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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2004 Commission file number 1-31763
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KRONOS WORLDWIDE, INC.
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 76-0294959
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes _X_ No___
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes___ No_X_
Number of shares of the Registrant's common stock outstanding on April 30, 2004:
48,943,049.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
December 31, 2003 and March 31, 2004 3
Consolidated Statements of Income -
Three months ended March 31, 2003 and 2004 5
Consolidated Statements of Comprehensive Income -
Three months ended March 31, 2003 and 2004 6
Consolidated Statement of Stockholders' Equity -
Three months ended March 31, 2004 7
Consolidated Statements of Cash Flows -
Three months ended March 31, 2003 and 2004 8
Notes to Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 4. Controls and Procedures 23
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8-K 24
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, March 31,
2003 2004
------------ -----------
Current assets:
Cash and cash equivalents $ 55,876 $ 90,360
Restricted cash and cash equivalents 1,313 845
Accounts and other receivables 156,212 183,583
Refundable income taxes 35,336 14,428
Receivable from affiliates 1,209 601
Inventories 266,020 227,530
Prepaid expenses 4,456 4,520
Deferred income taxes 2,755 3,118
---------- ----------
Total current assets 523,177 524,985
---------- ----------
Other assets:
Investment in TiO2 manufacturing joint venture 129,011 127,211
Other 28,040 27,182
---------- ----------
Total other assets 157,051 154,393
---------- ----------
Property and equipment:
Land 32,339 31,461
Buildings 179,472 175,143
Equipment 765,231 750,086
Mining properties 63,701 61,160
Construction in progress 9,666 9,108
---------- ----------
1,050,409 1,026,958
Less accumulated depreciation and amortization 615,442 609,637
---------- ----------
Net property and equipment 434,967 417,321
---------- ----------
$1,115,195 $1,096,699
========== ==========
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, March 31,
2003 2004
------------ ---------
Current liabilities:
Current maturities of long-term debt $ 288 $ 279
Accounts payable 97,446 61,908
Accrued liabilities 69,218 75,784
Payable to affiliates 8,919 8,250
Income taxes 12,354 12,681
Deferred income taxes 3,436 1,407
---------- ----------
Total current liabilities 191,661 160,309
---------- ----------
Noncurrent liabilities:
Long-term debt 356,451 377,531
Note payable to affiliate 200,000 200,000
Accrued pension costs 68,161 67,846
Accrued postretirement benefits costs 11,176 10,895
Deferred income taxes 113,143 108,796
Other 14,727 14,318
---------- ----------
Total noncurrent liabilities 763,658 779,386
---------- ----------
Minority interest 525 518
---------- ----------
Stockholders' equity:
Common stock 489 489
Additional paid-in capital 1,060,157 1,060,157
Retained deficit (729,260) (731,688)
Accumulated other comprehensive loss:
Currency translation (133,009) (133,446)
Pension liabilities (39,026) (39,026)
---------- ----------
Total stockholders' equity 159,351 156,486
---------- ----------
$1,115,195 $1,096,699
========== ==========
Commitments and contingencies (Notes 8 and 10)
See accompanying notes to consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three months ended March 31, 2003 and 2004
(In thousands, except per share data)
2003 2004
---- ----
Net sales $ 252,973 $ 263,267
Cost of sales 188,417 202,231
--------- ----------
Gross margin 64,556 61,036
Selling, general and administrative expense 29,379 35,244
Other operating income (expense):
Currency transaction gains (losses), net (1,098) 254
Disposition of property and equipment (61) (23)
Other income 103 14
Corporate expense (771) (438)
--------- ----------
Income from operations 33,350 25,599
Other income (expense):
Trade interest income 163 206
Interest income from affiliates 358 -
Other interest income 36 151
Interest expense to affiliates (384) (4,475)
Interest expense (7,983) (9,215)
--------- ----------
Income before income taxes and minority interest 25,540 12,266
Provision for income taxes 8,851 2,450
Minority interest in after-tax earnings 24 8
--------- ----------
Net income $ 16,665 $ 9,808
--------- ----------
Basic and diluted net income per share $ .34 $ .20
========= ==========
Basic and diluted weighted-average shares used in the calculation of
net income per share 48,943 48,943
========= ==========
See accompanying notes to consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended March 31, 2003 and 2004
(In thousands)
2003 2004
---- ----
Net income $ 16,665 $ 9,808
Other comprehensive income (loss), net of tax - currency
translation adjustment 3,699 (437)
--------- ---------
Comprehensive income $ 20,364 $ 9,371
========= =========
See accompanying notes to consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three months ended March 31, 2004
