Back to GetFilings.com
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, 2003
Commission file number 1-31763
KRONOS WORLDWIDE, INC.
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 76-0294959
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common stock New York Stock Exchange
($.01 par value)
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate by check mark 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.
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act). Yes No X
No common stock was held by nonaffiliates of Kronos Worldwide, Inc. as of June
30, 2003 (the last business day of the Registrant's most recently-completed
second fiscal quarter).
As of February 27, 2004, 48,943,099 shares of the Registrant's common stock were
outstanding.
Documents incorporated by reference
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
the world's fifth largest producer of titanium dioxide pigments ("TiO2") with an
estimated 12% share of worldwide TiO2 sales volume in 2003. Approximately
one-half of the Company's 2003 sales volume was in Europe, where the Company is
the second largest producer of TiO2 with an estimated 18% 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, 2003, (i) NL Industries, Inc. (NYSE: NL) directly held 51%
of the outstanding common stock of the Company, (ii) Valhi, Inc (NYSE: VHI) and
a wholly-owned subsidiary of Valhi held an additional 42% of the Company's
common stock, (iii) Valhi and such wholly-owned subsidiary of Valhi held 84% of
NL's outstanding common stock and (iv) Contran Corporation and its subsidiaries
held approximately 90% 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. Mr. Simmons, the Chairman of the Board of each of Contran,
Valhi, NL and Kronos may be deemed to control such companies.
Prior to December 2003, the Company was a wholly-owned subsidiary of NL. On
December 8, 2003, NL completed the pro-rata distribution to its stockholders of
approximately 48.8% of the Company's outstanding common stock (including Valhi
and a wholly-owned subsidiary of Valhi). Stockholders of NL received one share
of common stock of Kronos for every two shares of NL common stock outstanding as
of the close of business on November 17, 2003, the record date for the
distribution.
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 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 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, fires, explosions, unscheduled or unplanned downtime and
transportation interruptions),
o The ability of the Company to renew or refinance credit facilities,
o The ultimate outcome of income tax audits, tax settlement initiatives or
other tax matters,
o Environmental matters (such as those requiring emission and discharge
standards for existing and new facilities),
o Government laws and regulations and possible changes therein,
o The ultimate resolution of pending litigation, and
o Possible future litigation.
Should one or more of these risks materialize (or the consequences of such
a development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or expected. The
Company disclaims any intention or obligation to update or revise any
forward-looking statement whether as a result of changes in information, future
events or otherwise.
Industry. Titanium dioxide pigments are chemical products used for
imparting whiteness, brightness and opacity to a wide range of products,
including paints, 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.
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 the Company's earnings and operating cash
flows. The Company's average TiO2 selling prices were generally decreasing
during all of 2001 and the first quarter of 2002, were generally flat during the
second quarter of 2002, were generally increasing during the third and fourth
quarters of 2002 and the first quarter of 2003, were generally flat during the
second quarter of 2003 and were generally decreasing during the third and fourth
quarters of 2003. Industry-wide demand for TiO2 is estimated to have been flat
or declined slightly throughout 2003. This is believed to have been the result
of lower customer inventory levels resulting from overall declining selling
prices. Volume demand in 2004 is expected to increase moderately over 2003
levels.
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 regions 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, are in greater demand. The Company believes that, due to its
strong presence in Western Europe, it is well positioned to participate in
growth in consumption of TiO2 in Eastern Europe. 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. Rutile TiO2 is a more tightly bound crystal that has a higher
refractive index than anatase TiO2 and, therefore, provides better opacification
and tinting strength in many applications. Although many end-use applications
can use either form of TiO2, rutile TiO2 is the preferred form for use in
coatings, plastics and ink. Anatase TiO2 has a bluer undertone and is less
abrasive than rutile TiO2, and it is often preferred for use in paper, ceramics,
rubber and man-made fibers.
The Company believes that there are no effective substitutes for TiO2.
However, extenders such as kaolin clays, calcium carbonate and polymeric
opacifiers are used in a number of the Company's markets. Generally, extenders
are used to reduce to some extent the utilization of higher-cost TiO2. The use
of extenders has not significantly changed TiO2 consumption over the past decade
because, to date, extenders generally have failed to match the performance
characteristics of TiO2. As a result, the Company believes that the use of
extenders will not materially alter the growth of the TiO2 business in the
foreseeable future.
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 is one of the world's leading producers and marketers of TiO2.
The Company and its distributors and agents sell and provide technical services
for its products to over 4,000 customers with the majority of sales in Europe
and North America. TiO2 is distributed by rail, truck and ocean carrier in
either dry or slurry form. The Company's manufacturing facilities are located in
Germany, Canada, Belgium and Norway, and the Company owns a one-half interest in
a TiO2 manufacturing joint venture located in Louisiana, U.S.A. The Company
conducts sales and marketing activities in over 100 countries worldwide. The
Company and its predecessors have produced and marketed TiO2 in North America
and Europe for over 80 years. As a result, 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. By
volume, approximately one-half of the Company's 2003 TiO2 sales were to Europe,
with approximately 40% to North America and the balance to export markets.
The Company is also engaged in the mining and sale of ilmenite ore (a raw
material used directly as a feedstock by some sulfate-process TiO2 plants)
pursuant to a governmental concession with an unlimited term that allows the
Company to operate an ilmenite mine in Norway. The ore body, owned by the
Norwegian government, has estimated ilmenite reserves that are expected to last
at least 20 years. Approximately 5% of the Company's consolidated net sales in
the last three years represented ilmenite sales to third-party customers. The
Company is also engaged in the manufacture and sale of iron-based water
treatment chemicals (derived co-products of the pigment production processes).
The Company's water treatment chemicals (marketed under the name Ecochem) are
used as treatment and conditioning agents for industrial effluents and municipal
wastewater, and in the manufacture of iron pigments. Sales of water treatment
chemicals were approximately 3% of the Company's revenues in each of 2001, 2002
and 2003.
Manufacturing process and raw materials. TiO2 is manufactured by the
Company using both the chloride process and the sulfate process. Approximately
72% of the Company's current production capacity is based on the chloride. The
chloride process is a continuous process in which chlorine is used to extract
rutile TiO2. In general, the chloride process is also less intensive than the
sulfate process in terms of capital investment, labor and energy. 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 normally produces 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 milling
and micronizing.
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 2003, chloride-process production
facilities represented approximately 62% of industry capacity.
Kronos produced a new Company record 476,000 metric tons of TiO2 in 2003,
compared to the prior record 442,000 metric tons produced in 2002 and 412,000
metric tons in 2001. The Company's average production capacity utilization rate
in 2003 was near full capacity, up from 96% in 2002. The rates in 2002 and 2003
were higher than 2001 due in part to debottlenecking activities. The Company
believes its current annual attainable production capacity is approximately
480,000 metric tons, including its one-half interest in the joint venture-owned
Louisiana plant (see "TiO2 manufacturing joint venture"). The Company expects
this production capacity will be increased by approximately 10,000 metric tons,
primarily at its chloride facilities, with moderate capital expenditures,
bringing the Company's capacity to approximately 490,000 metric tons during
2005.
The primary raw materials used in the TiO2 chloride production process are
titanium-containing feedstock derived from sand ilmenite, natural rutile ore,
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 390,000 metric tons of chloride feedstock in
2003, of which the vast majority was slag.
The Company purchased slag in 2003 from two subsidiaries of Rio Tinto plc
UK - Richards Bay Iron and Titanium Limited South Africa and Q.I.T. Fer et
Titane Inc. Canada ("Q.I.T.") under long-term supply contracts that expire at
the end of 2007 and 2006 respectively. Natural rutile ore is purchased primarily
from Iluka Resources, Limited (Australia), a company formed through the merger
of Westralian Sands Limited (Australia) and RGC Mineral Sands, Ltd., under a
long-term supply contract that expires at the end of 2005. 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 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 operates a rock ilmenite mine in Norway,
which provided all of the Company's feedstock for its European sulfate-process
pigment plants in 2003. The Company produced approximately 850,000 metric tons
of ilmenite in 2003 of which approximately 300,000 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 25,000 metric tons in 2003) primarily from Q.I.T., under a
long-term supply contract that expires at the end of 2006.
The Company believes the availability of titanium-containing feedstock for
both the chloride and sulfate processes is adequate for the next several years.
The Company does not expect to experience any interruptions of its raw material
supplies because of its long-term supply contracts. However, political and
economic instability in certain countries from which the Company purchases its
raw material supplies could adversely affect the availability of such feedstock.
Should the Company's vendors not be able to meet their contractual obligations
or should the Company be otherwise unable to obtain necessary raw materials, the
Company may incur higher costs for raw materials or may be required to reduce
production levels, which may have a material adverse effect on the Company's
financial position, results of operations or liquidity.
TiO2 manufacturing joint venture. A Subsidiary of the Company and Huntsman
International 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.
The manufacturing joint venture operates on a break-even basis and,
accordingly, the Company reports no equity in earnings of the joint venture. The
Company's cost for its share of the TiO2 produced is equal to its share of the
joint venture's costs. 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 Note 6 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. During 2003
the Company had an estimated 12% share of worldwide TiO2 sales volume, and the
Company believes that it is the leading seller of TiO2 in several countries,
including Germany and Canada.
The Company's principal competitors are E.I. du Pont de Nemours & Co.
("DuPont"); Millennium Chemicals, Inc.; Huntsman; Kerr-McGee Corporation; and
Ishihara Sangyo Kaisha, Ltd. The Company's five largest competitors have
estimated individual shares of TiO2 production capacity ranging from 24% to 5%,
and an estimated aggregate 70% share of worldwide TiO2 production volume. DuPont
has about one-half of total U.S. TiO2 production capacity and is the Company's
principal North American competitor.
Capacity additions that are the result of construction of greenfield plants
in the worldwide TiO2 market require significant capital and substantial lead
time, typically three to five years in the Company's experience. As no new
plants are currently under construction, additional greenfield capacity is not
expected in the next three to five years, but industry capacity can be expected
to increase as the Company and its competitors debottleneck existing plants. In
addition to potential capacity additions, certain competitors have either idled
or shut down facilities. Based on the factors described under the caption
"Industry" above, the Company expects that the average annual increase in
industry capacity from announced debottlenecking projects will be less than the
average annual demand growth for TiO2 over the next three to five years.
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 the Company's expectations. If actual developments differ from the
Company's expectations, the Company and the TiO2 industry's performance could be
unfavorably affected.
Research and development. The Company's expenditures for research and
development and certain technical support programs were approximately $6 million
in each of 2001 and 2002 and $7 million in 2003. 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.
Patents and trademarks. Patents held for products and production processes
are believed to be important to the Company and to the continuing business
activities of the Company. The Company continually 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.
The Company's major trademarks, including Kronos(TM), are protected by
registration in the United States and elsewhere with respect to those products
it manufactures and sells.
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 $435 million at December 31, 2003. Net
property and equipment in the U.S., including 50% of the property and equipment
of LPC, was approximately $116 million at December 31, 2003. Kronos' European
operations include production facilities in Germany, Belgium and Norway.
Approximately $711 million of the Company's 2003 consolidated sales were to
non-U.S. customers, including $91 million to customers in areas other than
Europe and Canada. Sales to customers in the U.S. aggregated $297 million in
2003. 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
25% of net sales in 2003. 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, 2003, the Company employed approximately
2,450 persons, excluding LPC employees, with approximately 50 employees in the
United States and approximately 2,400 at sites outside the United States. Hourly
employees in production facilities worldwide, including LPC, are represented by
a variety of labor unions, with labor agreements having various expiration
dates. The Company believes its labor relations are good.
Regulatory and environmental matters. Kronos' operations are governed by
various environmental laws and regulations. Certain of Kronos' businesses 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. 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. The policy of Kronos 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. From time to time,
Kronos' facilities may be subject to environmental regulatory enforcement under
such 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' production facilities operate in an environmental regulatory
framework in which governmental authorities typically are granted broad
discretionary powers that allow them to issue operating permits required for the
plants to operate. Kronos believes that all its plants are in substantial
compliance with applicable environmental laws. Neither Kronos nor any of its
subsidiaries have been notified of any environmental claim in the United States
or any foreign jurisdictions by the U.S. EPA or any applicable foreign authority
or any state, provincial or local authority.
While the laws regulating operations of industrial facilities in Europe
vary from country to country, a common regulatory denominator 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, 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, including EU Directive 92/112/EEC regarding establishment of
procedures for reduction and eventual elimination of pollution caused by waste
from the TiO2 industry.
At Kronos' sulfate plant facilities other than Fredrikstad, Norway and
Varennes, Quebec, Canada Kronos recycles spent acid either through contracts
with third parties or using Kronos' own facilities. At its 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
byproduct gypsum is sold to a local wallboard manufacturer and solid wastes are
landfilled. Kronos has a contract with a third party to treat certain
by-products of its German sulfate-process plants. Either party may terminate the
contract after giving four years advance notice with regard to its Nordenham,
Germany plant. Under certain circumstances, Kronos may terminate the contract
after giving six months notice with respect to treatment of by-products from the
Leverkusen, Germany plant.
Kronos is also involved in various other environmental, contractual,
product liability and other claims and disputes incidental to its business.
Kronos' capital expenditures related to its ongoing environmental
protection and improvement programs in 2003 were approximately $5 million, and
are currently expected to be approximately $5 million in 2004.
Website and other available information. 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, 2003 and copies of the
Company's Quarterly Reports on Form 10-Q for 2003 and 2004 and any Current
Reports on Form 8-K for 2003 and 2004, 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 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 2. PROPERTIES
The Company currently operates four TiO2 plants in Europe (one in
Leverkusen, Germany; one in Nordenham, Germany; one in Langerbrugge, Belgium;
and one in 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.
The Company operates an ilmenite ore mine in Hauge i Dalane, Norway pursuant to
a governmental concession and also owns a TiO2 slurry plant in Lake Charles,
Louisiana. See Note 6 to the Consolidated Financial Statements.
The Company's principal German operating subsidiary leases the land under
its Leverkusen TiO2 production facility pursuant to a lease expiring in 2050.
The Leverkusen facility, with about one-third of the Company's current TiO2
production capacity, is located within an extensive manufacturing complex owned
by Bayer AG. Rent for the Leverkusen facility is periodically established by
agreement with Bayer AG 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 and certain amounts of sulfuric acid,
auxiliary and operating materials and utilities services necessary to operate
the Leverkusen facility. The lease and the supplies and services agreement have
certain restrictions regarding the Company's ability to transfer ownership or
use of the Leverkusen facility.
