Noncash interest expense 2,197 2,375 2,854
Deferred income taxes 36,489 (263,314) 26,467
Minority interest 72 53 12
Net loss from disposition of
property and equipment 480 1,120 1,506
Securities transaction gain - - (5,439)
Benefit plan expense greater (less)
than cash funding:
Defined benefit pension plans (5,792) (2,986) (5,250)
Other postretirement benefit plans (1,032) (151) (1,289)
Distributions from TiO2 manufacturing
joint venture, net 875 8,600 4,850
Other, net 1,016 2,858 (1,935)
Change in assets and liabilities:
Accounts and other receivable 1,264 (21,813) (13,893)
Inventories (26,041) 48,237 (47,922)
Prepaid expenses 1,494 (478) (237)
Accounts payable and accrued liabilities 9,478 862 14,213
Income taxes (38,706) 24,699 10,264
Accounts with affiliates 1,920 (5,771) 1,171
Other noncurrent assets (3,919) (1,103) 515
Other noncurrent liabilities 916 (1,089) (2,606)
---------- ---------- ----------
Net cash provided by
operating activities 107,681 151,005 97,826
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures (35,245) (39,295) (43,366)
Purchase of interest in subsidiary - (575) -
Proceeds from disposal of interest
in Norwegian smelting operation - - 3,542
Change in restricted cash equivalents
and restricted marketable debt
securities, net (554) (70) 129
Proceeds from disposition of
property and equipment 381 99 37
---------- ---------- ----------
Net cash used by
investing activities (35,418) (39,841) (39,658)
---------- ---------- ----------
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2003, 2004 and 2005
(In thousands)
2003 2004 2005
---- ---- ----
Cash flows from financing activities:
Indebtedness:
Borrowings $ 16,106 $ 241,648 $ 51,920
Principal payments (46,006) (100,073) (48,959)
Deferred financing fees - (1,989) -
Dividends paid (7,000) (48,945) (48,949)
Loans from affiliates:
Loans 8,000 - -
Repayments (52,600) (200,000) -
Other capital transactions with
affiliates, net 19,700 396 1,214
Other, net (14) 213 -
---------- ---------- ----------
Net cash used by financing
activities (61,814) (108,750) (44,774)
---------- ---------- ----------
Cash and cash equivalents - net change from:
Operating, investing and financing activities 10,449 2,414 13,394
Currency translation 4,742 2,500 (2,155)
---------- ---------- ----------
15,191 4,914 11,239
Balance at beginning of year 40,685 55,876 60,790
---------- ---------- ----------
Balance at end of year $ 55,876 $ 60,790 $ 72,029
========== ========== ==========
Supplemental disclosures -
cash paid (received) for:
Interest $ 30,152 $ 49,206 $ 41,309
Income taxes 1,597 (23,657) 30,021
Inventories received as partial
consideration for disposal of
interest in Norwegian smelting
operations $ - $ - $ 1,897
See accompanying notes to consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies:
Organization and basis of presentation. At December 31, 2005, (i) Valhi,
Inc. (NYSE:VHI) 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 92% 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 such companies.
Prior to December 2003, Kronos was a wholly-owned subsidiary of NL. On
December 8, 2003, NL completed a recaptialization and a pro-rata distribution to
its stockholders of approximately 48.8% of Kronos' common stock (including Valhi
and its wholly-owned subsidiary). Stockholders of NL received one share of
Kronos common stock for every two shares of NL held. Immediately prior to NL's
distribution of shares of Kronos' common stock, the Company distributed a $200
million dividend to NL in the form of a long-term note payable. See Note 10.
On September 26, 2003 Kronos amended and restated its articles of
incorporation. Under the amended and restated articles of incorporation, among
other things, (i) Kronos' authorized capital stock now consists of 60 million
shares of common stock and 100,000 shares of preferred stock, each par value
$.01 per share, and (ii) the 1,000 shares of Kronos' common stock previously
outstanding were reclassified into an aggregate of 48.9 million shares. The
accompanying Consolidated Financial Statements have been retroactively
reclassified to reflect such changes in Kronos' capital structure for all
periods prior to September 30, 2003, and earnings per share data for all periods
prior to September 26, 2003 has been restated to reflect the 48.9 million shares
of Kronos' common stock that was outstanding following effectiveness of the
amended and restated articles of incorporation.
Management's estimates. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America ("GAAP") requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amount of revenues and expenses during the reporting period. Actual
results may differ significantly from previously-estimated amounts under
different assumptions or conditions.
Principles of consolidation. The consolidated financial statements include
the accounts of Kronos and its majority-owned subsidiaries. All material
intercompany accounts and balances have been eliminated. Minority interest
relates to the Company's majority-owned subsidiary in France, which conducts the
Company's marketing and sales activities in that country. During 2004, the
Company increased its ownership interest by approximately 5% to 99% in such
subsidiary by acquiring shares of such subsidiary previously held by certain of
its other stockholders for an aggregate of $575,000.
Translation of foreign currencies. Assets and liabilities of subsidiaries
whose functional currency is other than the U.S. dollar are translated at
year-end rates of exchange and revenues and expenses are translated at average
exchange rates prevailing during the year. Resulting translation adjustments are
accumulated in stockholders' equity as part of accumulated other comprehensive
income, net of related deferred income taxes and minority interest. Currency
transaction gains and losses are recognized in income currently.
Derivatives and hedging activities. Derivatives are recognized as either
assets or liabilities and measured at fair value in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended. The accounting for changes in
fair value of derivatives depends upon the intended use of the derivative, and
such changes are recognized either in net income or other comprehensive income.
As permitted by the transition requirements of SFAS No. 133, the Company has
exempted from the scope of SFAS No. 133 all host contracts containing embedded
derivatives that were issued or acquired prior to January 1, 1999.
Cash and cash equivalents. Cash equivalents include bank time deposits and
U.S. Treasury securities purchased under short-term agreements to resell with
original maturities of three months or less.
Restricted marketable debt securities. Restricted marketable debt
securities are primarily invested in corporate debt securities, and include
amounts restricted in accordance with applicable Norwegian law regarding certain
requirements of the Company's Norwegian defined benefit pension plans ($2.9
million and $2.6 million at December 31, 2004 and 2005, respectively). The
restricted marketable debt securities are generally classified as either a
current or noncurrent asset depending upon the maturity date of each such debt
security and are carried at market which approximates cost.
Accounts receivable. The Company provides an allowance for doubtful
accounts for known and estimated potential losses arising from sales to
customers based on a periodic review of these accounts.
Investment in TiO2 manufacturing joint venture. Investment in a 50%-owned
manufacturing joint venture is accounted for by the equity method.
Property and equipment and depreciation. Property and equipment are stated
at cost. The Company has a governmental concession with an unlimited term to
operate an ilmenite mine in Norway. Mining properties consist of buildings and
equipment used in the Company's Norwegian ilmenite mining operations. While the
Company owns the land and ilmenite reserves associated with the mine, such land
and reserves were acquired for nominal value and the Company has no material
asset recognized for the land and reserves related to such mining operations.
Depreciation of property and equipment for financial reporting purposes
(including mining properties) is computed principally by the straight-line
method over the estimated useful lives of ten to 40 years for buildings and
three to 20 years for equipment. Accelerated depreciation methods are used for
income tax purposes, as permitted. Upon sale or retirement of an asset, the
related cost and accumulated depreciation are removed from the accounts and any
gain or loss is recognized in income currently.
Expenditures for maintenance, repairs and minor renewals are expensed;
expenditures for major improvements are capitalized. The Company performs
planned major maintenance activities during the year. Repair and maintenance
costs estimated to be incurred in connection with planned major maintenance
activities are accrued in advance and are included in cost of sales. Accrued
repair and maintenance costs, included in other current liabilities and
consisting primarily of materials and supplies, was $5.4 million and $5.0
million at December 31, 2004 and 2005, respectively.
Interest costs related to major long-term capital projects and renewals are
capitalized as a component of construction costs. Interest costs capitalized
were not significant in 2003, 2004 or 2005.
When events or changes in circumstances indicate that assets may be
impaired, an evaluation is performed to determine if an impairment exists. Such
events or changes in circumstances include, among other things, (i) significant
current and prior periods or current and projected periods with operating
losses, (ii) a significant decrease in the market value of an asset or (iii) a
significant change in the extent or manner in which an asset is used. All
relevant factors are considered. The test for impairment is performed by
comparing the estimated future undiscounted cash flows (exclusive of interest
expense) associated with the asset to the asset's net carrying value to
determine if a write-down to market value or discounted cash flow value is
required. The Company assesses impairment of property and equipment in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets."
Long-term debt. Long-term debt is stated net of any unamortized original
issue premium or discount. Amortization of deferred financing costs and any
premium or discount associated with the issuance of indebtedness, all included
in interest expense, is computed by the interest method over the term of the
applicable issue.
Employee benefit plans. Accounting and funding policies for retirement
plans are described in Note 14.
Income taxes. Prior to December 2003, Kronos and its qualifying
subsidiaries were members of NL's consolidated U.S. federal income tax group
(the "NL Tax Group"), and the NL Tax Group was included in the consolidated U.S.
federal tax return of Contran (the "Contran Tax Group"). As a member of the NL
Tax Group, the Company was a party to a tax sharing agreement (the "NL Tax
Agreement"). As a member of the Contran Tax Group, NL was a party to a separate
tax sharing agreement (the "Contran Tax Agreement"). The Contran Tax Agreement
provides that NL and its qualifying subsidiaries, including Kronos, compute
provisions for U.S. income taxes on a separate-company basis using the tax
elections made by Contran. Pursuant to the NL Tax Agreement and using the tax
elections made by Contran, Kronos made payments to or received payments from NL
in amounts it would have paid to or received from the U.S. Internal Revenue
Service had it not been a member of NL's consolidated tax group but instead was
a separate taxpayer. Refunds are limited to amounts previously paid under the NL
Tax Agreement. The Company made net payments to NL under the terms of the NL Tax
Agreement of $10.7 million in 2003, and received $1.2 million from NL in 2004.
See Note 13.
Effective December 2003, following NL's distribution of 48.8% of the
outstanding shares of Kronos common stock to NL stockholders, Kronos and its
qualifying subsidiaries ceased being members of the NL Tax Group, but Kronos and
its qualifying subsidiaries remained as members of the Contran Tax Group. Kronos
entered into a new tax sharing agreement with Valhi and Contran, which contains
similar terms to the NL Tax Agreement. The Company made net payments to Valhi of
$.3 million in 2004 and $7.7 million in 2005 related to such tax agreement. As a
member of the Contran Tax Group, Kronos is jointly and severally liable for the
federal income tax liability of Contran and the other companies included in the
Contran Tax Group for all periods in which the Company is included in the
Contran Tax Group. See Note 16. Kronos is also included in Contran's
consolidated unitary state income tax returns in certain qualifying U.S.
jurisdictions. The terms of the Contran Tax Agreement also apply to state tax
payments in these jurisdictions.