(In thousands)
Accumulated other
comprehensive loss
Additional -------------------------- Total
Common paid-in Retained Currency Pension stockholders'
stock capital deficit translation liabilities equity
-------- ----------- ----------- ------------- ------------ -------------
Balance at December 31, 2003 $ 489 $1,060,157 $(729,260) $(133,009) $(39,026) $159,351
Net income - - 9,808 - - 9,808
Dividends - - (12,236) - - (12,236)
Other comprehensive loss - - - (437) - (437)
------ ---------- --------- --------- -------- --------
Balance at March 31, 2004 $ 489 $1,060,157 $(731,688) $(133,446) $(39,026) $156,486
====== ========== ========= ========= ======== ========
See accompanying notes to consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2003 and 2004
(In thousands)
2003 2004
------ ------
Cash flows from operating activities:
Net income $ 16,665 $ 9,808
Depreciation and amortization 9,520 11,038
Noncash interest expense 528 619
Deferred income taxes 4,246 (1,357)
Minority interest 24 8
Net loss from disposition of property and equipment 61 23
Pension cost, net (1,051) 1,027
Distributions from (contributions to) TiO2 manufacturing joint venture, net (1,250) 1,800
Other postretirement benefits, net (314) (258)
Other, net - 700
Change in assets and liabilities:
Accounts and other receivables (28,457) (31,008)
Inventories 18,702 33,494
Prepaid expenses 1,581 (66)
Accounts payable and accrued liabilities (29,577) (27,339)
Income taxes 405 21,286
Accounts with affiliates 2,077 279
Other, net 801 (940)
-------- --------
Net cash provided by (used in) operating activities (6,039) 19,114
-------- --------
Cash flows from investing activities:
Capital expenditures (6,503) (4,501)
Change in restricted cash equivalents (1,009) 556
Other, net 42 30
-------- --------
Net cash used in investing activities (7,470) (3,915)
-------- --------
Cash flows from financing activities:
Indebtedness:
Borrowings 16,106 99,968
Principal payments (342) (67,468)
Repayment of loans from affiliates 8,000 -
Dividends paid - (12,236)
Other capital transactions with affiliates, net (11,400) -
-------- --------
Net cash provided by financing activities 12,364 20,264
-------- --------
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Three months ended March 31, 2003 and 2004
(In thousands)
2003 2004
------ ------
Cash and cash equivalents - net change from:
Operating, investing and financing activities $ (1,145) $ 35,463
Currency translation 421 (979)
Cash and cash equivalents at beginning of period 40,685 55,876
-------- --------
Cash and cash equivalents at end of period $ 39,961 $ 90,360
======== ========
Supplemental disclosures - cash paid (received) for:
Interest, net of amounts capitalized $ 1,056 $ 5,559
Income taxes, net 3,041 (18,165)
See accompanying notes to consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
Kronos Worldwide, Inc. ("Kronos") (NYSE: KRO) is a 50.5% owned subsidiary
of NL Industries, Inc. (NYSE: NL) at March 31, 2004. NL conducts its titanium
dioxide pigments ("TiO2") operations through Kronos. At March 31, 2004, Valhi,
Inc. and a wholly-owned subsidiary of Valhi, held approximately 83% of NL's
outstanding common stock, and Contran Corporation and its subsidiaries held
approximately 90% of Valhi's outstanding common stock. At March 31, 2004, Valhi
and a wholly-owned subsidiary of Valhi held an additional 43.3% of Kronos'
outstanding common stock. Substantially all of Contran's outstanding voting
stock is held by trusts established for the benefit of certain children and
grandchildren of Harold C. Simmons, of which Mr. Simmons is sole trustee, or is
held by Mr. Simmons or persons or other entities related to Mr. Simmons. Mr.
Simmons, the Chairman of the Board of Valhi, Contran and the Company, may be
deemed to control each of such companies.
The consolidated balance sheet of Kronos at December 31, 2003 has been
condensed from the Company's audited consolidated financial statements at that
date. The consolidated balance sheet at March 31, 2004, and the consolidated
statements of income, comprehensive income, stockholders' equity and cash flows
for the interim periods ended March 31, 2003 and 2004, have been prepared by the
Company, without audit, in accordance with accounting principles generally
accepted in the United States of America ("GAAP"). In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the consolidated financial position, results of operations and
cash flows have been made.
The results of operations for the interim periods are not necessarily
indicative of the operating results for a full year or of future operations.
Certain information normally included in financial statements prepared in
accordance with GAAP has been condensed or omitted, and certain prior year
amounts have been reclassified to conform to the current year presentation. The
accompanying consolidated financial statements should be read in conjunction
with the Company's Annual Report on Form 10-K for the year ended December 31,
2003 (the "2003 Annual Report").