The Company owns all of its principal production facilities described
above, except for the land under the Leverkusen and Fredrikstad facilities. The
Company also operates an ilmenite ore mine in Norway pursuant to a governmental
concession with an unlimited term to operate the ilmenite mine in Norway.
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.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings. 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, 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to December 2003, the Company was a wholly-owned subsidiary of NL. On
December 8, 2003, NL completed the pro-rata distribution to its stockholders of
approximately 48.8% of the Company's outstanding common stock (including Valhi
and a wholly-owned subsidiary of Valhi.) Stockholders of NL received one share
of common stock of Kronos for every two shares of NL common stock outstanding as
of the close of business on November 17, 2003, the record date for the
distribution.
The Company's common stock is listed and traded on the New York Stock
Exchange (symbol: KRO). As of February 27, 2004, there were approximately 5,300
holders of record of common stock. The Company's common stock commenced trading
on December 8, 2003. For the period from December 8, 2003 to December 31, 2003,
the high and low closing per share sales price of Kronos common stock according
to Bloomberg was $24.79 and $16.00 respectively. On February 27, 2004 the
closing price of Kronos common stock according to the NYSE Composite Tape was
$32.25.
Immediately prior to NL's distribution of shares of Kronos common stock to
its stockholders, the Company declared and paid a dividend to NL in the form of
a $200 million long-term note payable. See Note 10 to the Consolidated Financial
Statements.
On February 19, 2004, the Company's Board of Directors declared a regular
quarterly dividend of $.25 per share to stockholders of record as of March 11,
2004 to be paid on March 29, 2004. 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.
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
following selected historical financial data of Kronos with respect to the years
ended December 31, 2000, 2001, 2002 and 2003 and as of December 31, 2001, 2002
and 2003, is derived from, and should be read in conjunction with, Kronos'
audited Consolidated Financial Statements. The selected historical financial
data for the year ended December 31, 1999, and as of December 31, 1999 and 2000,
is derived from Kronos' unaudited Consolidated Financial Statements. 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. The selected historical financial data reflects Kronos'
results as it has historically been operated as a part of NL, and these results
may not be indicative of Kronos' future performance as a publicly traded company
following the distribution.
Years ended December 31,
1999 2000 2001 2002 2003
(In millions, except per share data)
STATEMENTS OF OPERATIONS DATA:
Net sales $ 908.4 $ 922.3 $ 835.1 $ 875.2 $1,008.2
Net income (1) 125.9 130.2 154.5 66.3 87.5
Net income per share 2.57 2.66 3.16 1.35 1.79
Cash dividends per share (2) $ .61 $ 1.12 $ .62 $ 2.27 $ .14
BALANCE SHEET DATA (at year end):
Total assets 973.6 893.4 910.1 988.5 1,121.9
Notes payable and long-term debt including
current maturities 340.4 266.1 242.7 370.5 556.7
Common stockholder's equity 310.9 346.6 378.5 314.2 159.4
TiO2 OPERATING STATISTICS:
Average selling price
Index (1983=100) 153 161 156 142 146
Sales volume* 427 436 402 455 462
Production volume* 411 441 412 442 476
Production capacity at beginning of year* 440 440 450 455 470
Production rate as a percentage of capacity 93% Full 91% 96% Full
* Metric tons in thousands
(1) Net income in 1999 includes a $57.7 million income tax benefit related to
(i) a favorable resolution of Kronos' previously-reported tax contingency
in Germany ($29.1 million) and (ii) a net reduction in Kronos' deferred
income tax asset valuation allowance due to a change in the estimate of
Kronos' ability to utilize certain income tax attributes under the
"more-likely-than-not" recognition criteria ($28.6 million).
(2) 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 2001, 2002 and 2003, 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 12% to 18%.
o The Company provides reserves for estimated obsolescence or unmarketable
inventory 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 2003, 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 amount recognized
as defined benefit pension and OPEB expense, and the reported amount 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 expense 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.
o The Company records accruals for legal, income tax and other contingencies
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).
Executive summary
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. The relatively lower
levels of sales and production volumes in 2001 as compared to 2002 and 2003 are
due in part to the effects of a fire at one of the Company's production
facilities, as discussed below.
Selling prices for TiO2, the Company's principal product, were generally
decreasing during all of 2001 and the first quarter of 2002, were generally flat
during the second quarter of 2002, were generally increasing during the last
half of 2002 and the first quarter of 2003, were generally flat during the
second quarter of 2003 and were generally declining during the third and fourth
quarters of 2003.
Results of operations
Average TiO2 selling prices in billing currencies (which exclude the
effects of foreign currency translation) were generally decreasing during all of
2001 and the first quarter of 2002, were generally flat during the second
quarter of 2002 and were generally increasing during the last half of 2002 and
the first quarter of 2003. Average selling prices for TiO2 were generally flat
during the second quarter of 2003 and were generally decreasing throughout the
remainder of 2003.
Years ended December 31, % Change
2001 2002 2003 2001-02 2002-03
(In millions, except selling price data)
Net sales $ 835.1 $ 875.2 $1,008.2 + 5% +15%
Cost of sales 578.1 671.8 739.2 +16% +10%
------ ------- ---------
Gross margin 257.0 203.4 269.0 -21% +32%
Selling, general and administrative
expense (98.7) (107.7) (124.4) + 9% +16%
Insurance recoveries, net 7.2 - -
Currency transaction gains (losses), net 1.2 (.5) (7.7)
Corporate expense (4.9) (3.3) (4.2)
Other operating income (expense), net .2 (.4) (.2)
------- ------- --------
Income from operations $ 162.0 $ 91.5 $ 132.5 -44% +45%
======= ======= ========
TiO2 operating statistics:
Percent change in average selling prices:
Using actual foreign currency
exchange rates - 7% +13%
Impact of changes in foreign
currency exchange rates - 2% -10%
----- ----
In billing currencies - 9% + 3%
===== ====
Sales volumes* 402 455 462 +13% + 2%
Production volumes* 412 442 476 + 7% + 8%
Production rate as Full
percent of capacity 91% 96%
* Thousands of metric tons
Year ended December 31, 2003 compared to year ended December 31, 2002
The Company's net sales increased $133.0 million (15%) in 2003 compared to
2002 due to higher average selling prices along with higher sales volumes in
2003 and the positive effects of currency exchange rates, specifically the
weaker U.S. dollar as compared to the euro and Canadian dollar. Excluding the
effect of fluctuations in the value of the U.S. dollar relative to other
currencies, the Company's average TiO2 selling price in 2003 was 3% higher than
2002, primarily due to the European and export markets. When translated from
billing currencies to U.S. dollars using actual foreign currency exchange rates
prevailing during the respective periods, the Company's average TiO2 selling
prices in 2003 increased 13% compared to 2002. The Company's TiO2 sales volumes
in 2003 set a new record, increasing 2% from the previous record achieved in
2002, with higher volumes in European and North American markets more than
offsetting a decline in volumes to export markets. By volume, approximately
one-half of the Company's 2002 and 2003 TiO2 sales volumes were attributable to
markets in Europe, with 40% attributable to North America and the balance to
export markets.
The Company's sales are denominated in various currencies, including the
U.S. dollar, the euro, other major European currencies and the Canadian dollar.
The disclosure of the percentage change in the Company's average TiO2 selling
price in billing currencies (which excludes the effects of fluctuations in the
value of the U.S. dollar relative to other currencies) is considered a
"non-GAAP" financial measure under regulations of the SEC. The disclosure of the
percentage change in the Company's average TiO2 selling prices using actual
foreign currency exchange rates prevailing during the respective periods is
considered the most directly comparable financial measure presented in
accordance with accounting principles generally accepted in the United States
("GAAP measure"). The Company discloses percentage changes in its average TiO2
prices in billing currencies because the Company believes such disclosure
provides useful information to investors to allow them to analyze such changes
without the impact of changes in foreign currency exchange rates, thereby
facilitating period-to-period comparisons of the relative changes in average
selling prices in the actual various billing currencies. Generally, when the
U.S. dollar either strengthens or weakens against other currencies, the
percentage change in average selling prices in billing currencies will be higher
or lower, respectively, than such percentage changes would be using actual
exchange rates prevailing during the respective periods. The difference between
the 13% increase in the Company's average TiO2 selling prices during 2003 as
compared to 2002 using actual foreign currency exchange rates prevailing during
the respective periods (the GAAP measure) and the 3% percentage increase in the
Company's average TiO2 selling price in billing currencies (the non-GAAP
measure) during such periods is due to the effect of changes in foreign currency
exchange rates. The table above presents (i) the percentage change in the
Company's average TiO2 selling prices using actual foreign currency exchange
rates prevailing during the respective periods (the GAAP measure), (ii) the
percentage change in Kronos average TiO2 selling price in billing currencies
(the non-GAAP measure) and (iii) the percentage change due to changes in foreign
currency exchange rates (or the reconciling item between the non-GAAP measure
and the GAAP measure).
The Company's cost of sales increased $67.4 million (10%) in 2003 compared
to 2002 due to the higher sales volumes. The Company's cost of sales, as a
percentage of net sales, decreased from 77% in 2002 to 73% in 2003 due primarily
to the effects of continued cost reduction efforts combined with the impact of
higher production volumes and higher average selling prices. Operating rates
were near full capacity during most of 2003, setting a new Company production
record.
The Company's gross margins increased $65.5 million (32%) from 2002 to 2003
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
remained consistent at 12%, increasing proportionately with the increased sales
and production volume.
Certain of the sales generated by the Company's European and Canadian
operations are denominated in the U.S. dollar, and such operations routinely
hold U.S. dollar-denominated receivables. Primarily as a result of the weakening
of the U.S. dollar as compared to the Canadian dollar and the euro throughout
the year, the Company's results in 2003 included net currency transaction losses
of $7.7 million. Due to a more stable dollar in 2002, the Company recognized net
currency transaction losses of $500,000.
Corporate expenses for 2003 increased 26% to $4.1 million as compared to
2002 primarily due to higher fees associated with Kronos becoming a separate SEC
registrant and certain corporate office relocation expenses.
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 in 2003 by a net $93 million compared
to 2002. Fluctuations in the value of the U.S. dollar relative to other
currencies similarly impacted Kronos' foreign currency-denominated operating
expenses. The Company's operating costs that are not denominated in the U.S.
dollar, when translated into U.S. dollars, were higher in 2003 compared to the
same periods of 2002. Overall, currency exchange rate fluctuations resulted in a
net decrease in Kronos' operating income in 2003 of approximately $6 million as
compared to 2002.
Year ended December 31, 2002 compared to year ended December 31, 2001
The Company's sales increased $40.1 million (5%) in 2002 compared to 2001
due primarily to higher TiO2 sales volumes, offset by lower average TiO2 selling
prices. The Company's record TiO2 sales volumes in 2002 were 13% higher compared
to 2001 primarily due to higher volumes in European and North American markets
of 14% and 17%, respectively. By volume, approximately one-half of the Company's
2002 TiO2 sales volumes were attributable to markets in Europe, with 39%
attributable to North America and the balance to export markets. The lower TiO2
sales volumes in 2001 were due in part to the effect of a fire at the Company's
Leverkusen, Germany facility in March 2001 that disrupted operations. See Note
14 to the Consolidated Financial Statements. Excluding the effect of
fluctuations in the value of the U.S. dollar relative to other currencies, the
Company's average TiO2 selling price in 2002 was 9% lower than 2001, with prices
lower in all major regions. When translated from billing currencies to U.S.
dollars using actual foreign currency exchange rates prevailing during the
respective periods, the Company's average TiO2 selling prices in 2002 decreased
7% compared to 2001.
The Company's cost of sales increased $93.8 million (16%) in 2002 compared
to 2001 due to the higher sales volume, partially offset by lower unit costs,
which resulted primarily from the higher production levels. The effects of lower
TiO2 sales and production volumes in 2001 were partially offset by receipt of
the business interruption proceeds discussed above. The Company's cost of sales,
as a percentage of net sales, increased from 69% in 2001 to 77% in 2002
primarily due to the impact on net sales of the lower average selling prices
partially offset by lower unit costs.
The Company's gross margin declined $53.6 million (21%) in 2002 compared to
2001 as the effect of lower average TiO2 selling prices more than offset the
effect of higher TiO2 sales and production volumes. The effect of the higher
sales and production volumes was offset in part by the $27.3 million of business
interruption proceeds received in 2001, as discussed below.
The Company's record TiO2 production volume in 2002 was 7% higher than
2001. Kronos' operating rates in 2001 were lower as compared to 2002 primarily
due to lost production resulting from the Leverkusen fire.
The Company's income from operations in 2001 includes $27.3 million of
business interruption insurance proceeds as payment for losses (unallocated
period costs and lost margin) caused by the Leverkusen fire. The effects of the
lower TiO2 sales and production volumes were offset in part by the business
interruption insurance proceeds. Of such $27.3 million of business interruption
insurance proceeds, $20.1 million was recorded as a reduction of cost of sales
to offset unallocated period costs that resulted from lost production, and the
remaining $7.2 million, presenting recovery of lost margin, is included in
income from operations (as shown on the table above). The business interruption
insurance proceeds distorted the income from operations margin percentage in
2001 as there are no sales associated with the $7.2 million of lost margin
recognized. See Note 14 to the Consolidated Financial Statements.
The Company also recognized insurance recoveries of $29.1 million in 2001
for property damage and related cleanup and other extra expenses related to the
Leverkusen fire, resulting in an insurance gain of $17.5 million, as the
insurance recoveries exceeded the carrying value of the property destroyed and
the cleanup and other extra expenses incurred. Such insurance gain is not
reported as a component of income from operations but is included in other
income and expense, as discussed below. The Company does not expect to recognize
any additional insurance recoveries related to the Leverkusen fire. See Note 14
to the Consolidated Financial Statements.
The Company's selling, general and administrative expenses ("SG&A
expenses") increased $9.0 million (9%) in 2002 as compared to 2001 primarily due
to higher distribution expenses ($600,000) associated with the higher sales
volume in 2002 and higher administrative expenses of $5.8 million, as well as
the impact of relative changes in foreign currency exchange rates, which
increased Kronos' expenses in 2002 compared to 2001. SG&A expenses were
approximately 12% of sales in both 2001 and 2002.