Deferred income tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the income tax and
financial reporting carrying amounts of assets and liabilities, including
investments in the Company's subsidiaries and affiliates who are not members of
the Contran Tax Group and undistributed earnings of foreign subsidiaries which
are not deemed to be permanently reinvested. Earnings of foreign subsidiaries
deemed to be permanently reinvested aggregated $527 million at December 31, 2004
and $707 million at December 31, 2005. Determination of the amount of the
unrecognized deferred income tax liability related to such earnings is not
practicable due to the complexities associated with the U.S. taxation on
earnings of foreign subsidiaries repatriated to the U.S. The Company
periodically evaluates its deferred tax assets in the various taxing
jurisdictions in which it operates and adjusts any related valuation allowance
based on the estimate of the amount of such deferred tax assets that the Company
believes does not meet the "more-likely-than-not" recognition criteria.
Net sales. Sales are recorded when products are shipped and title and other
risks and rewards of ownership have passed to the customer, or when services are
performed. Shipping terms of products shipped are generally FOB shipping point,
although in some instances shipping terms are FOB destination point (for which
sales are not recognized until the product is received by the customer). Amounts
charged to customers for shipping and handling are included in net sales. Sales
are stated net of price, early payment and distributor discounts and volume
rebates.
Inventories and cost of sales. Inventories are stated at the lower of cost
(principally average cost) or market, net of allowance for slow-moving
inventories ($9.0 million and $8.3 million at December 31, 2004 and 2005,
respectively). Amounts are removed from inventories at average cost. Cost of
sales includes costs for materials, packing and finishing, utilities, salary and
benefits, maintenance and depreciation.
Selling, general and administrative expense; shipping and handling costs.
Selling, general and administrative expense include costs related to marketing,
sales, distribution, shipping and handling, research and development, legal, and
administrative functions such as accounting, treasury and finance, and includes
costs for salaries and benefits, travel and entertainment, promotional materials
and professional fees. Shipping and handling costs are included in selling,
general and administrative expense and were $63 million in 2003, $70 million in
2004 and $76 million in 2005. Advertising costs are expensed as incurred and
were $1 million in each of 2003, 2004 and 2005. Research, development and
certain sales technical support costs are expensed as incurred and approximated
$7 million in 2003, $8 million in 2004 and $9 million in 2005.
Stock options. The Company has not issued any stock options. However,
certain employees of the Company have been granted options by NL to purchase NL
common stock. The Company has elected the disclosure alternative prescribed by
SFAS No. 123, "Accounting for Stock-Based Compensation," as amended, and to
account for its stock-based employee compensation related to stock options 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 not less than the market price on the grant date.
Prior to 2003, and following NL's cash settlement of options to purchase NL
common stock held by certain individuals, NL and the Company commenced
accounting for its stock options using the variable accounting method because NL
could not overcome the presumption that it would not similarly cash settle its
remaining stock options. Under the variable accounting method, the intrinsic
value of all unexercised stock options (including those with an exercise price
at least equal to the market price on the date of grant) are accrued as an
expense over their vesting period, with subsequent increases (decreases) in NL's
market price resulting in additional compensation expense (income). Upon
exercise of such options to purchase NL common stock held by employees of the
Company, the Company pays NL an amount equal to the difference between the
market price of NL's common stock on the date of exercise and the exercise price
of such stock option. Aggregate compensation expense related to NL stock options
held by employees of the Company was $1.0 million in 2003 and $2.8 million in
2004 and compensation income was $1.0 million in 2005. The total income tax
benefit related to such compensation cost recognized by the Company was
approximately $.4 million in 2003 and $1.0 million in 2004 and the total income
tax provision related to the compensation income was $.4 million in 2005. No
compensation cost was capitalized as part of assets (inventory or fixed assets)
during 2003, 2004 and 2005.
The following table presents what the Company's consolidated net income,
and related per share amounts, would have been in 2003, 2004 and 2005 if the
Company had applied the fair value-based recognition provisions of SFAS No. 123,
for all awards granted subsequent to January 1, 1995.
Years ended December 31,
-----------------------------------------
2003 2004 2005
---- ---- ----
(In millions, except per share amounts)
Net income as reported $ 87.5 $ 314.9 $ 71.0
Adjustments, net of applicable income
tax effects and minority interest:
Stock-based employee compensation expense
(income) determined under APBO No. 25 .7 1.8 (.7)
Stock-based employee compensation expense
determined under SFAS No. 123 (.3) (.1) -
------- ------- -------
Pro forma net income $ 87.9 $ 316.6 $ 70.3
======= ======= =======
Basic and diluted earnings per share:
As reported $ 1.79 $ 6.43 $ 1.45
Pro forma $ 1.80 $ 6.47 $ 1.44
Note 2 - Geographic information:
The Company's operations are associated with the production and sale of
TiO2. Titanium dioxide pigments are used to impart whiteness, brightness and
opacity to a wide variety of products, including paints, plastics, paper, fibers
and ceramics. At December 31, 2004 and 2005, the net assets of non-U.S.
subsidiaries included in consolidated net assets approximated $293 million and
$272 million, respectively.
For geographic information, net sales are attributed to the place of
manufacture (point of origin) and the location of the customer (point of
destination); property and equipment are attributed to their physical location.
Years ended December 31,
-----------------------------------------
2003 2004 2005
---- ---- ----
(In thousands)
Geographic areas
Net sales - point of origin:
Germany $ 510,105 $ 576,138 $ 613,081
United States 310,694 449,351 495,538
Canada 173,297 170,309 202,077
Belgium 150,728 186,445 186,951
Norway 131,457 144,492 160,528
Eliminations (268,104) (398,135) (461,446)
---------- ---------- ----------
$1,008,177 $1,128,600 $1,196,729
========== ========== ==========
Net sales - point of destination:
Europe $ 567,496 $ 666,701 $ 690,884
North America 349,813 363,510 404,926
Other 90,868 98,389 100,919
---------- ---------- ----------
$1,008,177 $1,128,600 $1,196,729
========== ========== ==========
December 31,
--------------
2004 2005
---- ----
(In thousands)
Identifiable assets -
net property and equipment:
Germany $ 269,922 $ 235,932
Canada 68,048 67,480
Belgium 68,314 57,943
Norway 57,808 54,759
Other 2,798 2,806
---------- ----------
$ 466,890 $ 418,920
========== ==========
Note 3 - Accounts and other receivables:
December 31,
--------------
2004 2005
---- ----
(In thousands)
Trade receivables $ 176,332 $ 170,619
Recoverable VAT and other receivables 16,364 15,930
Allowance for doubtful accounts (2,377) (1,965)
---------- ----------
$ 190,319 $ 184,584
========== ==========
Note 4 - Inventories
December 31,
--------------
2004 2005
---- ----
(In thousands)
Raw materials $ 45,962 $ 52,343
Work in progress 16,612 17,959
Finished products 130,385 149,900
Supplies 40,899 39,642
---------- ----------
$ 233,858 $ 259,844
========== ==========
Note 5 - Other noncurrent assets:
December 31,
--------------
2004 2005
---- ----
(In thousands)
Deferred financing costs, net $ 10,921 $ 8,150
Restricted marketable debt securities 2,877 2,572
Unrecognized net pension obligation 13,518 11,916
Other 5,024 3,000
---------- ----------
$ 32,340 $ 25,638
========== ==========
Note 6 - Investment in TiO2 manufacturing joint venture:
Kronos Louisiana, Inc. ("KLA"), a wholly-owned subsidiary of Kronos, owns a
50% interest in Louisiana Pigment Company, L.P. ("LPC"). LPC is a manufacturing
joint venture that is also 50%-owned by Tioxide Americas Inc. ("Tioxide").
Tioxide is a wholly-owned subsidiary of Huntsman Holdings LLC. LPC owns and
operates a chloride-process TiO2 plant in Lake Charles, Louisiana.
KLA and Tioxide are both required to purchase one-half of the TiO2 produced
by LPC. LPC operates on a break-even basis and, accordingly, the Company reports
no equity in earnings of LPC. Each owner's acquisition transfer price for its
share of the TiO2 produced is equal to its share of the joint venture's
production costs and interest expense, if any. Kronos' share of net costs is
reported as cost of sales as the related TiO2 acquired from LPC is sold.
Distributions from LPC, which generally relate to excess cash generated by LPC
from its non-cash production costs, and contributions to LPC, which generally
relate to cash required by LPC when it builds working capital, are reported as
part of cash generated by operating activities in the Company's Consolidated
Statements of Cash Flows. Such distributions are reported net of any
contributions made to LPC during the periods. Net distributions to Kronos of $.9
million in 2003, $8.6 million in 2004 and $4.9 million in 2005 are stated net of
contributions of $13.1 million in 2003, $15.6 million in 2004 and $10.1 million
in 2005.
LPC made net cash distributions of $1.8 million in 2003, $17.2 million in
2004 and $9.7 million in 2005, equally split between the partners.
Summary balance sheets of LPC are shown below:
December 31,
--------------
2004 2005
---- ----
(In thousands)
ASSETS
Current assets $ 58,121 $ 62,878
Property and equipment, net 211,721 200,383
---------- ----------
$ 269,842 $ 263,261
========== ==========
LIABILITIES AND PARTNERS' EQUITY
Other liabilities, primarily current $ 26,590 $ 29,896
Partners' equity 243,252 233,365
---------- ----------
$ 269,842 $ 263,261
========== ==========
Summary income statements of LPC are shown below:
Years ended December 31,
-----------------------------------------
2003 2004 2005
---- ---- ----
(In thousands)
Revenues and other income:
Kronos $ 101,293 $ 104,849 $ 109,417
Tioxide 101,619 105,543 110,379
Interest 73 54 196
---------- ---------- ----------
202,985 210,446 219,992
---------- ---------- ----------
Cost and expenses:
Cost of sales 201,947 209,983 219,576
General and administrative 398 463 416
---------- ---------- ----------
202,345 210,446 219,992
---------- ---------- ----------
Net income from continuing operations 640 - -
Cumulative effect of change in
accounting principles (640) - -
---------- ---------- ----------
Net income $ - $ - $ -
========== ========== ==========
On September 22, 2005, the chloride-process TiO2 facility operated by
Kronos' 50%-owned joint venture, Louisiana Pigment Company ("LPC"), temporarily
halted production due to Hurricane Rita. Although storm damage to core
processing facilities was not extensive, a variety of factors, including loss of
utilities, limited access and availability of employees and raw materials,
prevented the resumption of partial operations until October 9, 2005 and full
operations until late 2005. The joint venture expects the majority of its
property damage and unabsorbed fixed costs for periods in which normal
production levels were not achieved will be covered by insurance, and Kronos
believes insurance will cover its lost profits (subject to applicable
deductibles) resulting from its share of the lost production from LPC. Insurance
proceeds from the lost profit for product that Kronos was not able to sell as a
result of the loss of production from LPC, are expected to be recognized by
Kronos during 2006, although the amount and timing of such insurance recoveries
is not presently determinable. The effect on Kronos' financial results will
depend on the timing and amount of insurance recoveries.