The Company has not issued any stock options to purchase Kronos common
stock. However, certain employees of the Company have been granted options by NL
to purchase NL common stock. As disclosed in the 2003 Annual Report, the Company
accounts for stock-based employee compensation in accordance with Accounting
Principles Board Opinion ("APBO") No. 25, "Accounting for Stock Issued to
Employees," and its various interpretations. Under APBO No. 25, no compensation
cost is generally recognized for fixed stock options in which the exercise price
is greater than or equal to the market price on the grant date. Prior to 2003,
the Company commenced accounting for its stock options using the variable
accounting method of APBO No. 25, which requires the intrinsic value of all
unexercised stock options (including stock options with an exercise price at
least equal to the market price on the date of grant) to be accrued as an
expense, with subsequent increases (decreases) in the Company's market price
resulting in recognition of additional compensation expense (income). Aggregate
compensation expense related to NL stock options held by employees of the
Company was $200,000 in the first quarter of 2003 and approximately $700,000 in
the first quarter of 2004.
The following table presents what the Company's consolidated net income,
and related per share amounts, would have been in the first quarter of 2003 and
2004 if the Company and its subsidiaries and affiliates had each elected to
account for their respective stock-based employee compensation related to stock
options in accordance with the fair value-based recognition provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation," for all awards granted
subsequent to January 1, 1995.
Three months ended March 31,
------------------------------
2003 2004
------- -------
(In millions, except
per share amounts)
Net income as reported $16.6 $ 9.8
Adjustments, net of applicable income
tax effects and minority interest:
Stock-based employee compensation expense
determined under APBO No. 25 .2 .5
Stock-based employee compensation expense
determined under SFAS No. 123 (.1) -
----- -----
Pro forma net income $16.7 $10.3
===== =====
Basic and diluted earnings per share:
As reported $ .34 $ .20
Pro forma .34 .21
The Company has complied with the consolidation requirements of FASB
Interpretation ("FIN") No. 46R, "Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51," as amended, as of March 31, 2004. See Note 11.
Note 2 - Accounts and other receivables:
December 31, March 31,
2003 2004
----------- ----------
(In thousands)
Trade receivables $147,029 $176,130
Recoverable VAT and other receivables 12,103 10,348
Allowance for doubtful accounts (2,920) (2,895)
-------- --------
$156,212 $183,583
======== ========
Note 3 - Inventories:
December 31, March 31,
2003 2004
----------- ----------
(In thousands)
Raw materials $ 61,959 $ 31,591
Work in process 19,855 18,135
Finished products 147,270 142,175
Supplies 36,936 35,629
-------- --------
$266,020 $227,530
======== ========
Note 4 - Other noncurrent assets:
December 31, March 31,
2003 2004
----------- ----------
(In thousands)
Deferred financing costs, net $ 10,417 $ 9,695
Restricted marketable debt securities 2,586 2,458
Unrecognized net pension obligations 13,747 13,747
Other 1,290 1,282
-------- --------
$ 28,040 $ 27,182
======== ========
Note 5 - Accrued liabilities:
December 31, March 31,
2003 2004
----------- ----------
(In thousands)
Employee benefits $ 31,732 $ 28,800
Interest 207 8,043
Other 37,279 38,941
-------- --------
$ 69,218 $ 75,784
======== ========
Note 6 - Long-term debt:
December 31, March 31,
2003 2004
----------- ----------
(In thousands)
Kronos International, Inc. and subsidiaries:
Senior Secured Notes $356,136 $345,848
Revolving credit facility - 31,551
Other 603 411
-------- --------
356,739 377,810
Less current maturities 288 279
-------- --------
$356,451 $377,531
======== ========
During the first quarter of 2004, certain of Kronos' operating subsidiaries
in Europe borrowed a net Euro 26 million ($32 million when borrowed) under the
European revolving credit facility at an interest rate of 3.8%.