As discussed above, Kronos has substantial operations and assets located
outside the United States (primarily in Germany, Belgium, Norway and Canada) and
consequently, the translated U.S. dollar value of Kronos' foreign sales and
operating results are subject to currency exchange rate fluctuations that may
favorably or adversely impact reported earnings and may affect the comparability
of period-to-period operating results. Overall, fluctuations in the value of the
U.S. dollar relative to other currencies, primarily the euro, increased TiO2
sales in 2002 by a net $21 million compared to 2001. Fluctuations in the value
of the U.S. dollar relative to other currencies similarly impacted Kronos'
foreign currency-denominated operating expenses. The Company's operating costs
that are not denominated in the U.S. dollar, when translated into U.S. dollars,
were higher in 2003 compared to the same periods of 2002. Overall, currency
exchange rate fluctuations on Kronos' operating income comparisons was not
significant in 2002 as compared to 2001.
Outlook.
Kronos expects its TiO2 production volumes in 2004 will approximate its
2003 production volumes, and sales volumes are expected to be slightly higher in
2004 as compared to 2003. Kronos' average Ti02 selling price, which declined
during the second half of 2003, is expected to continue to decline during the
first quarter of 2004. Kronos is hopeful that its average selling prices will
cease to decline sometime during the first half of 2004 and will rise
thereafter. Nevertheless, Kronos expects its average TiO2 selling prices, in
billing currencies, will be lower in 2004 as compared to 2003. Overall, Kronos
expects its operating income in 2004 will be lower than 2003. Kronos'
expectations as to the future prospects of Kronos and the TiO2 industry are
based upon a number of factors beyond its control, including worldwide growth of
gross domestic product, competition in the marketplace, unexpected or
earlier-than-expected capacity additions and technological advances. If actual
developments differ from Kronos' expectations, Kronos' results of operations
could be unfavorably affected.
The following table sets forth certain information regarding other income and
expense items.
Years ended December 31, Change
2001 2002 2003 2001-02 2002-03
(In millions)
Trade interest income $ 2.3 $ 1.7 $ .7 $ (.6) $ (1.0)
Interest income from affiliates 33.4 20.7 .7 (12.7) (20.0)
Other interest income .3 .7 .2 .4 (.5)
Currency transaction gains - 6.3 - 6.3 (6.3)
Insurance recoveries, net 17.5 - - (17.5) -
Interest expense (4.3) (16.8) (33.0) (12.5) (16.2)
Interest expense to affiliates (22.9) (12.3) (1.8) 10.6 10.5
------ ------ ------ ------ ------
$(26.3) $ .3 $(33.2) $(26.0) $(33.5)
====== ====== ====== ====== ======
Interest income fluctuates in part based upon the amount of funds invested
and yields thereon. Aggregate interest income declined $21.0 million in 2003
compared to 2002 and $13.3 million in 2002 compared with 2001 primarily due to
lower average yields on invested funds. The Company expects interest income will
be lower in 2004 than 2003 due to lower average funds available for investment
and to lower average yields and lower average levels of funds available for
investment.
In June 2002 Kronos International, Inc. ("KII"), a wholly-owned subsidiary
of the Company, sold (euro)285 million of its 8.875% Senior Secured Notes (the
"Notes") due 2009. KII used the net proceeds of the Notes offering to repay
certain intercompany indebtedness owed to the Company, a portion of which the
Company used to redeem at par all of its outstanding 11.75% Senior Secured Notes
due 2003, plus accrued interest. As a result of the refinancing, the Company
recognized a foreign currency transaction gain of $6.3 million in 2002 related
to the extinguishment of certain intercompany indebtedness. See Note 8 to the
Consolidated Financial Statements.
The insurance recoveries, net of $17.5 million in 2001 related to insurance
proceeds received from property damage resulting from the Leverkusen fire. The
insurance proceeds received exceeded the carrying value of the property
destroyed and cleanup costs incurred. See Note 14 to the Consolidated Financial
Statements.
Aggregate interest expense in 2003 increased $5.7 million compared to 2002
primarily due to higher levels of outstanding debt and associated currency
effects, partially offset by lower interest rates. Aggregate interest expense in
2002 increased $1.9 million compared with 2001 primarily due to $2.0 million of
additional second-quarter 2002 interest expense related to the early
extinguishment of the Company's 11.75% Senior Secured Notes. See Note 8 to the
Consolidated Financial Statements. Assuming no significant change in interest
rates, interest expense in 2004 is expected to be higher compared with 2003 due
to higher average levels of outstanding indebtedness, partially offset by lower
average interest rates.
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 12 to the Consolidated Financial
Statements. Income tax rates vary by jurisdiction (country and/or state), and
relative changes in the geographic mix of the Company's pre-tax earnings can
result in fluctuations in the effective income tax rate.
During 2003, the Company reduced its deferred income tax asset valuation
allowance by 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, the Company recognized a $38.0 million income tax
benefit related to the net refund of certain prior year German income taxes.
During 2002, the Company reduced its deferred income tax asset valuation
allowance by approximately $1.8 million, primarily as a result of utilization of
certain income tax attributes for which the benefit had not previously been
recognized. The provision for income taxes in 2002 also includes a $2.3 million
deferred income tax benefit related to certain changes in the Belgian tax law.
During 2001, the Company reduced its deferred income tax asset valuation
allowance by $23.2 million. This entire reduction related to a change in
estimate of the Company's ability to utilize certain German income tax
attributes following the completion of a restructuring of its German operations,
the benefit of which had not previously been recognized under the
"more-likely-than-not" recognition criteria.
At December 31, 2003, the Company had the equivalent of approximately $438
million of income tax loss carryforwards in Germany with no expiration date.
However, the Company has provided a deferred tax valuation allowance against
substantially all of these income tax loss carryforwards because the Company
currently believes they do not meet the "more-likely-than-not" recognition
criteria. The Company periodically evaluates the "more-likely-than-not"
recognition criteria with respect to such tax loss carryforwards, and it is
possible that in the future the Company may conclude such carryforwards do meet
the recognition criteria, at which time the Company would reverse all or a
portion of such deferred tax valuation allowance.
In January 2004, the German federal government enacted new tax law
amendments that limit the annual utilization of income tax loss carryforward
effective January 1, 2004. The new law may significantly affect Kronos' future
income tax expense and cash tax payments.
Related party transactions. The Company is a party to certain transactions
with related parties. See Note 15 to the Consolidated Financial Statements.
Accounting principles newly adopted in 2003. See Note 18 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 13 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 $5.0 million in 2001, $7.1 million in 2002 and $8.4
million in 2003. 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 $7.4 million in 2001, $9.0 million in 2002 and $13.6
million in 2003.
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, 2003, approximately 4%, 63%, 12% and 17% of the projected
benefit obligation related to Company plans in the U.S., Germany, Canada and
Norway, 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
ecember 31, 2001 and expense December 31, 2002 and expense December 31, 2003 and
D in 2002 in 2003 expense in 2004
------------------------------- -------------------------------- -----------------------------
Germany 5.8% 5.5% 5.3%
Canada 7.3% 7.0% 6.3%
Norway 6.0% 6.0% 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, 2003, approximately 5%, 57%, 12% and 22% of the plan assets
related to plan assets for the Company's plans in the U.S., Germany, Canada and
Norway, 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 current
plan asset allocation at December 31, 2003 was 25% to equity managers and
75% to fixed income managers.
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, 2003 was 57% to equity managers and
43% to fixed income managers.
o In Norway, the Company currently has a plan asset target allocation of 14%
to equity managers and 86% to fixed income managers, with an expected
long-term rate of return for such investments of approximately 8% and 6%,
respectively. The current plan asset allocation at December 31, 2003 was
15% to equity managers and 85% to fixed income managers.
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 2001,
2002 and 2003 were as follows:
2001 2002 2003
---- ---- ----
Germany 7.3% 6.8% 6.5%
Canada 7.8% 7.0% 7.0%
Norway 7.0% 7.0% 6.0%
The Company currently expects to utilize the same long-term rate of return
on plan asset assumptions in 2004 as it used in 2003 for purposes of determining
the 2004 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.
Based on the actuarial assumptions described above and the Company's
current expectation for what actual average foreign currency exchange rates will
be during 2004, the Company expects its defined benefit pension expense will
approximate $13 million in 2004. In comparison, the Company expects to be
required to make approximately $9 million of contributions to such plans during
2004.
As noted above, defined benefit pension expense and the amount recognized
as prepaid and 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, 2003, the Company's
aggregate projected benefit obligations would have increased by approximately
$11.6 million at that date, and the Company's defined benefit pension expense
would be expected to increase by approximately $1.6 million during 2004.
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
2004.
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 13 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 $76,000 in 2001, $265,000 in 2002 and $133,000 in 2003. 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 $1.2 million in 2001 and $1.0 million
in 2002 and 2003.
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 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, 2003,
the expected rate of increase in future health care costs ranges from 10% in
2004, declining 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 2004, the Company expects its consolidated OPEB credit will
approximate $200,000 in 2004. In comparison, the Company expects to be required
to make approximately $2 million of contributions to such plans during 2004.
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, 2003, 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 2004. 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 $1.1 million at December 31,
2003, and OPEB expense would have increased by $200,000 in 2003.
Foreign operations
The Company has substantial operations located outside the United States
(principally Europe and Canada) 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. As of January 1, 2001, the functional currency of the Company's German,
Belgian, Dutch and French operations had been converted to the euro from their
respective national currencies. At December 31, 2003, the Company had
substantial net assets denominated in the euro, Canadian dollar, Norwegian
kroner and United Kingdom pound sterling.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated cash flows
The Company's consolidated cash flows for each of the past three years are
presented below:
Years ended December 31,
2001 2002 2003
(In millions)
Operating activities $ 135.7 $ 111.1 $ 107.6
Investing activities (33.7) (34.6) (35.4)
Financing activities (99.0) (93.9) (61.8)
------- ------- -------
Net cash provided (used) by operating, investing and financing
activities $ 3.0 $ (17.4) $ 10.4
======= ======= =======
Operating cash flows. Certain items included in the determination of net
income do not represent current inflows or outflows of cash. For example,
insurance recoveries, net of $17.5 million in 2001, are excluded from the
determination of operating cash flow. These insurance proceeds are shown in the
statement of cash flows under investing activities to partially offset the cash
outflow impact of capital expenditures related to the Leverkusen sulfate plant
reconstruction. Certain other items included in the determination of net income
have an impact on cash flows from operating activities, but the impact of such
items on cash will differ from their impact on net income. For example, the
amount of income or expense recorded for pension and OPEB assets and obligations
(which depend upon a number of factors, including actuarial assumptions used to
value obligations) will generally differ from the outflows of cash for such
benefits. See Note 13 to the Company's Consolidated Financial Statements.
The TiO2 industry is cyclical and changes in economic conditions within the
industry significantly impact the earnings and operating cash flows of the
Company. Cash flow from operations is considered the primary source of liquidity
for the Company. Changes in TiO2 pricing, production volume and customer demand,
among other things, could significantly affect the liquidity of the Company.
Relative changes in assets and liabilities generally result from the timing
of production, sales, purchases and income tax payments. Such relative changes
can significantly impact the comparability of cash flow from operations from
period to period, as the income statement impact of such items may occur in a
different period from when the underlying cash transaction occurs. For example,
raw materials may be purchased in one period, but the payment for such raw
materials may occur in a subsequent period. Similarly, inventory may be sold in
one period, but the cash collection of the receivable may occur in a subsequent
period.
Cash flows from operating activities decreased from $111.1 million in 2002
to $107.7 million in 2003. This $3.4 million decrease was due primarily to the
effect of (i) higher net income of $21.3 million, (ii) higher depreciation
expense of $7.3 million, (iii) lower net distributions from the TiO2
manufacturing joint venture of $875,000 in 2003 compared to $8.0 million in
2002, (iv) a lower amount of net cash generated from relative changes in the
Company's inventories, receivables, payables and accruals and accounts with
affiliates of $30.7 million in 2003 as compared to 2002 and (v) lower cash paid
for income taxes of $15.8 million. 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 and accounts payable and
accrued liabilities are affected by, among other things, the timing of raw
material purchases and the payment for such purchases and the relative
difference between production volume and sales volume.
Cash flows from operating activities decreased from $135.7 million in 2001
to $111.1 million in 2002. This $24.6 million decrease was due primarily to the
net effect of (i) lower net income of $88.2 million, (ii) higher depreciation
expense of $3.2 million, (iii) insurance recoveries, net of $17.5 million in
2001 as compared to nil in 2002, (iv) lower distributions from the manufacturing
joint venture of $3.4 million in 2002 and (vi) a higher amount of net cash
generated from relative changes in the Company's inventories, receivables,
payables and accruals and accounts with affiliates of $22.9 million in 2002 as
compared to 2001. Relative changes in accounts receivable are affected by, among
other things, the timing of sales and the collection of the resulting
receivable.
Investing cash flows. The Company's capital expenditures were $53.7
million, $32.6 million and $35.2 million in 2001, 2002 and 2003, respectively.
Capital expenditures in 2001 and 2002 included an aggregate of $22.3 million and
$3.1 million, respectively, for the rebuilding of the Company's Leverkusen,
Germany sulfate plant. In 2001 the Company received $23.4 million of insurance
proceeds for property damage resulting from the Leverkusen fire and paid $3.2
million of expenses related to repairs and clean-up costs.
The Company's capital expenditures during the past three years include an
aggregate of approximately $15.4 million ($5.4 million in 2003) for the
Company's ongoing environmental protection and compliance programs. The
Company's estimated 2004 capital expenditures are $38 million and include
approximately $5 million in the area of environmental protection and compliance.
Financing cash flows. In March 2003, KII'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 three-year (euro)80 million secured revolving credit facility
("European Credit Facility"). See Note 8 to the Consolidated Financial
Statements.
