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, 2004
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 X No
The aggregate market value of the 2.9 million shares of voting stock held by
nonaffiliates of Kronos Worldwide, Inc. as of June 30, 2004 (the last business
day of the Registrant's most recently-completed second fiscal quarter)
approximated $98 million.
As of February 28, 2005, 48,946,049 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
a leading global producer and marketer of value-added titanium dioxide pigments
("TiO2"). Approximately one-half of the Company's 2004 sales volumes were
attributable to markets in Europe, where the Company is the second largest
producer of TiO2 with an estimated 20% share of European TiO2 sales volumes. The
Company has an estimated 14% 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, 2004, (i) Valhi, Inc (NYSE: VHI) directly and through a
wholly-owned subsidiary held approximately 57% of the Company's common stock and
NL Industries, Inc. (NYSE: NL) held an additional 37% of the outstanding common
stock of the Company, (ii) Valhi and its wholly-owned subsidiary held 83% of
NL's outstanding common stock and (iii) Contran Corporation and its subsidiaries
held approximately 91% of Valhi's outstanding common stock. Substantially all of
Contran's outstanding voting stock is held by trusts established for the benefit
of certain children and grandchildren of Harold C. Simmons of which Mr. Simmons
is sole trustee, or is held by Mr. Simmons or persons or other entities related
to Mr. Simmons. Consequently, Mr. Simmons may be deemed to control each of such
companies.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Annual Report on Form 10-K relating to matters that are not historical facts,
including, but not limited to, statements found in this Item 1 - "Business,"
Item 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 The ultimate ability to utilize income tax attributes, the benefit of which
has been recognized under the "more-likely-than-not" recognition criteria,
o Environmental matters (such as those requiring emission and discharge
standards for existing and new facilities),
o Government laws and regulations and possible changes therein,
o The ultimate resolution of pending litigation, and
o Possible future litigation.
Should one or more of these risks materialize (or the consequences of such
a development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or expected. The
Company disclaims any intention or obligation to update or revise any
forward-looking statement whether as a result of changes in information, future
events or otherwise.
Industry. Titanium dioxide pigments are inorganic chemical products used
for imparting whiteness, brightness and opacity to a diverse range of customer
applications and end-use markets, including coatings, plastics, paper, fibers,
food, ceramics and cosmetics. TiO2 is considered a "quality-of-life" product
with demand affected by gross domestic product in various regions of the world.
TiO2, the largest commercially used whitening pigment by volume, derives its
value from its whitening properties and opacifying ability (commonly referred to
as hiding power). As a result of TiO2's high refractive index rating, it can
provide more hiding power than any other commercially produced white pigment. In
addition, TiO2 demonstrates excellent resistance to chemical attack, good
thermal stability and resistance to ultraviolet degradation. TiO2 is supplied to
customers in either a powder or slurry form.
Per capita consumption of TiO2 in the United States and Western Europe far
exceeds that in other areas of the world and these regions are expected to
continue to be the largest consumers of TiO2. Significant markets for TiO2
consumption could emerge in Eastern Europe, the Far East or China as the
economies in these regions develop to the point that quality-of-life products,
including TiO2, experience greater demand. Geographic information is contained
in Note 2 to the Consolidated Financial Statements.
Products and operations. TiO2 is produced in two crystalline forms: rutile
and anatase. Both the chloride and sulfate production processes (discussed
below) produce rutile TiO2. Chloride process rutile is preferred for the
majority of customer applications. From a technical standpoint, chloride process
rutile has a bluer undertone and higher durability than sulfate process rutile
TiO2. Although many end-use applications can use either form of TiO2, chloride
process rutile TiO2 is the preferred form for use in coatings and plastics, the
two largest end-use markets. Anatase TiO2, which is produced only through the
sulfate production process, represents a much smaller percentage of annual
global TiO2 production and is preferred for use in selected paper, ceramics,
rubber tires, man-made fibers, food and cosmetics.
The Company believes that there are no effective substitutes for TiO2.
Extenders, such as kaolin clays, calcium carbonate and polymeric opacifiers, are
used in a number of end-use markets as white pigments, however the opacity in
these products is not able to duplicate the performance characteristics of TiO2,
and the Company believes these products are unlikely to replace TiO2.
The Company currently produces over 40 different TiO2 grades, sold under
the Kronos trademark, which provide a variety of performance properties to meet
customers' specific requirements. The Company's major customers include domestic
and international paint, plastics and paper manufacturers.
The Company and its distributors and agents sell and provide technical
services for its products to over 4,000 customers in over 100 countries with the
majority of sales in Europe and North America. TiO2 is distributed by rail,
truck and ocean carrier in either dry or slurry form. The Company and its
predecessors have produced and marketed TiO2 in North America and Europe for
over 80 years, and Kronos is the only leading TiO2 producer committed to
producing TiO2 and related products as its sole business. The Company believes
that it has developed considerable expertise and efficiency in the manufacture,
sale, shipment and service of its products in domestic and international
markets.
Sales of TiO2 represented about 90% of Kronos' total sales in 2004. Sales
of other products, complementary to Kronos' TiO2 business, are comprised of the
following:
o Kronos operates an ilmenite mine in Norway pursuant to a governmental
concession with an unlimited term. Ilmenite is a raw material used directly
as a feedstock by some sulfate-process TiO2 plants, including all of
Kronos' European sulfate-process plants. The mine has estimated reserves
that are expected to last at least 20 years. Ilmenite sales to
third-parties represented approximately 4% of the Company's consolidated
net sales in 2004.
o Kronos manufactures and sells iron-based chemicals, which are by-products
and processed by-products of the TiO2 pigment production process. These
co-product chemicals are marketed through Kronos' Ecochem division, and are
used primarily as treatment and conditioning agents for industrial
effluents and municipal wastewater as well as in the manufacture of iron
pigments, cement and agricultural products. Sales of iron based chemical
products were about 3% of sales in 2004.
o Kronos manufactures and sells certain titanium chemical products (titanium
oxychloride and titanyl sulfate), which are side-stream products from the
production of TiO2. Titanium oxychloride is used in specialty applications
in the formulation of pearlescent pigments, production of electroceramic
capacitors for cell phones and other electronic devices. Titanyl sulfate
products are used primarily in pearlescent pigments. Sales of these
products were about 1% of sales in 2004.
Manufacturing process and raw materials. TiO2 is manufactured by the
Company using both the chloride process and the sulfate process. Approximately
73% of the Company's current production capacity is based on the chloride
process. The chloride process is a continuous process in which chlorine is used
to extract rutile TiO2. The chloride process typically has lower manufacturing
costs than the sulfate process due to higher yield and production of less waste
and lower energy requirements and labor costs. Because much of the chlorine is
recycled and feedstock bearing a higher titanium content is used, the chloride
process produces less waste than the sulfate process. The sulfate process is a
batch chemical process that uses sulfuric acid to extract TiO2. Sulfate
technology can produce either anatase or rutile pigment. Once an intermediate
TiO2 pigment has been produced by either the chloride or sulfate process, it is
'finished' into products with specific performance characteristics for
particular end-use applications through proprietary processes involving various
chemical surface treatments and intensive micronizing (milling). Due to
environmental factors and customer considerations, the proportion of TiO2
industry sales represented by chloride-process pigments has increased relative
to sulfate-process pigments and, in 2004, chloride-process production facilities
represented approximately 64% of industry capacity.
Kronos produced a new Company record 484,000 metric tons of TiO2 in 2004,
compared to the prior records of 476,000 metric tons in 2003 and 442,000 metric
tons in 2002. Such production amounts include the Company's one-half interest in
the joint-venture owned Louisiana plant discussed below. The Company's average
production capacity utilization rates in 2003 and 2004 were near full capacity,
up from 96% in 2002. Kronos production capacity has increased by approximately
30% over the past ten years due to debottlenecking programs, with only moderate
capital expenditures. The Company believes its annual attainable production
capacity for 2005 is approximately 500,000 metric tons, with some slight
additional capacity available in 2006 through Kronos' continued debottlenecking
efforts.
The primary raw materials used in the TiO2 chloride production process are
titanium-containing feedstock, chlorine and coke. Chlorine and coke are
available from a number of suppliers. Titanium-containing feedstock suitable for
use in the chloride process is available from a limited but increasing number of
suppliers around the world, principally in Australia, South Africa, Canada,
India and the United States. The Company purchased approximately 410,000 metric
tons of chloride feedstock in 2004, of which the vast majority was slag. The
Company purchased chloride process grade slag in 2004 from a subsidiary of Rio
Tinto plc UK - Richards Bay Iron and Titanium Limited South Africa under a
long-term supply contract that expires at the end of 2007. Natural rutile ore is
purchased primarily from Iluka Resources, Limited (Australia), 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 2007.
The Company does not expect to encounter difficulties obtaining long-term
extensions to existing supply contracts prior to the expiration of the
contracts. Raw materials purchased under these contracts and extensions thereof
are expected to meet the Company's chloride process feedstock requirements over
the next several years.
The primary raw materials used in the TiO2 sulfate production process are
titanium-containing feedstock, derived primarily from rock and beach sand
ilmenite, and sulfuric acid. Sulfuric acid is available from a number of
suppliers. Titanium-containing feedstock suitable for use in the sulfate process
is available from a limited number of suppliers around the world. Currently, the
principal active sources are located in Norway, Canada, Australia, India and
South Africa. As one of the few vertically integrated producers of
sulfate-process pigments, the Company operates a rock ilmenite mine in Norway,
which provided all of the Company's feedstock for its European sulfate-process
pigment plants in 2004. The Company produced approximately 867,000 metric tons
of ilmenite in 2004 of which approximately 311,000 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 20,000 metric tons in 2004) primarily from Q.I.T. Fer et Titane
Inc. Canada, a subsidiary of Rio Tinto plc UK, under a long-term supply contract
that expires at the end of 2009. Raw materials purchased under these contracts
and extensions thereof are expected to meet the Company's sulfate process
feedstock requirements over the next several years.
Kronos has sought to minimize the impact of potential changes in the price
of its feedstock raw materials by entering into the contracts discussed above
which fix, to a large extent, the price of its raw materials. The contracts
contain fixed quantities that Kronos is required to purchase, although certain
of these contracts allow for an upward or downward adjustment in the quantity
purchased, generally no more than 10%, based on the Company's feedstock
requirements. The quantities under these contracts do not require Kronos to
purchase feedstock in excess of amounts that Kronos would reasonably consume in
any given year. The pricing under these agreements is generally based on a fixed
price with price escalation clauses primarily based on consumer price indices,
as defined in the respective contracts.
The number of sources of, and availability of, certain raw materials is
specific to the particular geographic region in which a facility is located. As
noted above, Kronos purchases titanium-bearing ore from three different
suppliers in different countries under multiple-year contracts. Political and
economic instability in certain countries from which Kronos purchases its raw
material supplies could adversely affect the availability of such feedstock.
Should Kronos' vendors not be able to meet their contractual obligations or
should Kronos be otherwise unable to obtain necessary raw materials, Kronos may
incur higher costs for raw materials or may be required to reduce production
levels, which may have a material adverse effect on Kronos' consolidated
financial position, results of operations or liquidity.
TiO2 manufacturing joint venture. Subsidiaries of the Company and Huntsman
Holdings LLC ("Huntsman") each own a 50%-interest in a manufacturing joint
venture, Louisiana Pigment Company ("LPC"). LPC owns and operates a
chloride-process TiO2 plant located in Lake Charles, Louisiana. Production from
the plant is shared equally by the Company and Huntsman (the "Partners")
pursuant to separate offtake agreements.
A supervisory committee, composed of four members, two of whom are
appointed by each Partner, directs the business and affairs of LPC, including
production and output decisions. Two general managers, one appointed and
compensated by each Partner, manage the operations of the joint venture acting
under the direction of the supervisory committee.
Kronos is required to purchase one-half of the TiO2 produced by the joint
venture. Because Kronos does not control the joint venture, the joint venture is
not consolidated in the Company's financial statements. The Company accounts for
its interest in the joint venture by the equity method. The manufacturing joint
venture operates on a break-even basis and, accordingly, the Company reports no
equity in earnings of the joint venture. With the exception of raw material
costs for the pigment grades produced, Kronos and Huntsman share all costs and
capital expenditures of the joint venture equally. The Company's share of net
costs is reported as cost of sales as the related TiO2 acquired from the joint
venture is sold. See Notes 6 and 15 to the Consolidated Financial Statements.
Competition. The TiO2 industry is highly competitive. The Company competes
primarily on the basis of price, product quality and technical service, and the
availability of high performance pigment grades. Although certain TiO2 grades
are considered specialty pigments, the majority of the Company's grades and
substantially all of the Company's production are considered commodity pigments
with price generally being the most significant competitive factor. During 2004
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. Overall, Kronos is the world's fifth largest
producer of TiO2.
The Company's principal competitors are E.I. du Pont de Nemours & Co.
("DuPont"); Millennium Chemicals, Inc.; 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 4%,
and an estimated aggregate 70% share of worldwide TiO2 production volume. DuPont
has about one-half of total North American TiO2 production capacity and is the
Company's principal North American competitor.
Worldwide capacity additions in the TiO2 market resulting from construction
of greenfield plants require significant capital expenditures and substantial
lead time (typically three to five years in Kronos' experience). No greenfield
plants are currently under construction in North America or Europe. Kronos does
expect that industry capacity will increase as Kronos and its competitors
continue to debottleneck their existing facilities. In addition to the potential
capacity additions through debottlenecking, certain competitors have recently
either idled or shut down facilities. In the past year, certain competitors have
announced the idling or shut down of an aggregate of approximately 135,000
metric tons of sulfate production capacity by early 2005. Based on the factors
described above, Kronos expects that the average annual increase in industry
capacity from announced debottlenecking projects will be less than the average
annual demand growth for TiO2 during the next three to five years. However, no
assurance can be given that future increases in the TiO2 industry production
capacity and future average annual demand growth rates for TiO2 will conform to
Kronos' expectations. If actual developments differ from Kronos' expectations,
Kronos and the TiO2 industry's performances could be unfavorably affected.
Research and development. The Company's expenditures for research and
development, process technology and quality assurance activities were
approximately $6 million in 2002, $7 million in 2003 and $8 million in 2004.
Research and development activities are conducted principally at the Leverkusen,
Germany facility. Such activities are directed primarily toward improving both
the chloride and sulfate production processes, improving product quality and
strengthening the Company's competitive position by developing new pigment
applications.
Kronos continually seeks to improve the quality of its grades, and has been
successful at developing new grades for existing and new applications to meet
the needs of customers and increase product life cycle. Over the last five
years, ten new grades have been added for plastics, coatings, fiber and paper
laminate applications.
Patents and trademarks. Patents held for products and production processes
are important to Kronos and its continuing business activities. Kronos seeks
patent protection for its technical developments, principally in the United
States, Canada and Europe, and from time to time enters into licensing
arrangements with third parties. Kronos' existing patents generally have a term
of 20 years from the date of filing, and have remaining terms ranging from one
to 19 years. Kronos seeks to protect its intellectual property rights, including
its patent rights, and from time to time Kronos will be involved in disputes
relating to the protection and use of intellectual property relating to its
products.
Kronos' major trademarks, including Kronos, are protected by registration
in the United States and elsewhere with respect to those products it
manufactures and sells. Kronos also relies on unpatented proprietary know-how
and continuing technological innovation and other trade secrets to develop and
maintain its competitive position. Kronos' proprietary chloride production
process is an important part of Kronos' technology, and Kronos' business could
be harmed if Kronos should fail to maintain confidentiality of its trade secrets
used in this technology.
Foreign operations. The Company's chemical businesses have operated in
non-U.S. markets since the 1920s. Most of the Company's current production
capacity is located in Europe and Canada with non-U.S. net property and
equipment aggregating approximately $464 million at December 31, 2004. Kronos'
European operations include production facilities in Germany, Belgium and
Norway. Approximately $813 million (72%) of the Company's 2004 consolidated
sales were to non-U.S. customers, including $98 million (9%) to customers in
areas other than Europe and Canada. Foreign operations are subject to, among
other things, currency exchange rate fluctuations, and the Company's results of
operations have, in the past, been both favorably and unfavorably affected by
fluctuations in currency exchange rates. Effects of fluctuations in currency
exchange rates on the Company's results of operations are discussed in Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Item 7A. "Quantitative and Qualitative Disclosures about Market
Risk."
Political and economic uncertainties in certain of the countries in which
the Company operates may expose it to risk of loss. The Company does not believe
that there is currently any likelihood of material loss through political or
economic instability, seizure, nationalization or similar event. The Company
cannot predict, however, whether events of this type in the future could have a
material effect on its operations. The Company's manufacturing and mining
operations are also subject to extensive and diverse environmental regulation in
each of the foreign countries in which they operate. See "Regulatory and
Environmental Matters."
Customer base and annual seasonality. The Company believes that neither its
aggregate sales nor those of any of its principal product groups are
concentrated in or materially dependent upon any single customer or small group
of customers. The Company's largest ten customers accounted for approximately
25% of net sales in 2004. 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, 2004, Kronos employed approximately 2,420
persons (excluding employees of the Louisiana joint venture), with 50 employees
in the United States, 420 employees in Canada and 1,950 employees in Europe.
Hourly employees in production facilities worldwide, including the TiO2
joint venture, are represented by a variety of labor unions, with labor
agreements having various expiration dates. In Europe, Kronos' union employees
are covered by master collective bargaining agreements in the chemicals industry
that are renewed annually. In Canada, Kronos' union employees are covered by a
collective bargaining agreement that expires in June 2007. Kronos believes its
labor relations are good.
Regulatory and environmental matters. Kronos' operations are governed by
various environmental laws and regulations. Certain of Kronos' operations are,
or have been, engaged in the handling, manufacture or use of substances or
compounds that may be considered toxic or hazardous within the meaning of
applicable environmental laws and regulations. As with other companies engaged
in similar businesses, certain past and current operations and products of
Kronos have the potential to cause environmental or other damage. Kronos has
implemented and continues to implement various policies and programs in an
effort to minimize these risks. Kronos' policy is to maintain compliance with
applicable environmental laws and regulations at all its facilities and to
strive to improve its environmental performance. It is possible that future
developments, such as stricter requirements in environmental laws and
enforcement policies thereunder, could adversely affect Kronos' production,
handling, use, storage, transportation, sale or disposal of such substances as
well as Kronos' consolidated financial position, results of operations or
liquidity.
Kronos' U.S. manufacturing operations are governed by federal environmental
and worker health and safety laws and regulations, principally the Resource
Conservation and Recovery Act ("RCRA"), the Occupational Safety and Health Act,
the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act, the Toxic
Substances Control Act and the Comprehensive Environmental Response,
Compensation and Liability Act, as amended by the Superfund Amendments and
Reauthorization Act ("CERCLA"), as well as the state counterparts of these
statutes. Kronos believes the TiO2 plant owned by the LPC joint venture and a
TiO2 slurry facility owned by Kronos in Lake Charles, Louisiana are in
substantial compliance with applicable requirements of these laws or compliance
orders issued thereunder. Kronos has no other U.S. plants.