Note 7 - Other noncurrent liabilities:
December 31, March 31,
2003 2004
----------- ----------
(In thousands)
Employee benefits $ 4,849 $ 4,663
Insurance 1,673 1,957
Other 8,205 7,698
-------- --------
$ 14,727 $ 14,318
======== ========
Note 8 - Provision for income taxes:
Three months ended
March 31,
--------------------------
2003 2004
----- -----
(In millions)
Expected tax expense $ 8.9 $ 4.3
Incremental U.S. tax and rate differences on (.1)
equity in earnings of non-tax group companies .9
Non-U.S. tax rates .1 .1
Change in deferred income tax valuation (3.0)
allowance, net (.7)
Other, net (.4) 1.2
----- -----
$ 8.8 $ 2.5
===== =====
In the first quarter of 2003, Kronos International, Inc. ("KII"), which
conducts Kronos' TiO2 operations in Europe, was notified by the German Federal
Fiscal Court (the "Court") that the Court had ruled in KII's favor concerning a
claim for refund suit in which KII sought refunds of prior taxes paid during the
periods 1990 through 1997. KII and the Company's German operating subsidiary
were required to file amended tax returns with the German tax authorities to
receive refunds for such years, and all of such amended returns were filed
during 2003. Such amended returns reflected an aggregate 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. Through April 2004, KII's German operating
subsidiary received net refunds of Euro 16.3 million ($20.3 million when
received). KII believes it will receive the net refunds 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 for which the
Company received euro 21.5 million ($24.6 million) in 2003. KII 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 penalties
and interest. For example:
o Kronos has received a preliminary tax assessment related to 1993 from the
Belgian tax authorities proposing tax deficiencies, including related
interest, of approximately Euro 6 million ($8 million at March 31, 2004).
Kronos has filed a protest to this assessment and believes that a
significant portion of the assessment is without merit. The Belgian tax
authorities have filed a lien on the fixed assets of Kronos' Belgian TiO2
operations in connection with this assessment. In April 2003, Kronos
received a notification from the Belgian tax authorities of their intent to
assess a tax deficiency related to 1999 that, including interest, is
expected to be approximately Euro 13 million ($16 million). Kronos believes
the proposed assessment is substantially without merit, and Kronos has
filed a written response.
o The Norwegian tax authorities have notified Kronos of their intent to
assess tax deficiencies of approximately kroner 12 million ($2 million at
March 31, 2004) relating to the years 1998 to 2000. Kronos 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.
Note 9 - Employee benefit plans:
The components of net periodic defined benefit pension cost are presented
in the table below.
Three months ended
March 31,
--------------------------
2003 2004
----- -----
(In thousands
Service cost benefits $ 1,239 $ 1,611
Interest cost on projected benefit obligations 3,692 4,328
Expected return on plan assets (4,142) (3,832)
Amortization of prior service cost 87 141
Amortization of net transition obligations 187 160
Recognized actuarial losses 307 742
------- -------
$ 1,370 $ 3,150
======= =======
The components of net periodic postretirement benefits other than pensions
("OPEB") cost are presented in the table below.
Three months ended
March 31,
--------------------------
2003 2004
----- -----
(In thousands
Service cost $ 35 $ 57
Interest cost 166 181
Amortization of prior service credit (264) (183)
Recognized actuarial losses 20 39
------- -------
$ (43) $ 94
Note 10 - Commitments and contingencies:
In May 2004, the court ruled and, among other things, imposed a fine of
euro 200,000 against the Company and fines ranging from euro 1,000 to euro
25,000 against various employees of the Company, the liability of which has been
undertaken by the Company, in the previously-reported matter concerning
fatalities at the Company's Belgian facility. The Company plans to appeal the
ruling.
In addition to the litigation described above, the Company is from time to
time also involved in various other environmental, contractual, product
liability, patent (or intellectual property), employment and other claims and
disputes incidental to its present and former businesses. In certain cases, the
Company has insurance coverage for such items. The Company currently believes
the disposition of all claims and disputes individually or in the aggregate,
should not have a material adverse effect on the Company's consolidated
financial condition, results of operations or liquidity.
Note 11 - Accounting principle newly adopted in 2004:
The Company complied with the consolidation requirements of FIN No. 46R,
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,"
as amended, as of March 31, 2004. The Company does not have any involvement with
any variable interest entity (as that term is defined in FIN No. 46R) covered by
the scope of FIN No. 46R, and therefore the impact to the Company of adopting
the consolidation requirements of FIN No. 46R was not material.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
Executive summary
Relative changes in the Company's TiO2 sales and income from operations
during the first three months of 2003 and 2004 are primarily due to (i) relative
changes in TiO2 average selling prices and (ii) relative changes in foreign
currency exchange rates. Selling prices were generally increasing during the
first quarter of 2003, were generally flat during the second quarter of 2003 and
were generally decreasing during the third and fourth quarters of 2003 and the
first quarter of 2004.
Forward-looking information
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts
are forward-looking statements that represent management's beliefs and
assumptions based on currently available information. Forward-looking statements
can be identified by the use of words such as "believes," "intends," "may,"
"should," "could," "anticipates," "expects" or comparable terminology, or by
discussions of strategies or trends. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
cannot give any assurances that these expectations will prove to be correct.