In March 2002 the Company redeemed $25 million principal amount of its
11.75% Senior Secured Notes using available cash on hand, and in June 2002 the
Company redeemed the remaining $169 million principal amount of such 11.75%
Senior Secured Notes using a portion of the proceeds from the June 2002 issuance
of the (euro)285 million principal amount of the KII 8.875% Senior Secured Notes
($280 million when issued). Also in June 2002, KII's operating subsidiaries in
Germany, Belgium and Norway borrowed (euro)13 million ($13 million) and NOK 200
million ($26 million) which, along with available cash, was used to repay and
terminate KII's short term notes payable ($53.2 million when repaid). In 2002,
the Company repaid a net euro-equivalent 12.7 million ($12.4 million when
repaid) and 1.7 million ($1.6 million when repaid), respectively, of the
European Credit Facility.
In September 2002 the Company's U.S. operating subsidiaries entered into a
three-year $50 million asset-based revolving credit facility ("U.S. Credit
Facility"). As of December 31, 2003, no borrowings were outstanding under the
U.S. Credit Facility and borrowing availability was approximately $39 million.
See Note 8 to the Consolidated Financial Statements.
Deferred financing costs of $10.7 million for the Notes, the European
Credit Facility and the U.S. Credit Facility are being amortized over the life
of the respective agreements and are included in other noncurrent assets as of
December 31, 2003.
In 2001 the Company repaid (euro)7.6 million ($6.5 million when paid) and
(euro)16.4 million ($14.9 million when paid), respectively, of its
euro-denominated short-term debt with excess cash flow from operations.
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 dividends paid during 2001, 2002 and 2003 totaled $30.5 million,
$111.0 million and $7.0 million, respectively. On February 19, 2004, the
Company's Board of Directors declared a regular quarterly dividend of $.25 per
share to stockholders of record as of March 11, 2004 to be paid on March 26,
2004. 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 net cash outflows of $47.5 million and $73.7 million in
2001 and 2002, respectively and 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. In 2002, Kronos transferred certain such
notes receivable from affiliates to NL, and as a result, Kronos will no longer
report cash flows related to certain such notes receivable from affiliates. Such
net cash flows in 2002 also included $9.2 million related to the Company's
purchase of EWI RE, Inc. See Note 1 to the Consolidated Financial Statements.
Cash, cash equivalents, restricted cash and restricted marketable debt
securities and borrowing availability. At December 31, 2003, the Company had
current cash and cash equivalents aggregating $55.9 million ($41 million held by
non-U.S. subsidiaries). At December 31, 2003, the Company's U.S. and non-U.S.
subsidiaries had current restricted cash equivalents of $1.3 million and
noncurrent restricted marketable debt securities of $2.6 million. At December
31, 2003, certain of the Company's subsidiaries had approximately $139 million
available for borrowing with approximately $100 million available under non-U.S.
credit facilities (including approximately $97 million under the European Credit
Facility) and approximately $39 million available under the U.S. Credit Facility
(based on borrowing availability). At December 31, 2003, KII had approximately
$70 million available for payment of dividends and other restricted payments as
defined in the Notes indenture. At December 31, 2003, the Company had complied
with all financial covenants governing its debt agreements.
Based upon the Company's expectations for the TiO2 industry and anticipated
demands on the Company's cash resources as discussed herein, the Company expects
to have sufficient liquidity to meet its near-term obligations including
operations, capital expenditures, debt service and current dividend policy. To
the extent that actual developments differ from 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. As of January 1, 2001, the functional currency of the Company's German,
Belgian, Dutch and French operations have been converted to the euro from their
respective national currencies. At December 31, 2003, 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 acquisition or joint venture 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.
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 and 16 to the Consolidated Financial
Statements. The following table summarizes such contractual commitments of the
Company and its consolidated subsidiaries that are unconditional both in terms
of timing and amount by the type and date of payment.
Unconditional payment due date
2009 and
Contractual commitment 2004 2005/2006 2007/2008 after Total
----- --------- --------- ----- ------
(In millions)
Third-party indebtedness $ .3 $ .3 $ - $ 356.1 $ 356.7
Operating leases 3.3 3.7 2.5 19.9 29.4
Fixed asset acquisitions 9.6 - - - 9.6
Long-term supply contracts for the
purchase of TiO2 feedstock 146.1 265.8 135.0 - 546.9
Asset retirement obligations and other - - - 5.8 5.8
------- -------- ------- ------- -------
$ 159.3 $ 269.8 $ 137.5 $ 381.8 $ 948.4
======= ======== ======= ======= =======
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.
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 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, 2002 and 2003. 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, 2003,
substantially all of the Company's aggregate indebtedness was comprised of
fixed-rate instruments (2002 - 92% of fixed-rate instruments and 8% of variable
rate borrowings). 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, 2003. At
December 31, 2002 and 2003, all outstanding fixed-rate indebtedness was
denominated in U.S. dollars or the euro, and the outstanding variable rate
borrowings were denominated in U.S. dollars, the euro or the Norwegian kroner.
Information shown below for such foreign currency denominated indebtedness is
presented in its U.S. dollar equivalent at December 31, 2003 using exchange
rates of 1.25 U.S. dollars per euro. Certain Norwegian kroner denominated
capital leases totaling $700,000 in 2003 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 $ 356.1 $ 356.1 8.9% 2009
======= =======
At December 31, 2002, fixed rate indebtedness aggregated $296.9 million
(fair value - $299.9 million) with a weighted-average interest rate of 8.9%; and
variable rate indebtedness at such date aggregated $27.1 million, which
approximates fair value, with a weighted-average interest rate of 6.5%. All of
such fixed rate indebtedness was denominated in euros. Such variable rate
indebtedness was denominated in the euro (58% of the total) or the Norwegian
kroner (42%).
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, 2003, the Company had the equivalent of
$356.1 million of outstanding euro-denominated indebtedness (2002 - the
equivalent of $312.5 million of euro-denominated indebtedness and $11.5 million
of Norwegian kroner-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 $35.6 million at December 31, 2003 (2002 - $32.4 million).
At December 31, 2003, the Company had entered into a short-term currency
forward contract maturing on January 2, 2004 to exchange an aggregate of
(euro)40 million into U.S. dollars at an exchange rate of U.S. $1.25 per euro.
Such contract was entered into in conjunction with the January 2004 payment of
an intercompany dividend from one of the Company's European subsidiaries. At
December 31, 2004, the actual exchange rate was U.S. $1.25 per euro. The
estimated fair value of such foreign currency forward contract was not material
at December 31, 2003.
Other. The Company believes there are 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.
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.
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
The Company maintains a system of disclosure controls and procedures. The
term "disclosure controls and procedures," as defined by regulations of the SEC,
means controls and other procedures that are designed to ensure that information
required to be disclosed in the reports that the Company files or submits to the
SEC under the Securities Exchange Act of 1934, as amended (the "Act"), is
recorded, processed, summarized and reported, within the time periods specified
in the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
to the SEC under the Act is accumulated and communicated to the Company's
management, including its principal executive officer and its principal
financial officer, as appropriate to allow timely decisions to be made regarding
required disclosure. Each of Harold C. Simmons, the Company's Chief Executive
Officer, and Gregory M. Swalwell, the Company's Vice President and Chief
Financial Officer, have evaluated the Company's disclosure controls and
procedures as of December 31, 2003. Based upon their evaluation, these executive
officers have concluded that the Company's disclosure controls and procedures
are effective as of the date of such evaluation.
The Company also maintains a system of internal controls over financial
reporting. The term "internal control over financial reporting," as defined by
regulations of the SEC, means a process designed by, or under the supervision
of, the Company's principal executive and principal financial officers, or
persons performing similar functions, and effected by the Company's board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America ("GAAP)", and
includes those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the assets of the
Company,
o Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP, and
that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company,
and
o Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the Company's consolidated financial
statements.
There has been no change to the Company's system of internal controls over
financial reporting during the quarter ended December 31, 2003 that has
materially affected, or is reasonably likely to materially affect, the Company's
system of internal controls over financial reporting.
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, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d) 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) Reports on Form 8-K
Reports on Form 8-K filed for the quarter ended December 31,
2003.
None.
(c) 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, 2003 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 4.2) - incorporated by reference to Exhibit
4.2 to Kronos International, Inc.'s Registration Statement on Form S-4
(File No. 333-100047).
4.3 Form of certificate of 8.875% Senior Secured Note due 2009 (included
as Exhibit B to Exhibit 4.2) - incorporated by reference to Exhibit
4.3 to Kronos International Inc.'s Registration Statement on Form S-4
(File No. 333-100047).
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 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.
4.6 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.
4.7 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.
4.8 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.
4.9 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 Form of Intercorporate Services Agreement between Contran Corporation
and Kronos Worldwide, Inc. - incorporated by reference to Exhibit 10.2
of the Registration statement on Form 10 of the Registrant (File No.
001-31763).
10.3 Form of Promissory Note made by Kronos Worldwide, Inc. in favor of NL
Industries, Inc. - incorporated by reference to Exhibit 10.3 of the
Registration statement on Form 10 of the Registrant (File No.
001-31763).
10.4** 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).
10.5 (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.
10.6 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.
10.7 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.
10.8 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.
10.9 Services Agreement, dated as of January 1, 1995, amended as of April
1, 2002, among NL Industries, Inc., Kronos (US), Inc. and Kronos
International, Inc. - incorporated by reference to Exhibit 10.6 to
Kronos International, Inc.'s Registration Statement on Form S-4 (File
No. 333-100047).
10.10 Form of Kronos Cost Sharing Agreement, effective as of January 1,
2002, among Kronos International, Inc., Kronos Europe S.A./N.V.,
Kronos (US), Inc., NL Industries, Inc., Kronos Titan GmbH & Co. OHG,
Societe Industrielle du Titane, S.A., Kronos Titan A/S, Titania A/S,
Kronos Limited, Kronos Canada, Inc., Kronos Denmark ApS and Kronos
Louisiana Inc. - incorporated by reference to Exhibit 10.8 to Kronos
International, Inc.'s Registration Statement on Form S-4 (File No.
333-100047).
10.11 Form of Assignment and Assumption Agreement, dated as of January 1,
1999, between Kronos (US), 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).
10.12 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).
10.13* Richards Bay Slag Sales Agreement dated May 1, 1995, between
Richards Bay Iron and Titanium (Proprietary) Limited and Kronos
Worldwide, Inc. (f/k/a 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.
10.14* Amendment to Richards Bay Slag Sales Agreement, dated May 1, 1999,
between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos Worldwide, Inc. (f/k/a 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.
10.15* Amendment to Richards Bay Slag Sales Agreement, dated June 1, 2001,
between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos Worldwide, Inc. (f/k/a 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.
10.16* Amendment to Richards Bay Slag Sales Agreement dated December 20,
2002 between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos Worldwide, Inc. (f/k/a 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.
10.17* Amendment to Richards Bay Slag Sales Agreement dated October 31,
2003 between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc.
10.18 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.
10.19 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.
10.20 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.
10.21 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.
10.22 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.
10.23 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.
10.24 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.
10.25 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.
10.26 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.
10.27 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.
10.28 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.
10.29 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.
10.30 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.
10.31 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.
10.32 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).
10.33 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 the Registrant - 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.
10.34** Summary of Consulting Arrangement beginning on August 1, 2003
between Lawrence A. Wigdor and Kronos Worldwide, Inc. - incorporated
by reference to Exhibit 10.50 to NL Industries, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 2003.
21.1 Subsidiaries.
31.1 Certification.
31.2 Certification.
32.1 Certification.
* Portions of the exhibit have been omitted pursuant to a request for
confidential treatment.
** Management contact, 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 8, 2004
(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 8, 2004 Steven L. Watson, March 8, 2004
(Chairman of the Board and Chief (Director)
Executive Officer)
/s/ George E. Poston /s/ Glenn R. Simmons
- ------------------------------- -------------------------------
George E. Poston, March 8, 2004 Glenn R. Simmons, March 8, 2004
(Director) (Director)
/s/ C. H. Moore, Jr. /s/ Gregory M. Swalwell
- ------------------------------- -------------------------------
C. H. Moore, Jr., March 8, 2004 Gregory M. Swalwell, March 8, 2004
(Director) (Vice President, Chief Financial
Officer, Principal Financial Officer)
/s/ R. Gerald Turner
- -------------------------------
R. Gerald Turner, March 8, 2004
(Director)
KRONOS WORLDWIDE, INC.
Annual Report on Form 10-K
Items 8, 14(a) and 14(d)
Index of Financial Statements and Schedules
Financial Statements Page
Report of Independent Auditors F-2
Consolidated Balance Sheets - December 31, 2002 and 2003 F-3
Consolidated Statements of Income -
Years ended December 31, 2001, 2002 and 2003 F-5
Consolidated Statements of Comprehensive Income -
Years ended December 31, 2001, 2002 and 2003 F-6
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 2001, 2002 and 2003 F-7
Consolidated Statements of Cash Flows -
Years ended December 31, 2001, 2002 and 2003 F-8
Notes to Consolidated Financial Statements F-11
Financial Statement Schedules
Report of Independent Auditors S-1
Schedule I - Condensed Financial Information of Registrant S-2
Schedule II - Valuation and Qualifying Accounts S-7
Schedules III and IV are omitted because they are not applicable.
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of Kronos Worldwide, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, comprehensive income, stockholders'
equity and cash flows present fairly, in all material respects, the financial
position of Kronos Worldwide, Inc. and Subsidiaries as of December 31, 2002 and
2003, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit 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.