While the laws regulating operations of industrial facilities in Europe
vary from country to country, a common regulatory framework is provided by the
European Union (the "EU"). Germany and Belgium are members of the EU and follow
its initiatives. Norway, although not a member of the EU, generally patterns its
environmental regulatory actions after the EU. Kronos believes that it has
obtained all required permits and is in substantial compliance with applicable
EU requirements.
At its sulfate plant facilities in Germany, Kronos recycles weak sulfuric
acid either through contracts with third parties or using its own facilities. At
Kronos' Fredrikstad, Norway plant, Kronos ships its spent acid to a third party
location where it is treated and disposed. Kronos' Canadian sulfate plant
neutralizes its spent acid and sells its gypsum by-product to a local wallboard
manufacturer. Kronos has a contract with a third party to treat certain
sulfate-process effluents at its German sulfate plant. Either party may
terminate the contract after giving four years advance notice with regard to
Kronos' Nordenham, Germany plant.
Kronos is also involved in various other environmental, contractual,
product liability and other claims and disputes incidental to its business.
From time to time, Kronos' facilities may be subject to environmental
regulatory enforcement under U.S. and foreign statutes. Resolution of such
matters typically involves the establishment of compliance programs.
Occasionally, resolution may result in the payment of penalties, but to date
such penalties have not involved amounts having a material adverse effect on
Kronos' consolidated financial position, results of operations or liquidity.
Kronos believes that all its plants are in substantial compliance with
applicable environmental laws.
Kronos' capital expenditures related to its ongoing environmental
protection and improvement programs in 2004 were approximately $7 million, and
are currently expected to be approximately $7 million in 2005.
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, 2004 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
During 2004, the Company operated four TiO2 plants in Europe (one in each
of Leverkusen, Germany, Nordenham, Germany, Langerbrugge, Belgium, and
Fredrikstad, Norway). In North America, the Company has a TiO2 plant in
Varennes, Quebec, Canada and, through the manufacturing joint venture described
above, a one-half interest in a TiO2 plant in Lake Charles, Louisiana. The
Company operates an ilmenite ore mine in Hauge i Dalane, Norway pursuant to a
governmental concession with an unlimited term and also owns a TiO2 slurry plant
in Lake Charles, Louisiana. See Note 6 to the Consolidated Financial Statements.
TiO2 is produced using the chloride process at the Leverkusen, Langerbrugge,
Varennes and Lake Charles facilities and is manufactured using the sulfate
process in Nordenham, Leverkusen, Fredrikstad and Varennes. Kronos' co-products
are produced at its Norwegian, Belgian and German facilities and its titanium
chemicals are produced at its Belgian and Canadian facilities.
The Company owns all of its principal production facilities described
above, except for the land under the Fredrikstad and Leverkusen facilities. The
Norwegian plant is located on public land and is leased until 2013, with an
option to extend the lease for an additional 50 years. The Company's principal
German operating subsidiary leases the land under its Leverkusen TiO2 production
facility pursuant to a lease 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 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
ownership and use of the Leverkusen facility.
The Company has under lease various corporate and administrative offices
located in the U.S. and various sales offices located in the U.S., France, the
Netherlands, Denmark and the U.K.
ITEM 3. LEGAL PROCEEDINGS
Kronos is involved in various environmental, contractual, product liability
and other claims and disputes incidental to its business. Certain information
called for by this Item is included in Note 16 to the Consolidated Financial
Statements, which information is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 2004.
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
(including Valhi and a wholly-owned subsidiary of Valhi) of approximately 48.8%
of the Company's outstanding common stock. 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 28, 2005, 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. The following table sets forth
the high and low closing per share sales price for Kronos common stock for the
periods indicated according to Bloomberg, and dividends paid during such
periods. On February 28, 2005 the closing price of Kronos common stock according
to the NYSE Composite Tape was $47.09.
Cash
dividends
High Low paid
---- --- ---------
Year ended December 31, 2004
First Quarter $33.25 $22.22 $ .25
Second Quarter 34.20 29.11 .25
Third Quarter 39.70 30.80 .25
Fourth Quarter 48.48 38.50 .25
Immediately prior to NL's distribution of shares of Kronos common stock to
its stockholders on December 8, 2003, 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.
The Company paid four quarterly $.25 per share cash dividends in 2004. On
February 17, 2005, the Company's Board of Directors declared a regular quarterly
dividend of $.25 per share to stockholders of record as of March 10, 2005 to be
paid on March 25, 2005. However, the declaration and payment of future
dividends, and the amount thereof, is discretionary, and the amount, if any,
will be dependent upon the Company's results of operations, financial condition,
contractual restrictions and other factors deemed relevant by the Company's
Board of Directors. The amount and timing of past dividends is not necessarily
indicative of the amount and timing of any future dividends which might be paid.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's Consolidated Financial Statements and Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
following selected historical financial data of Kronos with respect to the years
ended December 31, 2000, 2001, 2002, 2003 and 2004 and as of December 31, 2001,
2002, 2003 and 2004, is derived from, and should be read in conjunction with,
Kronos' audited Consolidated Financial Statements. The selected historical
financial data as of December 31, 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,
----------------------------------------------------------
2000 2001 2002 2003 2004
---- ---- ---- ---- -----
(In millions, except per share data and TiO2
operating statistics)
STATEMENTS OF OPERATIONS DATA:
Net sales $ 922.3 $ 835.1 $ 875.2 $1,008.2 $1,128.6
Net income 130.2 154.5 66.3 87.5 314.9
Net income per share 2.66 3.16 1.35 1.79 6.43
Cash dividends per share (1) 1.12 .62 2.27 .14 1.00
BALANCE SHEET DATA (at year end):
Total assets 893.4 910.1 988.5 1,121.9 1,353.3
Notes payable and long-term debt
including current maturities 266.1 242.7 370.5 556.7 533.2
Common stockholder's equity 346.6 378.5 314.2 159.4 470.8
TiO2 OPERATING STATISTICS:
Average selling price
Index (1990=100) 92 89 81 84 82
Sales volume* 436 402 455 462 500
Production volume* 441 412 442 476 484
Production capacity at
beginning of year* 440 450 455 470 480
Production rate as a
percentage of capacity Full 91% 96% Full Full
__________________________________
* Metric tons in thousands
(1) Excludes Kronos' December 2003 dividend to NL in the form of a $200 million
long-term note payable. See Note 10 to the Consolidated Financial
Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Critical accounting policies and estimates
The accompanying "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are based upon the Company's consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). The
preparation of these financial statements requires the Company to make estimates
and judgments that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the reported
period. On an on-going basis, the Company evaluates its estimates, including
those related to bad debts, inventory reserves, impairments of investments in
marketable securities and investments accounted for by the equity method, the
recoverability of other long-lived assets (including goodwill and other
intangible assets), pension and other post-retirement benefit obligations and
the underlying actuarial assumptions related thereto, the realization of
deferred income tax assets and accruals for litigation, income tax and other
contingencies. The Company bases its estimates on historical experience and on
various other assumptions that it believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the reported amounts of assets, liabilities, revenues and expenses. Actual
results may differ from previously-estimated amounts under different assumptions
or conditions.
The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements:
o The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments and
other factors. The Company takes into consideration the current financial
condition of its customers, the age of the outstanding balance and the
current economic environment when assessing the adequacy of the allowance.
If the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. During 2002, 2003 and 2004, the net amount
written off against the allowance for doubtful accounts as a percentage of
the balance of the allowance for doubtful accounts as of the beginning of
the year ranged from 17% to 20%.
o The Company provides reserves for estimated obsolescence or unmarketable
inventories equal to the difference between the cost of inventory and the
estimated net realizable value using assumptions about future demand for
its products and market conditions. If actual market conditions are less
favorable than those projected by management, additional inventory reserves
may be required. The Company also provides reserves for tools and supplies
inventory based generally on both historical and expected future usage
requirements.
o The Company recognizes an impairment charge associated with its long-lived
assets, including property and equipment, whenever it determines that
recovery of such long-lived asset is not probable. Such determination is
made in accordance with the applicable GAAP requirements associated with
the long-lived asset, and is based upon, among other things, estimates of
the amount of future net cash flows to be generated by the long-lived asset
and estimates of the current fair value of the asset. Adverse changes in
such estimates of future net cash flows or estimates of fair value could
result in an inability to recover the carrying value of the long-lived
asset, thereby possibly requiring an impairment charge to be recognized in
the future.
Under applicable GAAP (SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets"), property and equipment is not assessed for
impairment unless certain impairment indicators, as defined, are present.
During 2004, no such impairment indicators, as defined, were present.
o The Company maintains various defined benefit pension plans and
postretirement benefits other than pensions ("OPEB"). The amounts
recognized as defined benefit pension and OPEB expenses, and the reported
amounts of prepaid and accrued pension costs and accrued OPEB costs, are
actuarially determined based on several assumptions, including discount
rates, expected rates of returns on plan assets and expected health care
trend rates. Variances from these actuarially assumed rates will result in
increases or decreases, as applicable, in the recognized pension and OPEB
obligations, pension and OPEB expenses and funding requirements. These
assumptions are more fully described below under "Assumptions on defined
benefit pension plans and OPEB plans."
o The Company records a valuation allowance to reduce its deferred income tax
assets to the amount that is believed to be realized under the
"more-likely-than-not" recognition criteria. While the Company has
considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for a valuation allowance, it is
possible that in the future the Company may change its estimate of the
amount of the deferred income tax assets that would "more-likely-than-not"
be realized in the future, resulting in an adjustment to the deferred
income tax asset valuation allowance that would either increase or
decrease, as applicable, reported net income in the period such change in
estimate was made. For example, during 2004 the Company concluded that the
more-likely-than-not recognition criteria had been met with respect to the
income tax benefit associated with its German net operating loss
carryforwards. The Company has substantial net operating loss carryforwards
in Germany (the equivalent of $671 million for German corporate purposes
and $232 million for German trade tax purposes at December 31, 2004). Prior
to the complete utilization of such carryforwards, it is possible that the
Company might conclude in the future that the benefit of such carryforwards
would no longer meet the more-likely-than-not recognition criteria, at
which point the Company would be required to recognize a valuation
allowance against the then-remaining tax benefit associated with the
carryforwards.
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).
Income from operations are impacted by certain of these significant
judgments and estimates, such as allowance for doubtful accounts, reserves for
obsolete or unmarketable inventories, impairment of equity method investees, and
other long-lived assets, defined benefit pension and OPEB plans and loss
accruals. In addition, other income and expense items are impacted by the
significant judgments and estimates for deferred income tax asset valuation
allowances and loss accruals.
Executive summary
The Company reported net income of $314.9 million, or $6.43 per diluted
share. Net income in 2004 includes (i) a second quarter income tax benefit
related to the reversal of Kronos' deferred income tax asset valuation allowance
in Germany of $5.49 per diluted share and (ii) income related to Kronos'
contract dispute settlement of $4.1 million, or $.08 per diluted share. Net
income in 2003 includes an income tax benefit relating to the refund of prior
year German income taxes of $.50 per diluted share. Net income in 2002 includes
(i) an income tax benefit related to the reduction in the Belgian corporate
income tax rate of $.05 per diluted share and (ii) income of $.08 per diluted
share related to Kronos' foreign currency transaction gain resulting from the
extinguishment of certain intercompany indebtedness of NL and Kronos. Each of
these items is more fully discussed below and/or in the notes to the
Consolidated Financial Statements.
The Company currently expect income from operations will be higher in 2005
compared to 2004, but this increase will not offset the decline in income tax
benefits in 2005 as compared to 2004.
Relative changes in the Company's TiO2 sales and operating income during
the past three years are primarily due to (i) relative changes in TiO2 sales and
production volumes, (ii) relative changes in TiO2 average selling prices and
(iii) relative changes in foreign currency exchange rates.
Selling prices (in billing currencies) for TiO2, the Company's principal
product, were generally: decreasing during the first quarter of 2002, flat
during the second quarter of 2002, increasing during the last half of 2002 and
the first quarter of 2003, flat during the second quarter of 2003, decreasing
during the third and fourth quarters of 2003 and the first quarter of 2004, flat
during the second quarter of 2004 and increasing during the last half of 2004.
Results of operations
Years ended December 31, % Change
---------------------------------------- ---------------------
2002 2003 2004 2002-03 2003-04
---- ---- ---- ------- -------
(In millions, except selling price data)
Net sales $ 875.2 $1,008.2 $1,128.6 +15% +12%
Cost of sales 671.8 739.2 866.3 +10% +17%
------- -------- --------
Gross margin 203.4 269.0 262.3 +32% - 2%
Selling, general and administrative
expense (107.7) (124.4) (145.4) +16% +17%
Currency transaction gains (losses), net (.5) (7.7) (3.9)
Corporate expense (3.3) (4.2) (3.5)
Other operating income (expense), net (.4) (.2) 5.5
------- -------- --------
Income from operations $ 91.5 $ 132.5 $ 115.0 +45% -13%
======= ======== ========
TiO2 operating statistics:
Percent change in average selling
prices:
Using actual foreign currency
exchange rates +13% + 4%
Impact of changes in foreign
currency exchange rates -10% - 6%
---- ----
In billing currencies + 3% - 2%
==== ====
Sales volumes* 455 462 500 + 2% + 8%
Production volumes* 442 476 484 + 8% + 2%
Production rate as
percent of capacity 96% Full Full
___________________________________
* Thousands of metric tons
Year ended December 31, 2004 compared to year ended December 31, 2003
Kronos' sales increased $120.4 million (12%) in 2004 as compared to 2003 as
higher sales volumes and the favorable effect of fluctuations in foreign
currency exchange rates, which increased sales by approximately $60 million as
further discussed below, more than offset the impact of lower average TiO2
selling prices. Excluding the effect of fluctuations in the value of the U.S.
dollar relative to other currencies, Kronos' average TiO2 selling prices in
billing currencies were 2% lower in 2004 as compared to 2003. When translated
from billing currencies into U.S. dollars using actual foreign currency exchange
rates prevailing during the respective periods, Kronos' average TiO2 selling
prices in 2004 increased 4% as compared to 2003. See " - Effects of foreign
currency exchange rates" below for a discussion of the impact of relative
changes in currency exchange rates on Kronos' operations.
Kronos' TiO2 sales volumes in 2004 increased 8% compared to 2003, as higher
volumes in European and export markets more than offset lower volumes in Canada.
Approximately one-half of Kronos' 2004 TiO2 sales volumes were attributable to
markets in Europe, with 38% attributable to North America and the balance to
export markets. Demand for TiO2 has remained strong throughout 2004, and while
Kronos believes that the strong demand is largely attributable to the end-use
demand of its customers, it is possible that some portion of the strong demand
resulted from customers increasing their inventory levels of TiO2 in advance of
implementation of announced or anticipated price increases. Kronos' operating
income comparisons were also favorably impacted by higher production levels,
which increased 2%. Kronos' operating rates were near full capacity in both
periods, and Kronos' sales and production volumes in 2004 were both new records
for Kronos, setting new volume records for Kronos for the third consecutive
year.
The Company's cost of sales increased $127.1 million (17%) in 2004 compared
to 2003 due to higher raw material and maintenance costs as well as higher
production volumes and related effects of translating foreign currencies into
the U.S. dollar. The Company's cost of sales, as a percentage of net sales,
increased from 73% in 2003 to 77% in 2004 due primarily to the effects of lower
average selling prices and higher costs.
The Company's gross margins decreased $6.7 million (2%) from 2003 to 2004
due to the net effects of the aforementioned changes in sales and cost of sales
during such periods.
As a percentage of net sales, selling, general and administrative expenses
were relatively consistent from 2003 to 2004, increasing marginally from 12% to
13%, and increasing proportionately with the increased sales and production
volume.
Kronos' income from operations in 2004 includes $6.3 million of income
related to the settlement of a contract dispute with a customer. As part of the
settlement, the customer agreed to make payments to Kronos through 2007
aggregating $7.3 million. The $6.3 million gain recognized represents the
present value of the future payments to be made by the customer to Kronos. The
dispute with the customer concerned the customer's alleged past failure to
purchase the required amount of TiO2 from Kronos under the terms of Kronos'
contract with the customer. Under the settlement, the customer agreed to pay an
aggregate of $7.3 million to Kronos through 2007 to resolve such dispute. See
Note 12 to the Consolidated Financial Statements.
Kronos' income from operations decreased $17.5 million (13%) in 2004 as
compared to 2003, as the effect of lower average TiO2 selling prices and higher
raw material and maintenance costs more than offset the impact of higher sales
and production volumes and the income from the contract dispute settlement. See
also " - Effects of foreign currency exchange rates" below for a discussion of
the impact of relative changes in currency exchange rates on Kronos' operations.
Year ended December 31, 2003 compared to year ended December 31, 2002
The Company's sales increased $133.0 million (15%) in 2003 compared to 2002
due primarily to higher average selling prices, higher sales volumes and the
favorable effect of fluctuations in foreign currency exchange rates, which
increased sales by approximately $93 million as further discussed below.
Excluding the effect of fluctuations in the value of the U.S. dollar relative to
other currencies, the Company's average TiO2 selling price in 2003 was 3% higher
than 2002, with the greatest improvement in 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. See " - Effects of
foreign currency exchange rates" below for a discussion of the impact of
relative changes in currency exchange rates on Kronos' operations.
The Company's TiO2 sales volumes in 2003 increased 2% from 2002, with
higher volumes in European and North American markets more than offsetting a
decline in volumes to export markets.
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.
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' income from operations increased $41.0 million (45%) in 2003
compared to 2002 due primarily to higher average TiO2 selling prices and higher
TiO2 sales and production volumes. See also " - Effects of foreign currency
exchange rates" below for a discussion of the impact of relative changes in
currency exchange rates on Kronos' operations.
Effects of foreign currency exchange rates
Kronos' sales are denominated in various currencies, including the U.S.
dollar, the euro, other major European currencies and the Canadian dollar. The
disclosure of the percentage change in Kronos' average TiO2 selling prices in
billing currencies (which excludes the effects of fluctuations in the value of
the U.S. dollar relative to other currencies) is considered a "non-GAAP"
financial measure under regulations of the SEC. The disclosure of the percentage
change in Kronos' average TiO2 selling prices using actual foreign currency
exchange rates prevailing during the respective periods is considered the most
directly comparable financial measure presented in accordance with GAAP ("GAAP
measure"). Kronos discloses percentage changes in its average TiO2 prices in
billing currencies because Kronos believes such disclosure provides useful
information to investors to allow them to analyze such changes without the
impact of changes in foreign currency exchange rates, thereby facilitating
period-to-period comparisons of the relative changes in average selling prices
in the actual various billing currencies. Generally, when the U.S. dollar either
strengthens or weakens against other currencies, the percentage change in
average selling prices in billing currencies will be higher or lower,
respectively, than such percentage changes would be using actual exchange rates
prevailing during the respective periods. The difference between the 13% and 4%
increases in Kronos' average TiO2 selling prices during 2003 and 2004,
respectively, as compared to the respective prior year using actual foreign
currency exchange rates prevailing during the respective periods (the GAAP
measure), and the 3% increase and 2% decrease in Kronos' average TiO2 selling
prices in billing currencies (the non-GAAP measure) during such periods is due
to the effect of changes in foreign currency exchange rates. The above table
presents (i) the percentage change in Kronos' average TiO2 selling prices using
actual foreign currency exchange rates prevailing during the respective periods
(the GAAP measure), (ii) the percentage change in Kronos' average TiO2 selling
prices in billing currencies (the non-GAAP measure) and (iii) the percentage
change due to changes in foreign currency exchange rates (or the reconciling
item between the non-GAAP measure and the GAAP measure).