Such statements by their nature involve substantial risks and uncertainties that
could significantly impact expected results, and actual future results could
differ materially from those described in such forward-looking statements. While
it is not possible to identify all factors, the Company continues to face many
risks and uncertainties. Among the factors that could cause actual future
results to differ materially are the risks and uncertainties discussed in this
Quarterly Report and those described from time to time in the Company's other
filings with the Securities and Exchange Commission ("SEC") including, but not
limited to, the following:
o Future supply and demand for the Company's products,
o The cyclicality of the Company's businesses,
o Customer inventory levels (such as the extent to which the Company's
customers may, from time to time, accelerate purchases of TiO2 in advance
of anticipated price increases or defer purchases of TiO2 in advance of
anticipated price decreases),
o Changes in raw material and other operating costs (such as energy costs),
o The possibility of labor disruptions,
o General global economic and political conditions (such as changes in the
level of gross domestic product in various regions of the world and the
impact of such changes on demand for TiO2),
o Competitive products and substitute products,
o Customer and competitor strategies,
o The impact of pricing and production decisions,
o Competitive technology positions,
o Fluctuations in currency exchange rates (such as changes in the exchange
rate between the U.S. dollar and each of the euro, the Norwegian kroner and
the Canadian dollar),
o Operating interruptions (including, but not limited to, labor disputes,
leaks, fires, explosions, unscheduled or unplanned downtime and
transportation interruptions),
o The ability of the Company to renew or refinance credit facilities,
o The ultimate outcome of income tax audits, tax settlement initiatives or
other tax matters,
o 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 new information, future events
or otherwise.
Three months ended
March 31,
------------------------ %
2003 2004 Change
----- ----- -------
(In millions, except
percentage and volumes)
Net sales $253.0 $263.3 +4%
Cost of sales 188.4 202.3 +7%
------ ------
Gross margin 64.6 61.0 -6%
Selling, general and administrative expense (29.4) (35.2)
Currency transaction gains (losses), net (1.1) .2
Other income .1 -
Corporate expense (.8) (.4)
------ ------
Income from operations $ 33.4 $ 25.6 -23%
====== ======
TiO2 data:
Percent change in average selling prices:
Using actual foreign currency exchange rates +4%
Impact of changes in foreign currency exchange rates -8%
----
In billing currencies -4%
====
Sales volumes* 118 118
Production volumes* 117 117
________________________________
* Thousands of metric tons
Kronos' sales increased $10.3 million (4%) in the first quarter of 2004
compared to the first quarter of 2003, as the favorable effect of fluctuations
in foreign currency exchange rates, which increased sales by approximately $21
million (as more fully discussed below), more than offset the impact of lower
average TiO2 selling prices. Excluding the effect of fluctuations in the value
of the U.S. dollar relative to other currencies, the Company's average TiO2
selling prices in billing currencies in the first quarter of 2004 were 4% lower
than the first quarter of 2003. When translated from billing currencies into
U.S. dollars using actual foreign currency exchange rates prevailing during the
respective periods, Kronos' average TiO2 selling prices in the first quarter of
2004 were 4% higher compared to the first quarter of 2003. Kronos' TiO2 sales
volumes in the first quarter of 2004 approximated Kronos' TiO2 sales volumes in
the first quarter of 2003.
The Company's sales are denominated in various currencies, including the
U.S. dollar, the euro, other major European currencies and the Canadian dollar.
The disclosure of the percentage change in the Company's average TiO2 selling
prices in billing currencies (which excludes the effects of fluctuations in the
value of the U.S. dollar relative to other currencies) is considered a
"non-GAAP" financial measure under regulations of the SEC. The disclosure of the
percentage change in the Company's average TiO2 selling prices using actual
foreign currency exchange rates prevailing during the respective periods is
considered the most directly comparable financial measure presented in
accordance with accounting principles generally accepted in the United States
("GAAP measure"). The Company discloses percentage changes in its average TiO2
prices in billing currencies because the Company believes such disclosure
provides useful information to investors to allow them to analyze such changes
without the impact of changes in foreign currency exchange rates, thereby
facilitating period-to-period comparisons of the relative changes in average
selling prices in the actual various billing currencies. Generally, when the
U.S. dollar either strengthens or weakens against other currencies, the
percentage change in average selling prices in billing currencies will be higher
or lower, respectively, than such percentage changes would be using actual
exchange rates prevailing during the respective periods. The difference between
the 4% increase in the Company's average TiO2 selling prices during the first
quarter 2004 as compared to the same period in 2003 using actual foreign
currency exchange rates prevailing during the respective periods (the GAAP
measure) and the 4% decrease 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 above table presents
in a tabular format (i) the percentage change in the Company's average TiO2
selling prices using actual foreign currency exchange rates prevailing during
the respective periods (the GAAP measure), (ii) the percentage change in the
Company's average TiO2 selling prices in billing currencies (the non-GAAP
measure) and (iii) the percentage change due to changes in foreign currency
exchange rates (or the reconciling item between the non-GAAP measure and the
GAAP measure).