PricewaterhouseCoopers LLP
Dallas, Texas
March 5, 2004
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2003
(In thousands, except per share data)
ASSETS
2002 2003
---- ----
Current assets:
Cash and cash equivalents $ 40,685 $ 55,876
Restricted cash 1,226 1,313
Accounts and other receivables 134,243 156,212
Receivable from affiliates 1,032 1,209
Refundable income taxes 1,777 35,336
Inventories 209,882 266,020
Prepaid expenses 5,164 4,456
Deferred income taxes 4,404 2,755
-------- -----------
Total current assets 398,413 523,177
-------- -----------
Other assets:
Notes receivable from NL Industries, Inc. 44,600 -
Investment in TiO2 manufacturing joint venture 130,009 129,011
Prepaid pension cost 17,572 -
Deferred income taxes 1,934 6,682
Other 20,259 28,040
-------- ----------
Total other assets 214,374 163,733
-------- ----------
Property and equipment:
Land 26,568 32,339
Buildings 148,701 179,472
Equipment 636,336 765,231
Mining properties 65,296 63,701
Construction in progress 8,702 9,666
-------- ----------
885,603 1,050,409
Less accumulated depreciation and amortization 509,845 615,442
-------- ----------
Net property and equipment 375,758 434,967
-------- ----------
$988,545 $1,121,877
======== ==========
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 2002 and 2003
(In thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
2002 2003
---- -----
Current liabilities:
Current maturities of long-term debt $ 1,298 $ 288
Accounts payable and accrued liabilities 148,257 166,664
Payable to affiliates 7,933 8,919
Income taxes 6,193 12,354
Deferred income taxes 3,219 3,436
--------- --------
Total current liabilities 166,900 191,661
--------- --------
Noncurrent liabilities:
Long-term debt 324,608 356,451
Deferred income taxes 79,234 119,825
Notes payable to affiliates 44,600 200,000
Accrued pension cost 33,098 68,161
Accrued postretirement benefits cost 11,806 11,176
Other 13,742 14,727
--------- --------
Total noncurrent liabilities 507,088 770,340
--------- --------
Minority interest 383 525
--------- --------
Stockholders' equity:
Preferred stock, $.01 par value; 100 shares
authorized; no shares issued or outstanding - -
Common stock, $.01 par value; 60,000 shares
authorized; 48,943 shares issued 489 489
Additional paid-in capital 1,060,157 1,060,157
Retained deficit (584,909) (729,260)
Accumulated other comprehensive loss:
Currency translation (148,082) (133,009)
Pension liabilities (13,481) (39,026)
---------- ---------
Total stockholders' equity 314,174 159,351
---------- ---------
$ 988,545 $1,121,877
========== ==========
Commitments and contingencies (Notes 12 and 16)
See accompanying notes to consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2001, 2002 and 2003
(In thousands, except per share data)
2001 2002 2003
---- ---- ----
Net sales $ 835,099 $ 875,188 $1,008,177
Cost of sales 578,060 671,830 739,237
--------- --------- ----------
Gross margin 257,039 203,358 268,940
Selling, general and administrative expense 98,667 107,675 124,446
Other operating income (expense):
Currency transaction gains (losses), net 1,188 (547) (7,743)
Disposition of property and equipment (735) (625) (480)
Insurance recoveries, net 7,222 - -
Other income 886 459 490
Corporate expense (4,878) (3,288) (4,140)
Other expense (78) (172) (128)
--------- --------- ----------
Income from operations 161,977 91,510 132,493
Other income (expense):
Currency transaction gain - 6,271 -
Insurance recoveries, net 17,468 - -
Trade interest income 2,332 1,709 771
Other interest income 349 702 180
Interest expense to affiliates (22,969) (12,290) (1,887)
Interest income from affiliates 33,379 20,754 723
Interest expense (4,305) (16,837) (33,002)
--------- --------- ----------
Income before income taxes and minority interest 188,231 91,819 99,278
Provision for income taxes 33,759 25,500 11,657
Income before minority interest 154,472 66,319 87,621
Minority interest 16 55 72
Net income $ 154,456 $ 66,264 $ 87,549
========= ========= ==========
Net income per basic and diluted share $ 3.16 $ 1.35 $ 1.79
========= ========= ==========
Basic and diluted weighted average shares used in the
calculation of net income per share 48,943 48,943 48,943
========= ========= ==========
See accompanying notes to consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2001, 2002 and 2003
(In thousands)
2001 2002 2003
---- ---- ----
Net income $ 154,456 $ 66,264 $ 87,549
--------- ---------- ---------
Other comprehensive income (loss), net of tax:
Minimum pension liabilities adjustment (6,352) (7,129) (25,545)
Currency translation adjustment (15,974) 51,803 15,073
--------- --------- ---------
Total other comprehensive income (loss) (22,326) 44,674 (10,472)
--------- --------- ---------
Comprehensive income $ 132,130 $ 110,938 $ 77,077
========= ========= =========
See accompanying notes to consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2001, 2002 and 2003
(In thousands)
Accumulated other
Notes comprehensive
Additional Retained receivable income (loss)
Common paid-in earnings from Currency Pension
stock capital (deficit) affiliates translation liabilities Total
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
Balance at December 31, 2000 $489 $ 775,604 $ 56,092 $(301,695) $(183,911) $ - $ 346,579
Net income - - 154,456 - - - 154,456
Other comprehensive loss, net of tax - - - - (15,974) (6,352) (22,326)
Dividends declared - - (30,500) - - - (30,500)
Change in notes receivable from affiliates - - - (69,678) - - (69,678)
Capital contribution - 284,553 - (284,545) - - 8
---- ---------- --------- --------- --------- -------- --------
Balance at December 31, 2001 489 1,060,157 180,048 (655,918) (199,885) (6,352) 378,539
Net income - - 66,264 - - - 66,264
Other comprehensive income (loss), net of tax - - - - 51,803 (7,129) 44,674
Change in notes receivable from affiliates - - - (55,154) - - (55,154)
Dividends declared:
Cash - - (120,149) - - - (120,149)
Noncash - - (711,072) 711,072 - - -
--- --------- -------- -------- --------- ------- --------
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 - - (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
=== ========== ========= ======== ========= ======== =========
See accompanying notes to consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001, 2002 and 2003
(In thousands)
2001 2002 2003
Cash flows from operating activities:
Net income $ 154,456 $ 66,264 $87,549
Depreciation and amortization 28,907 32,152 39,421
Noncash interest income from affiliates (22,201) (20,629) -
Noncash interest expense - 932 2,197
Deferred income taxes (4,242) 10,755 36,489
Minority interest 16 55 72
Net loss from disposition of
property and equipment 735 625 480
Pension cost, net (2,332) (1,866) (5,792)
Other postretirement benefits, net (1,236) (1,250) (1,032)
Distributions from TiO2 manufacturing
joint venture, net 11,313 7,950 875
Insurance recoveries, net (17,468) - -
Other, net 261 - -
Change in assets and liabilities:
Accounts and other receivable 2,507 5,547 1,264
Inventories (32,698) 42,249 (26,041)
Prepaid expenses (322) 882 1,494
Accounts payable and accrued liabilities 26,274 (25,049) 10,494
Income taxes (4,211) (2,239) (38,706)
Accounts with affiliates (652) (4,440) 1,920
Other noncurrent assets (1,314) 74 (3,919)
Other noncurrent liabilities (2,111) (866) 916
------- ------- --------
Net cash provided by operating activities 135,682 111,146 107,681
------- ------- --------
Cash flows from investing activities:
Capital expenditures (53,656) (32,571) (35,245)
Property damaged by fire:
Insurance proceeds 23,361 - -
Other, net (3,205) - -
Change in restricted cash equivalents and restricted
marketable debt securities, net (577) (2,891) (554)
Proceeds from disposition of property and equipment 399 864 381
------- ------- -------
Net cash used by investing activities (33,678) (34,598) (35,418)
------- ------- -------
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2001, 2002 and 2003
(In thousands)
2001 2002 2003
Cash flows from financing activities:
Indebtedness:
Borrowings $ 1,437 $335,768 $ 16,106
Principal payments (22,428) (84,814) (46,006)
Deferred financing fees - (10,706) -
Dividends paid (30,500) (120,149) (7,000)
Loans from affiliates:
Loans - 44,600 8,000
Repayments - (194,000) (52,600)
Other capital transactions with affiliates, net (47,477) (64,600) 19,700
Other, net 3 (11) (14)
--------- -------- ---------
Net cash used by financing activities (98,965) (93,912) (61,814)
--------- -------- ---------
Cash and cash equivalents - net change from:
Operating, investing and financing activities 3,039 (17,364) 10,449
Currency translation (1,301) 3,332 4,742
--------- -------- ---------
1,738 (14,032) 15,191
Balance at beginning of year 52,979 54,717 40,685
--------- -------- ---------
Balance at end of year $ 54,717 $ 40,685 $ 55,876
========= ======== =========
Supplemental disclosures - cash paid for:
Interest $ 27,239 $ 33,169 $ 30,152
Income taxes 43,422 17,369 1,597
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. Kronos Worldwide, Inc. ("Kronos")
(NYSE: KRO) is an approximately 51% owned subsidiary of NL Industries, Inc.
(NYSE: NL). NL Industries, Inc. (NYSE: NL) conducts its titanium dioxide
pigments ("TiO2") operations through Kronos. At December 31, 2003, Valhi, Inc.
and a wholly-owned subsidiary of Valhi, held approximately 84% of NL's
outstanding common stock, and Contran Corporation and its subsidiaries held
approximately 90% of Valhi's outstanding common stock. At December 31, 2003,
Valhi and a wholly-owned subsidiary of Valhi held an additional approximate 42%
of Kronos' outstanding common stock. Substantially all of Contran's outstanding
voting stock is held by trusts established for the benefit of certain children
and grandchildren of Harold C. Simmons, of which Mr. Simmons is sole trustee.
Mr. Simmons, the Chairman of the Board of Valhi, Contran and the Company, 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 the pro-rata distribution to its stockholders of
approximately 48.8% of Kronos' common stock (including Valhi and a wholly-owned
subsidiary of Valhi). Stockholders of NL received 1 share of Kronos common stock
for every 2 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 presented. Earnings per share data for all periods presented 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.
In January 2002, the Company acquired all of the stock and limited
liability company units of EWI RE, Inc. and EWI RE, Ltd. (collectively "EWI"),
respectively, for an aggregate of $9.2 million in cash, including acquisition
costs of $.2 million. An entity controlled by one of Harold C. Simmons'
daughters owned a majority of EWI, and a wholly-owned subsidiary of Contran
owned the remainder of EWI. EWI provides reinsurance brokerage services for
insurance policies of the Company, its joint venture and other affiliates of
Contran as well as external third-party customers. The purchase was approved by
a special committee of NL's Board of Directors consisting of two of its
directors unrelated to Contran, and the purchase price was negotiated by the
special committee based upon its consideration of relevant factors, including
but not limited to due diligence performed by independent consultants and an
appraisal of EWI conducted by an independent third party selected by the special
committee. In June 2003 the Company distributed its investment in the common
stock and limited liability company units in EWI to NL in the form of a noncash
dividend. The Company has accounted for the distribution of EWI 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 acquisition. The effect of the change in accounting entity on the
Company's consolidated net income was immaterial for 2002 and 2003, and the
effect of the change in accounting entity on the Company's previously reported
stockholder's equity was a reduction of approximately $10 million. The $9.2
million purchase price for EWI is reflected as part of "other capital
transactions with affiliates, net" in the accompanying consolidated statements
of cash flows.
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 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.
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, and in 2002
included a $6.3 million gain related to the extinguishments of certain
intercompany indebtedness that is classified as a component of other income
(expense) in the accompanying Consolidated Statement of Income.
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. 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.
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 ($2.5
million and $2.6 million at December 31, 2002 and 2003, 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. Investments 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. The
Company does not own the ilmenite reserves associated with the mine.
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.
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, was $4.0 million and $6.3 million at December 31, 2002 and 2003,
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 2001, 2002 or 2003.
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. Effective January 1, 2002, the Company commenced assessing impairment
of other long-lived assets (such as property and equipment and mining
properties) in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets."
Long-term debt. Amortization of deferred financing costs, included in
interest expense, is computed by the interest method over the term of the
applicable issue.
Derivatives and hedging activities. Derivatives are recognized as either
assets or liabilities and measured at fair value in accordance with 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.
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"). As a member of the NL Tax Group, the Company was a party
to a tax sharing agreement (the "NL Tax Agreement"). Effective January 1, 2001,
the NL Tax Group, including Kronos, was included in the consolidated U.S.
federal tax return of Contran (the "Contran Tax Group"). As a member of the
Contran Tax Group, NL is 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 Sharing 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
Sharing Agreement. See Note 12.
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.
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 including undistributed earnings of foreign
subsidiaries which are not deemed to be permanently reinvested. 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. Earnings
of foreign subsidiaries deemed to be permanently reinvested aggregated $261
million at December 31, 2002 and $304 million at December 31, 2003.
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.
During the fourth quarter of 2002 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 nil in 2001, $2.3 million
in 2002 and $1.0 million in 2003.
The following table presents what the Company's consolidated net income,
and related per share amounts, would have been in 2001, 2002 and 2003 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,
2001 2002 2003
(In millions, except
per share amounts)
Net income as reported $154.4 $66.3 $ 87.5
Adjustments, net of applicable income
tax effects and minority interest:
Stock-based employee compensation expense
determined under APBO No. 25 - 1.5 .7
Stock-based employee compensation expense
determined under SFAS No. 123 (1.1) (.7) (.3)
------ ----- ------
Pro forma net income $153.3 $67.1 $ 87.9
====== ===== ======
Basic and diluted earnings per share:
As reported $ 3.16 $1.35 $ 1.79
Pro forma $ 3.13 $1.37 $ 1.80
Selling, general and administrative expenses; shipping and handling costs.
Selling, general and administrative expenses 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 $49 million in 2001, $51 million in
2002 and $63 million in 2003. Advertising costs are expensed as incurred and
were $1 million in each of 2001, 2002 and 2003. Research, development and
certain sales technical support costs are expensed as incurred and approximated
$6 million in each of 2001 and 2002 and $7 million in 2003.
Other. Accounting and funding policies for retirement and post retirement
benefits other than pensions ("OPEB") plans are described in Note 13.