Kronos has substantial operations and assets located outside the United
States (primarily in Germany, Belgium, Norway and Canada). A significant amount
of Kronos' sales generated from its non-U.S. operations are denominated in
currencies other than the U.S. dollar, principally the euro, other major
European currencies and the Canadian dollar. A portion of Kronos' sales
generated from its non-U.S. operations are denominated in the U.S. dollar.
Certain raw materials, primarily titanium-containing feedstocks, are purchased
in U.S. dollars, while labor and other production costs are denominated
primarily in local currencies. Consequently, the translated U.S. dollar value of
Kronos' foreign sales and operating results are subject to currency exchange
rate fluctuations which may favorably or adversely impact reported earnings and
may affect the comparability of period-to-period operating results. Overall,
fluctuations in the value of the U.S. dollar relative to other currencies,
primarily the euro, increased TiO2 sales by a net $60 million in 2004 as
compared to 2003, and increased sales by a net $93 million in 2003 as compared
to 2002. Fluctuations in the value of the U.S. dollar relative to other
currencies similarly impacted Kronos' foreign currency-denominated operating
expenses. Kronos' operating costs that are not denominated in the U.S. dollar,
when translated into U.S. dollars, were higher in 2004 and 2003 compared to the
same periods of the respective prior years. Overall, currency exchange rate
fluctuations resulted in a net $6 million increase in Kronos' operating income
in 2004 as compared to 2003, and resulted in a net decrease in Kronos' operating
income in 2003 of approximately $6 million as compared to 2002.
Outlook
Reflecting the impact of partial implementation of prior price increase
announcements, Kronos' average TiO2 selling prices in billing currencies in the
fourth quarter of 2004 were 2% higher than the third quarter of 2004. In 2005,
Kronos expects income from operations will be higher than 2004, primarily due to
higher expected selling prices in 2005. The anticipated higher selling prices in
2005 reflects the expected continued implementation of price increase
announcements, including Kronos' latest price increases announced in March 2005.
The extent to which any of such price increases which have previously been
announced, and any additional price increases which may be announced
subsequently in 2005, will be realized will depend on, among other things,
economic factors.
Kronos' efforts to debottleneck its production facilities to meet long-term
demand continue to prove successful. Kronos' production capacity has increased
by approximately 30% over the past ten years due to debottlenecking programs,
with only moderate capital investment. Kronos believes its annual attainable
production capacity for 2005 is approximately 500,000 metric tons, with some
slight additional capacity available in 2006 through Kronos' continued
debottlenecking efforts.
Kronos expects its TiO2 production volumes in 2005 will be slightly higher
than its 2004 volumes, with sales volumes comparable to or slightly lower in
2005 as compared to 2004. Kronos' average TiO2 selling prices, which started to
increase during the second half of 2004, are expected to continue to increase
during 2005, and consequently Kronos currently expects its average TiO2 selling
prices, in billing currencies, will be higher in 2005 as compared to 2004.
Overall, Kronos expects its income from operations in 2005 will be higher than
2004, due primarily to higher expected selling prices. Kronos' expectations as
to the future prospects of Kronos and the TiO2 industry are based upon a number
of factors beyond the Company's control, including worldwide growth of gross
domestic product, competition in the marketplace, unexpected or
earlier-than-expected capacity additions and technological advances. If actual
developments differ from Kronos' expectations, Kronos' results of operations
could be unfavorably affected.
Other income (expense).
The following table sets forth certain information regarding other income
and expense items.
Years ended December 31, Change
------------------------------------- -------------------------
2002 2003 2004 2002-03 2003-04
---- ---- ---- ------- -------
(In millions)
(In millions)
Currency transaction gains $ 6.3 $ - $ - $ (6.3) $ -
Interest income from affiliates 20.7 .7 - (20.0) (.7)
Trade interest income 1.7 .7 1.1 (1.0) .4
Other interest income .7 .2 1.0 (.5) .8
Interest expense to affiliates (12.3) (1.8) (15.2) 10.5 (13.4)
Other interest expense (16.8) (33.0) (37.4) (16.2) (4.4)
------ ------ ------ ------ ------
$ .3 $(33.2) $(50.5) $(33.5) $(17.3)
====== ====== ====== ====== ======
Interest income fluctuates in part based upon the amount of funds invested
and yields thereon. Aggregate interest income increased approximately $500,000
in 2004 compared to 2003 due to higher average yields on invested funds. As
compared to 2002, aggregate interest income in 2003 declined $21.5 million
primarily due to lower amounts outstanding on loans to affiliates. The Company
expects interest income will be lower in 2005 than 2004 due to lower average
funds available for investment.
The Company has a significant amount of indebtedness denominated in the
euro, including KII's euro-denominated 8.875% Senior Secured Notes ("Senior
Secured Notes"). Accordingly, the reported amount of interest expense will vary
depending on relative changes in foreign currency exchange rates. Interest
expense on indebtedness to third parties in 2004 was higher than 2003 due
primarily to relative changes in foreign currency exchange rates, which
increased the U.S. dollar equivalent of interest expense on the euro 285 million
principal amount of KII Senior Secured Notes outstanding during both years by
approximately $3 million as compared to the respective prior year. In addition,
KII issued an additional euro 90 million principal amount of KII Senior Secured
Notes in November 2004, and the interest expense associated with these
additional Senior Secured Notes was $1 million in 2004.
Interest expense to affiliates increased $13.4 million in 2004 as compared
to 2003 due to higher amounts outstanding on loans from affiliates, primarily
due to the $200 million dividend distributed to NL in December 2003. Such note
was repaid in 2004. See Note 10 to the Consolidated Financial Statements. The
Company does not currently expect to report any material interest expense to
affiliates in 2005.
Assuming interest rates and foreign currency exchange rates do not increase
significantly from current levels, interest expense on third party indebtedness
in 2005 is expected to be higher than 2004 due primarily to the effect of the
issuance of an additional euro 90 million principal amount of KII Senior Secured
Notes in November 2004.
Aggregate interest expense increased $5.7 million in 2003 as compared to
2002 due primarily to the net effects of higher average levels of indebtedness
and lower average interest rates on the Company's indebtedness.
At December 31, 2004, approximately $519 million of consolidated
indebtedness, principally KII's Senior Secured Notes, bears interest at fixed
interest rates averaging 8.4% (2003 - $356 million with a weighted average
interest rate of 8.9%; 2002 - $297 million with a weighted average fixed
interest rate of 8.9%). The weighted average interest rate on $14 million of
outstanding variable rate borrowings at December 31, 2004 was 3.9% (2003 - none
outstanding; 2002 - $27 million outstanding at 6.5%). See Note 8 to the
Consolidated Financial Statements.
As noted above, KII has a significant amount of indebtedness denominated in
currencies other than the U.S. dollar. See Item 7A, "Quantitative and
Qualitative Disclosures About Market Risk."
Provision for income taxes. The principal reasons for the difference
between the Company's effective income tax rates and the U.S. federal statutory
income tax rates are explained in Note 13 to the Consolidated Financial
Statements. 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.
At December 31, 2004, Kronos had the equivalent of $671 million and $232
million of income tax loss carryforwards for German corporate and trade tax
purposes, respectively, all of which have no expiration date. As more fully
described in Note 13 to the Consolidated Financial Statements, Kronos had
previously provided a deferred income tax asset valuation allowance against
substantially all of these tax loss carryforwards and other deductible temporary
differences in Germany because Kronos did not believe they met the
"more-likely-than-not" recognition criteria. During the first six months of
2004, Kronos reduced its deferred income tax asset valuation allowance by
approximately $8.7 million, primarily as a result of utilization of these German
net operating loss carryforwards, the benefit of which had not previously been
recognized. At June 30, 2004, after considering all available evidence, Kronos
concluded that these German tax loss carryforwards and other deductible
temporary differences now met the "more-likely-than-not" recognition criteria.
Under applicable GAAP related to accounting for income taxes at interim periods,
a change in estimate at an interim period resulting in a decrease in the
valuation allowance is segregated into two components, the portion related to
the remaining interim periods of the current year and the portion related to all
future years. The portion of the valuation allowance reversal related to the
former is recognized over the remaining interim periods of the current year, and
the portion of the valuation allowance related to the latter is recognized at
the time the change in estimate is made. Accordingly, as of June 30, 2004,
Kronos reversed $268.6 million of the valuation allowance (the portion related
to future years), and Kronos reversed the remaining $3.4 million during the last
six months of 2004. Because the benefit of such net operating loss carryforwards
and other deductible temporary differences in Germany has now been recognized,
the Company's effective income tax rate in 2005 is expected to be higher than
what it would have otherwise been, although its future cash income tax rate will
not be affected by the reversal of the valuation allowance. Prior to the
complete utilization of such carryforwards, it is possible that the Company
might conclude in the future that the benefit of such carryforwards would no
longer meet the "more-likely-than-not" recognition criteria, at which point the
Company would be required to recognize a valuation allowance against the
then-remaining tax benefit associated with the carryforwards.
In January 2004, the German federal government enacted new tax law
amendments that limit the annual utilization of income tax loss carryforwards
effective January 1, 2004 to 60% of taxable income after the first euro 1
million of taxable income. The new law will have a significant effect on Kronos'
cash tax payments in Germany going forward, the extent of which will be
dependent upon the level of taxable income earned in Germany.
During 2003, Kronos reduced its deferred income tax asset valuation
allowance by an aggregate of approximately $6.7 million, primarily as a result
of utilization of certain income tax attributes for which the benefit had not
previously been recognized. In addition, Kronos recognized a $38.0 million
income tax benefit related to the net refund of certain prior year German income
taxes.
During 2002, Kronos reduced its deferred income tax asset valuation
allowance by an aggregate of 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.
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law contains several provisions that could impact the Company.
These provisions provide for, among other things, a special deduction from U.S.
taxable income equal to a stipulated percentage of qualified income from
domestic activities (as defined) beginning in 2005, and a special 85% dividends
received deduction for certain dividends received from controlled foreign
corporations. Both of these provisions are complex and subject to numerous
limitations. See Note 13 to the Consolidated Financial Statements.
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 2002, 2003 and 2004. 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 14 to the
Consolidated Financial Statements.
The Company accounts for its defined benefit pension plans using SFAS No.
87, "Employer's Accounting for Pensions." Under SFAS No. 87, defined benefit
pension plan expense and prepaid and accrued pension costs are each recognized
based on certain actuarial assumptions, principally the assumed discount rate,
the assumed long-term rate of return on plan assets and the assumed increase in
future compensation levels. The Company recognized consolidated defined benefit
pension plan expense of $7.1 million in 2002, $8.4 million in 2003 and $13.2
million in 2004. 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 $9.0 million in 2002, $13.6 million in 2003 and
$17.1 million in 2004.
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, 2004, approximately 63%, 17%, 13% and 5% of the projected
benefit obligation related to Company plans in Germany, Norway, Canada and the
U.S., respectively. The Company uses several different discount rate assumptions
in determining its consolidated defined benefit pension plan obligations and
expense because the Company maintains defined benefit pension plans in several
different countries in North America and Europe and the interest rate
environment differs from country to country.
The Company used the following discount rates for its defined benefit
pension plans:
Discount rates used for:
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Obligations at Obligations at Obligations at
December 31, 2002 and December 31, 2003 and December 31, 2004 and
expense in 2003 expense in 2004 expense in 2005
----------------------- ------------------------ ----------------------
Germany 5.5% 5.3% 5.0%
Norway 6.0% 5.5% 5.0%
Canada 7.0% 6.3% 6.0%
U.S. 6.5% 5.9% 5.8%
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, 2004, approximately 56%, 21%, 14% and 5% of the plan assets
related to the Company's plans in the Germany, Norway, Canada and the U.S.,
respectively. The Company uses several different long-term rates of return on
plan asset assumptions in determining its consolidated defined benefit pension
plan expense because the Company maintains defined benefit pension plans in
several different countries in North America and Europe, the plan assets in
different countries are invested in a different mix of investments and the
long-term rates of return for different investments differ from country to
country.
In determining the expected long-term rate of return on plan asset
assumptions, the Company considers the long-term asset mix (e.g. equity vs.
fixed income) for the assets for each of its plans and the expected long-term
rates of return for such asset components. In addition, the Company receives
advice about appropriate long-term rates of return from the Company's
third-party actuaries. Such assumed asset mixes are summarized below:
o In Germany, the composition of the Company's plan assets is established to
satisfy the requirements of the German insurance commissioner. The current
plan asset allocation at December 31, 2004 was 23% to equity managers, 48%
to fixed income managers and 29% to real estate.
o In Norway, the Company currently has a plan asset target allocation of 14%
to equity managers and 62% to fixed income managers and the remainder
primarily to cash and liquid investments. The expected long-term rate of
return for such investments is approximately 8% and 4.5% to 6.5% and 2.5%,
respectively. The plan asset allocation at December 31, 2004 was 16% to
equity managers and 64% to fixed income managers and the remainder
primarily to cash and liquid investments.
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, 2004 was 60% to equity managers and
40% to fixed income managers.
o During 2004, the plan assets in the U.S. 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 benefits plans sponsored by Contran and certain of
its affiliates. Harold Simmons is the sole trustee of the CMRT. The CMRT's
long-term investment objective is to provide a rate of return exceeding a
composite of broad market equity and fixed income indices (including the
S&P 500 and certain Russell indices) utilizing both third-party investment
managers as well as investments directed by Mr. Simmons. During the 16-year
history of the CMRT, through December 31, 2004 the average annual rate of
return has been approximately 13%.
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 2002,
2003 and 2004 were as follows:
2002 2003 2004
---- ---- ----
Germany 6.8% 6.5% 6.0%
Norway 7.0% 6.0% 6.0%
Canada 7.0% 7.0% 7.0%
U.S. 8.5% 10.0% 10.0%
The Company currently expects to utilize the same long-term rate of return
on plan asset assumptions in 2005 as it used in 2004 for purposes of determining
the 2005 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 2005, the Company expects its defined benefit pension expense will
approximate $14 million in 2005. In comparison, the Company expects to be
required to make approximately $9 million of contributions to such plans during
2005.
As noted above, defined benefit pension expense and the amounts recognized
as accrued pension costs are based upon the actuarial assumptions discussed
above. The Company believes all of the actuarial assumptions used are reasonable
and appropriate. If the Company had lowered the assumed discount rate by 25
basis points for all of its plans as of December 31, 2004, the Company's
aggregate projected benefit obligations would have increased by approximately
$13.1 million at that date, and the Company's defined benefit pension expense
would be expected to increase by approximately $1.7 million during 2005.
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
2005.
OPEB plans. Certain subsidiaries of the Company in the U.S. and Canada
currently provide certain health care and life insurance benefits for eligible
retired employees. See Note 14 to the Consolidated Financial Statements. The
Company accounts for such OPEB costs under SFAS No. 106, "Employers Accounting
for Postretirement Benefits other than Pensions." Under SFAS No. 106, OPEB
expense and accrued OPEB costs are based on certain actuarial assumptions,
principally the assumed discount rate and the assumed rate of increases in
future health care costs. The Company recognized consolidated OPEB income of
approximately $265,000 in 2002, $133,000 in 2003 and consolidated OPEB cost of
approximately $455,000 in 2004. Similar to defined benefit pension benefits, the
amount of funding will differ from the expense recognized for financial
reporting purposes, and contributions to the plans to cover benefit payments
aggregated $1.0 million in each of 2002, 2003 and 2004. Substantially all of the
Company's accrued OPEB cost relates to benefits being paid to current retirees
and their dependents, and no material amount of OPEB benefits are being earned
by current employees. As a result, the amount recognized for OPEB expense for
financial reporting purposes has been, and is expected to continue to be,
significantly less than the amount of OPEB benefit payments made each year.
Accordingly, the amount of accrued OPEB expense has been, and is expected to
continue to, decline gradually.
The assumed discount rates the Company utilizes for determining OPEB
expense and the related accrued OPEB obligations are generally based on the same
discount rates the Company utilizes for its 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, 2004,
the expected rate of increase in future health care costs ranges from 9% in
2005, declining to 5% to 5.5% in 2010 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 2005, the Company expects its consolidated OPEB expense will
approximate $200,000 in 2005. In comparison, the Company expects to be required
to make approximately $800,000 of contributions to such plans during 2005.
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, 2004, 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 2005. 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,
2004, and OPEB expense would have increased by $100,000 in 2004.
LIQUIDITY AND CAPITAL RESOURCES
Summary
The Company's primary source of liquidity on an ongoing basis is its cash
flows from operating activities, which is generally used to (i) fund capital
expenditures, (ii) repay short-term indebtedness incurred primarily for working
capital purposes and (iii) provide for the payment of dividends. In addition,
from time-to-time the Company will incur indebtedness, generally to (i) fund
short-term working capital needs, (ii) refinance existing indebtedness or (iii)
fund major capital expenditures or the acquisition of other assets outside the
ordinary course of business. Also, the Company may from time-to-time sell assets
outside the ordinary course of business, the proceeds of which are generally
used to (i) repay existing indebtedness (including indebtedness which may have
been collateralized by the assets sold), (ii) fund major capital expenditures or
the acquisition of other assets outside the ordinary course of business or (iii)
pay dividends.
At December 31, 2004, the Company's indebtedness was substantially
comprised of $519 million related to KII's Senior Secured Notes due in 2009 and
the equivalent of $13.6 million related to KII's euro 80 million secured
revolving credit facility ("European Credit Facility") due in June 2005.
Accordingly, the Company does not currently expect that a significant amount of
its cash flows from operating activities generated during 2005 will be required
to be used to repay indebtedness during 2005. KII expects to seek a renewal of
its European credit facility during the first half of 2005.
Consolidated cash flows
The Company's consolidated cash flows for each of the past three years are
presented below:
Years ended December 31,
----------------------------------------
2002 2003 2004
---- ---- ----
(in millions)
Operating activities $ 111.1 $ 107.6 $ 151.0
Investing activities (34.6) (35.4) (39.8)
Financing activities (93.9) (61.8) (108.8)
------- ------- -------
Net cash provided (used) by
operating, investing and
financing activities $ (17.4) $ 10.4 $ 2.4
======= ======= =======
Operating cash flows. Trends in cash flows from operating activities
(excluding the impact of significant asset dispositions and relative changes in
assets and liabilities) are generally similar to trends in the Company's
earnings. However, certain items included in the determination of net income are
non-cash, and therefore such items have no impact on cash flows from operating
activities. Non-cash items included in the determination of net income include
depreciation and amortization expense, non-cash interest expense. Non-cash
interest expense relates to amortization of original issue discount or premium
on certain indebtedness and amortization of deferred financing costs.