Note 7 - Accounts payable and accrued liabilities:
December 31,
--------------
2004 2005
---- ----
(In thousands)
Accounts payable $ 91,713 $ 91,397
Employee benefits 36,861 35,610
Other 41,435 38,538
---------- ----------
$ 170,009 $ 165,545
========== ==========
Note 8 - Long-term debt:
December 31,
--------------
2004 2005
---- ----
(In thousands)
Kronos' U.S. subsidiaries - bank credit facility $ - $ 11,500
Kronos International, Inc. and subsidiaries:
8.875% Senior Secured Notes 519,225 449,298
Bank credit facility 13,622 -
Other 348 4,525
---------- ----------
533,195 465,323
Less current maturities 13,792 958
---------- ----------
$ 519,403 $ 464,365
========== ==========
In June 2002, KII issued at par value euro 285 million principal amount
($280 million when issued) of its 8.875% Senior Secured Notes due 2009, and in
November 2004 KII issued at 107% of par an additional euro 90 million principal
amount ($130 million when issued) of the KII Senior Secured Notes (collectively
the "Notes"). The Notes are collateralized by a pledge of 65% of the common
stock or other ownership interests of certain of KII's first-tier operating
subsidiaries. Such operating subsidiaries are Kronos Titan GmbH, Kronos Denmark
ApS, Kronos Limited and Societe Industrielle Du Titane, S.A. The Notes are
issued pursuant to an indenture which contains a number of covenants and
restrictions which, among other things, restricts the ability of KII and its
subsidiaries to incur debt, incur liens, pay dividends or merge or consolidate
with, or sell or transfer all or substantially all of their assets to, another
entity. The Notes are redeemable, at KII's option, at redemption prices ranging
from 104.437% of the principal amount, declining to 100% on or after December
30, 2008. In the event of a change of control of KII, as defined, KII would be
required to make an offer to purchase its Notes at 101% of the principal amount.
KII would also be required to make an offer to purchase a specified portion of
its Notes at par value in the event KII generates a certain amount of net
proceeds from the sale of assets outside the ordinary course of business, and
such net proceeds are not otherwise used for specified purposes within a
specified time period. At December 31, 2005, the estimated market price of the
Notes was approximately euro 1,045 per euro 1,000 principal amount (2004 - euro
1,075 per euro 1,000 principal amount). At December 31, 2005, the carrying
amount of the Notes includes euro 4.8 million ($5.7 million) of unamortized
premium associated with the November 2004 issuance (2004 - euro 6.2 million, or
$8.4 million).
KII's operating subsidiaries in Germany, Belgium and Norway (collectively,
the "Borrowers") have a euro 80 million secured revolving bank credit facility
that matures in June 2008 ("European Credit Facility"). Borrowings may be
denominated in euros, Norwegian kroners or U.S. dollars, and bear interest at
the applicable interbank market rate plus 1.125%. The facility also provides for
the issuance of letters of credit up to euro 5 million. The European Credit
Facility is collateralized by the accounts receivable and inventories of the
borrowers, plus a limited pledge of all of the other assets of the Belgian
borrower. The European Credit Facility contains certain restrictive covenants
which, among other things, restricts the ability of the Borrowers to incur debt,
incur liens, pay dividends or merge or consolidate with, or sell or transfer all
or substantially all of their assets to, another entity. In addition, the
European Credit Facility contains customary cross-default provisions with
respect to other debt and obligations of the Borrowers, KII and its other
subsidiaries. At December 31, 2005, no amounts were outstanding under the
European Credit Facility, and the equivalent of $92.3 million was available for
additional borrowing by the subsidiaries.
Certain of the Company's U.S. subsidiaries have a $50 million revolving
credit facility ($11.5 million outstanding at December 31, 2005) that matures in
September 2008 ("U.S. Credit Facility"). The facility is collateralized by the
accounts receivable, inventories and certain fixed assets of the borrowers.
Borrowings under this facility are limited to the lesser of $45 million or a
formula-determined amount based upon the accounts receivable and inventories of
the borrowers. Borrowings bear interest at either the prime rate or rates based
upon the eurodollar rate (7.0% at December 31, 2005). The facility contains
certain restrictive covenants which, among other things, restricts the abilities
of the borrowers to incur debt, incur liens, pay dividends in certain
circumstances, sell assets or enter into mergers. At December 31, 2005, $33.5
million was available for additional borrowing under the facility.
Kronos' Canadian subsidiary has a Cdn. $30 million revolving credit
facility that matures in January 2009. The facility is collateralized by the
accounts receivable and inventories of the borrower. Borrowings under this
facility are limited to the lesser of Cdn. $26 million or a formula-determined
amount based upon the accounts receivable and inventories of the borrower.
Borrowings bear interest at rates based upon either the Canadian prime rate, the
U.S. prime rate or LIBOR. The facility contains certain restrictive covenants
which, among other things, restricts the ability of the borrower to incur debt,
incur liens, pay dividends in certain circumstances, sell assets or enter into
mergers. At December 31, 2005, no amounts were outstanding and the equivalent of
$12.8 million was available for borrowing under the facility.
Under the cross-default provisions of the Notes, the Notes may be
accelerated prior to their stated maturity if KII or any of KII's subsidiaries
default under any other indebtedness in excess of $20 million due to a failure
to pay such other indebtedness at its due date (including any due date that
arises prior to the stated maturity as a result of a default under such other
indebtedness). Under the cross-default provisions of the European Credit
Facility, any outstanding borrowings under the European Credit Facility may be
accelerated prior to their stated maturity if the Borrowers or KII default under
any other indebtedness in excess of euro 5 million due to a failure to pay such
other indebtedness at its due date (including any due date that arises prior to
the stated maturity as a result of a default under such other indebtedness).
Under the cross-default provisions of the U.S. Credit Facility, any outstanding
borrowing under such facility may be accelerated prior to their stated maturity
in the event of the bankruptcy of Kronos. The Canadian revolving credit facility
contains no cross-default provisions. The European, U.S. and Canadian revolving
credit facilities each contain provisions that allow the lender to accelerate
the maturity of the applicable facility in the event of a change of control, as
defined, of the applicable borrower. In the event any of these cross-default or
change-of-control provisions become applicable, and such indebtedness is
accelerated, Kronos would be required to repay such indebtedness prior to their
stated maturity.
Aggregate maturities of long-term debt at December 31, 2005 are shown in
the table below.
Years ending December 31, Amount
- -------------------------- --------------
(In thousands)
2006 $ 958
2007 861
2008 12,372
2009 450,200
2010 932
2011 and thereafter -
---------
$ 465,323
=========
Restrictions. Certain of the credit facilities described above require the
respective borrower to maintain minimum levels of equity, require the
maintenance of certain financial ratios, limit dividends and additional
indebtedness and contain other provisions and restrictive covenants customary in
lending transactions of this type. At December 31, 2005, the restricted net
assets of consolidated subsidiaries approximated $90 million. At December 31,
2005, there were no restrictions on the Company's ability to pay dividends.
Note 9 - Other noncurrent liabilities:
December 31,
--------------
2004 2005
---- ----
(In thousands)
Insurance claims and expenses $ 1,927 $ 1,733
Employee benefits 5,107 4,735
Asset retirement obligations 958 934
Other 9,415 8,653
---------- ----------
$ 17,407 $ 16,055
========== ==========
The asset retirement obligations are discussed in Note 19.
Note 10 - Notes and payable to affiliates:
Notes payable to affiliates. In December 2003, immediately prior to NL's
distribution of approximately 48.8% of the outstanding shares of Kronos' common
stock to NL stockholders, the Company distributed a $200 million dividend to NL
in the form of a long-term note payable. The $200 million long-term note payable
to NL was unsecured and bore interest at 9% per annum, with interest payable
quarterly and all principal due in 2010.
On September 24, 2004, NL completed the acquisition of the shares of common
stock of CompX International, Inc. previously held by Valhi and Valcor, Inc., a
wholly-owned subsidiary of Valhi. The purchase price for these shares was paid
by NL's transfer to Valhi and Valcor of an aggregate $168.6 million of NL's $200
million long-term note receivable from Kronos. In October 2004, Valcor
distributed its note receivable from Kronos to Valhi, and subsequently Kronos
prepaid $100.0 million on the note payable to Valhi principally using available
cash on hand. In December 2004 all remaining balances due to NL, Valhi and
Valcor were prepaid and the related notes were canceled.
In 2003, the Company repaid all amounts outstanding under the terms of a
prior $55 million revolving credit facility with NL Environmental Management
Services, Inc. ("EMS"), a majority-owned subsidiary of NL and the revolving
credit agreement with EMS was terminated on June 30, 2003.
Note 11 - Common stock and notes receivable from affiliates:
NL common stock options held by employees of the Company. Certain employees
of the Company have been granted nonqualified options to purchase NL common
stock under the terms of certain option plans sponsored by NL. Generally, the
stock options are granted at a price equal to or greater than 100% of the market
price of NL's common stock at the date of grant, vest over a five-year period
and expire ten years from the date of grant. Following NL's distribution of
approximately 48.8% of the outstanding shares of Kronos' common stock to NL
stockholders, the exercise prices for all options to purchase NL common stock
were adjusted.
Changes in outstanding options to purchase NL common stock granted to
certain employees of the Company are summarized in the table below.