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, 2002 and 2003, the net assets of non-U.S.
subsidiaries included in consolidated net assets approximated $159 million and
$193 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,
2001 2002 2003
(In thousands)
Geographic areas
Net sales - point of origin:
Germany $ 398,470 $ 404,299 $ 510,105
United States 278,624 291,823 310,694
Canada 149,412 157,773 173,297
Belgium 126,782 123,760 150,728
Norway 102,843 111,811 131,457
Other 82,320 89,560 110,358
Eliminations (303,352) (303,838) (378,462)
---------- ---------- ----------
$ 835,099 $ 875,188 $1,008,177
========== ========== ==========
Net sales - point of destination:
Europe $ 425,338 $ 456,834 $ 567,496
United States 258,347 271,865 296,643
Canada 47,061 53,371 53,170
Latin America 25,514 19,970 15,920
Asia 46,169 47,549 49,020
Other 32,670 25,599 25,928
---------- ---------- ----------
$ 835,099 $ 875,188 $1,008,177
========== ========== ==========
December 31,
2002 2003
(In thousands)
Identifiable assets -
net property and equipment:
Germany $213,170 $252,411
Canada 54,719 63,623
Belgium 54,625 64,895
Norway 49,737 50,811
Other 3,507 3,227
-------- --------
$375,758 $434,967
======== ========
Note 3 - Accounts and other receivables:
December 31,
2002 2003
(In thousands)
Trade receivables $124,044 $146,971
Insurance claims 312 58
Recoverable VAT and other receivables 12,492 12,103
Allowance for doubtful accounts (2,605) (2,920)
-------- --------
$134,243 $156,212
======== ========
Note 4 - Inventories
December 31,
2002 2003
(In thousands)
Raw materials $ 54,077 $ 61,959
Work in progress 15,936 19,855
Finished products 109,203 147,270
Supplies 30,666 36,936
-------- --------
$209,882 $266,020
======== ========
Note 5 - Other noncurrent assets:
December 31,
2002 2003
(In thousands)
Deferred financing costs, net $10,550 $10,417
Restricted marketable debt securities 2,492 2,586
Unrecognized net pension obligation 5,561 13,747
Other 1,656 1,290
------- -------
$20,259 $28,040
======= =======
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"), a
wholly-owned subsidiary of Huntsman International Holdings LLC, a 60%-owned
subsidiary of Huntsman Corporation. LPC owns and operates a chloride-process
TiO2 plant in Lake Charles, Louisiana.
KLA is 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. Kronos' cost for its share of the TiO2 produced is equal to
its share of LPC's costs. 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 of $11.3 million in 2001, $8.0 million in
2002, and $.9 million in 2003 are stated net of contributions of $6.2 million in
2001, $14.2 million in 2002 and $13.1 million in 2003.
LPC made net cash distributions of $22.6 million in 2001, $15.9 million in
2002 and $1.8 million in 2003, equally split between the partners.
Summary balance sheets of LPC are shown below:
December 31,
2002 2003
(In thousands)
ASSETS
Current assets $ 56,745 $ 57,028
Property and equipment, net 235,739 226,971
--------- ---------
$ 292,484 $ 283,999
========= =========
LIABILITIES AND PARTNERS' EQUITY
Other liabilities, primarily current $ 29,716 $ 23,229
Partners' equity 262,768 260,770
--------- ---------
$ 292,484 $ 283,999
========= =========
Summary income statements of LPC are shown below:
Years ended December 31,
2001 2002 2003
(In thousands)
Revenues and other income:
Kronos $ 93,393 $ 92,428 $ 101,293
Tioxide 94,009 93,833 101,619
Interest 303 53 73
--------- --------- ----------
187,705 186,314 202,985
--------- --------- ----------
Cost and expenses:
Cost of sales 187,295 185,946 201,947
General and administrative 410 368 398
--------- --------- ----------
187,705 186,314 202,345
--------- --------- ----------
Net income from continuing operations - - 640
Cumulative effect of change in accounting principles - - (640)
--------- --------- ----------
Net income $ - $ - $ -
========= ========= ==========
Note 7 - Accounts payable and accrued liabilities:
December 31,
2002 2003
(In thousands)
Accounts payable $ 89,602 $ 97,446
Employee benefits 27,042 31,732
Other 31,613 37,486
-------- --------
$148,257 $166,664
======== ========
Note 8 - Long-term debt:
December 31,
2002 2003
(In thousands)
Kronos International, Inc. and subsidiaries:
8.875% Senior Secured Notes $ 296,942 $ 356,136
Bank credit facility 27,077 -
Other 1,887 603
--------- ----------
325,906 356,739
Less current maturities 1,298 288
--------- ----------
$ 324,608 $ 356,451
========= ==========
In June 2002, Kronos International, Inc. ("KII"), a wholly-owned subsidiary
of the Company which conducts the Company's TiO2 operations in Europe, issued
euro 285 million principal amount ($280 million when issued) of its 8.875%
Senior Secured Notes (the "Notes") due 2009. The Notes are collateralized by
first priority liens on 65% of the common stock or other ownership interests of
certain of KII's first-tier operating subsidiaries. In addition, the indenture
contains customary cross-default provisions with respect to other debt and
obligations of KII or its subsidiaries. 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, on or after December 30, 2005 at redemption prices
ranging from 104.437% of the principal amount, declining to 100% on or after
December 30, 2008. In addition, on or before June 30, 2005, KII may redeem up to
35% of the Notes with the net proceeds of a qualified public equity offering at
108.875% of the principal amount. 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, 2003, the quoted market price of
the Notes was approximately (euro)1,000 per (euro)1,000 principal amount (2002 -
(euro)1,010 per (euro)1,000 principal amount). The Notes require cash interest
payments on June 30 and December 30. KII completed an exchange offer in November
2002 to exchange the Notes for registered publicly traded notes that have
substantially identical terms as the Notes.
Also in June 2002, KII's operating subsidiaries in Germany, Belgium and
Norway (collectively, the "Borrowers") entered into a (euro)80 million secured
revolving bank credit facility that matures in June 2005 ("European Credit
Facility"). Borrowings under this facility were used in part to repay and
terminate Kronos' short-term non-U.S. bank credit agreements. Borrowings may be
denominated in euros, Norwegian kroners or U.S. dollars, and bear interest at
the applicable interbank market rate plus 1.75%. 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, 2003, no amounts were outstanding under the
European Credit Facility, and the equivalent of $97.5 million was available for
additional borrowing by the subsidiaries.
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). In
the event the cross-default provisions of either the Notes or the European
Credit Facility become applicable, and such indebtedness is accelerated, the
Company would be required to repay such indebtedness prior to their stated
maturity.
In September 2002, certain of the Company's U.S. subsidiaries entered into
a $50 million revolving credit facility (nil outstanding at December 31, 2003)
that matures in September 2005 ("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. 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, 2003, $39 million was
available for borrowing under the facility.
Deferred financing costs of $10.7 million for the KII Senior Notes, the
European Credit Facility and the U.S. Credit Facility are being amortized over
the life of the respective agreements and are included in other noncurrent
assets as of December 31, 2003.
Unused lines of credit available for borrowing under the Company's non-U.S.
credit facilities approximated $99.9 million at December 31, 2003 (including
approximately $97.5 million under the European Credit Facility).
In January and February 2004, certain of KII's operating subsidiaries
borrowed a net (euro)40 million ($50 million when borrowed)
under the European Credit Facility at an interest rate of 3.825%.
In January 2004, Kronos' Canadian subsidiary entered into a new 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.
Aggregate maturities of long-term debt at December 31, 2003 are shown
in the table below.
Years ending December 31, Amount
(In thousands)
2004 $ 288
2005 153
2006 145
2007 18
2008 -
2009 and thereafter 356,135
---------
$ 356,739
=========
Note 9 - Other noncurrent liabilities:
December 31,
2002 2003
(In thousands)
Insurance claims and expenses $ 1,480 $ 1,673
Employee benefits 4,025 4,849
Other 8,237 8,205
------- -------
$13,742 $14,727
======= =======
Note 10 - Notes receivable from and payable to affiliates:
December 31,
2002 2003
(In thousands)
Notes receivable from affiliates:
Variable rate - NL $44,600 $ -
======= ========
Notes payable to affiliates:
Revolving credit facility $44,600 $ -
Note payable to NL - 200,000
------- --------
$44,600 $200,000
======= ========
Notes receivable from affiliates. At December 31, 2002, the Company had
$44.6 million of loans outstanding to NL under the terms of a $55 million
revolving credit facility entered into with NL during 2002. The loan bore
interest at U.S. LIBOR plus 1.75% (3.1% at December 31, 2002), with interest
payable quarterly, and all principal was due on December 31, 2005. This note
receivable from NL is included in noncurrent assets at December 31, 2002 (rather
than classified as contra-equity), as settlement of the note was currently
contemplated within the foreseeable future. During the first six months of 2003,
NL repaid a net $19.7 million to the Company. In June 2003 the Company
distributed the remaining $24.9 million of notes receivable from affiliate to NL
in the form of a noncash dividend. The revolving credit agreement with NL was
terminated on June 30, 2003.
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 is unsecured and bears interest at 9% per annum, with interest payable
quarterly and all principal due in 2010.
At December 31, 2002, the Company had $44.6 million outstanding of loans
from NL Environmental Management Services, Inc. ("EMS"), a majority-owned
subsidiary of NL, under the terms of a $55 million revolving credit facility
entered into with EMS in 2002. The loan bore interest at U.S. LIBOR plus 1.75%
(3.1% at December 31, 2002), with interest payable quarterly, and all principal
was due on December 31, 2005. During the first six months of 2003, the Company
repaid this outstanding balance in full, 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- Weighted-
Exercise payable average average fair
price per upon exercise value at
Shares share exercise price grant
(In thousands, except per share amounts)
Outstanding at December 31, 2000 641 $ 5.00-21.97 $ 9,619 $ 15.01
Granted 216 20.11-20.51 4,344 20.11 $ 7.52
Exercised (6) 11.28-14.25 (70) 12.43
---- ----------- --------
Outstanding at December 31, 2001 851 5.00-21.97 13,893 16.33
Exercised (192) 5.00-15.19 (2,715) 14.16
---- ----------- --------
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
==== =========== ========
At December 31, 2001, 2002 and 2003 options to purchase 261,000, 240,400
and 351,900 shares, respectively, were exercisable, and options to purchase
103,200 shares become exercisable in 2004. Of the exercisable options, options
to purchase 321,900 shares at December 31, 2003 had exercise prices less than
NL's December 31, 2003 quoted market price of $11.70 per share. Outstanding
options at December 31, 2003 expire at various dates through 2011.
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, 2003 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 12/31/03 life price 12/31/03 Price
$ 0.06 - $ 3.56 59,500 4.6 $ 2.89 44,000 $ 2.83
5.06 - 7.13 180,500 5.5 5.75 98,300 5.83
8.63 - 11.49 299,600 6.1 10.94 179,600 10.58
13.34 30,000 4.1 13.34 30,000 13.34
-------- -------
569,600 5.8 $ 8.58 351,900 $ 8.52
======== =======
Notes receivable from affiliates - contra equity. Certain long-term notes
receivable from affiliates were included as a component of equity in accordance
with GAAP, as settlement of the affiliate notes receivable balances was not
currently contemplated within the foreseeable future. In July 2002 the Company
distributed its affiliate notes receivable to NL totaling $711.1 million in the
form of a noncash dividend.
The Company periodically converted interest receivable from affiliates to
notes receivable from affiliates. For the years ended 2001 and 2002, the
interest transferred to notes receivable from affiliates totaled $22.2 million
and $20.6 million, respectively and totaled nil in 2003.
Cash flows related to such loans made to affiliates included in contra
equity were reflected in "Other capital transactions with affiliates, net" in
the accompanying Consolidated Statements of Cash Flows.
Note 12 - Income taxes:
Years ended December 31,
2001 2002 2003
---- ---- ----
(In millions)
Pre-tax income:
U.S. $ 34.2 $ 24.3 $ 13.2
Non-U.S. 154.0 67.5 86.1
------ ------ ------
$188.2 $ 91.8 $ 99.3
====== ====== ======
Expected tax expense, at U.S.
federal statutory income tax rate of 35% $ 65.9 $ 32.1 $ 34.8
Non-U.S. tax rates (7.2) (6.7) (1.1)
Incremental U.S. tax and rate differences
on equity in earnings of non-tax group
companies .5 .5 1.9
Change in deferred income tax valuation allowance, net (23.2) (1.8) (6.7)
Nondeductible expenses .2 2.9 2.8
Nontaxable income (3.2) - -
Change in Belgian income tax law - (2.3) -
U.S. state income taxes, net .5 - -
NL tax contingency reserve adjustment, net (3.4) .2 14.8
Refund of prior year German income taxes - - (38.0)
Other, net 3.7 .6 3.2
------ ------ ------
$ 33.8 $ 25.5 $ 11.7
====== ====== ======
Years ended December 31,
2001 2002 2003
(In millions)
Components of income tax expense:
Currently payable (refundable):
U.S. federal and state $ 9.0 $ 4.3 $ 10.5
Non-U.S. 29.0 10.4 (35.3)
------ ------ ------
38.0 14.7 (24.8)
------ ------ ------
Deferred income taxes (benefit):
U.S. federal and state 4.0 5.2 (1.0)
Non-U.S. (8.2) 5.6 37.5
------ ------ ------
(4.2) 10.8 36.5
------ ------ ------
$ 33.8 $ 25.5 $ 11.7
====== ====== ======
Comprehensive provision for
income taxes allocable to:
Net income $ 33.8 $ 25.5 $ 11.7
Other comprehensive income -
pension liabilities (2.2) (2.9) (11.3)
------ ------ ------
$ 31.6 $ 22.6 $ .4
====== ====== ======
The components of the net deferred tax liability at December 31, 2002 and
2003, and changes in the deferred income tax valuation allowance during the past
three years, are summarized in the following tables.
December 31,
2002 2003
Assets Liabilities Assets Liabilities
(In millions)
Tax effect of temporary differences
related to:
Inventories $ 3.4 $ (3.3) $ 1.5 $ (4.1)
Property and equipment 43.9 (59.1) 46.0 (62.7)
Accrued OPEB costs 4.5 - 4.3 -
Accrued (prepaid) pension cost 3.1 (24.8) 15.9 (33.5)
Other accrued liabilities and deductible differences 9.6 - 19.8 -
Other taxable differences - (35.3) - (71.3)
Tax on unremitted earnings of non-U.S. subsidiaries - (4.1) - (4.3)
Tax loss and tax credit carryforwards 139.7 - 137.3 -
Valuation allowance (153.7) - (162.7) -
------- -------- ------- --------
Adjusted gross deferred tax assets
(liabilities) 50.5 (126.6) 62.1 (175.9)
Netting of items by tax jurisdiction (44.2) 44.2 (52.7) 52.7
------- -------- ------- --------
6.3 (82.4) 9.4 (123.2)
Less net current deferred tax
asset (liability) 4.4 (3.2) 2.8 (3.4)
------- -------- ------- --------
Net noncurrent deferred tax asset
(liability) $ 1.9 $ (79.2) $ 6.6 $(119.8)
======= ======== ======= ========
Years ended December 31,
2001 2002 2003
(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 $ (23.2) $(1.8) $ (6.7)
Foreign currency translation (7.5) 21.6 28.2
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 (3.2) 12.2 (12.5)
------- ----- -------
$ (33.9) $32.0 $ 9.0
======= ===== =======
A reduction in the Belgian income tax rate from 40% to 34% was enacted in
December 2002 and became effective in January 2003. This reduction in the
Belgian income tax rate resulted in a $2.3 million decrease in the Company's
income tax expense in 2002 because the Company had previously recognized a net
deferred income tax liability with respect to Belgian temporary differences.