Certain other items included in the determination of net income may have an
impact on cash flows from operating activities, but the impact of such items on
cash flows from operating activities will differ from their impact on net
income. For example, the amount of periodic defined benefit pension plan expense
and periodic OPEB expense depends upon a number of factors, including certain
actuarial assumptions, and changes in such actuarial assumptions will result in
a change in the reported expense. In addition, the amount of such periodic
expense generally differs from the outflows of cash required to be currently
paid for such benefits.
Certain other items included in the determination of net income have no
impact on cash flows from operating activities, but such items do impact cash
flows from investing activities (although their impact on such cash flows
differs from their impact on net income). For example, realized gains and losses
from the disposal long-lived assets are included in the determination of net
income, although the proceeds from any such disposal are shown as part of cash
flows from investing activities.
Changes in product pricing, production volumes and customer demand, among
other things, can significantly affect the liquidity of the Company. Relative
changes in assets and liabilities generally result from the timing of
production, sales, purchases and income tax payments. Such relative changes can
significantly impact the comparability of cash flow from operations from period
to period, as the income statement impact of such items may occur in a different
period from when the underlying cash transaction occurs. For example, raw
materials may be purchased in one period, but the payment for such raw materials
may occur in a subsequent period. Similarly, inventory may be sold in one
period, but the cash collection of the receivable may occur in a subsequent
period. Relative changes in accounts receivable are affected by, among other
things, the timing of sales and the collection of the resulting receivable.
Relative changes in inventories, accounts payable and accrued liabilities are
affected by, among other things, the timing of raw material purchases and the
payment for such purchases and the relative difference between production
volumes and sales volumes.
Cash flows provided from operating activities increased from $107.7 million
in 2003 to $151.0 million in 2004. This $43.3 million increase was due primarily
to the net effect of (i) higher net income of $227.3 million, (ii) a larger
deferred income tax benefit of $299.8 million, (iii) higher depreciation and
amortization expense of $4.6 million, (iv) higher net distributions from Kronos'
TiO2 manufacturing joint venture of $7.7 million, (v) a higher amount of net
cash used to fund changes in the Company's inventories, receivables, payables,
accruals and accounts with affiliates of $34.9 million and (vi) higher cash
received for income taxes of $25.3 million.
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.
Investing cash flows. The Company's capital expenditures were $32.6
million, $35.2 million and $39.3 million in 2002, 2003 and 2004, respectively.
Capital expenditures in 2002 included an aggregate of $3.1 million for the
rebuilding of the Company's Leverkusen, Germany sulfate plant. In addition,
during 2004 the Company purchased additional shares of its majority-owned French
subsidiary for $575,000.
The Company's capital expenditures during the past three years include an
aggregate of approximately $18 million ($7 million in 2004) for the Company's
ongoing environmental protection and compliance programs. The Company's
estimated 2005 capital expenditures are $41 million and include approximately $7
million in the area of environmental protection and compliance.
Financing cash flows. During 2004, (i) KII issued an additional euro 90
million principal amount of it Senior Secured Notes at 107% of par (equivalent
to $130 million when issued) and (ii) KII's operating subsidiaries in Germany
and Belgium borrowed an aggregate of euro 90 million ($112 million when
borrowed) of borrowings under its European Credit Facility, of which euro 80
million ($100 million when repaid) were subsequently repaid.
On September 24, 2004, NL completed the acquisition of the shares of common
stock of CompX International Inc. previously held by Valhi and Valcor, Inc., a
wholly-owned subsidiary of Valhi. The purchase price for these shares was paid
by NL's transfer to Valhi and Valcor of an aggregate $168.6 million of NL's $200
million long-term note receivable from Kronos. In October 2004, Valcor
distributed its note receivable from Kronos to Valhi, and subsequently Kronos
prepaid $100.0 million on the note payable to Valhi (including accrued interest)
principally using available cash on hand. In November 2004, the remaining
balances due under these notes were repaid primarily using the funds raised from
the issuance of euro 90 million principal amount of KII's Senior Secured Notes,
and the notes were cancelled.
In March 2003, 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 European Credit
Facility.
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.
Deferred financing costs paid of $10.7 million in 2002 and $2.0 million in
2004 for the Senior Secured Notes, the European Credit Facility and the
Company's U.S. revolving credit facility are being amortized over the life of
the respective agreements and are included in other noncurrent assets as of
December 31, 2004.
Cash dividends paid during 2002, 2003 and 2004 totaled $120.1 million, $7.0
million and $48.9 million, respectively. On February 17, 2005, the Company's
Board of Directors declared a regular quarterly dividend of $.25 per share to
stockholders of record as of March 10, 2005 to be paid on March 25, 2005. 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 $73.7 million in 2002 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 of such notes receivable
from affiliates to NL, and as a result, Kronos will no longer report cash flows
related to certain of 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.
Provisions contained in certain of Kronos' credit agreements could result
in the acceleration of the applicable indebtedness prior to its stated maturity.
For example, certain credit agreements allow the lender to accelerate the
maturity of the indebtedness upon a change of control (as defined) of the
borrower. In addition, certain credit agreements could result in the
acceleration of all or a portion of the indebtedness following a sale of assets
outside the ordinary course of business. Other than operating lease commitments
disclosed in Note 16 to the Consolidated Financial Statements, the Company is
not party to any material off-balance sheet financing arrangements.
Cash, cash equivalents, restricted cash and restricted marketable debt
securities and borrowing availability. At December 31, 2004, the Company had
current cash and cash equivalents aggregating $60.8 million ($21.1 million held
by non-U.S. subsidiaries). At December 31, 2004, the Company's U.S. and non-U.S.
subsidiaries had current restricted cash equivalents of $1.5 million and
noncurrent restricted marketable debt securities of $2.9 million. At December
31, 2004, certain of the Company's subsidiaries had approximately $139 million
available for borrowing with approximately $101 million available under non-U.S.
credit facilities (including approximately $93 million under the European Credit
Facility) and approximately $38 million available under the U.S. Credit Facility
(based on borrowing availability). At December 31, 2004, KII had approximately
$49 million available for payment of dividends and other restricted payments as
defined in the Notes indenture.
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 obligations including operations,
capital expenditures, debt service and current dividend policy. To the extent
that actual developments differ from the Company's expectations, the Company's
liquidity could be adversely affected.
Legal proceedings and environmental matters. See Note 16 to the
Consolidated Financial Statements for certain legal proceedings and
environmental matters with respect to the Company.
Foreign operations. As discussed above, the Company has substantial
operations located outside the United States for which the functional currency
is not the U.S. dollar. As a result, the reported amount of the Company's assets
and liabilities related to its non-U.S. operations, and therefore the Company's
consolidated net assets, will fluctuate based upon changes in currency exchange
rates. At December 31, 2004, the Company had substantial net assets denominated
in the euro, Canadian dollar, Norwegian kroner and United Kingdom pound
sterling.
Other. The Company periodically evaluates its liquidity requirements,
alternative uses of capital, capital needs and availability of resources in view
of, among other things, its dividend policy, its debt service and capital
expenditure requirements and estimated future operating cash flows. As a result
of this process, the Company in the past has sought, and in the future may seek,
to reduce, refinance, repurchase or restructure indebtedness; raise additional
capital; issue additional securities; repurchase shares of its common stock;
modify its dividend policy; restructure ownership interests; sell interests in
subsidiaries or other assets; or take a combination of such steps or other steps
to manage its liquidity and capital resources. In the normal course of its
business, the Company may review opportunities for the acquisition, divestiture,
joint venture or other business combinations in the chemicals or other
industries, as well as the acquisition of interests in related companies. In the
event of any such transaction, the Company may consider using available cash,
issuing equity securities or increasing its indebtedness to the extent permitted
by the agreements governing the Company's existing debt. See Note 8 to the
Consolidated Financial Statements.
Summary of debt and other contractual commitments
As more fully described in the notes to the Consolidated Financial
Statements, the Company is a party to various debt, lease and other agreements
which contractually and unconditionally commit the Company to pay certain
amounts in the future. See Notes 8, 15, 16 and 18 to the Consolidated Financial
Statements. The Company's obligation for the purchase of TiO2 feedstock is more
fully described in Note 16 to the Consolidated Financial Statements and above in
"Business - raw materials." The following table summarizes such contractual
commitments of the Company and its consolidated subsidiaries by the type and
date of payment.
Payment due date
-----------------------------------------------------------
2010 and
Contractual commitment 2005 2006/2007 2008/2009 after Total
---------------------- ---- --------- --------- -------- -----
(In millions)
Third-party indebtedness(1) $ 13.8 $ .2 $ 519.2 $ - $ 533.2
Interest payments on
third-party indebtedness 45.0 89.4 44.7 - 179.1
Operating leases 4.8 6.3 4.5 21.1 36.7
Fixed asset acquisitions 6.7 - - - 6.7
Long-term supply contracts
for the purchase of
TiO2 feedstock 165.7 349.2 10.5 - 525.4
Estimated tax obligations 17.5 - - - 17.5
------- ------- ------- ------- --------
$ 253.5 $ 445.1 $ 578.9 $ 21.1 $1,298.6
======= ======= ======= ======= ========
_____________________________
(1) Primarily relates to KII's Senior Secured Notes. See Item 7A, "Quantitative
and Qualitative Disclosures about Market Risk" and Note 8 to the
Consolidated Financial Statements.
The timing and amount shown for the Company's commitments related to
indebtedness (principal and interest), operating leases, fixed asset
acquisitions, long-term supply contracts and other are based upon the
contractual payment amount and the contractual payment date for such
commitments. With respect to revolving credit facilities, the amount shown for
indebtedness is based upon the actual amount outstanding at December 31, 2004,
and the amount shown for interest for any outstanding variable-rate indebtedness
is based upon the December 31, 2004 interest rate and assumes that such
variable-rate indebtedness remains outstanding until the maturity of the
facility. The amount shown for income taxes is the consolidated amount of income
taxes payable at December 31, 2004, which is assumed to be paid during 2005. A
significant portion of the amount shown for indebtedness relates to KII's Senior
Secured Notes ($519.2 million at December 31, 2004). Such indebtedness is
denominated in euro. See Item 7A - "Quantative and Qualitative Disclosures About
Market Risk" and Note 8 to the Consolidated Financial Statements.
Kronos' contracts for the purchase of TiO2 feedstock contain fixed
quantities that Kronos is required to purchase, although certain of these
contracts allow for an upward or downward adjustment in the quantity purchased,
generally no more than 10%, based on the Company's feedstock requirements. The
pricing under these agreements is generally based on a fixed price with price
escalation clauses primarily based on consumer price indices, as defined in the
respective contracts. The timing and amount shown for the Company's commitments
related to the long-term supply contracts for TiO2 feedstock is based upon the
Company's current estimate of the quantity of material that will be purchased in
each time period shown, and the payment that would be due based upon such
estimated purchased quantity and an estimate of the effect of the price
escalation clause. The actual amount of material purchased, and the actual
amount that would be payable by the Company, may vary from such estimated
amounts.
The above table does not reflect any amounts that the Company might pay to
fund its defined benefit pension plans and OPEB plans, as the timing and amount
of any such future fundings are unknown and dependent on, among other things,
the future performance of defined benefit pension plan assets, interest rate
assumptions and actual future retiree medical costs. Such defined benefit
pension plans and OPEB plans are discussed above in greater detail. The table
also does not reflect any amounts that the Company might pay related to its
asset retirement obligations as the terms and amounts of such future fundings
are unknown. See Notes 14 and 18 to the Consolidated Financial Statements.
The above table also does not reflect any amounts the Company might pay to
acquire TiO2 from its TiO2 manufacturing joint venture, as the timing and amount
of such purchases are unknown and dependent on, among other things, the amount
of TiO2 produced by the joint venture in the future and the joint venture's
future cost of producing such TiO2. However, the table does include amounts
related to Kronos' share of the joint venture's ore requirements necessary to
produce TiO2 for Kronos. See Item 1, "Business" and Note 6 to the Consolidated
Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General. The Company is exposed to market risk from changes in foreign
currency exchange rates, interest rates and equity security prices. In the past,
the Company has periodically entered into currency forward contracts, interest
rate swaps or other types of contracts in order to manage a portion of its
interest rate market risk. Otherwise, the Company does not generally enter into
forward or option contracts to manage such market risks, nor does the Company
enter into any such contract or other type of derivative instrument for trading
or speculative purposes. Other than as described below, the Company was not a
party to any material forward or derivative option contract related to foreign
exchange rates, interest rates or equity security prices at December 31, 2003
and 2004. 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 and
2004, substantially all of the Company's aggregate indebtedness was comprised of
fixed-rate instruments. The large percentage of fixed-rate debt instruments
minimizes earnings volatility that would result from changes in interest rates.
The following table presents principal amounts and weighted average interest
rates for the Company's aggregate outstanding indebtedness at December 31, 2004.
At December 31, 2003 and 2004, all outstanding fixed-rate indebtedness was
denominated in U.S. dollars or the euro and the outstanding variable rate
borrowings were denominated in euros. Information shown below for such foreign
currency denominated indebtedness is presented in its U.S. dollar equivalent at
December 31, 2004 using exchange rates of 1.36 U.S. dollars per euro. Certain
Norwegian kroner denominated capital leases totaling $300,000 in 2004 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 $ 519.2 $ 549.1 8.9% 2009
======= =======
Variable rate indebtedness -
euro-denominated European
Credit Facility $ 13.6 $ 13.6 3.9% 2005
======= =======
At December 31, 2003, fixed rate indebtedness aggregated $356.1 million
(fair value - $356.1 million) with a weighted-average interest rate of 8.9%. All
of such fixed rate indebtedness was denominated in euros. Variable indebtedness
at December 31, 2003 was nil.
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, 2004, the Company had the equivalent of
$532.8 million of outstanding euro-denominated indebtedness (2003 - the
equivalent of $356.1 million of euro-denominated indebtedness). The potential
increase in the U.S. dollar equivalent of the principal amount outstanding
resulting from a hypothetical 10% adverse change in exchange rates at such date
would be approximately $52.4 million at December 31, 2004 (2003 - $35.6
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, 2003, 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 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
Evaluation of Disclosure Controls and Procedures. The Company maintains a
system of disclosure controls and procedures. The term "disclosure controls and
procedures," as defined by regulations of the SEC, means controls and other
procedures that are designed to ensure that information required to be disclosed
in the reports that the Company files or submits to the SEC under the Securities
Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits to the SEC under the Act is
accumulated and communicated to the Company's management, including its
principal executive officer and its principal financial officer, or persons
performing similar functions, as appropriate to allow timely decisions to be
made regarding required disclosure. Each of Harold C. Simmons, the Company's
Chief Executive Officer, and Gregory M. Swalwell, the Company's Vice President,
Finance and Chief Financial Officer, have evaluated the Company's disclosure
controls and procedures as of December 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.
Scope of Management's Report on Internal Control Over Financial Reporting.
The Company also maintains internal control over financial reporting. The term
"internal control over financial reporting," as defined by 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.
Section 404 of the Sarbanes-Oxley Act of 2002 requires the Company to
annually include a management report on internal control over financial
reporting starting in the Company's Annual Report on Form 10-K for the year
ended December 31, 2004. The Company's independent registered public accounting
firm is also required to annually audit the Company's internal control over
financial reporting.
As permitted by the SEC, the Company's assessment of internal control over
financial reporting excludes (i) internal control over financial reporting of
its equity method investees and (ii) internal control over the preparation of
the Company's financial statement schedules required by Article 12 of Regulation
S-X. See Note 6 to the Consolidated Financial Statements and the index of
financial statements and schedules on page F-1 of this Annual Report. However,
our assessment of internal control over financial reporting with respect to the
Company's equity method investees did include our controls over the recording of
amounts related to our investment that are recorded in our consolidated
financial statements, including controls over the selection of accounting
methods for our investments, the recognition of equity method earnings and
losses and the determination, valuation and recording of our investment account
balances.
Changes in Internal Control Over Financial Reporting. There has been no
change to the Company's internal control over financial reporting during the
quarter ended December 31, 2004 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
Management's Report on Internal Control Over Financial Reporting. The
Company's management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f). The Company's evaluation of the effectiveness of its
internal control over financial reporting is based upon the framework
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (commonly referred to as
the "COSO" framework). Based on the Company's evaluation under that framework,
management of the Company has concluded that the Company's internal control over
financial reporting was effective as of December 31, 2004. See Scope of
Management's Report on Internal Control Over Financial Reporting above.
PricewaterhouseCoopers LLP, the independent registered public accounting
firm that has audited the Company's consolidated financial statements included
in this Annual Report, has audited management's assessment of the effectiveness
of the Company's internal control over financial reporting as of December 31,
2004, as stated in their report which is included in this Annual Report on Form
10-K.
Certifications. The Company's chief executive officer is required to
annually file a certification with the New York Stock Exchange ("NYSE"),
certifying the Company's compliance with the corporate governance listing
standards of the NYSE. During 2004, the Company's chief executive officer filed
such annual certification with the NYSE, indicating that he was not aware of any
violations by the Company of the NYSE corporate governance listing standards.
The Company's chief executive officer and chief financial officer are also
required to, among other things, quarterly file certifications with the SEC
regarding the quality of the Company's public disclosures, as required by
Section 302 of the Sarbanes-Oxley Act of 2002. The certifications for the
quarter ended December 31, 2004 have been filed as exhibits 31.1 and 31.2 to
this Annual Report on Form 10-K.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to the
Company's definitive Proxy Statement to be filed with the SEC pursuant to
Regulation 14A within 120 days after the end of the fiscal year covered by this
report (the "Kronos Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Kronos Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Kronos Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Kronos Proxy Statement. See also Note 15 to the Consolidated Financial
Statements.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by the Item is incorporated by reference to the
Kronos Proxy Statement.
PART IV
ITEM 15. EXHIBITS, 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, 2004.
October 12, 2004 - Reported Item 7.01 and Item 9.01.
October 22, 2004 - Reported Item 7.01 and Item 9.01.
November 9, 2004 - Reported Item 2.02, Item 7.01 and Item 9.01.
November 17, 2004 - Reported Item 9.01.
November 18, 2004 - Reported Item 5.02.
November 19, 2004 - Reported Item 2.03, Item 7.01 and Item 9.01.
November 24, 2004 - Reported Item 1.01, Item 2.03 and Item 9.01.
(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, 2004 will
be furnished to the Commission upon request.
The Company will also furnish, without charge, a copy of its Code of
Business Conduct and Ethics, as adopted by the board of directors on
February 19, 2004, upon request. Such requests should be directed to
the attention of the Company's Corporate Secretary at the Company's
corporate offices located at 5430 LBJ Freeway, Suite 1700, Dallas, TX
75240.