The Company's cost of sales increased $13.9 million (7%) in the first
quarter of 2004 compared to the first quarter of 2003 largely due to the effects
of translating foreign currencies (primarily the euro) into U.S. dollars. As a
result of the lower average TiO2 selling prices in billing currencies, the
Company's cost of sales, as a percentage of net sales, increased from 74% in the
first quarter of 2003 to 77% in the first quarter of 2004. Kronos' TiO2
production volumes in the first quarter of 2004 approximated Kronos' TiO2
production volumes in the first quarter of 2003, with operating rates near full
capacity in both periods.
The Company's gross margins for the first quarter of 2004 decreased $3.6
million (6%) from the first quarter of 2003 as the unfavorable effect of lower
average TiO2 selling prices more than offset the favorable effect on gross
margin resulting from relative changes in foreign currency exchange rates.
Selling, general and administrative expenses increased $5.9 million (20%)
in the first quarter of 2004 as compared to the corresponding period in 2003.
This increase is largely attributable to the impact of translating foreign
currencies (primarily the euro) into U.S. dollars as well as increased
compensation costs associated with options to purchase NL common stock held by
employees of the Company.
The Company has substantial operations and assets located outside the
United States (particularly in Germany, Belgium, Norway and Canada). A
significant amount of the Company's sales generated from its non-U.S. operations
are denominated in currencies other than the U.S. dollar, primarily the euro,
other major European currencies and the Canadian dollar. In addition, a portion
of the Company's sales generated from its non-U.S. operations are denominated in
the U.S. dollar. Certain raw materials, primarily titanium-containing
feedstocks, are purchased in U.S. dollars, while labor and other production
costs are denominated primarily in local currencies. Consequently, the
translated U.S. dollar value of the Company's foreign sales and operating
results are subject to currency exchange rate fluctuations which may favorably
or adversely impact reported earnings and may affect the comparability of
period-to-period operating results. Overall, fluctuations in the value of the
U.S. dollar relative to other currencies, primarily the euro, increased TiO2
sales in the first quarter of 2004 approximately $21 million compared to the
same period in 2003. Fluctuations in the value of the U.S. dollar relative to
other currencies similarly impacted the Company's foreign currency-denominated
operating expenses. The Company's operating costs that are not denominated in
the U.S. dollar, when translated into U.S. dollars, were higher in the first
quarter of 2004 compared to the first quarter of 2003. Overall, the net impact
of currency exchange rate fluctuations on the Company's operating income
comparisons was not significant in the first quarter of 2004 as compared to the
same period in 2003.
Outlook
The Company expects its TiO2 sales and production volumes to be higher for
the full year 2004 as compared to 2003. The Company's average Ti02 selling
price, which declined during the second half of 2003 and the first quarter of
2004, is expected to cease to decline sometime during the second quarter of 2004
and should rise thereafter. Nevertheless, the Company expects its average TiO2
selling prices, in billing currencies, to be lower in 2004 as compared to 2003.
Overall, the Company expects its gross margin in 2004 to be lower than 2003. The
Company's expectations as to the future prospects of the Company and the TiO2
industry are based upon a number of factors beyond its control, including
worldwide growth of gross domestic product, competition in the marketplace,
unexpected or earlier-than-expected capacity additions and technological
advances. If actual developments differ from the Company's expectations, the
Company's results of operations could be unfavorably affected.
Other income (expense)
Three months ended
March 31,
-------------------------
2003 2004 Difference
----- ----- -----------
(In millions)
Trade interest income $ .2 $ .2 $ -
Interest income from affiliates .4 - (.4)
Other interest income - .2 .2
Interest expense to affiliates (.4) (4.5) (4.1)
Other interest expense (8.0) (9.2) (1.2)
------ ------ ------
$ (7.8) $(13.3) $ (5.5)
====== ====== ======
Interest expense to affiliates increased $4.1 million from the first
quarter of 2003 to $4.5 million in the first quarter of 2004 due to the $200
million long-term note payable to NL, which was distributed to NL in December
2003. Because of such December 2003 distribution, interest expense to affiliates
is expected to continue to be higher during the remainder of 2004 as compared to
the same periods in 2003.