In 2001, the Company completed a restructuring of its German subsidiaries,
and as a result the Company recognized a $17.6 million net income tax benefit.
This benefit is comprised of a $23.2 million decrease in the Company's deferred
income tax asset valuation allowance due to a change in estimate of the
Company's ability to utilize certain German income tax attributes that did not
previously meet the "more-likely-than-not" recognition criteria, offset by $5.6
million of incremental U.S. taxes on undistributed earnings of certain foreign
subsidiaries.
In the first quarter of 2003, the Company was notified by the German
Federal Fiscal Court (the "Court") that the Court had ruled in the Company's
favor concerning a claim for refund suit in which the Company sought refunds of
prior taxes paid during the periods 1990 through 1997. KII and the Company's
German operating subsidiary were required to file amended tax returns with the
German tax authorities in order to receive its refunds for such years, and all
of such amended returns were filed during 2003. Such amended returns reflected
an aggregate refund of taxes and related interest to the Company's German
operating subsidiary of (euro)103.2 million ($123.0 million), and an aggregate
additional liability of taxes and related interest to KII of (euro)91.9 million
($109.6 million). Assessments and refunds will be processed by year as the
respective returns are reviewed by the tax authorities. Certain interest
components may also be refunded separately. The German tax authorities have
reviewed and accepted the amended return with respect to the 1990 tax year. In
February 2004, the Company's German operating subsidiary received interest of
(euro)16.8 million ($19.2 million). The Company believes it will receive the net
refunds of taxes and related interest for the remaining years during 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 received
(euro)21.5 million ($24.6 million) in 2003. The Company has recognized the
aggregate (euro)32.8 million ($38 million) benefit of such net refunds in its
2003 results of operations.
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 The Company has received a preliminary tax assessment related to 1993 from
the Belgian tax authorities proposing tax deficiencies, including interest,
of approximately (euro)6 million ($8 million at December 31, 2003). The
Company has filed a protest to this assessment and believes that a
significant portion of the assessment is without merit. The Belgian tax
authorities have filed a lien on the fixed assets of the Company's Belgian
TiO2 operations in connection with this assessment. In April 2003, the
Company received a notification from the Belgian tax authorities of their
intent to assess a tax deficiency related to 1999 that, including interest,
is expected to be approximately (euro)13 million ($16 million). The Company
believes the proposed assessment is substantially without merit, and the
Company has filed a written response. In December 2003, the Belgian tax
authorities agreed to a settlement of certain tax assessments separate from
the assessments noted previously, for the years 1991 to 1997. Including
interest, the proposed (euro)10.1 million tax deficiency ($12.6 million at
December 31, 2003) was settled for (euro)5.0 million ($6.3 million).
o The Norwegian tax authorities have notified NL of their intent to assess
tax deficiencies of approximately kroner 12 million ($2 million at December
31, 2003) relating to the years 1998 to 2000. The Company has filed a
written protest to this proposed assessment.
No assurance can be given that these tax matters will be resolved in the
Company's favor in view of the inherent uncertainties involved in settlement
initiatives, court and tax proceedings. The Company believes that it has
provided adequate accruals for additional taxes and related interest expense
which may ultimately result from all such examinations and believes that the
ultimate disposition of such examinations should not have a material adverse
effect on its consolidated financial position, results of operations or
liquidity.
At December 31, 2003, the Company had the equivalent of $438 million of
German income tax loss carryforwards with no expiration date. The Company has
provided a deferred tax valuation allowance of $153.7 million at December 31,
2002 and $162.7 million at December 31, 2003, principally related to Germany,
partially offsetting deferred tax assets which the Company believes do not meet
the "more-likely-than-not" recognition criteria.
In January 2004, the German federal government enacted new tax law
amendments that limit the annual utilization of income tax loss carryforward
effective January 1, 2004. The new law may significantly affect the Company's
future income tax expense and
cash tax payments.
Note 13 - 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, 2003, the Company
currently expects to contribute the equivalent of approximately $9 million to
all of its defined benefit pension plans during 2004.
The funded status of the Company's defined benefit pension plans, the
components of net periodic defined benefit pension cost related to the Company's
consolidated business segments and charged to continuing operations 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 their defined benefit pension plans.
Years ended December 31,
2002 2003
(In thousands)
Change in projected benefit obligations ("PBO"):
Benefit obligations at beginning of the year $218,162 $ 254,459
Service cost 4,278 5,127
Interest cost 13,641 15,373
Participant contributions 1,056 1,346
Plan amendments - 3,200
Actuarial losses (gains) (5,178) 21,919
Change in foreign exchange rates 36,436 42,770
Benefits paid (13,936) (18,234)
-------- ---------
Benefit obligations at end of the year $254,459 $ 325,960
======== =========
Change in plan assets:
Fair value of plan assets at beginning of the year $168,155 $ 189,936
Actual return on plan assets (2,054) (10,249)
Employer contributions 9,010 13,586
Participant contributions 1,056 1,346
Change in foreign exchange rates 27,705 26,899
Benefits paid (13,936) (18,234)
-------- ---------
Fair value of plan assets at end of year $189,936 $ 203,284
======== =========
Funded status at end of the year:
Plan assets less than PBO $(64,523) $(122,676)
Unrecognized actuarial losses 55,807 115,807
Unrecognized prior service cost 4,881 8,566
Unrecognized net transition obligations 5,247 5,275
-------- ---------
$ 1,412 $ 6,972
======== =========
Amounts recognized in the balance sheet:
Prepaid pension costs $ 17,572 $ -
Unrecognized net pension obligations 5,561 13,747
Accrued pension costs:
Current (6,677) (7,987)
Noncurrent (33,098) (68,161)
Accumulated other comprehensive income 18,054 69,373
-------- ---------
$ 1,412 $ 6,972
======== =========
Years ended December 31,
2001 2002 2003
(In thousands)
Net periodic pension cost:
Service cost benefits $ 3,743 $ 4,278 $ 5,127
Interest cost on PBO 12,751 13,641 15,373
Expected return on plan assets (12,635) (12,778) (14,529)
Amortization of prior service cost 201 307 354
Amortization of net transition obligations 563 570 793
Recognized actuarial losses 399 1,126 1,245
-------- -------- --------
$ 5,022 $ 7,144 $ 8,363
======== ======== ========
The weighted-average rate assumptions used in determining the actuarial
present value of benefit obligations as of December 31, 2002 and 2003 are
presented in the table below. Such weighted-average rates were determined using
the projected benefit obligations at each date.
December 31,
2002 2003
Discount rate 5.9% 5.5%
Increase in future compensation levels 2.6% 2.8%
The weighted-average rate assumptions used in determining the net periodic
pension cost for 2001, 2002 and 2003 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.
December 31,
2001 2002 2003
Discount rate 6.5% 6.2% 5.9%
Increase in future compensation levels 3.0% 2.8% 2.6%
Long-term return on plan assets 7.8% 7.5% 7.2%
As of December 31, 2003, the accumulated benefit obligations for all
defined benefit pension plans was approximately $290 million (2002 - $233
million). At December 31, 2003, the projected benefit obligations for all
defined benefit pension plans was comprised of $13 million related to U.S. plans
and $313 million related to non-U.S. plans (2002 - $11 million and $243 million,
respectively).
At December 31, 2003, the fair value of plan assets for all defined benefit
pension plans was comprised of $11 million related to U.S. plans and $192
million related to non-U.S. plans (2002 - $10 million and $180 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, 2002 and 2003, 94% and 96%, respectively, of
the projected benefit obligations of such plans relate to non-U.S. plans.
December 31,
2002 2003
(In thousands)
Projected benefit obligation $204,398 $325,960
Accumulated benefit obligation 184,314 290,287
Fair value of plan assets:
U.S. plans 10,385 10,866
Non U.S. plans 132,227 192,418
At December 31, 2003, all of the assets attributable to U.S. plans were
invested in the Combined Master Retirement Trust ("CMRT"), a collective
investment trust established by Valhi 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, 2003, the asset mix of the CMRT was 50% in U.S. equity
securities, 24% in U.S. fixed income securities, 7% in international equity
securities and 19% in cash and other investments. At December 31, 2002, the
assets of the U.S. plans were allocated as 39% to equity managers and 61% to
fixed asset managers.
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 Simmons. Mr. Simmons is
the trustee of the CMRT. The trustee of the CMRT, along with the CMRT's
investment committee, 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 year ended December 31, 2003, 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 16-year history of the CMRT from its inception in 1987 through
December 31, 2003, the average annual rate of return has been 13%.
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 $.4 million in 2001,
$.4 million in 2002 and $.5 million in 2003.
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. Based on communications with a certain insurance provider of certain
retiree benefits of NL, and consultations with NL's actuaries, NL has been
released from certain life insurance retiree benefit obligations as of December
31, 2002 through the use of an equal amount of plan assets. 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, 2003, the expected rate of increase in future
healthcare costs is 8% to 10% in 2004, declining to 5.5% in 2009 and thereafter.
(In 2002, the expected rate of increase in future healthcare costs ranged from
9% in 2003 declining to 5.5% in 2007 and thereafter.) 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 2003,
and the actuarial present value of accumulated OPEB obligations at December 31,
2003 would have increased by $1.1 million (decreased by $.9 million).
Years ended December 31,
2002 2003
(In thousands)
Change in accumulated OPEB obligations:
Obligations at beginning of the year $ 11,407 $ 10,533
Service cost 103 152
Interest cost 660 684
Actuarial losses 103 1,434
Release of benefit obligations (787) -
Change in foreign exchange rates 32 772
Benefits paid - Company funds (985) (914)
-------- --------
Obligations at end of the year $ 10,533 $ 12,661
======== ========
Change in plan assets:
Fair value of plan assets at beginning of the year $ 787 $ -
Actual return on plan assets - -
Employer contributions 985 914
Release of benefit obligations (787) -
Benefits paid (985) (914)
-------- --------
Fair value of plan assets at end of the year $ - $ -
======== ========
Funded status at end of the year:
Plan assets less than benefit obligations $(10,533) $(12,661)
Unrecognized net actuarial (gains) losses (335) 1,356
Unrecognized prior service credit (2,225) (1,170)
-------- --------
$(13,093) $(12,475)
======== ========
Accrued OPEB costs recognized in the balance sheet:
Current $ (1,287) $ (1,299)
Noncurrent (11,806) (11,176)
-------- --------
$(13,093) $(12,475)
======== ========
Years ended December 31,
2001 2002 2003
(In thousands)
Net periodic OPEB cost (credit):
Service cost $ 94 $ 103 $ 152
Interest cost 924 660 684
Expected return on plan assets (66) - -
Amortization of prior service credit (1,055) (1,055) (1,055)
Recognized actuarial losses 27 27 86
------- ------- -------
$ (76) $ (265) $ (133)
======= ======= =======
The weighted average discount rate used in determining the actuarial
present value of benefit obligations as of December 31, 2003 was 5.9% (2002 -
6.5%). 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 2003 was 6.5% (2002 - 7.0%; 2001 - 7.3%). 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, 2002 or 2003.
As of December 31, 2003, the accumulated OPEB obligations for all OPEB
plans was approximately $12.7 million (2002 - $10.5 million). At December 31,
2003, the accumulated OPEB obligations for all OPEB plans was comprised of $7.1
million related to U.S. plans and $5.6 million related to non-U.S. plans (2002 -
$7.3 million and $3.2 million, respectively). The Company uses a September 30th
measurement date for their OPEB plans.
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Medicare 2003 Act") was enacted. 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 equivalent to Medicare Part D. Detailed
regulations necessary to implement the Medicare 2003 Act have not been issued,
including those that would specify the manner in which plan sponsors could
demonstrate their eligibility to receive the subsidy. Certain accounting issues
raised by the Medicare 2003 Act, including how to account for the federal
subsidy, are not explicitly addressed by current existing authoritative
guidance. In accordance with FASB Staff Position No. 106-1, the Company has
elected to defer accounting for the effects of the Medicare 2003 Act until
authoritative guidance on how to account for the federal subsidy has been
issued. Consequently, the Company's accumulated postretirement benefit
obligation and net periodic postretirement benefit cost, as reflected in the
accompanying Consolidated Financial Statements, do not reflect any effect of the
Medicare 2003 Act. Specific authoritative guidance on accounting for the federal
subsidy is pending, and that guidance, when issued, could require the Company to
change previously reported financial information, depending on the transition
provisions of such guidance.
Note 14 - Leverkusen fire and insurance claim:
In March 2001, the Company suffered a fire at its Leverkusen, Germany TiO2
facility. Production at the facility's chloride-process plant returned to full
capacity on April 8, 2001. The facility's sulfate-process plant became
approximately 50% operational in September 2001, and became fully operational in
late October 2001. The damages to property and the business interruption losses
caused by the fire were covered by insurance, but the effect on the financial
results of the Company on a quarter-to-quarter basis was impacted by the timing
and amount of insurance recoveries. The Company's operating income in 2001
includes $27.3 million of business interruption insurance recoveries related to
the Leverkusen fire. Of such business interruption proceeds amount, $20.1
million was recorded as a reduction of cost of sales to offset unallocated
period costs that resulted from lost production: and the remaining $7.2 million,
representing recovery of lost margin, was recorded as other income. The Company
also recognized insurance recoveries of $29.1 million in 2001 for property
damage and related cleanup and other extra costs, resulting in an insurance gain
of $17.5 million as such recoveries exceeded the carrying value of the property
destroyed and the cleanup and other extra expenses incurred.
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.
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.
Current receivables from and payables to affiliates are summarized in the
table below.
December 31,
2002 2003
(In thousands)
Current receivables from affiliates:
NL - income taxes $ 978 $ 1,209
Other 54 -
------ -------
$1,032 $ 1,209
====== =======
Current payables to affiliates:
NL $ 319 $ 359
LPC 7,614 8,560
------ -------
$7,933 $ 8,919
====== =======
Amounts payable to LPC are generally for the purchase of TiO2 (see Note 6)
and amounts payable to NL principally relate to accrued interest on affiliate
loans. Purchases of TiO2 from LPC were $93.4 million in 2001, $92.4 million in
2002 and $101.3 million in 2003.