Amount Weighted-
Exercise payable average
price per upon exercise
Shares share exercise price
------ ----------- ---------- -----------
(In thousands, except per share amounts)
Outstanding at December 31, 2002 659 $ 8.69-21.97 $ 11,178 $ 16.96
Exercised (20) 11.28-11.88 (226) 11.55
Canceled (69) 11.28-20.11 (1,150) 16.67
Adjusted for Kronos common stock
distribution - 8.69-21.97 (4,913) 8.63
---- ------------ -------- -------
Outstanding at December 31, 2003 570 0.06-13.34 4,889 8.58
Exercised (276) 0.06-11.49 (2,222) 8.04
Canceled (61) 3.56-08.63 (370) 6.14
---- ------------ -------- -------
Outstanding at December 31, 2004 233 2.66-13.34 2,297 9.86
Exercised (112) 5.63-11.49 (1,187) 10.59
Canceled (1) 11.49 (13) 11.49
---- ------------ -------- -------
Outstanding at December 31, 2005 120 $ 2.66-11.49 $ 1,097 $ 9.15
==== ============ ======== =======
At December 31, 2005, all of the outstanding options were exercisable, with
an aggregate intrinsic value (defined as the excess of the market price of NL's
common stock over the exercise price) of $592,000. All of such outstanding
options had exercise prices less than NL's December 31, 2005 quoted market price
of $14.09 per share. Outstanding options at December 31, 2005 expire at various
dates through 2011. Shares issued under the incentive stock plan are generally
newly-issued shares, however prior to September 30, 2004 shares issued under the
incentive stock plan were issued from NL's treasury shares.
The following table summarizes NL's stock options outstanding and held by
certain employees of the Company, and those which are exercisable as of December
31, 2005 by price range.
Options outstanding Options exercisable
- ----------------------------------------------------------------------- ----------------------------
Weighted-
average Weighted- Weighted-
Outstanding remaining average Exercisable average
Range of at contractual exercise at exercise
exercise prices 12/31/05 life price 12/31/05 price
------------------- ----------- ----------- ---------- ------------ -----------
$ 2.66 - $ 3.25 8,550 2.8 $ 2.74 8,550 $ 2.74
5.63 34,350 4.0 5.63 34,350 5.63
9.34 - 11.49 76,950 5.0 11.43 76,950 11.43
------- -------
119,850 4.8 $ 9.15 119,850 $ 9.15
======= =======
Such options generally vest over five years, and vesting ceases at the date
the employee separates from service to the Company (including retirement). The
intrinsic value of these NL options exercised aggregated $.1 million in 2003,
$1.8 million in 2004 and $1.2 million in 2005, and the related income tax
benefit from such exercises was less than $50,000 in 2003, $.6 million in 2004
and $.4 million in 2005.
Long-term incentive compensation plan. Kronos has a long-term incentive
compensation plan that provides for the discretionary grant of, among other
things, qualified incentive stock options, nonqualified stock options,
restricted common stock, stock awards and stock appreciation rights. Up to
150,000 shares of Kronos common stock may be issued pursuant to this plan. As of
December 31, 2005, no options had been granted pursuant to this plan, and
143,500 shares were available for future grants. During the years ended December
31, 2004 and 2005, 3,000 and 3,500 shares, respectively, of Kronos common stock
were awarded pursuant to this plan to members of the Company's board of
directors.
Dividends. During each of 2004 and 2005, Kronos paid four quarterly
dividends aggregating $1.00 per share.
Other capital transactions. In December 2004 and in 2005, NL sold certain
shares of Kronos common stock in market transactions. Within six months of such
sales by NL, Valhi purchased shares of Kronos common stock in market
transactions. In settlement of any alleged short-swing profits derived from
these transactions as calculated pursuant to Section 16(b) of the Securities
Exchange Act of 1934, as amended, Valhi remitted approximately $600,000 and $1.2
million to the Company during the years ended December 31, 2004 and 2005,
respectively, which amounts, net of taxes, have been recorded by the Company as
capital contributions, increasing additional paid-in capital.
Other. The pro forma information included in Note 1, required by SFAS No.
123, "Accounting for Stock-Based Compensation," as amended, is based on an
estimation of the fair value of options issued subsequent to January 1, 1995
using the Black-Scholes stock option valuation model. The Black-Scholes model
was not developed for use in valuing employee stock options, but was developed
for use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, it requires the use of
subjective assumptions including expectations of future dividends and stock
price volatility. Such assumptions are only used for making the required fair
value estimate and should not be considered as indicators of future dividend
policy or stock price appreciation. Because changes in the subjective
assumptions can materially affect the fair value estimate, and because employee
stock options have characteristics significantly different from those of traded
options, the use of the Black-Scholes option-pricing model may not provide a
reliable estimate of the fair value of employee stock options. The pro forma
impact on net income and basic earnings per share disclosed in Note 1 is not
necessarily indicative of future effects on net income or earnings per share.
See also Note 20.
Note 12 - Other income:
Years ended December 31,
-----------------------------------------
2003 2004 2005
---- ---- ----
(In thousands)
Contract dispute settlement $ - $6,289 $ -
Other income 490 426 576
------ ------ ------
$ 490 $6,715 $ 576
====== ====== ======
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
in 2004 represents the present value of the future payments to be paid by the
customer to the Company. Of such $7.3 million, $1.5 million was paid to Kronos
in 2004 and $1.75 million was paid in 2005, and $1.75 million is due to Kronos
in 2006 and $2.25 million is due in 2007. At December 31, 2005 the present value
of the remaining amounts due to be paid to Kronos aggregated approximately $3.7
million, of which $1.7 million is included in accounts and other receivables and
$2.0 million is included in other noncurrent assets.
Securities transaction gain in the year ended December 31, 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.
Note 13 - Income taxes:
Years ended December 31,
-----------------------------------------
2003 2004 2005
---- ---- ----
(In millions)
Pre-tax income:
U.S. $ 13.2 $ 3.3 $ 13.0
Non-U.S. 86.1 61.2 125.1
------ ------ ------
$ 99.3 $ 64.5 $138.1
====== ====== ======
Expected tax expense, at U.S.
federal statutory income tax rate of 35% $ 34.8 $ 22.6 $ 48.3
Non-U.S. tax rates (1.1) .2 .3
Loss of German tax attribute - - 17.5
Canadian tax rate change - - .9
Incremental U.S. tax and rate differences
on equity in earnings of non-tax group
companies 1.9 (.1) .2
Change in deferred income tax valuation
allowance, net (6.7) (280.7) -
Nondeductible expenses 2.8 4.3 4.6
U.S. state income taxes, net - .2 4.3
Tax contingency reserve adjustment, net 14.8 (3.1) (11.5)
Assessment (refund) of prior
year income taxes (38.0) (2.5) 2.3
Adjustment of prior year taxes - (.1) -
Other, net 3.2 8.8 .2
------ ------- ------
$ 11.7 $(250.4) $ 67.1
====== ======= ======
Years ended December 31,
-----------------------------------------
2003 2004 2005
---- ---- ----
(In millions)
Components of income tax expense (benefit):
Currently payable (refundable):
U.S. federal and state $ 10.5 $ .8 $ 8.2
Non-U.S. (35.3) 12.1 32.4
------ ------- ------
(24.8) 12.9 40.6
------ ------- ------
Deferred income taxes (benefit):
U.S. federal and state (1.0) 11.4 (1.0)
Non-U.S. 37.5 (274.7) 27.5
------ ------- ------
36.5 (263.3) 26.5
------ ------- ------
$ 11.7 $(250.4) $ 67.1
====== ======= ======
Comprehensive provision for
income taxes allocable to:
Net income $ 11.7 $(250.4) $ 67.1
Paid in capital - .2 -
Other comprehensive income -
pension liabilities (11.3) (8.3) (33.8)
------ ------- ------
$ .4 $(258.5) $ 33.3
====== ======= ======
The components of the net deferred tax liability at December 31, 2004 and
2005, and changes in the deferred income tax valuation allowance during the past
three years, are summarized in the following tables.
December 31,
---------------------------------------------------
2004 2005
----------------------- -----------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
(In millions)
Tax effect of temporary differences
related to:
Inventories $ 2.0 $ (5.4) $ 2.2 $ (3.4)
Property and equipment 37.7 (62.4) 25.6 (58.2)
Accrued Postretirement benefits other than pension 3.9
("OPEB") costs 4.2 - -
Accrued (prepaid) pension cost 22.4 (40.4) 55.1 (36.1)
Other accrued liabilities and deductible differences 52.9 - 26.3 -
Other taxable differences - (49.8) - (32.1)
Investments in subsidiaries and affiliates not members of -
the Contran Tax Group 1.9 - -
Tax on unremitted earnings of non-U.S. subsidiaries - (4.5) - (3.1)
Tax loss and tax credit carryforwards 218.1 - 178.1 -
------ ------ ------ -------
Adjusted gross deferred tax assets
(liabilities) 339.2 (162.5) 291.2 (132.9)
Netting of items by tax jurisdiction (99.7) 99.7 (75.3) 75.3
------ ------ ------ -------
239.5 (62.8) 215.9 (57.6)
Less net current deferred tax 2.2
asset (liability) 1.2 (2.7) (4.2)
------ ------ ------ -------
Net noncurrent deferred tax asset
(liability) $238.3 $(60.1) $213.7 $ (53.4)
====== ====== ====== =======
Years ended December 31,
-----------------------------------------
2003 2004 2005
---- ---- ----
(In millions)
Increase (decrease) in valuation allowance:
Recognition of certain deductible tax
attributes for which the benefit had not
previously been recognized under the
"more-likely-than-not" recognition criteria $ (6.7) $(280.7) $ -
Foreign currency translation 28.2 (3.0) -
Offset to the change in gross deferred
income tax assets due principally to
redeterminations of certain tax attributes
and implementation of certain tax
planning strategies (12.5) 121.0 -
------ ------- ------
$ 9.0 $(162.7) $ -
====== ======= ======
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 non-income
related items and interest. For example:
o Kronos 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 December 31,
2005). Kronos filed a protest to this assessment, and believes that a
significant portion of the assessment was 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, would
have aggregated approximately euro 9 million ($11 million). Kronos filed a
written response to the assessment, and in September 2005 the Belgian tax
authorities withdrew the assessment.
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.
o Kronos has received a tax assessment from the Canadian tax authorities
related to the years 1998 and 1999 proposing tax deficiencies, including
interest, of approximately Cdn. $5 million ($4 million). Kronos filed a
protest and in October 2005, the Canadian tax authorities agreed to reduce
the assessment and settle all issues, including interest, for approximately
Cdn. $2 million ($1.7 million).
During the third quarter of 2005, Kronos reached an agreement in principle
with the German tax authorities regarding such tax authorities' objection to the
value assigned to certain intellectual property rights held by Kronos' operating
subsidiary in Germany. Under the agreement in principle, the value assigned to
such intellectual property for German income tax purposes will be reduced
retroactively, resulting in a reduction in the amount of Kronos' net operating
loss carryforward in Germany as well as a future reduction in the amount of
amortization expense attributable to such intellectual property. As a result,
Kronos recognized a $17.5 million non-cash deferred income tax expense in the
third quarter of 2005 related to such agreement. The $11.5 million tax
contingency adjustment income tax benefit in 2005 relates primarily to the
withdrawal of the Belgium tax authorities' assessment related to 1999 and the
Canadian tax authorities' reduction of one of its assessments, as discussed
above.