Kronos has a significant amount of outstanding indebtedness denominated in
the euro, including KII's Euro 285 million Senior Secured Notes. Accordingly,
the reported amount of interest expense will vary depending on relative changes
in foreign currency exchange rates. Other interest expense in the first quarter
of 2004 was $9.2 million, an increase of $1.2 million from the first quarter of
2003. The increase was due primarily to relative changes in foreign currency
exchange rates, which increased the U.S. dollar equivalent of interest expense
on the KII Senior Secured Notes by approximately $1.1 million in the first
quarter of 2004 as compared to the first quarter of 2003. Assuming no
significant change in interest rates or foreign currency exchange rates, other
interest expense for the full-year 2004 is expected to be slightly higher than
amounts for the same periods in 2003.
Provision for income taxes
The principal reasons for the difference between the Company's effective
income tax rates and the U.S. federal statutory income tax rates are explained
in Note 8 to the Consolidated Financial Statements.
During the first quarter of 2004, the Company reduced its deferred income
tax asset valuation allowance by approximately $3 million primarily as a result
of utilization of certain income tax attributes for which the benefit had not
previously been recognized.
At March 31, 2004, Kronos had the equivalent of $606 million of German
income tax loss carryforwards with no expiration date. However, Kronos has
provided a deferred income tax asset valuation allowance against substantially
all of this loss carryforward because Kronos does not currently believe it meets
the "more-likely-than-not" recognition criteria. Kronos periodically evaluates
the "more-likely-than-not" recognition criteria with respect to such tax loss
carryforwards, and it is possible that in the future Kronos may conclude such
carryforwards do meet the recognition criteria, at which time Kronos would
reverse all or a portion of such deferred tax asset valuation allowance.
In January 2004, the German federal government enacted new tax law
amendments that limit the annual utilization of income tax loss carryforwards
effective January 1, 2004. While the new law did not significantly affect the
Company's income tax expense and cash tax payments in the first quarter of 2004,
it could have a significant effect in the future depending on the level of
income earned in Germany.
Recently adopted accounting principle
See Note 11 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES:
Consolidated cash flows
The Company's consolidated cash flows from operating, investing and
financing activities for the three months ended March 31, 2003 and 2004 are
presented below:
Three months ended
March 31,
------------------------
2003 2004
------ -----
(In millions)
Net cash provided (used) by:
Operating activities $ (6.0) $ 19.1
Investing activities (7.5) (3.9)
Financing activities 12.4 20.3
------ ------
Net cash provided (used) by operating, investing and financing activities $ (1.1) $ 35.5
====== ======
Operating activities
The TiO2 industry is cyclical and changes in economic conditions within the
industry significantly impact the earnings and operating cash flows of the
Company. Cash flow from operations is considered the primary source of liquidity
for the Company. Changes in TiO2 pricing, production volume and customer demand,
among other things, could significantly affect the liquidity of the Company.
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 for operating activities increased from $6.0 million used in the
first quarter of 2003 to $19.1 million of cash provided by operating activities
in the first quarter of 2004. This $25.1 million increase was due primarily to
the net effects of (i) lower net income of $6.9 million, (ii) higher
depreciation expense of $1.5 million, (iii) lower deferred income taxes of $5.6
million, (iv) higher net distributions from the TiO2 manufacturing joint venture
of $1.8 million in the first quarter of 2004 compared to $1.3 million in
contributions in the first quarter of 2003, (v) a lower amount of net cash used
in relative changes in the Company's inventories, receivables, payables and
accruals and accounts with affiliates of $12.7 million in the first quarter of
2004 as compared to the first quarter of 2003 and (vi) lower cash paid for
income taxes of $21.2 million. Relative changes in accounts receivable are
affected by, among other things, the timing of sales and the collection of the
resulting receivables. Relative changes in inventories and accounts payable and
accrued liabilities are affected by, among other things, the timing of raw
material purchases and the payment for such purchases and the relative
difference between production volume and sales volume.
Investing and financing activities
The Company's capital expenditures were $6.5 million and $4.5 million in
the first three months of 2003 and 2004, respectively.
In the first quarter of 2004 KII's operating subsidiaries in Germany,
Belgium and Norway borrowed a net Euro 26 million ($32 million when borrowed)
under the European revolving credit facility at an interest rate of 3.8%.
In the first quarter of 2004, the Company paid a regular quarterly dividend
to stockholders of $.25 per share, aggregating $12.2 million.