Item No. Exhibit Index
2.1 Form of Distribution Agreement between NL Industries, Inc. and Kronos
Worldwide, Inc. - incorporated by reference to Exhibit 2.1 of the
Registration Statement on Form 10 of the Registrant (File No.
001-31763).
3.1 First Amended and Restated Certificate of Incorporation of Kronos
Worldwide, Inc. - incorporated by reference to Exhibit 3.1 of the
Registration statement on Form 10 of the Registrant (File No.
001-31763).
3.2 Amended and Restated Bylaws of Kronos Worldwide, Inc. - incorporated
by reference to Exhibit 3.2 of the Registration statement on Form 10
of the Registrant (File No. 001-31763).
4.1 Indenture governing the 8.875% Senior Secured Notes due 2009 dated as
of June 28, 2002, between Kronos International, Inc. and The Bank of
New York, as trustee - incorporated by reference to Exhibit 4.1 to the
Quarterly Report on Form 10-Q of NL Industries, Inc. for the quarter
ended June 30, 2002.
4.2 Form of certificate of 8.875% Senior Secured Note due 2009 (included
as Exhibit A to Exhibit 4.1) - incorporated by reference to Exhibit
4.1 to the Quarterly Report on Form 10-Q of NL Industries, Inc. (File
No. 1-640) for the quarter ended June 30, 2002.
4.3 Form of certificate of 8.875% Senior Secured Note due 2009 (included
as Exhibit B to Exhibit 4.1) - incorporated by reference to Exhibit
4.1 to the Quarterly Report on Form 10-Q of NL Industries, Inc. (File
No. 1-640) for the quarter ended June 30, 2002.
4.4 Purchase Agreement, dated as of June 19, 2002, among Kronos
International, Inc., Deutsche Bank AG London, Dresdner Bank AG, London
Branch, and Commerzbank Aktiengesellschaft, London Branch -
incorporated by reference to Exhibit 4.4 to the Quarterly Report on
Form 10-Q of NL Industries, Inc. for the quarter ended June 30, 2002.
4.5 Purchase Agreement dated November 18, 2004 between Kronos
International, Inc. and Deutsche Bank AG London (incorporated by
reference to Exhibit 4.4 to the Current Report on Form 8-K of Kronos
International, Inc. (File No. 333-100047) dated November 24, 2004.
4.6 Form of Registration Rights Agreement, dated as of November 26, 2004
between Kronos International, Inc. and Deutsche Bank AG London
(incorporated by reference to Exhibit 4.5 to the Current Report on
Form 8-K of Kronos International, Inc. (File No. 333-100047) dated
November 24, 2004.
4.7 Collateral Agency Agreement, dated as of June 28, 2002, among The Bank
of New York, U.S. Bank, N.A. and Kronos International, Inc. (filed
herewith only with respect to Sections 2, 5, 6 and 8 thereof) -
incorporated by reference to Exhibit 4.6 to the Quarterly Report on
Form 10-Q of NL Industries, Inc. for the quarter ended June 30, 2002.
4.8 Security Over Shares Agreement (shares of Kronos Limited), dated June
28, 2002, between Kronos International, Inc. and The Bank of New York,
U.S., as trustee - incorporated by reference to Exhibit 4.7 to the
Quarterly Report on Form 10-Q of NL Industries, Inc. for the quarter
ended June 30, 2002.
4.9 Pledge of Shares (shares of Kronos Denmark ApS), dated June 28, 2002,
between Kronos International, Inc. and U.S. Bank, N.A., as collateral
agent - incorporated by reference to Exhibit 4.8 to the Quarterly
Report on Form 10-Q of NL Industries, Inc. for the quarter ended June
30, 2002.
4.10 Pledge Agreement (pledge of shares of Societe Industrielle du Titane,
S.A.), dated June 28, 2002, between Kronos International, Inc. and
U.S. Bank, N.A., as collateral agent - incorporated by reference to
Exhibit 4.9 to the Quarterly Report on Form 10-Q of NL Industries,
Inc. for the quarter ended June 30, 2002.
4.11 Partnership Interest Pledge Agreement (pledge of fixed capital
contribution in Kronos Titan GmbH & Co. OHG), dated June 28, 2002,
between Kronos International, Inc. and U.S. Bank, N.A., as collateral
agent - incorporated by reference to Exhibit 4.10 to the Quarterly
Report on Form 10-Q of NL Industries, Inc. for the quarter ended June
30, 2002.
10.1 Form of Tax Agreement between Valhi, Inc. and Kronos Worldwide, Inc. -
incorporated by reference to Exhibit 10.1 of the Registration
statement on Form 10 of the Registrant (File No. 001-31763).
10.2 Intercorporate Services Agreement by and between Contran Corporation
and Kronos Worldwide, Inc., effective as of January 1, 2004 -
incorporated by reference to Exhibit 10.2 to the Quarterly Report on
Form 10-Q of the Registrant (File No. 001-31763) for the quarter ended
March 31, 2004.
10.3 Promissory Note, dated September 24, 2004, made by Kronos Worldwide,
Inc. in favor of NL Industries, Inc. - incorporated by reference to
Exhibit 10.2 to a Current Report on Form 8-K of NL Industries, Inc.
(File No. 1-640) dated September 24, 2004.
10.4 Promissory Note, dated September 24, 2004, made by Kronos Worldwide,
Inc. in favor of Valcor, Inc. - incorporated by reference to Exhibit
99.1 to a Current Report on Form 8-K of NL Industries, Inc. (File No.
1-640) dated September 24, 2004.
10.5 Promissory Note, dated September 24, 2004, made by Kronos Worldwide,
Inc. in favor of Valhi, Inc. - incorporated by reference to Exhibit
99.2 to a Current Report on Form 8-K of NL Industries, Inc. (File No.
1-640) dated September 24, 2004.
10.6** Form of Kronos Worldwide, Inc. Long-Term Incentive Plan -
incorporated by reference to Exhibit 10.4 of the Registration
statement on Form 10 of the Registrant (File No. 001-31763).
10.7 euro 80,000,000 Facility Agreement, dated June 25, 2002, among Kronos
Titan GmbH & Co. OHG, Kronos Europe S.A./N.V., Kronos Titan A/S and
Titania A/S, as borrowers, Kronos Titan GmbH & Co. OHG, Kronos Europe
S.A./N.V. and Kronos Norge AS, as guarantors, Kronos Denmark ApS, as
security provider, Deutsche Bank AG, as mandated lead arranger,
Deutsche Bank Luxembourg S.A., as agent and security agent, and KBC
Bank NV, as fronting bank, and the financial institutions listed in
Schedule 1 thereto, as lenders - incorporated by reference to Exhibit
10.1 to the Quarterly Report on Form 10-Q of NL Industries, Inc. for
the quarter ended June 30, 2002.
10.8 First Amendment Agreement, dated September 3, 2004, Relating to a
Facility Agreement dated June 25, 2002 among Kronos Titan GmbH, Kronos
Europe S.A./N.V., Kronos Titan AS and Titania A/S, as borrowers,
Kronos Titan GmbH, Kronos Europe S.A./N.V. and Kronos Norge AS, as
guarantors, Kronos Denmark ApS, as security provider, with Deutsche
Bank Luxembourg S.A., acting as agent - incorporated by reference to
Exhibit 10.1 of the Current Report on Form 8-K of the Registrant dated
November 17, 2004 (File No. 333-119639).
10.9 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.
10.10 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.
10.11 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).
10.12 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.
10.13 Form of Assignment and Assumption Agreement, dated as of January 1,
1999, between Kronos Inc. (formerly known as Kronos (USA), Inc.) and
Kronos International, Inc. - incorporated by reference to Exhibit 10.9
to Kronos International, Inc.'s Registration Statement on Form S-4
(File No. 333-100047).
10.14 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).
10.15* Richards Bay Slag Sales Agreement dated May 1, 1995, between
Richards Bay Iron and Titanium (Proprietary) Limited and Kronos, Inc.
- incorporated by reference to Exhibit 10.17 to the Annual Report on
Form 10-K for NL Industries, Inc. for the year ended December 31,
1995.
10.16* Amendment to Richards Bay Slag Sales Agreement, dated May 1, 1999,
between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit 10.4 to the Annual
Report on Form 10-K for NL Industries, Inc. for the year ended
December 31, 1999.
10.17* Amendment to Richards Bay Slag Sales Agreement, dated June 1, 2001,
between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit 10.5 to the Annual
Report on Form 10-K for NL Industries, Inc. for the year ended
December 31, 2001.
10.18* Amendment to Richards Bay Slag Sales Agreement dated December 20,
2002 between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit 10.7 to the Annual
Report on Form 10-K for NL Industries, Inc. for the year ended
December 31, 2002.
10.19* Amendment to Richards Bay Slag Sales Agreement dated October 31,
2003 between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit 10.17 to the
Annual Report on Form 10-K of Kronos Worldwide, Inc. (File No.
001-31763) for the year ended December 31, 2003.
10.20 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.
10.21 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.
10.22 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.
10.23 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.
10.24 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.
10.25 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.
10.26 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.
10.27 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.
10.28 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.
10.29 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.
10.30 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.
10.31 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.
10.32 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.
10.33 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.
10.34 Insurance sharing agreement dated October 30, 2003 by and among CompX
International Inc., Contran Corporation, Keystone Consolidated
Industries, Inc., Titanium Metals Corp., Valhi, Inc., NL Industries,
Inc. and Kronos Worldwide, Inc. - incorporated by reference to Exhibit
10.48 to NL Industries, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 2003.
10.35** Summary of Consulting Arrangement beginning on August 1, 2003, as
amended between Lawrence A. Wigdor and Kronos Worldwide, Inc. -
incorporated by reference to Exhibit 10.2 to the Quarterly Report on
Form 10-Q of the Registrant for the quarter ended March 31, 2004.
21.1 Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP.
31.1 Certification.
31.2 Certification.
32.1 Certification.
___________________________________
* Portions of the exhibit have been omitted pursuant to a request for
confidential treatment.
** Management contract, compensatory plan or arrangement
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Kronos Worldwide, Inc.
(Registrant)
By:/s/ Harold C. Simmons
--------------------------
Harold C. Simmons
March 30, 2005
(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 30, 2005 Steven L. Watson, March 30, 2005
(Chairman of the Board and Chief (Director)
Executive Officer)
/s/ George E. Poston /s/ Glenn R. Simmons
- -------------------------------- ------------------------------------
George E. Poston, March 30, 2005 Glenn R. Simmons, March 30, 2005
(Director) (Director)
/s/ C. H. Moore, Jr. /s/ Keith R. Coogan
- -------------------------------- ------------------------------------
C. H. Moore, Jr., March 30, 2005 Keith R. Coogan, March 30, 2005
(Director) (Director)
/s/ R. Gerald Turner /s/ Gregory M. Swalwell
- -------------------------------- ------------------------------------
R. Gerald Turner, March 30, 2005 Gregory M. Swalwell, March 30, 2005
(Director) (Vice President, Chief Financial
Officer, Principal Financial
Officer)
/s/ James W. Brown
-----------------------------------
James W. Brown, March 30, 2005
(Vice President, Controller,
Principal Accounting Officer
KRONOS WORLDWIDE, INC.
Annual Report on Form 10-K
Items 8, 15(a) and 15(d)
Index of Financial Statements and Schedules
Financial Statements Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets - December 31, 2003 and 2004 F-4
Consolidated Statements of Income -
Years ended December 31, 2002, 2003 and 2004 F-6
Consolidated Statements of Comprehensive Income -
Years ended December 31, 2002, 2003 and 2004 F-7
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 2002, 2003 and 2004 F-8
Consolidated Statements of Cash Flows -
Years ended December 31, 2002, 2003 and 2004 F-9
Notes to Consolidated Financial Statements F-11
Financial Statement Schedules
Report of Independent Registered Public Accounting Firm 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 REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Kronos Worldwide, Inc.:
We have completed an integrated audit of Kronos Worldwide, Inc.'s 2004
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2004 and audits of its 2002 and 2003 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated financial statements
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Kronos Worldwide, Inc and its subsidiaries at December 31, 2003 and
2004, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004 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 statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in Management's
Report on Internal Control Over Financial Reporting appearing under Item 9A,
that the Company maintained effective internal control over financial reporting
as of December 31, 2004 based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO"), is fairly stated, in all material respects, based
on those criteria. Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control -
Integrated Framework issued by the COSO. The Company's management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company, (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Dallas, Texas
March 30, 2005
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2004
(In thousands, except per share data)
ASSETS
2003 2004
---- ----
Current assets:
Cash and cash equivalents $ 55,876 $ 60,790
Restricted cash 1,313 1,529
Accounts and other receivables 156,212 190,319
Receivables from affiliate 1,209 16
Refundable income taxes 35,336 3,272
Inventories 266,020 233,858
Prepaid expenses 4,456 4,529
Deferred income taxes 2,755 1,205
---------- ----------
Total current assets 523,177 495,518
---------- ----------
Other assets:
Investment in TiO2 manufacturing joint venture 129,011 120,251
Deferred income taxes 6,682 238,284
Other 28,040 32,340
---------- ----------
Total other assets 163,733 390,875
---------- ----------
Property and equipment:
Land 32,339 35,511
Buildings 179,472 196,983
Equipment 765,231 857,714
Mining properties 63,701 71,980
Construction in progress 9,666 16,753
---------- ----------
1,050,409 1,178,941
Less accumulated depreciation and amortization 615,442 712,051
---------- ----------
Net property and equipment 434,967 466,890
---------- ----------
$1,121,877 $1,353,283
========== ==========
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 2003 and 2004
(In thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
2003 2004
---- ----
Current liabilities:
Current maturities of long-term debt $ 288 $ 13,792
Accounts payable and accrued liabilities 166,664 170,009
Payable to affiliates 8,919 9,231
Income taxes 12,354 17,129
Deferred income taxes 3,436 2,722
---------- ----------
Total current liabilities 191,661 212,883
---------- ----------
Noncurrent liabilities:
Long-term debt 356,451 519,403
Deferred income taxes 119,825 60,081
Notes payable to affiliates 200,000 -
Accrued pension cost 68,161 61,300
Accrued postretirement benefits cost 11,176 11,288
Other 14,727 17,407
---------- ----------
Total noncurrent liabilities 770,340 669,479
---------- ----------
Minority interest 525 76
---------- ----------
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 and 48,946 shares issued 489 489
Additional paid-in capital 1,060,157 1,060,643
Retained deficit (729,260) (463,352)
Accumulated other comprehensive loss:
Currency translation (133,009) (88,181)
Pension liabilities (39,026) (38,754)
---------- ----------
Total stockholders' equity 159,351 470,845
---------- ----------
$1,121,877 $1,353,283
========== ==========
Commitments and contingencies (Notes 13 and 16)
See accompanying notes to consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2002, 2003 and 2004
(In thousands, except per share data)
2002 2003 2004
---- ---- ----
Net sales $ 875,188 $1,008,177 $1,128,600
Cost of sales 671,830 739,237 866,313
--------- ---------- ----------
Gross margin 203,358 268,940 262,287
Selling, general and administrative expense 107,675 124,446 145,433
Other operating income (expense):
Currency transaction losses, net (547) (7,743) (3,949)
Disposition of property and equipment (625) (480) (1,120)
Other income 459 490 6,715
Corporate expense (3,288) (4,140) (3,474)
Other expense (172) (128) (73)
--------- ---------- ----------
Income from operations 91,510 132,493 114,953
Other income (expense):
Currency transaction gain 6,271 - -
Interest income from affiliates 20,754 723 -
Trade interest income 1,709 771 1,212
Other interest income 702 180 961
Interest expense to affiliates (12,290) (1,887) (15,210)
Other interest expense (16,837) (33,002) (37,399)
--------- ---------- ----------
Income before income taxes and minority interest 91,819 99,278 64,517
Provision (benefit) for income taxes 25,500 11,657 (250,389)
--------- ---------- ----------
Income before minority interest 66,319 87,621 314,906
Minority interest 55 72 53
--------- ---------- ----------
Net income $ 66,264 $ 87,549 $ 314,853
========= ========== ==========
Net income per basic and diluted share $ 1.35 $ 1.79 $ 6.43
========= ========== ==========
Basic and diluted weighted average shares
used in the calculation of net income per share 48,943 48,943 48,945
========= ========== ==========
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
Net income $ 66,264 $ 87,549 $ 314,853
--------- ---------- ----------
Other comprehensive income (loss), net of tax:
Minimum pension liabilities adjustment (7,129) (25,545) 272
Currency translation adjustment 51,803 15,073 44,828
--------- ---------- ----------
Total other comprehensive income (loss) 44,674 (10,472) 45,100
--------- ---------- ----------
Comprehensive income $ 110,938 $ 77,077 $ 359,953
========= ========== ==========
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2002, 2003 and 2004
(In thousands)
Accumulated other
comprehensive
Notes income (loss)
Additional Retained receivable ------------------------
Common paid-in earnings from Currency Pension
stock capital (deficit) affiliates translation liabilities Total
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
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
Net income - - 314,853 - - - 314,853
Other comprehensive income,
net of tax - - - - 44,828 272 45,100
Issuance of common stock - 90 - - - - 90
Cash dividends declared - - (48,945) - - - (48,945)
Other - 396 - - - - 396
---- ---------- --------- --------- --------- -------- ---------
Balance at December 31, 2004 $489 $1,060,643 $(463,352) $ - $ (88,181) $(38,754) $ 470,845
==== ========== ========= ========= ========= ======== =========
See accompanying notes to consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
Cash flows from operating activities:
Net income $ 66,264 $ 87,549 $ 314,853
Depreciation and amortization 32,152 39,421 44,053
Noncash interest income from affiliates (20,629) - -
Noncash interest expense 932 2,197 2,375
Deferred income taxes 10,755 36,489 (263,314)
Minority interest 55 72 53
Net loss from disposition of
property and equipment 625 480 1,120
Pension cost, net (1,866) (5,792) (2,986)
Other postretirement benefits, net (1,250) (1,032) (151)
Distributions from TiO2 manufacturing
joint venture, net 7,950 875 8,600
Other, net 2,304 1,016 2,858
Change in assets and liabilities:
Accounts and other receivable 5,547 1,264 (21,813)
Inventories 42,249 (26,041) 48,237
Prepaid expenses 882 1,494 (478)
Accounts payable and accrued liabilities (27,353) 9,478 862
Income taxes (2,239) (38,706) 24,699
Accounts with affiliates (4,440) 1,920 (5,771)
Other noncurrent assets 74 (3,919) (1,103)
Other noncurrent liabilities (866) 916 (1,089)
--------- --------- ---------
Net cash provided by operating activities 111,146 107,681 151,005
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (32,571) (35,245) (39,295)
Purchase of interest in subsidiary - - (575)
Change in restricted cash equivalents and restricted
marketable debt securities, net (2,891) (554) (70)
Proceeds from disposition of property and equipment 864 381 99
--------- --------- ---------
Net cash used by investing activities (34,598) (35,418) (39,841)
--------- --------- ---------
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
Cash flows from financing activities:
Indebtedness:
Borrowings $ 335,768 $ 16,106 $ 241,648
Principal payments (84,814) (46,006) (100,073)
Deferred financing fees (10,706) - (1,989)
Dividends paid (120,149) (7,000) (48,945)
Loans from affiliates:
Loans 44,600 8,000 -
Repayments (194,000) (52,600) (200,000)
Other capital transactions with affiliates, net (64,600) 19,700 -
Other, net (11) (14) 609
--------- --------- ---------
Net cash used by financing activities (93,912) (61,814) (108,750)
--------- --------- ---------
Cash and cash equivalents - net change from:
Operating, investing and financing activities (17,364) 10,449 2,414
Currency translation 3,332 4,742 2,500
--------- --------- ---------
(14,032) 15,191 4,914
Balance at beginning of year 54,717 40,685 55,876
--------- --------- ---------
Balance at end of year $ 40,685 $ 55,876 $ 60,790
========= ========= =========
Supplemental disclosures - cash paid (received) for:
Interest $ 33,169 $ 30,152 $ 49,206
Income taxes 17,369 1,597 (23,657)
See accompanying notes to consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies:
Organization and basis of presentation. At December 31, 2004, (i) Valhi,
Inc (NYSE:VHI) directly and through a wholly-owned subsidiary held approximately
57% of Kronos' outstanding common stock and NL Industries, Inc. (NYSE:NL) held
an additional 37% of Kronos' common stock, (ii) Valhi and its wholly-owned
subsidiary owned approximately 83% of NL's outstanding common stock and (iii)
Contran Corporation and its subsidiaries held approximately 91% of Valhi's
outstanding common stock. Substantially all of Contran's outstanding voting
stock is held by trusts established for the benefit of certain children and
grandchildren of Harold C. Simmons, of which Mr. Simmons is sole trustee, or is
held by Mr. Simmons or persons or other entities related to Mr. Simmons.