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.
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 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. At the
end of the second quarter of 2004, and based on all available evidence, Kronos
concluded that the benefit of the net operating loss carryforwards and other
German tax attributes now met the "more-likely-than-not" recognition criteria,
and that reversal of the deferred income tax asset valuation allowance related
to Germany was appropriate. Given the magnitude of the German net operating loss
carryforwards and the fact that current provisions of German law limit the
annual utilization of net operating loss carryforwards to 60% of taxable income
after the first euro 1 million of taxable income, KII believes it will take
several years to fully utilize the benefit of such loss carryforwards. However,
given that Kronos had generated positive taxable income in Germany in recent
years, combined with the fact that the net operating loss carryforwards have no
expiration date, Kronos concluded, among other reasons, that it was now
appropriate to reverse all of the valuation allowance related to the net
operating loss carryforwards because the benefit of such operating loss
carryforwards now meet the "more-likely-than-not" recognition criteria. Of the
$280.7 million valuation allowance related to Germany which was reversed during
2004, and in accordance with the applicable GAAP related to accounting for
income taxes at interim periods, (i) $8.7 million was reversed during the first
six months of 2004 that related primarily to the utilization of the German net
operating loss carryforwards during such period, (ii) $268.6 million was
reversed as of June 30, 2004 and (iii) $3.4 million was reversed during the last
six months of 2004.
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 of these net refunds in its 2003 results of
operations. For the year ended December 31, 2004, the Company recognized a net
refund of euro 2.5 million ($3.1 million) related to additional net interest
which has accrued on the outstanding refund amount. Through December 2004, KII
and its German operating subsidiary had received net refunds of euro 35.6
million ($44.7 million when received). All refunds relating to the periods 1990
to 1997 were received by December 31, 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, and the Company recognized euro 21.5 million ($24.6 million)
in 2003.
At December 31, 2005, Kronos had the equivalent of $593 million and $104
million of net operating loss carryforwards for German corporate and trade tax
purposes, respectively, all of which have no expiration date.
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law provided for a special 85% deduction for certain dividends
received from a controlled foreign corporation in 2005. In the third quarter of
2005, the Company completed its evaluation of this new provision and determined
that it would not benefit from such special dividends received deduction.
Note 14 - Employee benefit plans:
Defined benefit plans. The Company maintains various defined benefit
pension plans. Non-U.S. employees are covered by plans in their respective
countries and a majority of U.S. employees are eligible to participate in a
contributory savings plan. Variances from actuarially assumed rates will result
in increases or decreases in accumulated pension obligations, pension expense
and funding requirements in future periods. At December 31, 2005, the Company
expects to contribute the equivalent of approximately $18 million to all of its
defined benefit pension plans during 2006.
The funded status of the Company's defined benefit pension plans, the
components of net periodic defined benefit pension cost and the rates used in
determining the actuarial present value of benefit obligations are presented in
the tables below. The Company uses a September 30th measurement date for its
defined benefit pension plans.
Years ended December 31,
-------------------------
2004 2005
---- ----
(In thousands)
Change in projected benefit obligations ("PBO"):
Benefit obligations at beginning of the year $ 325,960 $ 368,863
Service cost 6,758 7,373
Interest cost 17,403 17,718
Participant contributions 1,409 1,526
Actuarial losses 5,176 95,342
Change in foreign currency exchange rates 30,163 (41,362)
Benefits paid (18,006) (19,890)
---------- ----------
Benefit obligations at end of the year $ 368,863 $ 429,570
========== ==========
Change in plan assets:
Fair value of plan assets at beginning of the year $ 203,284 $ 242,473
Actual return on plan assets 19,126 18,282
Employer contributions 17,089 18,555
Participant contributions 1,409 1,526
Change in foreign currency exchange rates 19,571 (22,973)
Benefits paid (18,006) (19,890)
---------- ----------
Fair value of plan assets at end of year $ 242,473 $ 237,973
========== ==========
Funded status at end of the year:
Plan assets less than PBO $ (126,390) $ (191,597)
Unrecognized actuarial losses 125,221 197,255
Unrecognized prior service cost 8,757 7,441
Unrecognized net transition obligations 5,019 4,666
---------- ----------
$ 12,607 $ 17,765
========== ==========
Amounts recognized in the balance sheet:
Unrecognized net pension obligations $ 13,518 $ 11,916
Accrued pension costs:
Current (8,771) (12,320)
Noncurrent (61,300) (139,786)
Accumulated other comprehensive loss 69,160 157,955
---------- ----------
$ 12,607 $ 17,765
========== ==========
Years ended December 31,
-----------------------------------------
2003 2004 2005
---- ---- ----
(In thousands)
Net periodic pension cost:
Service cost benefits $ 5,127 $ 6,758 $ 7,373
Interest cost on PBO 15,373 17,403 17,718
Expected return on plan assets (14,529) (15,240) (15,704)
Amortization of prior service cost 354 569 597
Amortization of net transition obligations 793 657 417
Recognized actuarial losses 1,245 3,015 3,672
-------- -------- --------
$ 8,363 $ 13,162 $ 14,073
======== ======== ========
The weighted-average rate assumptions used in determining the actuarial
present value of benefit obligations as of December 31, 2004 and 2005 are
presented in the table below. Such weighted-average rates were determined using
the projected benefit obligations at each date.
Rate December 31,
---- --------------
2004 2005
---- ----
Discount rate 5.2% 4.3%
Increase in future compensation levels 2.8% 2.8%
The weighted-average rate assumptions used in determining the net periodic
pension cost for 2003, 2004 and 2005 are presented in the table below. The
weighted-average discount rate and the weighted-average increase in future
compensation levels were determined using the projected benefit obligations as
of the beginning of each year, and the weighted-average long-term return on plan
assets was determined using the fair value of plan assets as of the beginning of
each year.
Rate December 31,
---- --------------------------------------------
2003 2004 2005
---- ---- ----
Discount rate 5.9% 5.5% 5.2%
Increase in future compensation levels 2.6% 2.8% 2.8%
Long-term return on plan assets 7.2% 7.1% 6.4%
As of December 31, 2005, the accumulated benefit obligations for all
defined benefit pension plans was approximately $391 million (2004 - $317
million). At December 31, 2005, the projected benefit obligations for all
defined benefit pension plans was comprised of $15 million related to U.S. plans
and $415 million related to non-U.S. plans (2004 - $14 million and $355 million,
respectively).
At December 31, 2005, the fair value of plan assets for all defined benefit
pension plans was comprised of $18 million related to U.S. plans and $220
million related to non-U.S. plans (2004 - $13 million and $230 million,
respectively).
Selected information related to the Company's defined benefit pension plans
that have accumulated benefit obligations in excess of fair value of plan assets
is presented below. At December 31, 2004 and 2005, 95% and 100%, respectively,
of the projected benefit obligations of such plans relate to non-U.S. plans.
December 31,
-------------------------
2004 2005
---- ----
(In thousands)
Projected benefit obligation $368,863 $414,501
Accumulated benefit obligation 316,602 376,945
Fair value of plan assets:
U.S. plans 12,694 -
Non U.S. plans 229,779 220,356
In determining the expected long-term rate of return on plan asset
assumptions, the Company considers the long-term asset mix (e.g. equity vs.
fixed income) for the assets for each of its plans and the expected long-term
rates of return for such asset components. In addition, the Company receives
advice about appropriate long-term rates of return from the Company's
third-party actuaries. Such assumed asset mixes are summarized below:
o In Germany, the composition of the Company's plan assets is
established to satisfy the requirements of the German insurance
commissioner. The plan asset allocation at December 31, 2005 was 23%
to equity managers, 48% to fixed income managers and 29% to real
estate (2004 - 23%, 48% and 29%, respectively).
o In Canada, the Company currently has a plan asset target allocation of
65% to equity managers and 35% to fixed income managers, with an
expected long-term rate of return for such investments to average
approximately 125 basis points above the applicable equity or fixed
income index. The plan asset allocation at December 31, 2005 was 64%
to equity managers, 32% to fixed income managers and 4% to other
investments (2004 - 60%, 40% and nil, respectively).
o In Norway, the Company currently has a plan asset target allocation of
14% to equity managers, 64% to fixed income managers and the remainder
primarily to liquid investments such as money markets. The expected
long-term rate of return for such investments is approximately 8%,
4.5% to 6% and 2.5%, respectively. The plan asset allocation at
December 31, 2005 was 16% to equity managers, 62% to fixed income
managers and the remainder invested primarily to cash and liquid
investments (2004 - 16%, 64% and 20%, respectively).
The Company regularly reviews its actual asset allocation for each of its
plans, and will periodically rebalance the investments in each plan to more
accurately reflect the targeted allocation when considered appropriate.
At December 31, 2004 and 2005, all of the assets attributable to U.S. plans
were invested in The Combined Master Retirement Trust ("CMRT"), a collective
investment trust sponsored by Contran to permit the collective investment by
certain master trusts which fund certain employee benefit plans sponsored by
Contran and certain of its affiliates.
At December 31, 2005, the asset mix of the CMRT was 86% in U.S. equity
securities, 3% in U.S. fixed income securities, 7% in international equity
securities and 4% in cash and other investments. At December 31, 2004, the asset
mix of the CMRT was 77% in U.S. equity securities, 14% in U.S. fixed income
securities, 7% in international equity securities and 2% in cash and other
investments.
The CMRT's long-term investment objective is to provide a rate of return
exceeding a composite of broad market equity and fixed income indices (including
the S&P 500 and certain Russell indices) utilizing both third-party investment
managers as well as investments directed by Mr. Harold C. Simmons. Mr. Harold
Simmons is the sole trustee of the CMRT. The trustee of the CMRT, along with the
CMRT's investment committee, of which Mr. Simmons is a member, actively manage
the investments of the CMRT. Such parties have in the past, and may in the
future, periodically change the asset mix of the CMRT based upon, among other
things, advice they receive from third-party advisors and their expectations as
to what asset mix will generate the greatest overall return. For the years ended
December 31, 2003, 2004 and 2005, the assumed long-term rate of return for plan
assets invested in the CMRT was 10%. In determining the appropriateness of such
long-term rate of return assumption, the Company considered, among other things,
the historical rates of return for the CMRT, the current and projected asset mix
of the CMRT and the investment objectives of the CMRT's managers. During the
18-year history of the CMRT from its inception in 1987 through December 31,
2005, the average annual rate of return has been 14% (with a 36% return for
2005).