Cash, cash equivalents, restricted cash and restricted marketable debt
securities and borrowing availability
At March 31, 2004, the Company and its subsidiaries had (i) current cash
and cash equivalents aggregating $90.4 million ($40.4 million held by non-U.S.
subsidiaries), (ii) current restricted cash equivalents of $800,000 and (iii)
noncurrent restricted marketable debt securities of $2.5 million. At March 31,
2004, certain of the Company's subsidiaries had approximately $121 million
available for borrowing with approximately $76 million available under non-U.S.
credit facilities (including approximately $63 million under the European Credit
Facility and $9.7 million under Kronos' Canadian bank credit facility) and
approximately $45 million available under the U.S. Credit Facility. At March 31,
2004, KII had approximately $12 million available for payment of dividends and
other restricted payments as defined in the Senior Secured Notes indenture.
Litigation matters
See Note 10 to the Consolidated Financial Statements and Part II, Item 1,
"Legal Proceedings."
Income tax contingencies
See Note 8 to the Consolidated Financial Statements for certain income tax
examinations currently underway with respect to certain of the Company's income
tax returns in various U.S. and non-U.S. jurisdictions.
Other matters
The Company periodically evaluates its liquidity requirements, alternative
uses of capital, its dividend policy, capital needs and availability of
resources in view of, among other things, its dividend policy, debt service and
capital expenditure requirements and estimated future operating cash flows. As a
result of this process, the Company has in the past and may in the future seek
to reduce, refinance, repurchase or restructure indebtedness, raise additional
capital, 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 industry or other
industries, as well as the acquisition of interests in related entities. In the
event of any such transaction, the Company may consider using its available
cash, issuing its equity securities or increasing its indebtedness to the extent
permitted by the agreements governing the Company's existing debt.
Non-GAAP financial measures
In an effort to provide investors with additional information regarding the
Company's results of operations as determined by GAAP, the Company has disclosed
certain non-GAAP information which the Company believes provides useful
information to investors.
o The Company discloses percentage changes in its average TiO2 selling prices
in billing currencies, which excludes the effects of foreign currency
translation. The Company believes disclosure of such percentage changes
allows investors to analyze such changes without the impact of changes in
foreign currency exchange rates, thereby facilitating period-to-period
comparisons of the relative changes in average selling prices in the actual
various billing currencies. Generally, when the U.S. dollar either
strengthens or weakens against other currencies, the percentage change in
average selling prices in billing currencies will be higher or lower,
respectively, than such percentage changes would be using actual exchange
rates prevailing during the respective periods.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures. The
term "disclosure controls and procedures," as defined by regulations of the SEC,
means controls and other procedures that are designed to ensure that information
required to be disclosed in the reports that the Company files or submits to the
SEC under the Securities Exchange Act of 1934, as amended (the "Act"), is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
to the SEC under the Act is accumulated and communicated to the Company's
management, including its principal executive officer and its principal
financial officer, as appropriate to allow timely decisions to be made regarding
required disclosure. Each of Harold C. Simmons, the Company's Chief Executive
Officer, and Gregory M. Swalwell, the Company's Vice President, Finance, have
evaluated the Company's disclosure controls and procedures as of March 31, 2004.
Based upon their evaluation, these executive officers have concluded that the
Company's disclosure controls and procedures are effective as of the date of
such evaluation.
The Company also maintains a system of internal controls over financial
reporting. The term "internal control over financial reporting," as defined by
regulations of the SEC, means a process designed by, or under the supervision
of, the Company's principal executive and principal financial officers, or
persons performing similar functions, and effected by the Company's board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with GAAP, and includes
those policies and procedures that:
o Pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the
assets of the Company,
o Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP, and
that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company,
and
o Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the Company's consolidated financial
statements.
There has been no change to the Company's system of internal controls over
financial reporting during the quarter ended March 31, 2004 that has materially
affected, or is reasonably likely to materially affect, the Company's system of
internal controls over financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 10 of the Consolidated Financial Statements and
to the 2003 Annual Report for descriptions of certain legal proceedings.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Company has retained a signed original of any exhibit listed below
that contains signatures, and the Company will provide any such
exhibit to the SEC or its staff upon request.
10.1 - Intercorporate Services Agreement by and between Contran
Corporation and the Registrant effective as of January 1, 2004
10.2 - Summary of Consulting Arrangement beginning August 1, 2003, as
amended, between Lawrence A. Wigdor and Kronos Worldwide, Inc.
(management contract, compensatory plan or arrangement)
31.1 - Certification
31.2 - Certification
32.1 - Certification
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended March 31, 2004.
February 20, 2004 - Reported Item 9.
February 24, 2004 - Reported Item 9.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Kronos Worldwide, Inc.
--------------------------------
(Registrant)
Date May 5, 2004 By /s/ Gregory M. Swalwell
------------------------------
Gregory M. Swalwell
Vice President, Finance
(Principal Financial Officer)
Date May 5, 2004 By /s/ James W. Brown
------------------------------
James W. Brown
Vice President and Controller
(Principal Accounting Officer)