Consequently, Mr. Simmons may be deemed to control each of such companies.
Prior to December 2003, Kronos was a wholly-owned subsidiary of NL. On
December 8, 2003, NL completed a recaptialization and a pro-rata distribution to
its stockholders of approximately 48.8% of Kronos' common stock (including Valhi
and its wholly-owned subsidiary). Stockholders of NL received one share of
Kronos common stock for every two shares of NL held. Immediately prior to NL's
distribution of shares of Kronos' common stock, the Company distributed a $200
million dividend to NL in the form of a long-term note payable. See Note 10.
On September 26, 2003 Kronos amended and restated its articles of
incorporation. Under the amended and restated articles of incorporation, among
other things, (i) Kronos' authorized capital stock now consists of 60 million
shares of common stock and 100,000 shares of preferred stock, each par value
$.01 per share, and (ii) the 1,000 shares of Kronos' common stock previously
outstanding were reclassified into an aggregate of 48.9 million shares. The
accompanying Consolidated Financial Statements have been retroactively
reclassified to reflect such changes in Kronos' capital structure for all
periods 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.
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. Minority interest
relates to the Company's majority-owned subsidiary in France, which conducts the
Company's marketing and sales activities in that country. During 2004, the
Company increased its ownership interest by approximately 5% to 99% in such
subsidiary by acquiring shares of such subsidiary previously held by certain of
its other stockholders for an aggregate of $575,000.
Translation of foreign currencies. Assets and liabilities of subsidiaries
whose functional currency is other than the U.S. dollar are translated at
year-end rates of exchange and revenues and expenses are translated at average
exchange rates prevailing during the year. Resulting translation adjustments are
accumulated in stockholders' equity as part of accumulated other comprehensive
income, net of related deferred income taxes and minority interest. Currency
transaction gains and losses are recognized in income currently.
In 2002, a $6.3 million currency transaction gain is classified as a
component of other income (expense) in the accompanying Consolidated Statement
of Income. Such gain related to the extinguishment of certain intercompany
indebtedness of NL. Prior to June 28, 2002, Kronos International, Inc. ("KII"),
a wholly-owned subsidiary of the Company which conducts the Company's operations
in Europe, had certain intercompany indebtedness payable to Kronos, a portion of
which was denominated in U.S. dollars, and a portion of which was denominated in
euros. Through June 19, 2002, such intercompany indebtedness was deemed to be of
a long-term nature for which settlement was not planned or anticipated in the
foreseeable future, and in accordance with GAAP, the foreign currency
transaction gains and losses related to such intercompany indebtedness were not
recognized in net income, but instead were reported as part of accumulated other
comprehensive income. On June 19, 2002, when the purchase agreement was entered
into in connection with KII's 2002 issuance of the KII Senior Secured Notes
discussed in Note 8, the expectation that such intercompany indebtedness was of
a long-term nature was no longer applicable, as KII had stated that it intended
to use a portion of the net proceeds of such offering to repay such intercompany
indebtedness owed to Kronos. Accordingly, from the time period of June 19, 2002
(the date the purchase agreement related to KII Senior Secured Notes was
executed) until June 28, 2002 (the closing date for the 2002 issuance of the KII
Senior Secured Note offering, and the date such intercompany indebtedness was
repaid), the foreign currency transaction gains and losses related to such
intercompany indebtedness during such time period, which aggregated a net gain
of $6.3 million, was recognized in net income in accordance with GAAP.
Derivatives and hedging activities. Derivatives are recognized as either
assets or liabilities and measured at fair value in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended. The accounting for changes in
fair value of derivatives depends upon the intended use of the derivative, and
such changes are recognized either in net income or other comprehensive income.
As permitted by the transition requirements of SFAS No. 133, the Company has
exempted from the scope of SFAS No. 133 all host contracts containing embedded
derivatives that were issued or acquired prior to January 1, 1999.
Cash and cash equivalents. Cash equivalents include bank time deposits and
U.S. Treasury securities purchased under short-term agreements to resell with
original maturities of three months or less.
Restricted marketable debt securities. Restricted marketable debt
securities are primarily invested in corporate debt securities, and include
amounts restricted in accordance with applicable Norwegian law regarding certain
requirements of the Company's Norwegian defined benefit pension plans ($2.6
million and $2.9 million at December 31, 2003 and 2004, 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.
Expenditures for maintenance, repairs and minor renewals are expensed;
expenditures for major improvements are capitalized. The Company performs
planned major maintenance activities during the year. Repair and maintenance
costs estimated to be incurred in connection with planned major maintenance
activities are accrued in advance and are included in cost of sales. Accrued
repair and maintenance costs, included in other current liabilities and
consisting primarily of materials and supplies, was $6.3 million and $5.4
million at December 31, 2003 and 2004, 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 2002, 2003 or 2004.
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 property and equipment in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which among other things provided
certain implementation guidance in relation to prior GAAP. See Note 18.
Long-term debt. Long-term debt is stated net of any unamortized original
issue premium or discount. Amortization of deferred financing costs and any
premium or discount associated with the issuance of indebtedness, all included
in interest expense, is computed by the interest method over the term of the
applicable issue.
Employee benefit plans. Accounting and funding policies for retirement
plans are described in Note 14.
Income taxes. Prior to December 2003, Kronos and its qualifying
subsidiaries were members of NL's consolidated U.S. federal income tax group
(the "NL Tax Group"), and the NL Tax Group was included in the consolidated U.S.
federal tax return of Contran (the "Contran Tax Group"). As a member of the NL
Tax Group, the Company is a party to a tax sharing agreement (the "NL Tax
Agreement"). As a member of the Contran Tax Group, NL was a party to a separate
tax sharing agreement (the "Contran Tax Agreement"). The Contran Tax Agreement
provides that NL and its qualifying subsidiaries, including Kronos, compute
provisions for U.S. income taxes on a separate-company basis using the tax
elections made by Contran. Pursuant to the NL Tax Agreement and using the tax
elections made by Contran, Kronos made payments to or received payments from NL
in amounts it would have paid to or received from the U.S. Internal Revenue
Service had it not been a member of NL's consolidated tax group but instead was
a separate taxpayer. Refunds are limited to amounts previously paid under the NL
Tax Agreement. The Company made net payments to NL under the terms of the NL Tax
Agreement of $5.3 million in 2002 and $10.7 million in 2003, and received $1.2
million from NL in 2004. See Note 13.
Effective December 2003, following NL's distribution of 48.8% of the
outstanding shares of Kronos common stock to NL stockholders, Kronos and its
qualifying subsidiaries ceased being members of the NL Tax Group, but Kronos and
its qualifying subsidiaries remained as members of the Contran Tax Group. Kronos
entered into a new tax sharing agreement with Valhi and Contran, which contains
similar terms to the NL Tax Agreement. The Company made net payments to Valhi of
$.3 million in 2004 related to such tax agreement. Kronos is also included in
Contran's consolidated unitary state income tax returns in certain qualifying
U.S. jurisdictions. The terms of the Contran Tax Agreement also apply to state
tax payments in these jurisdictions.
Deferred income tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the income tax and
financial reporting carrying amounts of assets and liabilities, including
investments in the Company's subsidiaries and affiliates who are not members of
the Contran Tax Group and undistributed earnings of foreign subsidiaries which
are not deemed to be permanently reinvested. Earnings of foreign subsidiaries
deemed to be permanently reinvested aggregated $610 million at December 31, 2003
and $638 million at December 31, 2004. The Company periodically evaluates its
deferred tax assets in the various taxing jurisdictions in which it operates and
adjusts any related valuation allowance based on the estimate of the amount of
such deferred tax assets that the Company believes does not meet the
"more-likely-than-not" recognition criteria.
Net sales. Sales are recorded when products are shipped and title and other
risks and rewards of ownership have passed to the customer, or when services are
performed. Shipping terms of products shipped are generally FOB shipping point,
although in some instances shipping terms are FOB destination point (for which
sales are not recognized until the product is received by the customer). Amounts
charged to customers for shipping and handling are included in net sales. Sales
are stated net of price, early payment and distributor discounts and volume
rebates.
Inventories and cost of sales. Inventories are stated at the lower of cost
(principally average cost) or market, net of allowance for slow-moving
inventories. Amounts are removed from inventories at average cost. Cost of sales
includes costs for materials, packing and finishing, utilities, salary and
benefits, maintenance and depreciation.
Selling, general and administrative expense; shipping and handling costs.
Selling, general and administrative expense include costs related to marketing,
sales, distribution, shipping and handling, research and development, legal, and
administrative functions such as accounting, treasury and finance, and includes
costs for salaries and benefits, travel and entertainment, promotional materials
and professional fees. Shipping and handling costs are included in selling,
general and administrative expense and were $51 million in 2002, $63 million in
2003 and $70 million in 2004. Advertising costs are expensed as incurred and
were $1 million in each of 2002, 2003 and 2004. Research, development and
certain sales technical support costs are expensed as incurred and approximated
$6 million in 2002, $7 million in 2003 and $8 million in 2004.
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 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 $2.3 million in 2002, $1.0 million in 2003 and $2.8
million in 2004.
The following table presents what the Company's consolidated net income,
and related per share amounts, would have been in 2002, 2003 and 2004 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,
-----------------------------------------
2002 2003 2004
---- ---- ----
(In millions, except
per share amounts)
Net income as reported $ 66.3 $ 87.5 $ 314.9
Adjustments, net of applicable income
tax effects and minority interest:
Stock-based employee compensation expense
determined under APBO No. 25 1.5 .7 1.8
Stock-based employee compensation expense
determined under SFAS No. 123 (.7) (.3) (.1)
------ ------- -------
Pro forma net income $ 67.1 $ 87.9 $ 316.6
====== ======= =======
Basic and diluted earnings per share:
As reported $ 1.35 $ 1.79 $ 6.43
Pro forma $ 1.37 $ 1.80 $ 6.47
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, 2003 and 2004, the net assets of non-U.S.
subsidiaries included in consolidated net assets approximated $193 million and
$293 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,
-----------------------------------------
2002 2003 2004
---- ---- ----
(In thousands)
Geographic areas
Net sales - point of origin:
Germany $ 404,299 $ 510,105 $ 576,138
United States 291,823 310,694 449,351
Canada 157,773 173,297 170,309
Belgium 123,760 150,728 186,445
Norway 111,811 131,457 144,492
Other 89,560 110,358 124,784
Eliminations (303,838) (378,462) (522,919)
---------- ---------- ----------
$ 875,188 $1,008,177 $1,128,600
========== ========== ==========
Net sales - point of destination:
Europe $ 456,834 $ 567,496 $ 666,701
United States 271,865 296,643 315,867
Canada 53,371 53,170 47,643
Latin America 19,970 15,920 24,915
Asia 47,549 49,020 47,261
Other 25,599 25,928 26,213
---------- ---------- ----------
$ 875,188 $1,008,177 $1,128,600
========== ========== ==========
December 31,
------------------------
2003 2004
---- ----
(In thousands)
Identifiable assets -
net property and equipment:
Germany $ 252,411 $ 269,922
Canada 63,623 68,048
Belgium 64,895 68,314
Norway 50,811 57,808
Other 3,227 2,798
--------- ---------
$ 434,967 $ 466,890
========= =========
Note 3 - Accounts and other receivables:
December 31,
------------------------
2003 2004
---- ----
(In thousands)
Trade receivables $ 146,971 $ 176,332
Insurance claims 58 32
Recoverable VAT and other receivables 12,103 16,332
Allowance for doubtful accounts (2,920) (2,377)
--------- ---------
$ 156,212 $ 190,319
========= =========
Note 4 - Inventories
December 31,
------------------------
2003 2004
---- ----
(In thousands)
Raw materials $ 61,959 $ 45,962
Work in progress 19,855 16,612
Finished products 147,270 130,385
Supplies 36,936 40,899
--------- ---------
$ 266,020 $ 233,858
========= =========
Note 5 - Other noncurrent assets:
December 31,
------------------------
2003 2004
---- ----
(In thousands)
Deferred financing costs, net $ 10,417 $ 10,921
Restricted marketable debt securities 2,586 2,877
Unrecognized net pension obligation 13,747 13,518
Other 1,290 5,024
--------- ---------
$ 28,040 $ 32,340
========= =========
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 Holdings LLC, which through its
subsidiaries, is wholly-owned by Huntsman Holdings LLC. LPC owns and operates a
chloride-process TiO2 plant in Lake Charles, Louisiana.
KLA and Tioxide are both required to purchase one-half of the TiO2 produced
by LPC. LPC operates on a break-even basis and, accordingly, the Company reports
no equity in earnings of LPC. Each owner's acquisition transfer price for its
share of the TiO2 produced is equal to its share of the joint venture's
production costs and interest expense, if any. Kronos' share of net costs is
reported as cost of sales as the related TiO2 acquired from LPC is sold.
Distributions from LPC, which generally relate to excess cash generated by LPC
from its non-cash production costs, and contributions to LPC, which generally
relate to cash required by LPC when it builds working capital, are reported as
part of cash generated by operating activities in the Company's Consolidated
Statements of Cash Flows. Such distributions are reported net of any
contributions made to LPC during the periods. Net distributions of $8.0 million
in 2002, $.9 million in 2003 and $8.6 million in 2004 are stated net of
contributions of $14.2 million in 2002, $13.1 million in 2003 and $15.6 million
in 2004.
LPC made net cash distributions of $15.9 million in 2002, $1.8 million in
2003 and $17.2 million in 2004, equally split between the partners.
Summary balance sheets of LPC are shown below:
December 31,
------------------------
2003 2004
---- ----
(In thousands)
ASSETS
Current assets $ 57,028 $ 58,121
Property and equipment, net 226,971 211,721
--------- ---------
$ 283,999 $ 269,842
========= =========
LIABILITIES AND PARTNERS' EQUITY
Other liabilities, primarily current $ 23,229 $ 26,590
Partners' equity 260,770 243,252
--------- ---------
$ 283,999 $ 269,842
========= =========
Summary income statements of LPC are shown below:
Years ended December 31,
-----------------------------------------
2002 2003 2004
---- ---- ----
(In thousands)
Revenues and other income:
Kronos $ 92,428 $ 101,293 $ 104,849
Tioxide 93,833 101,619 105,543
Interest 53 73 54
---------- ---------- ----------
186,314 202,985 210,446
---------- ---------- ----------
Cost and expenses:
Cost of sales 185,946 201,947 209,983
General and administrative 368 398 463
---------- ---------- ----------
186,314 202,345 210,446
---------- ---------- ----------
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,
------------------------
2003 2004
---- ----
(In thousands)
Accounts payable $ 97,446 $ 91,713
Employee benefits 31,732 36,861
Other 37,486 41,435
--------- ---------
$ 166,664 $ 170,009
========= =========
Note 8 - Long-term debt:
December 31,
------------------------
2003 2004
---- ----
(In thousands)
Kronos International, Inc. and subsidiaries:
8.875% Senior Secured Notes $ 356,136 $ 519,225
Bank credit facility - 13,622
Other 603 348
--------- ---------
356,739 533,195
Less current maturities 288 13,792
--------- ---------
$ 356,451 $ 519,403
========= =========
In June 2002, KII issued at par value euro 285 million principal amount
($280 million when issued) of its 8.875% Senior Secured Notes due 2009, and in
November 2004 KII issued at 107% of par an additional euro 90 million principal
amount ($130 million when issued) of the KII Senior Secured Notes (collectively
the "Notes"). The Notes are collateralized by a pledge of 65% of the common
stock or other ownership interests of certain of KII's first-tier operating
subsidiaries. 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, 2004, the estimated market price of the
Notes was approximately euro 1,075 per euro 1,000 principal amount (2003 - euro
1,000 per euro 1,000 principal amount). At December 31, 2004, the carrying
amount of the Notes includes euro 6.2 million ($8.4 million) of unamortized
premium associated with the November 2004 issuance.
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 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, 2004, euro 10 million
($13.6 million) was outstanding under the European Credit Facility at an
interest rate of 3.85%, and the equivalent of $92.6 million was available for
additional borrowing by the subsidiaries.
In September 2002, certain of the Company's U.S. subsidiaries entered into
a $50 million revolving credit facility (nil outstanding at December 31, 2004)
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, 2004, no amounts were
outstanding and $38 million was available for borrowing under the facility.
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. At December 31, 2004, no amounts were
outstanding and the equivalent of $8 million was available for borrowing under
the facility.
Under the cross-default provisions of the Notes, the Notes may be
accelerated prior to their stated maturity if KII or any of KII's subsidiaries
default under any other indebtedness in excess of $20 million due to a failure
to pay such other indebtedness at its due date (including any due date that
arises prior to the stated maturity as a result of a default under such other
indebtedness). Under the cross-default provisions of the European Credit
Facility, any outstanding borrowings under the European Credit Facility may be
accelerated prior to their stated maturity if the Borrowers or KII default under
any other indebtedness in excess of euro 5 million due to a failure to pay such
other indebtedness at its due date (including any due date that arises prior to
the stated maturity as a result of a default under such other indebtedness).