The Company expects future benefits paid from all defined benefit pension
plans are as follows:
Amount
Years ending December 31, (In thousands)
- -------------------------- --------------
2006 $ 20,235
2007 19,363
2008 21,309
2009 20,181
2010 20,694
2011 to 2015 113,273
Defined contribution plans. The Company maintains various defined
contribution pension plans with Company contributions based on matching or other
formulas. Defined contribution plan expense approximated $.5 million in 2003,
$.4 million in 2004 and $.6 million in 2005.
Postretirement benefits other than pensions. In addition to providing
pension benefits, the Company currently provides certain health care and life
insurance benefits for eligible retired employees. Certain of the Company's
Canadian employees may become eligible for such postretirement health care and
life insurance benefits if they reach retirement age while working for the
Company. In 1989 the Company began phasing out such benefits for active U.S.
employees over a ten-year period and U.S. employees retiring after 1998 are not
entitled to any such benefits. The majority of all retirees are required to
contribute a portion of the cost of their benefits and certain current and
future retirees are eligible for reduced health care benefits at age 65. The
Company's policy is to fund medical claims as they are incurred, net of any
contributions by the retiree.
The components of the periodic OPEB cost and accumulated OPEB obligations
and the rates used in determining the actuarial present value of benefit
obligations are presented in the tables below. Variances from
actuarially-assumed rates will result in additional increases or decreases in
accumulated OPEB obligations, net periodic OPEB cost and funding requirements in
future periods. At December 31, 2005, the expected rate of increase in future
health care costs is 8% to 9% in 2006, declining to 5.5% in 2009 and thereafter
for U.S. plans and from 7% to 8% declining to 5% in 2008 and thereafter for
Canadian plans. (At December 31, 2004, the expected rate of increase in future
healthcare costs ranged from 8% to 9% in 2005 declining to 5.5% in 2009 and
thereafter for U.S. plans and declining to 5% in 2008 and thereafter for
Canadian plans.) If the healthcare cost trend rate was increased (decreased) by
one percentage point for each year, OPEB expense would have increased by $.1
million (decreased by $.1 million) in 2005, and the actuarial present value of
accumulated OPEB obligations at December 31, 2005 would have increased by $1.4
million (decreased by $1.1 million). At December 31, 2005, the Company currently
expects to contribute the equivalent of approximately $800,000 to all of its
OPEB plans during 2006, and aggregate benefit payments to OPEB plan participants
are expected to be the equivalent of approximately $800,000 in each of 2006 and
2007, $700,000 in each of 2008, 2009 and 2010 and $3.0 million during 2011
through 2015. The effects of the Medicare Part D subsidy, discussed below, on
expected future contributions is not material.
Years ended December 31,
-------------------------
2004 2005
---- ----
(In thousands)
Change in accumulated OPEB obligations:
Obligations at beginning of the year $ 12,661 $ 10,520
Service cost 232 222
Interest cost 724 584
Actuarial losses (gains) (1,215) 923
Plan amendments (1,318) -
Change in foreign currency exchange rates 411 286
Benefits paid (975) (1,255)
---------- ----------
Obligations at end of the year $ 10,520 $ 11,280
========== ==========
Change in plan assets:
Employer contributions $ 975 $ 1,255
Benefits paid (975) (1,255)
---------- ----------
Fair value of plan assets at end of the year $ - $ -
========== ==========
Funded status at end of the year:
Plan assets less than benefit obligations $ (10,520) $ (11,280)
Unrecognized net actuarial losses 143 1,102
Unrecognized prior service credit (1,850) (1,211)
---------- ----------
$ (12,227) $ (11,389)
========== ==========
Accrued OPEB costs recognized in the balance sheet:
Current $ 939 $ 1,215
Noncurrent 11,288 10,174
---------- ----------
$ 12,227 $ 11,389
========== ==========
Years ended December 31,
-----------------------------------------
2003 2004 2005
---- ---- ----
(In thousands)
Net periodic OPEB cost (credit):
Service cost $ 152 $ 232 $ 222
Interest cost 684 724 584
Amortization of prior service credit (1,055) (638) (639)
Recognized actuarial losses 86 137 72
-------- -------- --------
$ (133) $ 455 $ 239
======== ======== ========
The weighted average discount rate used in determining the actuarial
present value of benefit obligations as of December 31, 2005 was 5.6% (2004 -
5.7%). Such weighted average rate was determined using the projected benefit
obligation as of such dates. The impact of assumed increases in future
compensation levels does not have a material effect on the actuarial present
value of the benefit obligation as substantially all of such benefits relate
solely to eligible retirees, for which compensation is not applicable.
The weighted average discount rate used in determining the net periodic
OPEB cost for 2005 was 5.7% (2004 - 5.9%; 2003 - 6.5%). Such weighted average
rate was determined using the projected benefit obligation as of the beginning
of each year. The impact of assumed increases in future compensation levels does
not have a material effect on the net periodic OPEB cost as substantially all of
such benefits relate solely to eligible retirees, for which compensation is not
applicable. The impact of assumed rate of return on plan assets also does not
have a material affect on the net periodic OPEB cost as there were no plan
assets as of December 31, 2004 or 2005.
As of December 31, 2005, the accumulated OPEB obligations for all OPEB
plans was approximately $11.3 million (2004 - $10.5 million). At December 31,
2005, the accumulated OPEB obligations for all OPEB plans was comprised of $4.4
million related to U.S. plans and $6.9 million related to the Company's Canadian
plans (2004 - $5.1 million and $5.4 million, respectively).
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. During the third quarter of 2004, the Company
determined that benefits provided by its plan are actuarially equivalent to the
Medicare Part D benefit and therefore the Company is eligible for the federal
subsidy provided for by the Medicare 2003 Act. The effect of such subsidy, which
is accounted for prospectively from the date actuarial equivalence was
determined, as permitted by and in accordance with FASB Staff Position No.
106-2, did not have a material impact on the accumulated postretirement benefit
obligation, and will not have a material impact on the net periodic OPEB cost
going forward.
Note 15 - Related party transactions:
The Company may be deemed to be controlled by Harold C. Simmons. See Note
1. Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (a) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account, and
sales, leases and exchanges of assets, including securities issued by both
related and unrelated parties and (b) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations,
securities repurchases, and purchases and sales (and other acquisitions and
dispositions) of subsidiaries, divisions or other business units, which
transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a
publicly-held minority equity interest in another related party. While no
transactions of the type described above are planned or proposed with respect to
the Company other than as set forth in these financial statements, the Company
continuously considers, reviews and evaluates, and understands that Contran and
related entities consider, review and evaluate such transactions. Depending upon
the business, tax and other objectives then relevant, it is possible that the
Company might be a party to one or more such transactions in the future.
Current receivables from and payables to affiliates are summarized in the
table below.
December 31,
-------------------------
2004 2005
---- ----
(In thousands)
Current receivables from affiliate:
NL $ 16 $ -
Titanium Metals Corporation - 2
------- -------
$ 16 $ 2
======= =======
Current payables to affiliates:
Income taxes payable to Valhi $ 387 $ 434
NL - 145
LPC 8,844 9,803
------- -------
$ 9,231 $ 10,382
======= =======
Amounts payable to LPC are generally for the purchase of TiO2 (see Note 6)
and amounts payable to NL principally related to accrued interest on affiliate
loans. Purchases of TiO2 from LPC were $101.3 million in 2003, $104.8 million in
2004 and $109.4 million in 2005. Titanium Metals Corporation is an affiliate of
Valhi.
From time to time, loans and advances are made between the Company and
various related parties pursuant to term and demand notes. These loans and
advances are entered into principally for cash management purposes. When the
Company loans funds to related parties, the lender is generally able to earn a
higher rate of return on the loan than the lender would earn if the funds were
invested in other instruments. While certain of such loans may be of a lesser
credit quality than cash equivalent instruments otherwise available to the
Company, the Company believes that it has evaluated the credit risks involved,
and that those risks are reasonable and reflected in the terms of the applicable
loans. When the Company borrows from related parties, the borrower is generally
able to pay a lower rate of interest than the borrower would pay if it borrowed
from other parties. In addition, certain loans to and from affiliates not made
for cash management purposes are discussed in Notes 10 and 11.
Interest income on all loans to related parties, including amounts
discussed in Notes 10 and 11, was $.7 million in 2003 and nil in each of 2004
and 2005. Interest expense on all loans from related parties, including amounts
discussed in Note 10, was $1.9 million in 2003, $15.2 million in 2004 and nil in
2005.
Under the terms of various intercorporate services agreements ("ISAs")
entered into between the Company and various related parties, including Contran,
employees of one company will provide certain management, tax planning,
financial and administrative services to the other company on a fee basis. Such
charges are based upon estimates of the time devoted by the employees of the
provider of the services to the affairs of the recipient, and the compensation
and associated expenses of such persons. Because of the large number of
companies affiliated with Contran and NL, the Company believes it benefits from
cost savings and economies of scale gained by not having certain management,
financial and administrative staffs duplicated at each entity, thus allowing
certain individuals to provide services to multiple companies but only be
compensated by one entity. The net ISA fee charged to the Company included in
selling, general and administrative expense and corporate expense, was $3.7
million in 2003, $4.4 million in 2004 and $5.7 million in 2005.
Tall Pines Insurance Company, and EWI RE, Inc. provide for or broker
certain insurance policies for Contran and certain of its subsidiaries and
affiliates, including the Company. Tall Pines is wholly-owned by a subsidiary of
Valhi, and EWI is a wholly-owned subsidiary of NL. Consistent with insurance
industry practices, Tall Pines and EWI receive commissions from insurance and
reinsurance underwriters and/or assess fees for the policies that they provide
or broker. The aggregate premiums paid to Tall Pines (including amounts paid to
Valmont Insurance Company, another subsidiary of Valhi that was merged into Tall
Pines in 2004) and EWI by the Company and its joint venture were $7.2 million in
2003, $7.7 million in 2004 and $7.0 million in 2005. These amounts principally
included payments for insurance and reinsurance premiums paid to third parties,
but also included commissions paid to Tall Pines and EWI. Tall Pines purchases
reinsurance for substantially all of the risks it underwrites. The Company
expects that these relationships with Tall Pines and EWI will continue in 2006.
Contran and certain of its subsidiaries and affiliates, including the
Company, purchase certain of their insurance policies as a group, with the costs
of the jointly-owned policies being apportioned among the participating
companies. With respect to certain of such policies, it is possible that
unusually large losses incurred by one or more insureds during a given policy
period could leave the other participating companies without adequate coverage
under that policy for the balance of the policy period. As a result, Contran and
certain of its subsidiaries and affiliates, including the Company, have entered
into a loss sharing agreement under which any uninsured loss is shared by those
entities who have submitted claims under the relevant policy. The Company
believes the benefits in the form of reduced premiums and broader coverage
associated with the group coverage for such policies justifies the risk
associated with the potential for any uninsured loss.