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 was $33.4 million in 2001,
$20.8 million in 2002 and $.7 million in 2003. Interest expense on all loans
from related parties was $23.0 million in 2001, $12.3 million in 2002 and $1.9
million in 2003.
Under the terms of various intercorporate services agreements ("ISAs")
entered into between the Company and various related parties, 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 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. These ISA
agreements are reviewed and approved by the applicable independent directors of
the companies that are parties to the agreements.
The Company is a party to an intercorporate services agreement with NL ("NL
ISA") whereby NL provides certain management services to the Company on a fee
basis. Intercorporate services fee expense related to the NL ISA was $3.5
million in 2001 and $3.7 million in each of 2002 and 2003.
Tall Pines, Valmont Insurance Company and EWI provide for or broker certain
insurance policies for Contran and certain of its subsidiaries and affiliates,
including the Company. Tall Pines and Valmont are wholly-owned subsidiaries of
Valhi, and EWI is currently a wholly-owned subsidiary of NL. Prior to January
2002, EWI was owned by Contran or parties related to Contran. Consistent with
insurance industry practices, Tall Pines, Valmont and EWI receive commissions
from the insurance and reinsurance underwriters for the policies that they
provide or broker. The aggregate premiums paid to Tall Pines, Valmont and EWI by
the Company and its joint venture were $9.7 million in 2001, $10.1 million in
2002 and $7.2 million in 2003. These amounts principally included payments for
insurance and reinsurance premiums paid to third parties, but also included
commissions paid to Tall Pines, Valmont and EWI. In the Company's opinion, the
amounts that the Company paid for these insurance policies and the allocation
among the Company and its affiliates of relative insurance premiums are
reasonable and similar to those they could have obtained through unrelated
insurance companies and/or brokers. The Company expects that these relationships
with Tall Pines, Valmont and EWI will continue in 2004.
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.
During 2002, NL and an officer of both the Company and NL entered into an
agreement whereby stock options held by the officer to purchase an aggregate of
160,400 shares of NL's common stock were exercised or canceled for value. On a
net basis, NL made aggregate cash payments to the officer of approximately $.7
million, and NL charged the Company an equivalent amount for stock compensation
expense. See Note 1.
Note 16 - Commitments and contingencies:
Environmental matters. The Company's operations are governed by various
federal, state, local and foreign environmental laws and regulations. Certain of
the Company's businesses 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. 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 comply with
environmental laws and regulations at all of its plants and to continually
strive to improve environmental performance in association with applicable
industry initiatives. The Company believes that its operations are in
substantial compliance with applicable requirements of environmental laws. From
time to time, the Company may be subject to environmental regulatory enforcement
under various 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's production facilities operate within an environmental
regulatory framework in which governmental authorities typically are granted
broad discretionary powers that allow them to issue operating permits under
which the plants must operate. The Company believes all of its plants are in
substantial compliance with applicable environmental laws. With respect to the
Company's plants, neither the Company nor any of its subsidiaries have been
notified of any environmental claim in the United States or any foreign
jurisdiction by the U.S. EPA or any applicable foreign authority or any state,
provincial or local authority.
Litigation matters. The Company's Belgian subsidiary and various Belgian
employees are the subject of civil and criminal proceedings related to an
accident that resulted in two fatalities in such facility in 2000. At a hearing
held in January 2004, the government requested the court to impose fines on the
Company's subsidiary and certain of its employees in an amount equal to
approximately (euro)367,500 ($460,000). The Company's subsidiary has undertaken
the defense of and liability for any fines and costs incurred by its employees
arising out of these proceedings. The court's decision is anticipated in April
2004.
Kronos is also involved in various other environmental, contractual,
product liability and other claims and disputes incidental to its business.
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 more than 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 (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 25% of net sales in each of the last three years. By
volume, approximately one-half of the Company's TiO2 sales by volume were to
Europe in each of the past three years and approximately 38% of sales in 2001,
39% in 2002 and 40% in 2003 were attributable to North America.
At December 31, 2003, consolidated cash, cash equivalents and restricted
cash includes $13.7 million invested in U.S. Treasury securities purchased under
short-term agreements to resell (2002 - $13.8 million).
Capital expenditures. At December 31, 2003 the estimated cost to complete
capital projects in process approximated $9.6 million.
Long-term contracts. The Company has long-term supply contracts that
provide for the Company's chloride-process TiO2 feedstock requirements through
2007. The agreements require the Company to purchase certain minimum quantities
of feedstock with average minimum annual purchase commitments aggregating
approximately $165 million.
Operating leases. Kronos' principal German operating subsidiary leases the
land under its Leverkusen TiO2 production facility pursuant to a lease expiring
in 2050. The Leverkusen facility, with approximately one-third of Kronos'
current TiO2 production capacity, is located within the lessor's extensive
manufacturing complex. Rent for the Leverkusen facility is periodically
established by agreement with the lessor for periods of at least two years at a
time. Under a separate supplies and services agreement expiring in 2011, the
lessor provides some raw materials, auxiliary and operating materials and
utilities services necessary to operate the Leverkusen facility. Both the lease
and the supplies and services agreements restrict the Company's ability to
transfer ownership or use of 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 $8 million in
2001, $10 million in 2002 and $12 million in 2003. At December 31, 2003, 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)
2004 $ 3,255
2005 2,271
2006 1,468
2007 1,316
2008 1,194
2009 and thereafter 19,881
-------
$29,385
=======
Approximately $19.4 million of the $29.4 million aggregate future minimum
rental commitments at December 31, 2003 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, 2003.
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,
2002 2003
--------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- -------------------------
(In millions)
Cash, cash equivalents, restricted cash and noncurrent
restricted marketable debt securities $ 44.4 $ 44.4 $ 59.8 $ 59.8
Notes payable and long-term debt:
Fixed rate with market quotes -
8.875% Senior Secured Notes $ 296.9 $ 299.9 $ 356.1 $ 356.1
Variable rate debt $ 29.0 $ 29.0 $ .6 $ .6
Note payable to affiliate $ 44.6 * $ 200.0 *
Common stockholders' equity $ 314.2 $ 314.2 $ 159.4 $ 1,086.5
- --------------------------------
* Due to the related party nature of the Company's long-term
note payable to NL, it is not practicable, without incurring substantial
cost, to estimate the fair value of such indebtedness.
Fair value of the Company's restricted marketable debt securities and Notes
and the fair value of the Company's common stockholders' equity, are based upon
quoted market prices at each balance sheet date.
At December 31, 2003, the Company had entered into a short-term currency
forward contract maturing January 2, 2004 to exchange an aggregate of (euro)40
million for an equivalent amount of U.S. dollars at an exchange rate of U.S.
$1.25 per euro. Such contract was entered into in conjunction with the January
2004 payment of an intercompany dividend from one of the Company's European
subsidiaries. At December 31, 2003, the actual exchange rate was U.S. $1.25 per
euro. The estimated fair value of such foreign currency contract was not
material at December 31, 2003. The Company held no other significant derivative
financial instruments at December 31, 2002 or 2003. See Note 1.
Note 18 Accounting principles newly adopted in 2003:
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 increase in the asset retirement obligations from January 1, 2003
($600,000) to December 31, 2003 ($800,000) is due to accretion expense and the
effects of currency translation. Accretion expense, which is reported as a
component of cost of sales in the accompanying Statement of Income, approximated
$100,000 for the year ended December 31, 2003. If the Company had adopted SFAS
No. 143 as of January 1, 2001, the asset retirement obligations would have been
approximately $500,000 at December 31, 2001.
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.
Note 19 - 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, 2002
Net sales $202.4 $ 226.9 $234.1 $211.9
Cost of sales 156.3 176.2 177.5 161.8
Net income $ 17.0 $ 23.3 $ 16.8 $ 9.2
Basic and diluted earnings per common share $ .35 $ .48 $ .34 $ .19
Year ended December 31, 2003
Net sales $253.0 $ 266.6 $242.9 $245.7
Cost of sales 188.4 197.6 177.4 175.8
Net income $ 16.7 $ 41.8 $ 16.0 $ 13.1
Basic and diluted earnings per common share
$ .34 $ .85 $ .33 $ .27
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 20 - Accounting principles not yet adopted:
The Company is required to comply with the consolidation requirements of
FASB Interpretation ("FIN") No. 46R, "Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51," as amended at March 31, 2004. While
the Company currently does not believe it has any involvement with any variable
interest entity (as that term is defined in FIN No. 46R) covered by the scope of
FIN No. 46R, the interpretation is complex and therefore the impact of adopting
the consolidation requirements of FIN No. 46R has not yet been definitively
determined.
REPORT OF INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULES
To the Stockholders and Board of Directors of Kronos Worldwide, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated March 5 , 2004, appearing on page F-2 of the 2003 Annual Report on Form
10-K of Kronos Worldwide, Inc., also included an audit of the financial
statement schedules listed in the index on page F-1 of this Form 10-K. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
March 5, 2004
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Balance Sheets
December 31, 2002 and 2003
(In thousands)
2002 2003
Current assets:
Cash and cash equivalents $ 3,564 $ 3,073
Receivable from affiliates 628 1,209
Deferred income taxes 647 -
--------- ----------
Total current assets 4,839 4,282
--------- ----------
Other assets:
Notes receivable from affiliates 88,054 50,250
Investment in subsidiaries 262,454 303,808
Deferred income taxes 8,890 4,018
--------- ----------
Total other assets 359,398 358,076
--------- ----------
$ 364,237 $ 362,358
========= ==========
Current liabilities:
Accounts payable and accrued liabilities $ 16 $ 16
Payable to affiliates 514 2,991
--------- ----------
Total current liabilities 530 3,007
--------- ----------
Noncurrent liabilities:
Notes payable to affiliates 44,600 200,000
Deferred income taxes 4,933 -
--------- ----------
Total noncurrent liabilities 49,533 200,000
--------- ----------
Stockholders' equity 314,174 159,351
--------- ----------
$ 364,237 $ 362,358
========= ==========
Contingencies (Note 4)
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
Condensed Statements of Income
Years ended December 31, 2001, 2002 and 2003
(In thousands)
2001 2002 2003
Revenues and other income:
Equity in income from continuing operations of subsidiaries $148,267 $ 60,943 $ 92,051
Interest income from affiliates 35,601 23,776 3,009
Interest and dividends 29 483 29
Other income, net - 3,555 8
-------- -------- --------
183,897 88,757 95,097
Costs and expenses:
General and administrative (103) (102) 269
Intercompany interest and others 25,638 17,421 1,917
-------- -------- --------
25,535 17,319 2,186
-------- -------- --------
Income before income taxes 158,362 71,438 92,911
Provision for income taxes 3,906 5,174 5,362
-------- -------- --------
Net income $154,456 $ 66,264 $ 87,549
======== ======== ========
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
Condensed Statements of Cash Flows
Years ended December 31, 2001, 2002 and 2003
(In thousands)
2001 2002 2003
Cash flows from operating activities:
Net income $ 154,456 $ 66,264 $ 87,549
Distributions from subsidiaries 18,407 48,900 -
Noncash interest income, net - (302) -
Deferred income taxes (3,147) (21) (538)
Equity in earnings of subsidiaries (148,267) (60,943) (92,051)
Net change in assets and liabilities 5,137 (4,490) 1,295
--------- -------- --------
Net cash provided by (used in) operating activities 26,586 49,408 (3,745)
--------- -------- --------
Cash flows from investing activities:
Loans to affiliates (14,600) (83,200) (16,550)
Collections of loans to affiliates 30,313 295,182 46,404
Investments in subsidiaries (3,807) (9,149) -
--------- -------- --------
Net cash provided by investing activities 11,906 202,833 29,854
--------- -------- --------
Cash flows from financing activities:
Loans from affiliates 1,625 46,675 8,000
Repayments of loans from affiliates - (194,000) (52,600)
Dividends paid (30,500) (111,000) 18,000
--------- -------- --------
Net cash used by financing activities: (28,875) (258,325) (26,600)
--------- -------- --------
Net change during the year from operating, investing and
financing activities 9,617 (6,084) (491)
Balance at beginning of year 31 9,648 3,564
--------- -------- --------
Balance at end of year $ 9,648 $ 3,564 $ 3,073
========= ======== ========
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,
2002 2003
(In thousands)
Current:
Receivable from:
NL - income taxes $ 628 $ 1,209
======== =========
Payable to:
KUS $ 511 $ 200
NL - income taxes - 2,291
KLA 3 -
Kronos Cananda, Inc. ("KC") - 500
-------- ---------
$ 514 $ 2,991
======== =========
Noncurrent:
Receivable from: $ 43,454 $ 50,250
KUS 44,600 -
-------- ---------
NL $ 88,054 $ 50,250
======== =========
Payable to:
NL $ - $ 200,000
EMS 44,600 -
-------- ---------
$ 44,600 $ 200,000
======== =========
During 2002 the Company completed certain capital restructuring
transactions whereby the Company distributed to NL certain affiliate notes
receivable, net and the Company recorded a corresponding decrease in its
investment in subsidiaries. See Note 3.
See Note 10 of the Consolidated Financial Statements for a description of
noncurrent receivables and payables.
Note 3 - Investment in subsidiaries:
December 31,
2002 2003
(In thousands)
Investment in:
KLA $ 104,089 $ 110,336
KC 82,201 81,910
KII 76,164 111,562
--------- ----------
$ 262,454 $ 303,808
========= ==========
2001 2002 2003
Equity in income from continuing operations of subsidiaries:
KLA $ 14,578 $ 8,904 $ 6,086
KC 9,483 11,288 2,192
KII 124,206 40,751 83,773
--------- -------- --------
$ 148,267 $ 60,943 $ 92,051
========= ======== ========
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, 2001:
Allowance for doubtful accounts $ 2,103 $ 485 $ (245) $ (104) $ - $ 2,239
Year ended December 31, 2002:
Allowance for doubtful accounts $ 2,239 $ 481 $ (414) $ 299 $ - $ 2,605
Year ended December 31, 2003:
Allowance for doubtful accounts $ 2,605 $ 367 $ (439) $ 387 $ - $ 2,920
Note:Certain information has been omitted from this Schedule because it is
disclosed in the Notes to the Consolidated Financial Statements.