Under the cross-default provisions of the U.S. Credit Facility, any outstanding
borrowing under such facility may be accelerated prior to their stated maturity
in the event of the bankruptcy of Kronos. The Canadian revolving credit facility
contains no cross-default provisions. The European, U.S. and Canadian revolving
credit facilities each contain provisions that allow the lender to accelerate
the maturity of the applicable facility in the event of a change of control, as
defined, of the applicable borrower. In the event any of these cross-default or
change-of-control provisions become applicable, and such indebtedness is
accelerated, Kronos would be required to repay such indebtedness prior to their
stated maturity.
Aggregate maturities of long-term debt at December 31, 2004 are shown in
the table below.
Years ending December 31, Amount
------------------------- --------------
(In thousands)
2005 $ 13,792
2006 159
2007 19
2008 -
2009 519,225
20010 and thereafter -
---------
$ 533,195
=========
Restrictions. Certain of the credit facilities described above require the
respective borrower to maintain minimum levels of equity, require the
maintenance of certain financial ratios, limit dividends and additional
indebtedness and contain other provisions and restrictive covenants customary in
lending transactions of this type. At December 31, 2004, the restricted net
assets of consolidated subsidiaries approximated $158 million. At December 31,
2004, there were no restrictions on the Company's ability to pay dividends.
Note 9 - Other noncurrent liabilities:
December 31,
------------------------
2003 2004
---- ----
(In thousands)
Insurance claims and expenses $ 1,673 $ 1,927
Employee benefits 4,849 5,107
Asset retirement obligations 766 958
Other 7,439 9,415
--------- ---------
$ 14,727 $ 17,407
========= =========
The asset retirement obligations are discussed in Note 18.
Note 10 - Notes and payable to affiliates:
Notes payable to affiliates. In December 2003, immediately prior to NL's
distribution of approximately 48.8% of the outstanding shares of Kronos' common
stock to NL stockholders, the Company distributed a $200 million dividend to NL
in the form of a long-term note payable. The $200 million long-term note payable
to NL was unsecured and bore interest at 9% per annum, with interest payable
quarterly and all principal due in 2010.
On September 24, 2004, NL completed the acquisition of the shares of common
stock of CompX International, Inc. previously held by Valhi and Valcor, Inc., a
wholly-owned subsidiary of Valhi. The purchase price for these shares was paid
by NL's transfer to Valhi and Valcor of an aggregate $168.6 million of NL's $200
million long-term note receivable from Kronos. In October 2004, Valcor
distributed its note receivable from Kronos to Valhi, and subsequently Kronos
prepaid $100.0 million on the note payable to Valhi principally using available
cash on hand. In December 2004 all remaining balances due to NL, Valhi and
Valcor were prepaid and the related notes were canceled.
In 2003, the Company repaid all amounts outstanding under the terms of a
prior $55 million revolving credit facility with NL Environmental Management
Services, Inc. ("EMS"), a majority-owned subsidiary of NL and the revolving
credit agreement with EMS was terminated on June 30, 2003.
Note 11 - Common stock and notes receivable from affiliates:
NL common stock options held by employees of the Company. Certain employees
of the Company have been granted nonqualified options to purchase NL common
stock under the terms of certain option plans sponsored by NL. Generally, the
stock options are granted at a price equal to or greater than 100% of the market
price of NL's common stock at the date of grant, vest over a five-year period
and expire ten years from the date of grant. Following NL's distribution of
approximately 48.8% of the outstanding shares of Kronos' common stock to NL
stockholders, the exercise prices for all options to purchase NL common stock
were adjusted.
Changes in outstanding options to purchase NL common stock granted to
certain employees of the Company are summarized in the table below.
Amount Weighted-
Exercise payable average
price per upon exercise
Shares share exercise price
------ ---------- -------- ----------
(In thousands, except per share amounts)
Outstanding at December 31, 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
Exercised (276) 0.06-11.49 (2,222) 8.04
Canceled (61) 3.56-08.63 (370) 6.14
---- ------------ -------
Outstanding at December 31, 2004 233 $ 2.66-13.34 $ 2,297 $ 9.86
==== ============ =======
At December 31, 2002, 2003 and 2004 options to purchase 240,400, 351,900
and 117,500 shares, respectively, were exercisable, and options to purchase
75,200 shares become exercisable in 2005. Of the exercisable options, options to
purchase 117,500 shares at December 31, 2004 had exercise prices less than NL's
December 31, 2004 quoted market price of $22.10 per share. Outstanding options
at December 31, 2004 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, 2004 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 12/31/04 life price 12/31/04 price
--------------------- ----------- ------------ ---------- ----------- -----------
$ 2.66 - $ 3.25 8,550 3.8 $ 2.74 8,550 $ 2.74
5.63 60,350 5.0 5.63 25,550 5.63
9.34 - 13.34 164,200 5.4 11.78 83,400 12.07
-------- --------
233,100 5.4 $ 9.86 117,500 $ 9.99
======== ========
Long-term incentive compensation plan. Kronos has a long-term incentive
compensation plan that provides for the discretionary grant of, among other
things, qualified incentive stock options, nonqualified stock options,
restricted common stock, stock awards and stock appreciation rights. Up to
150,000 shares of Kronos common stock may be issued pursuant to this plan. As of
December 31, 2004, no options had been granted pursuant to this plan, and
147,000 shares were available for future grants. During the year ended December
31, 2004, an aggregate of 3,000 shares of Kronos common stock were awarded
pursuant to this plan to members of the Company's board of directors.
Dividends. Subsequent to the December 8, 2003 distribution, See Note 1,
Kronos paid four quarterly dividends aggregating $1.00 per share in 2004.
Notes receivable from affiliates - contra equity. Certain prior 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
were 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.
During 2003, NL repaid all amounts outstanding under a prior revolving
credit facility with the Company and such facility was terminated in June 2003.
The Company periodically converted interest receivable from affiliates to
notes receivable from affiliates. For the year ended 2002, the interest
transferred to notes receivable from affiliates totaled $20.6 million and were
nil in 2003 and 2004.
Cash flows related to such loans made to affiliates included in contra
equity are reflected in "Other capital transactions with affiliates, net" in the
accompanying Consolidated Statements of Cash Flows.
Other capital transactions. In December 2004, NL sold certain shares of
Kronos common stock in market transactions. Earlier in 2004, and within six
months of such sales by NL, Valhi purchased shares of Kronos common stock in
market transactions. Pursuant to Section 16(b) of the Securities Exchange Act of
1934, Valhi remitted the short swing profit resulting from these purchases and
sales of approximately $600,000 to the Company, which amount, net of taxes, has
been recorded by the Company as a capital contribution.
Note 12 - Other income:
Years ended December 31,
-----------------------------------------
2002 2003 2004
---- ---- ----
(In thousands)
Contract dispute settlement $ - $ - $6,289
Other income 459 490 426
------ ------ ------
$ 459 $ 490 $6,715
====== ====== ======
The contract dispute settlement relates to the Company's settlement with a
customer. As part of the settlement, the customer agreed to make payments to the
Company through 2007 aggregating $7.3 million. The $6.3 million gain recognized
in 2004 represents the present value of the future payments to be paid by the
customer to the Company. Of such $7.3 million, $1.5 million was paid to Kronos
in the second quarter of 2004, $1.75 million is due in each of the second
quarter of 2005 and 2006 and $2.25 million is due in the second quarter of 2007.
At December 31, 2004, the present value of the remaining amounts due to be paid
to Kronos aggregated approximately $5.1 million, of which $1.7 million is
included in accounts and other receivables and $3.4 million is included in other
noncurrent assets.
Note 13 - Income taxes:
Years ended December 31,
-----------------------------------------
2002 2003 2004
---- ---- ----
(In millions)
Pre-tax income:
U.S. $ 24.3 $ 13.2 $ 3.3
Non-U.S. 67.5 86.1 61.2
------ ------ -------
$ 91.8 $ 99.3 $ 64.5
====== ====== =======
Expected tax expense, at U.S.
federal statutory income
tax rate of 35% $ 32.1 $ 34.8 $ 22.6
Non-U.S. tax rates (6.7) (1.1) .2
Incremental U.S. tax and rate
differences on equity in earnings
of non-tax group companies .5 1.9 (.1)
Change in deferred income tax
valuation allowance, net (1.8) (6.7) (280.7)
Nondeductible expenses 2.9 2.8 4.3
Change in Belgian income tax law (2.3) - -
U.S. state income taxes, net - - .2
NL tax contingency reserve
adjustment, net .2 14.8 (3.1)
Refund of prior year income taxes - (38.0) (2.5)
Adjustment of prior year taxes - - (.1)
Other, net .6 3.2 8.8
------ ------ -------
$ 25.5 $ 11.7 $(250.4)
====== ====== =======
Years ended December 31,
-----------------------------------------
2002 2003 2004
---- ---- ----
(In millions)
Components of income tax expense
(benefit):
Currently payable (refundable):
U.S. federal and state $ 4.3 $ 10.5 $ .8
Non-U.S. 10.4 (35.3) 12.1
------ ------ -------
14.7 (24.8) 12.9
------ ------ -------
Deferred income taxes (benefit):
U.S. federal and state 5.2 (1.0) 11.4
Non-U.S. 5.6 37.5 (274.7)
------ ------ -------
10.8 36.5 (263.3)
------ ------ -------
Comprehensive provision for
income taxes allocable to:
Net income $ 25.5 $ 11.7 $(250.4)
Paid in capital - - .2
Other comprehensive income -
pension liabilities (2.9) (11.3) (8.3)
------ ------ -------
$ 22.6 $ .4 $(258.5)
====== ====== =======
The components of the net deferred tax liability at December 31, 2003 and
2004, and changes in the deferred income tax valuation allowance during the past
three years, are summarized in the following tables. At December 31, 2003,
substantially all of the deferred tax valuation allowance related to tax
jurisdictions in Germany.
December 31,
--------------------------------------------------
2003 2004
------------------------ -----------------------
Assets Liabilities Assets Liabilities
------- ------------ ------ -----------
(In millions)
Tax effect of temporary differences
related to:
Inventories $ 1.5 $ (4.1) $ 2.0 $ (5.4)
Property and equipment 46.0 (62.7) 37.7 (62.4)
Accrued Postretirement benefits
other than pension ("OPEB") costs 4.3 - 4.2 -
Accrued (prepaid) pension cost 15.9 (33.5) 22.4 (40.4)
Other accrued liabilities and
deductible differences 19.8 - 52.9 -
Other taxable differences - (71.3) - (49.8)
Investments in subsidiaries and
affiliates not members of
the Contran Tax Group - - 1.9 -
Tax on unremitted earnings of
non-U.S. subsidiaries - (4.3) - (4.5)
Tax loss and tax credit carryforwards 137.3 - 218.1 -
Valuation allowance (162.7) - - -
------ ------- ------ -------
Adjusted gross deferred tax assets
(liabilities) 62.1 (175.9) 339.2 (162.5)
Netting of items by tax jurisdiction (52.7) 52.7 (99.7) 99.7
------ ------- ------ -------
9.4 (123.2) 239.5 (62.8)
Less net current deferred tax
asset (liability) 2.8 (3.4) 1.2 (2.7)
------ ------- ------ -------
Net noncurrent deferred tax asset
(liability) $ 6.6 $(119.8) $238.3 $ (60.1)
====== ======= ====== =======
Years ended December 31,
-----------------------------------------
2002 2003 2004
---- ---- ----
(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 $(1.8) $ (6.7) $(280.7)
Foreign currency translation 21.6 28.2 (3.0)
Offset to the change in gross deferred
income tax assets due principally to
redeterminations of certain tax attributes
and implementation of certain tax
planning strategies 12.2 (12.5) 121.0
----- ------- -------
$32.0 $ 9.0 $(162.7)
===== ======= =======
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 the first quarter of 2003, KII 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 KII and its German operating
subsidiary of euro 26.9 million ($32.1 million), and the Company recognized the
benefit for these net funds in its 2003 results of operations. For the year
ended December 31, 2004, the Company recognized a net refund of euro 2.5 million
($3.1 million) related to additional net interest which has accrued on the
outstanding refund amount. Through December 2004, KII and its German operating
subsidiary had received net refunds of euro 35.6 million ($44.7 million when
received). All refunds relating to the periods 1990 to 1997 were received by
December 31, 2004. In addition to the refunds for the 1990 to 1997 periods, the
court ruling also resulted in a refund of 1999 income taxes and interest, and
the Company received euro 21.5 million ($24.6 million) in 2003.
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, 2004). 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 9 million ($13 million). The Company
believes the proposed assessment is substantially without merit, and the
Company has filed a written response.
o The Norwegian tax authorities have notified the Company of their intent to
assess tax deficiencies of approximately kroner 12 million ($2 million at
December 31, 2004) relating to the years 1998 to 2000. The Company has
objected to this proposed assessment.
o The Company has received a preliminary tax assessment from the Canadian tax
authorities related to the years 1998 and 1999 proposing tax deficiencies
of Cdn. $11.4 million ($7.7 million). The Company is in the process of
filing a protest and believes a significant portion of the assessment is
without merit.
No assurance can be given that these tax matters will be resolved in the
Company's favor in view of the inherent uncertainties involved in settlement
initiatives, court and tax proceedings. The Company believes that it has
provided adequate accruals for additional taxes and related interest expense
which may ultimately result from all such examinations and believes that the
ultimate disposition of such examinations should not have a material adverse
effect on its consolidated financial position, results of operations or
liquidity.
At December 31, 2003, Kronos had a significant amount of net operating loss
carryforwards for German corporate and trade tax purposes, all of which have no
expiration date. These net operating loss carryforwards were generated by KII,
principally during the 1990's when KII had a significantly higher level of
outstanding indebtedness than is currently outstanding. For financial reporting
purposes, however, the benefit of such net operating loss carryforwards had not
previously been recognized because Kronos did not believe they met the
"more-likely-than-not" recognition criteria, and accordingly Kronos had a
deferred income tax asset valuation allowance offsetting the benefit of such net
operating loss carryforwards and Kronos' other tax attributes in Germany. KII
had generated positive taxable income in Germany for both German corporate and
trade tax purposes since 2000, and starting with the quarter ended December 31,
2002 and for each quarter thereafter, KII had cumulative taxable income in
Germany for the most recent twelve quarters. However, offsetting this positive
evidence was the fact that prior to the end of 2003, Kronos believed there was
significant uncertainty regarding its ability to utilize such net operating loss
carryforwards under German tax law and, principally because of the uncertainty
caused by this negative evidence, Kronos had concluded the benefit of the net
operating loss carryforwards did not meet the "more-likely-than-not" criteria.
By the end of 2003, and primarily as a result of a favorable German court ruling
in 2003 and the procedures Kronos had completed during 2003 with respect to the
filing of certain amended German tax returns (as discussed below), Kronos had
concluded that the significant uncertainty regarding its ability to utilize such
net operating loss carryforwards under German tax law had been eliminated.
However, at the end of 2003, Kronos believed at that time that it would generate
a taxable loss in Germany during 2004. Such expectation was based primarily upon
then-current levels of prices for TiO2, and the fact that Kronos was
experiencing a downward trend in its TiO2 selling prices and Kronos did not have
any positive evidence to indicate that the downward trend would improve. If the
price trend continued downward throughout all of 2004 (which was a possibility
given Kronos' prior experience), Kronos would likely have a taxable loss in
Germany for 2004. If the downward trend in prices had abated, ceased, or
reversed at some point during 2004, then Kronos would likely have taxable income
in Germany during 2004. Accordingly, Kronos continued to conclude at the end of
2003 that the benefit of the German net operating loss carryforwards did not
meet the "more-likely-than-not" criteria and that it would not be appropriate to
reverse the deferred income tax asset valuation allowance, given the likelihood
that Kronos would generate a taxable loss in Germany during 2004. The
expectation for a taxable loss in Germany continued through the end of the first
quarter of 2004. By the end of the second quarter of 2004, however, Kronos' TiO2
selling prices had started to increase, and Kronos believed its selling prices
would continue to increase during the second half of 2004 after Kronos and its
major competitors announced an additional round of price increases. The fact
that Kronos' selling prices started to increase during the second quarter of
2004, combined with the fact that Kronos and its competitors had announced
additional price increases (which based on past experience indicated to Kronos
that some portion of the additional price increases would be realized in the
marketplace), provided additional positive evidence that was not present at
December 31, 2003. Consequently, Kronos' revised projections now reflected
taxable income for Germany in 2004 as well as 2005. Accordingly, based on all
available evidence, including the fact that (i) KII had generated positive
taxable income in Germany since 2000, and starting with the quarter ended
December 31, 2002 and for each quarter thereafter, KII had cumulative taxable
income in Germany for the most recent twelve quarters, (ii) Kronos was now
projecting positive taxable income in Germany for 2004 and 2005 and (iii) the
German net operating loss carryforwards have no expiration date, Kronos
concluded that the benefit of the net operating loss carryforwards and other
German tax attributes now met the "more-likely-than-not" recognition criteria,
and that reversal of the deferred income tax asset valuation allowance related
to Germany was appropriate. Given the magnitude of the German net operating loss
carryforwards and the fact that current provisions of German law limit the
annual utilization of net operating loss carryforwards to 60% of taxable income
after the first euro 1 million of taxable income, Kronos believes it will take
several years to fully utilize the benefit of such loss carryforwards. However,
given the number of years for which Kronos has now generated positive taxable
income in Germany, combined with the fact that the net operating loss
carryforwards were generated during a time when KII had a significantly higher
level of outstanding indebtednesss than it currently has outstanding, and the
fact that the net operating loss carryforwards have no expiration date, Kronos
concluded it was now appropriate to reverse all of the valuation allowance
related to the net operating loss carryforwards because the benefit of such
operating loss carryforwards now meet the "more-likely-than-not" recognition
criteria. Under applicable GAAP related to accounting from income taxes at
interim periods, a change in estimate at an interim period resulting in a
decrease in the valuation allowance is segregated into two components, the
portion related to the remaining interim periods of the current year and the
portion related to all future years. The portion of the valuation allowance
reversal related to the former is recognized over the remaining interim periods
of the current year, and the portion of the valuation allowance related to the
latter is recognized at the time the change in estimate is made. Accordingly,
Kronos has recognized a $280.7 million income tax benefit in 2004 related to the
complete reversal of such deferred income tax asset valuation allowance
attributable to Kronos' income tax attributes in Germany (principally the net
operating loss carryforwards). Of such $280.7 million, (i) $8.7 million relates
primarily to the utilization of the German net operating loss carryforwards
during the first six months of 2004, the benefit of which had previously not met
the "more-likely-than-not" recognition criteria, (ii) $268.6 million relates to
the valuation allowance reversal recognized as of June 30, 2004 and (iii) $3.4
million relates to the valuation allowance reversal recognized during the last
six months of 2004.
At December 31, 2004, Kronos had the equivalent of $671 million and $232
million of net operating loss carryforwards for German corporate and trade tax
purposes, respectively, all of which have no expiration date.