In June 2003 the Company distributed EWI to NL in the form of a noncash
dividend. The Company accounted for the distribution of EWI to NL as a change in
accounting entity, and accordingly the Company's consolidated financial
statements have been retroactively restated to exclude the assets, liabilities,
results of operations and cash flows of EWI for all periods presented since the
January 2002 acquisiton. Reflected as part of "other capital transactions with
affiliates, net" in the accompanying Consolidated Statements of Cash Flows is
such $9.2 million purchase price.
Note 16 - Commitments and contingencies:
Environmental matters. The Company's operations are governed by various
environmental laws and regulations. Certain of the Company's operations are and
have been engaged in the handling, manufacture or use of substances or compounds
that may be considered toxic or hazardous within the meaning of applicable
environmental laws and regulations. As with other companies engaged in similar
businesses, certain past and current operations and products of the Company have
the potential to cause environmental or other damage. The Company has
implemented and continues to implement various policies and programs in an
effort to minimize these risks. The Company's policy is to maintain compliance
with applicable environmental laws and regulations at all of its facilities and
to strive to improve its environmental performance. From time to time, the
Company may be subject to environmental regulatory enforcement under U.S. and
foreign statutes, resolution of which typically involves the establishment of
compliance programs. It is possible that future developments, such as stricter
requirements of environmental laws and enforcement policies thereunder, could
adversely affect the Company's production, handling, use, storage,
transportation, sale or disposal of such substances. The Company believes all of
its plants are in substantial compliance with applicable environmental laws.
Litigation matters. Kronos' Belgian subsidiary and certain of its employees
are the subject of civil and criminal proceedings relating to an accident that
resulted in two fatalities at the Company's Belgian facility in 2000. In May
2004, the court ruled and, among other things, imposed a fine of euro 200,000
against Kronos and fines aggregating less than euro 40,000 against various
Kronos employees. Kronos and the individual employees have appealed the ruling.
In addition to the litigation described above, the Company and its
affiliates are also involved in various other environmental, contractual,
product liability, patent (or intellectual property), employment and other
claims and disputes incidental to its present and former businesses.
Kronos currently believes the disposition of all claims and disputes,
individually or in the aggregate, should not have a material adverse effect on
its consolidated financial condition, results of operations or liquidity.
Concentrations of credit risk. Sales of TiO2 accounted for approximately
90% of net sales from continuing operations during each of the past three years.
The remaining sales result from the mining and sale of ilmenite ore (a raw
material used in the sulfate pigment production process), and the manufacture
and sale of iron-based water treatment chemicals and certain titanium chemical
products (derived from co-products of the TiO2 production processes). TiO2 is
generally sold to the paint, plastics and paper industries. Such markets are
generally considered "quality-of-life" markets whose demand for TiO2 is
influenced by the relative economic well-being of the various geographic
regions. TiO2 is sold to over 4,000 customers, with the top ten customers
approximating 26% of net sales in 2005 and 25% of net sales in each of 2004 and
2003. By volume, approximately one-half of the Company's TiO2 sales were to
Europe in each of the past three years and approximately 40% of sales in 2003
and 38% in each of 2004 and 2005 were attributable to North America.
At December 31, 2005, consolidated cash, cash equivalents and restricted
cash includes $2.8 million invested in U.S. Treasury securities purchased under
short-term agreements to resell (2004 - $38.1 million).
Long-term contracts. The Company has long-term supply contracts that
provide for the Company's TiO2 feedstock requirements through 2010. The
agreements require the Company to purchase certain minimum quantities of
feedstock with minimum purchase commitments aggregating approximately $681
million at December 31, 2005.
Operating leases. Kronos' principal German operating subsidiary 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-third of Kronos' 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. Under a
separate supplies and services agreement expiring in 2011, the lessor provides
some raw materials, including chlorine, auxiliary and operating materials,
utilities and services necessary to operate the Leverkusen facility.
The Company also leases various other manufacturing facilities and
equipment. Some of the leases contain purchase and/or various term renewal
options at fair market and fair rental values, respectively. In most cases the
Company expects that, in the normal course of business, such leases will be
renewed or replaced by other leases. Net rent expense approximated $12 million
in 2003 and $11 million in each of 2004 and 2005. At December 31, 2005, future
minimum payments under noncancellable operating leases having an initial or
remaining term of more than one year were as follows:
Years ending December 31, Amount
- -------------------------- --------------
(In thousands)
2006 $ 4,857
2007 3,591
2008 3,045
2009 2,272
2010 1,388
2011 and thereafter 21,083
-------
$36,236
=======
Approximately $20.1 million of the $36.2 million aggregate future minimum
rental commitments at December 31, 2005 relates to the Company's Leverkusen
facility lease discussed above. The minimum commitment amounts for such lease
included in the table above for each year through the 2050 expiration of the
lease are based upon the current annual rental rate as of December 31, 2005. As
discussed above, any change in the rent is based solely on negotiations between
Bayer and the Company, and any such change in the rent is deemed "contingent
rentals" under GAAP which is excluded from the future minimum lease payments
disclosed above.
Income taxes. Contran and Valhi have agreed to a policy providing for the
allocation of tax liabilities and tax payments as described in Note 1. Under
applicable law, the Company, as well as every other member of the Contran Tax
Group, are each jointly and severally liable for the aggregate federal income
tax liability of Contran and the other companies included in the Contran Tax
Group for all periods in which the Company is included in the Contran Tax Group.
Contran has agreed, however, to indemnify the Company for any liability for
income taxes of the Contran Tax Group in excess of the Company's tax liability
previously computed and paid by Valhi in accordance with the tax allocation
policy.
Note 17 - Financial instruments:
Summarized below is the estimated fair value and related net carrying value
of the Company's financial instruments.
December 31, December 31,
2004 2005
--------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- -------------------------
(In millions)
Cash, cash equivalents, restricted cash
and noncurrent restricted marketable
debt securities $ 65.2 $ 65.2 $ 76.0 $ 76.0
Notes payable and long-term debt:
Fixed rate with market quotes -
8.875% Senior Secured Notes $ 519.2 $ 549.1 $ 449.3 $ 463.6
Variable rate debt $ 13.6 $ 13.6 $ 11.5 $ 11.5
Common stockholders' equity $ 470.8 $1,994.6 $ 410.0 $1,420.0
Fair value of the Company's restricted marketable debt securities, the
Notes and the fair value of the Company's common stockholders' equity, are based
upon quoted market prices at each balance sheet date.
Certain of the Company's sales generated by its non-U.S. operations are
denominated in U.S. dollars. The Company periodically uses currency forward
contracts to manage a very nominal portion of foreign exchange rate risk
associated with receivables denominated in a currency other than the holder's
functional currency or similar exchange rate risk associated with future sales.
The Company has not entered into these contracts for trading or speculative
purposes in the past, nor does the Company currently anticipate entering into
such contracts for trading or speculative purposes in the future. Derivatives
used to hedge forecasted transactions and specific cash flows associated with
foreign currency denominated financial assets and liabilities which meet the
criteria for hedge accounting are designated as cash flow hedges. Consequently,
the effective portion of gains and losses is deferred as a component of
accumulated other comprehensive income and is recognized in earnings at the time
the hedged item affects earnings. Contracts that do not meet the criteria for
hedge accounting are marked-to-market at each balance sheet date with any
resulting gain or loss recognized in income currently as part of net currency
transactions. During 2004 and 2005, the Company has not used hedge accounting
for any of its contracts. At December 31, 2005, the Company held a series of
short-term currency forward contracts, which mature at various dates through
March 31, 2006, to exchange an aggregate of U.S. $7.5 million for an equivalent
amount of Canadian dollars at an exchange rate of Cdn. $1.19 per U.S. dollar. At
December 31, 2005, the actual exchange rate was Cdn. $1.16 per U.S. dollar. The
estimated fair value of such foreign currency forward contracts was not material
at December 31, 2005. The Company held no such currency forward contracts at
December 31, 2004 and held no other significant derivative contracts at December
31, 2004 or 2005.
Note 18 - Quarterly results of operations (unaudited):
Quarter ended
----------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
--------- --------- --------- ---------
(In millions, except per share data)
Year ended December 31, 2004
Net sales $ 263.3 $ 295.8 $ 286.0 $ 283.5
Gross margin $ 61.0 $ 68.3 $ 66.7 $ 66.3
Net income $ 9.8 $ 284.8 $ 10.1 $ 10.2
Basic and diluted earnings per common share $ .20 $ 5.82 $ .21 $ .21
Year ended December 31, 2005
Net sales $ 291.9 $ 311.7 $ 292.1 $ 301.0
Gross margin $ 84.2 $ 94.6 $ 75.9 $ 72.2
Net income $ 21.4 $ 32.9 $ 8.0 $ 8.7
Basic and diluted earnings per common share $ .44 $ .67 $ .16 $ .18
The sum of the quarterly per share amounts may not equal the annual per
share amounts due to relative changes in the weighted average number of shares
used in the per share computations.
Note 19 - Accounting principles newly adopted in 2003 and 2004:
Asset retirement obligations. The Company adopted SFAS No. 143, "Accounting
for Asset Retirement Obligations," on January 1, 2003. Under SFAS No. 143, the
fair value of a liability for an asset retirement obligation covered under the
scope of SFAS No. 143 is recognized in the period in which the liability is
incurred, with an offsetting increase in the carrying amount of the related
long-lived asset. Over time, the liability would be accreted to its future
value, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon settlement.
Under the transition provisions of SFAS No. 143, at the date of adoption on
January 1, 2003 the Company recognized (i) an asset retirement cost capitalized
as an increase to the carrying value of its property, plant and equipment, (ii)
accumulated depreciation on such capitalized cost and (iii) a liability for the
asset retirement obligation. Amounts resulting from the initial application of
SFAS No. 143 are measured using information, assumptions and interest rates all
as of January 1, 2003. The amount recognized as the asset retirement cost is
measured as of the date the asset retirement obligation was incurred. Cumulative
accretion on the asset retirement obligation, and accumulated depreciation on
the asset retirement cost, is recognized for the time period from the date the
asset retirement cost and liability would have been recognized had the
provisions of SFAS No. 143 been in effect at the date the liability was
incurred, through January 1, 2003. The difference, if any, between the amounts
to be recognized as described above and any associated amounts recognized in the
Company's balance sheet as of December 31, 2002 is recognized as a cumulative
effect of a change in accounting principles as of the date of adoption. The
effect of adopting SFAS No. 143 as of January 1, 2003 was not material, as
summarized in the table below, and is not separately recognized in the
accompanying Statement of Income.
Amount
-------------
(in millions)
Increase in carrying value of net property, plant and equipment:
Cost $ .4
Accumulated depreciation (.1)
Decrease in carrying value of previously-accrued closure and
post-closure activities .3
Asset retirement obligation recognized (.6)
-----
Net impact $ -
=====
The change in the asset retirement obligations from January 1, 2003
($600,000) to December 31, 2003 ($800,000) and to December 31, 2004 ($1 million)
and to December 31, 2005 ($900,000) is due primarily to accretion expense and
the effects of currency translation. Accretion expense, which is reported as a
component of cost of sales in the accompanying Consolidated Statements of
Income, approximated $100,000 for each of the years ended December 31, 2003,
2004 and 2005.
Estimates of the ultimate cost to be incurred to settle the Company's asset
retirement obligations require a number of assumptions, are inherently difficult
to develop and the ultimate outcome may differ from current estimates. As
additional information becomes available, cost estimates will be adjusted as
necessary. It is possible that technological, regulatory or enforcement
developments, the results of studies or other factors could necessitate the
recording of additional liabilities.
Costs associated with exit or disposal activities. The Company adopted SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," on
January 1, 2003 for exit or disposal activities initiated on or after that date.
Under SFAS No. 146, costs associated with exit activities, as defined, that are
covered by the scope of SFAS No. 146 will be recognized and measured initially
at fair value, generally in the period in which the liability is incurred. Costs
covered by the scope of SFAS No. 146 include termination benefits provided to
employees, costs to consolidate facilities or relocate employees, and costs to
terminate contracts (other than a capital lease). Under prior GAAP, a liability
for such an exit cost is recognized at the date an exit plan is adopted, which
may or may not be the date at which the liability has been incurred. The effect
of adopting SFAS No. 146 as of January 1, 2003 was not material as the Company
was not involved in any exit or disposal activities covered by the scope of the
new standard as of such date.
Variable interest entities. The Company 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. 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 that would require the Company to consolidate such entity under 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.
Note 20- Accounting principles not yet adopted:
Stock options. The Company will adopt SFAS No. 123R, "Share-Based Payment",
as of January 1, 2006. SFAS No. 123R, among other things, eliminated the
alternative in previously 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, 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 previously measured
under SFAS No. 123 for the portion of any non-vested award existing as of
December 31, 2005 over the remaining vesting period. Because the Company has not
granted any options to purchase its common stock and did not grant any options
prior to January 1, 2006, and 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, the effect of adopting SFAS No. 123R is
not expected to be significant in so far as it relates to the recognition of
compensation cost in the Company's consolidated statements of income for
existing stock options. Should the Company, however, grant a significant number
of options in the future, the Company could recognize material amounts of
compensation cost related to such options in its consolidated financial
statements.
Also upon adoption of SFAS No. 123R, any cash income tax benefit resulting
from the exercise of stock options in excess of the cumulative income tax
benefit related to such options previously recognized for GAAP financial
reporting purposes in the Company's consolidated statements of income, if any,
will be reflected as a cash inflow from financing activities in the Company's
consolidated statements of cash flows, and the Company's cash flows from
operating activities will reflect the effect of cash paid for income taxes
exclusive of such cash income tax benefit.
SFAS No. 123R also requires certain expanded disclosures regarding the
Company's stock options, and such expanded disclosures have been provided in
Note 11.
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 are 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.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Balance Sheets
December 31, 2004 and 2005
(In thousands)
2004 2005
---- ----
Current assets:
Cash and cash equivalents $ 7,734 $ 186
Receivables from affiliates 2,776 4,661
Prepaid expenses 337 530
---------- ----------
Total current assets 10,847 5,377
---------- ----------
Other assets:
Notes receivable from subsidiaries and affiliates 51,250 23,280
Investment in subsidiaries 638,821 577,943
---------- ----------
Total other assets 690,071 601,223
---------- ----------
$ 700,918 $ 606,600
========== ==========
Current liabilities:
Accounts payable and accrued liabilities $ 4 $ 113
Payable to affiliates 742 436
Deferred income taxes 2 2
---------- ----------
Total current liabilities 748 551
---------- ----------
Noncurrent liabilities:
Notes payable to subsidiaries and affiliates 222,168 192,941
Deferred income taxes 7,157 3,124
---------- ----------
Total noncurrent liabilities 229,325 196,065
---------- ----------
Stockholders' equity 470,845 409,984
---------- ----------
$ 700,918 $ 606,600
========== ==========
Contingencies (Note 4)
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
Condensed Statements of Income
Years ended December 31, 2003, 2004 and 2005
(In thousands)
2003 2004 2005
---- ---- ----
Revenues and other income:
Equity in earnings of subsidiaries $ 92,051 $ 336,922 $ 77,437
Interest income from affiliates 3,009 2,678 2,627
Interest and dividends 29 382 69
Other income 8 - -
---------- ---------- ----------
95,097 339,982 80,133
---------- ---------- ----------
Costs and expenses:
General and administrative 269 1,601 2,048
Intercompany interest and other 1,917 17,973 18,943
Other expense - 130 (1,846)
---------- ---------- ----------
2,186 19,704 19,145
---------- ---------- ----------
Income before income taxes 92,911 320,278 60,988
Provision for income taxes 5,362 5,425 (10,018)
---------- ---------- ----------
Net income $ 87,549 $ 314,853 $ 71,006
========== ========== ==========
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
Condensed Statements of Cash Flows
Years ended December 31, 2003, 2004 and 2005
(In thousands)
2003 2004 2005
---- ---- ----
Cash flows from operating activities:
Net income $ 87,549 $314,853 $ 71,006
Cash distributions from subsidiaries - 60,000 25,500
Deferred income taxes (538) 10,831 (4,260)
Equity in earnings of subsidiaries (92,051) (336,922) (77,437)
Other, net - 90 (174)
Net change in assets and liabilities 1,295 (4,379) (2,525)
---------- ---------- ----------
Net cash provided (used)
by operating activities (3,745) 44,473 12,110
---------- ---------- ----------
Cash flows from investing activities:
Loans to affiliates (16,550) (8,000) -
Collections of loans to affiliates 46,404 7,000 27,970
---------- ---------- ----------
Net cash provided (used)
by investing activities 29,854 (1,000) 27,970
---------- ---------- ----------
Cash flows from financing activities:
Loans from affiliates 8,000 209,524
Repayments of loans from affiliates (52,600) (200,000) -
Dividends paid 18,000 (48,945) (48,949)
Capital contributions - 609 1,321
---------- ---------- ----------
Net cash used by financing
activities: (26,600) (38,812) (47,628)
---------- ---------- ----------
Net change during the year from operating,
investing and financing activities (491) 4,661 (7,548)
Balance at beginning of year 3,564 3,073 7,734
---------- ---------- ----------
Balance at end of year $ 3,073 $ 7,734 $ 186
========== ========== ==========
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
Notes to Condensed Financial Information
Note 1 - Basis of presentation:
The accompanying financial statements of Kronos Worldwide, Inc. reflect
Kronos' investment in its majority-owned subsidiaries on the equity method. The
Consolidated Financial Statements of Kronos and its majority-owned subsidiaries
(the "Company") and the related Notes to Consolidated Financial Statements are
incorporated herein by reference.
Note 2 - Net receivable from (payable to) subsidiaries and affiliates:
December 31,
-------------------------
2004 2005
---- ----
(In thousands)
Current:
Receivable from:
Kronos Louisiana, Inc. ("KLA") $ - $ 2,751
KLA - income taxes 2,681 1,874
Kronos (US), Inc. ("KUS") - 36
Kronos International, Inc. ("KII") 95 -
--------- ---------
$ 2,776 $ 4,661
========= =========
Payable to:
KUS $ 204 $
Valhi - income taxes 387 434
Kronos Cananda, Inc. ("KC") 56 -
Other 95 2
--------- ---------
$ 742 $ 436
========= =========
Noncurrent:
Receivable from KUS $ 51,250 $ 23,280
========= =========
Payable to KII $ 222,168 $ 192,941
========= =========
During 2004, KII loaned the Company the equivalent of $222,168. Such
amounts are eliminated upon consolidation. See also Note 10 of the Consolidated
Financial Statements for a description of noncurrent receivables and payables.
Note 3 - Investment in subsidiaries:
December 31,
-------------------------
2004 2005
---- ----
(In thousands)
Investment in:
KLA $ 136,749 $ 99,376
KC 86,066 87,240
KII 416,006 391,327
--------- ---------
$ 638,821 $ 577,943
========= =========
2003 2004 2005
---- ---- ----
Equity in income from continuing operations
of subsidiaries:
KLA $ 6,086 $ 12,969 $ 19,664
KC 2,192 (2,302) 1,481
KII 83,773 326,255 56,292
---------- ---------- ----------
$ 92,051 $ 336,922 $ 77,437
========== ========== ==========
Note 4 - Contingencies:
See Note 16 to the Consolidated Financial Statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
Balance at charged to Balance
beginning costs and Net Currency at end
Description of year expenses deductions translation Other of year
- --------------------------------------- ----------- ---------- ---------- ----------- ------ ---------
Year ended December 31, 2003:
Allowance for doubtful accounts $ 2,605 $ 367 $ (439) $ 387 $ - $ 2,920
======= ======= ======= ======= ====== =======
Allowance for slow moving inventory $ 7,716 $ 187 $ - $ 56 $ - $ 7,959
======= ======= ======= ======= ====== =======
Accrual for planned major
maintenance activities $ 3,986 $ 5,337 $(3,896) $ 900 $ - $ 6,327
======= ======= ======= ======= ====== =======
Year ended December 31, 2004:
Allowance for doubtful accounts $ 2,920 $ (125) $ (577) $ 159 $ - $ 2,377
======= ======= ======= ======= ====== =======
Allowance for slow moving inventory $ 7,959 $ 433 $ (167) $ 764 $ - $ 8,989
======= ======= ======= ======= ====== =======
Accrual for planned major
maintenance activities $ 6,327 $ 6,602 $(8,001) $ 425 $ - $ 5,353
======= ======= ======= ======= ====== =======
Year ended December 31, 2005:
Allowance for doubtful accounts $ 2,377 $ 689 $ (897) $ (204) $ - $ 1,965
======= ======= ======= ======= ====== =======
Allowance for slow moving inventory $ 8,989 $ 174 $ (29) $ (854) $ - $ 8,280
======= ======= ======= ======= ====== =======
Accrual for planned major
maintenance activities $ 5,353 $ 9,385 $(9,333) $ (448) $ - $ 4,957
======= ======= ======= ======= ====== =======
Note - Certain information has been omitted from this Schedule because it
is disclosed in the Notes to the Consolidated Financial Statements.