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law contains several provisions that could impact the Company.
These provisions provide for, among other things, a special deduction from U.S.
taxable income equal to a stipulated percentage of qualified income from
domestic production activities (as defined) beginning in 2005, and a special 85%
dividends received deduction for certain dividends received from controlled
foreign corporations. Both of these provisions are complex and subject to
numerous limitations. The Company is still studying the new law, including the
technical provisions related to the two complex provisions noted above. The
effect on the Company of the new law, if any, has not yet been determined, in
part because the Company has not definitively determined whether its operations
qualify for the special deduction or whether it would benefit from the special
dividends received deduction. If the Company determines it qualifies for the
special deduction, the tax benefit of such special deduction would be recognized
in the period earned. With respect to the special dividends received deduction
for certain dividends received from controlled foreign corporations, the Company
will likely not be able to complete its evaluation of whether it would benefit
from the special dividends received deduction until sometime after the U.S.
government has issued clarifying regulations regarding this provision of the
Act, the timing for the issuance of which is not known. The aggregate amount of
unremitted earnings that is potentially subject to the special dividends
received deduction is approximately $638 million at December 31, 2004. The
Company is unable to reasonably estimate a range of income tax effects if such
unremitted earnings would be repatriated and become eligible for the special
dividends received deduction, as the calculation would be extremely complex.
Note 14 - Employee benefit plans:
Defined benefit plans. The Company maintains various defined benefit
pension plans. Non-U.S. employees are covered by plans in their respective
countries and a majority of U.S. employees are eligible to participate in a
contributory savings plan. Variances from actuarially assumed rates will result
in increases or decreases in accumulated pension obligations, pension expense
and funding requirements in future periods. At December 31, 2004, the Company
currently expects to contribute the equivalent of approximately $9 million to
all of its defined benefit pension plans during 2005.
The funded status of the Company's defined benefit pension plans, the
components of net periodic defined benefit pension cost and the rates used in
determining the actuarial present value of benefit obligations are presented in
the tables below. The Company uses a September 30th measurement date for its
defined benefit pension plans.
Years ended December 31,
-------------------------
2003 2004
---- ----
(In thousands)
Change in projected benefit obligations ("PBO"):
Benefit obligations at beginning of the year $ 254,459 $ 325,960
Service cost 5,127 6,758
Interest cost 15,373 17,403
Participant contributions 1,346 1,409
Plan amendments 3,200 -
Actuarial losses 21,919 5,176
Change in foreign exchange rates 42,770 30,163
Benefits paid (18,234) (18,006)
--------- ---------
Benefit obligations at end of the year $ 325,960 $ 368,863
========= =========
Change in plan assets:
Fair value of plan assets at beginning of the year $ 189,936 $ 203,284
Actual return on plan assets (10,249) 19,126
Employer contributions 13,586 17,089
Participant contributions 1,346 1,409
Change in foreign exchange rates 26,899 19,571
Benefits paid (18,234) (18,006)
--------- ---------
Fair value of plan assets at end of year $ 203,284 $ 242,473
========= =========
Funded status at end of the year:
Plan assets less than PBO $(122,676) $(126,390)
Unrecognized actuarial losses 115,807 125,221
Unrecognized prior service cost 8,566 8,757
Unrecognized net transition obligations 5,275 5,019
--------- ---------
$ 6,972 $ 12,607
========= =========
Amounts recognized in the balance sheet:
Unrecognized net pension obligations $ 13,747 $ 13,518
Accrued pension costs:
Current (7,987) (8,696)
Noncurrent (68,161) (61,375)
Accumulated other comprehensive income 69,373 69,160
--------- ---------
$ 6,972 $ 12,607
========= =========
Years ended December 31,
-----------------------------------------
2002 2003 2004
---- ---- ----
(In thousands)
Net periodic pension cost:
Service cost benefits $ 4,278 $ 5,127 $ 6,758
Interest cost on PBO 13,641 15,373 17,403
Expected return on plan assets (12,778) (14,529) (15,240)
Amortization of prior service cost 307 354 569
Amortization of net transition obligations 570 793 657
Recognized actuarial losses 1,126 1,245 3,015
-------- -------- --------
$ 7,144 $ 8,363 $ 13,162
======== ======== ========
The weighted-average rate assumptions used in determining the actuarial
present value of benefit obligations as of December 31, 2003 and 2004 are
presented in the table below. Such weighted-average rates were determined using
the projected benefit obligations at each date.
December 31,
------------------------
2003 2004
---- ----
Discount rate 5.5% 5.2%
Increase in future compensation levels 2.8% 2.8%
The weighted-average rate assumptions used in determining the net periodic
pension cost for 2002, 2003 and 2004 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,
----------------------------------------
2002 2003 2004
---- ---- ----
Discount rate 6.2% 5.9% 5.5%
Increase in future compensation levels 2.8% 2.6% 2.8%
Long-term return on plan assets 7.5% 7.2% 7.1%
As of December 31, 2004, the accumulated benefit obligations for all
defined benefit pension plans was approximately $317 million (2003 - $290
million). At December 31, 2004, the projected benefit obligations for all
defined benefit pension plans was comprised of $14 million related to U.S. plans
and $355 million related to non-U.S. plans (2003 - $13 million and $313 million,
respectively).
At December 31, 2004, the fair value of plan assets for all defined benefit
pension plans was comprised of $13 million related to U.S. plans and $230
million related to non-U.S. plans (2003 - $11 million and $192 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, 2003 and 2004, 96% and 95%, respectively, of
the projected benefit obligations of such plans relate to non-U.S. plans.
December 31,
------------------------
2003 2004
---- ----
(In thousands)
Projected benefit obligation $325,960 $368,863
Accumulated benefit obligation 290,287 316,602
Fair value of plan assets:
U.S. plans 10,866 12,694
Non U.S. plans 192,418 229,779
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, 2004 was 23% to equity managers, 48%
to fixed income managers and 29% to real estate.
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, 2004 was 60% to equity managers and
40% to fixed income managers.
o In Norway, the Company currently has a plan asset target allocation of 14%
to equity managers, 62% to fixed income managers and the remainder
primarily to liquid investments such as money markets. The expected
long-term rate of return for such investments is approximately 8%, 4.5% to
6.5% and 2.5%, respectively. The current plan asset allocation at December
31, 2004 was 16% to equity managers, 64% to fixed income managers and the
remainder primarily to cash and liquid investments.
The Company regularly reviews its actual asset allocation for each of its
plans, and will periodically rebalance the investments in each plan to more
accurately reflect the targeted allocation when considered appropriate.
At December 31, 2003 and 2004, 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, 2004, the asset mix of the CMRT was 77% in U.S. equity
securities, 14% in U.S. fixed income securities, 7% in international equity
securities and 2% in cash and other investments. At December 31, 2003, the asset
mix of CMRT was 63% in U.S. equity securities, 24% in U.S. fixed income
securities, 7% in international equity securities and 6% in cash and other
investments.
The CMRT's long-term investment objective is to provide a rate of return
exceeding a composite of broad market equity and fixed income indices (including
the S&P 500 and certain Russell indices) utilizing both third-party investment
managers as well as investments directed by Mr. Harold C. Simmons. Mr. Harold
Simmons is the sole trustee of the CMRT. The trustee of the CMRT, along with the
CMRT's investment committee, of which Mr. Simmons is a member, actively manage
the investments of the CMRT. Such parties have in the past, and may in the
future, periodically change the asset mix of the CMRT based upon, among other
things, advice they receive from third-party advisors and their expectations as
to what asset mix will generate the greatest overall return. For the year ended
December 31, 2004, 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 17-year history
of the CMRT from its inception in 1987 through December 31, 2004, the average
annual rate of return has been 13%.
The Company expects future benefits paid from all defined benefit pension
plans are as follows:
Amount
Years ending December 31, (In thousands)
------------------------- --------------
2005 $ 18,232
2006 19,718
2007 18,842
2008 20,766
2009 19,667
2010 to 2014 109,731
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 2002,
$.5 million in 2003 and $.4 million in 2004.
Postretirement benefits other than pensions. In addition to providing
pension benefits, the Company currently provides certain health care and life
insurance benefits for eligible retired employees. Certain of the Company's
Canadian employees may become eligible for such postretirement health care and
life insurance benefits if they reach retirement age while working for the
Company. In 1989 the Company began phasing out such benefits for active U.S.
employees over a ten-year period and U.S. employees retiring after 1998 are not
entitled to any such benefits. The majority of all retirees are required to
contribute a portion of the cost of their benefits and certain current and
future retirees are eligible for reduced health care benefits at age 65. The
Company's policy is to fund medical claims as they are incurred, net of any
contributions by the retiree.
The components of the periodic OPEB cost and accumulated OPEB obligations
and the rates used in determining the actuarial present value of benefit
obligations are presented in the tables below. Variances from
actuarially-assumed rates will result in additional increases or decreases in
accumulated OPEB obligations, net periodic OPEB cost and funding requirements in
future periods. At December 31, 2004, the expected rate of increase in future
healthcare costs is 8% to 9% in 2005, declining to 5.5% in 2009 and thereafter
for U.S. plans and declining to 5% in 2008 and thereafter for Canadian plans.
(In 2003, the expected rate of increase in future healthcare costs ranged from
8% to 10% in 2004 declining to 5.5% in 2009 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
2004, and the actuarial present value of accumulated OPEB obligations at
December 31, 2004 would have increased by $1.1 million (decreased by $.9
million). At December 31, 2004, the Company currently expects to contribute the
equivalent of approximately $800,000 to all of its OPEB plans during 2005, and
aggregate benefit payments to OPEB plan participants are expected to be the
equivalent of approximately $800,000 in 2005, $700,000 in each of 2006, 2007 and
2008, $600,000 in 2009 and $2.6 million during 2010 through 2014.
Years ended December 31,
-------------------------
2003 2004
---- ----
(In thousands)
Change in accumulated OPEB obligations:
Obligations at beginning of the year $ 10,533 $ 12,661
Service cost 152 232
Interest cost 684 724
Actuarial losses (gains) 1,434 (1,215)
Plan amendments - (1,318)
Change in foreign exchange rates 772 411
Benefits paid - Company funds (914) (975)
--------- ---------
Obligations at end of the year $ 12,661 $ 10,520
========= =========
Change in plan assets:
Employer contributions $ 914 $ 975
Benefits paid (914) (975)
--------- ---------
Fair value of plan assets at end of the year $ - $ -
========= =========
Funded status at end of the year:
Plan assets less than benefit obligations $ (12,661) $ (10,520)
Unrecognized net actuarial losses 1,356 143
Unrecognized prior service credit (1,170) (1,850)
--------- ---------
$ (12,475) $ (12,227)
========= =========
Accrued OPEB costs recognized in the balance sheet:
Current $ 1,299 $ 939
Noncurrent 11,176 11,288
--------- ---------
$ 12,475 $ 12,227
========= =========
Years ended December 31,
-----------------------------------------
2002 2003 2004
---- ---- ----
(In thousands)
Net periodic OPEB cost (credit):
Service cost $ 103 $ 152 $ 232
Interest cost 660 684 724
Amortization of prior service credit (1,055) (1,055) (638)
Recognized actuarial losses 27 86 137
------- ------- -------
$ (265) $ (133) $ 455
======= ======= =======
The weighted average discount rate used in determining the actuarial
present value of benefit obligations as of December 31, 2004 was 5.7% (2003 -
5.9%). 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 2004 was 5.9% (2003 - 6.5%; 2002 - 7.0%). 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, 2003 or 2004.
As of December 31, 2004, the accumulated OPEB obligations for all OPEB
plans was approximately $10.5 million (2003 - $12.7 million). At December 31,
2004, the accumulated OPEB obligations for all OPEB plans was comprised of $5.1
million related to U.S. plans and $5.4 million related to the Company's Canadian
plans (2003 - $7.1 million and $5.6 million, respectively). The Company uses a
September 30th measurement date for their OPEB plans.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the "Medicare 2003 Act") introduced a prescription drug benefit under Medicare
(Medicare Part D) as well as a federal subsidy to sponsors of retiree health
care benefit plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D. During the third quarter of 2004, the Company
determined that benefits provided by its plan are actuarially equivalent to the
Medicare Part D benefit and therefore the Company is eligible for the federal
subsidy provided for by the Medicare 2003 Act. The effect of such subsidy, which
is accounted for prospectively from the date actuarial equivalence was
determined, as permitted by and in accordance with FASB Staff Position No.
106-2, did not have a material impact on the accumulated postretirement benefit
obligation, and will not have a material impact on the net periodic OPEB cost
going forward.
Note 15 - Related party transactions:
The Company may be deemed to be controlled by Harold C. Simmons. See Note
1. Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (a) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account, and
sales, leases and exchanges of assets, including securities issued by both
related and unrelated parties and (b) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations,
securities repurchases, and purchases and sales (and other acquisitions and
dispositions) of subsidiaries, divisions or other business units, which
transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a
publicly-held minority equity interest in another related party. While no
transactions of the type described above are planned or proposed with respect to
the Company other than as set forth in these financial statements, the Company
continuously considers, reviews and evaluates, and understands that Contran and
related entities consider, review and evaluate such transactions. Depending upon
the business, tax and other objectives then relevant, it is possible that the
Company might be a party to one or more such transactions in the future.
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,
-------------------------
2003 2004
---- ----
(In thousands)
Current receivables from affiliate:
NL:
Income taxes $ 1,209 $ -
Other - 16
------- -------
$ 1,209 $ 16
======= =======
Current payables to affiliates:
NL $ 359 $ -
Income taxes payable to Valhi - 387
LPC 8,560 8,844
------- -------
$ 8,919 $ 9,231
======= =======
Amounts payable to LPC are generally for the purchase of TiO2 (see Note 6)
and amounts payable to NL principally related to accrued interest on affiliate
loans. Purchases of TiO2 from LPC were $92.4 million in 2002, $101.3 million in
2003 and $104.8 million in 2004.
From time to time, loans and advances are made between the Company and
various related parties pursuant to term and demand notes. These loans and
advances are entered into principally for cash management purposes. When the
Company loans funds to related parties, the lender is generally able to earn a
higher rate of return on the loan than the lender would earn if the funds were
invested in other instruments. While certain of such loans may be of a lesser
credit quality than cash equivalent instruments otherwise available to the
Company, the Company believes that it has evaluated the credit risks involved,
and that those risks are reasonable and reflected in the terms of the applicable
loans. When the Company borrows from related parties, the borrower is generally
able to pay a lower rate of interest than the borrower would pay if it borrowed
from other parties. In addition, certain loans to and from affiliates not made
for cash management purposes are discussed in Notes 10 and 11.
Interest income on all loans to related parties, including amounts
discussed in Notes 10 and 11, was $20.8 million in 2002 and $.7 million in 2003
and nil in 2004. Interest expense on all loans from related parties, including
amounts discussed in Note 10, was $12.3 million in 2002, $1.9 million in 2003
and $15.2 million in 2004.
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 Contran and NL, the Company believes it benefits from cost savings and
economies of scale gained by not having certain management, financial and
administrative staffs duplicated at each entity, thus allowing certain
individuals to provide services to multiple companies but only be compensated by
one entity. The net ISA fee charged to the Company was $3.7 million in each of
2002 and 2003 and $4.4 million in 2004.
Tall Pines Insurance Company, Valmont Insurance Company (which merged into
Tall Pines in December 2004, with Tall Pines surviving the merger) and EWI RE,
Inc. provide for or broker certain insurance policies for Contran and certain of
its subsidiaries and affiliates, including the Company. Tall Pines is
wholly-owned by a subsidiary of Valhi, and EWI is a wholly-owned subsidiary of
NL. Consistent with insurance industry practices, Tall Pines, 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 $10.1 million in 2002,
$7.2 million in 2003 and $7.7 million in 2004. 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. The Company
expects that these relationships with Tall Pines and EWI will continue in 2005.
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.
In January 2002, the Company acquired EWI for an aggregate purchase price
of $9.2 million. An entity contolled by one of Harold C. Simmons' daughters
owned a majority of EWI, and a wholly-owned subsidiary of Contran owned the
remainder of EWI. In June 2003 the Company distributed EWI to NL in the form of
a noncash dividend. The Company accounted for the distribution of EWI to NL as a
change in accounting entity, and accordingly the Company's consolidated
financial statements have been retroactively restated to exclude the assets,
liabilities, results of operations and cash flows of EWI for all periods
presented since the January 2002 acquisiton. Reflected as part of "other capital
transactions with affiliates, net" in the accompanying Consolidated Statements
of Cash Flows is such $9.2 million purchase price.
Note 16 - Commitments and contingencies:
Environmental matters. The Company's operations are governed by various
environmental laws and regulations. Certain of the Company's operations are and
have been engaged in the handling, manufacture or use of substances or compounds
that may be considered toxic or hazardous within the meaning of applicable
environmental laws and regulations. As with other companies engaged in similar
businesses, certain past and current operations and products of the Company have
the potential to cause environmental or other damage. The Company has
implemented and continues to implement various policies and programs in an
effort to minimize these risks. The Company's policy is to maintain compliance
with applicable environmental laws and regulations at all of its facilities and
to strive to improve its environmental performance. From time to time, the
Company may be subject to environmental regulatory enforcement under U.S. and
foreign statutes, resolution of which typically involves the establishment of
compliance programs. It is possible that future developments, such as stricter
requirements of environmental laws and enforcement policies thereunder, could
adversely affect the Company's production, handling, use, storage,
transportation, sale or disposal of such substances. The Company believes all of
its plants are in substantial compliance with applicable environmental laws.
Litigation matters. Kronos' Belgian subsidiary and certain of its employees
are the subject of civil and criminal proceedings relating to an accident that
resulted in two fatalities at the Company's Belgian facility in 2000. In May
2004, the court ruled and, among other things, imposed a fine of euro 200,000
against Kronos and fines aggregating less than euro 40,000 against various
Kronos employees. Kronos and the individual employees have appealed the ruling.
In addition to the litigation described above, the Company and its
affiliates are also involved in various other environmental, contractual,
product liability, patent (or intellectual property), employment and other
claims and disputes incidental to its present and former businesses.
Kronos currently believes the disposition of all claims and disputes,
individually or in the aggregate, should not have a material adverse effect on
its consolidated financial condition, results of operations or liquidity.
Concentrations of credit risk. Sales of TiO2 accounted for 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 and certain titanium chemical products
(derived from co-products of the TiO2 production processes). TiO2 is generally
sold to the paint, plastics and paper industries. Such markets are generally
considered "quality-of-life" markets whose demand for TiO2 is influenced by the
relative economic well-being of the various geographic regions. TiO2 is sold to
over 4,000 customers, with the top ten customers approximating 25% of net sales
in each of the last three years. By volume, approximately one-half of the
Company's TiO2 sales were to Europe in each of the past three years and
approximately 39% of sales in 2002, 40% in 2003 and 38% in 2004 were
attributable to North America.
At December 31, 2004, consolidated cash, cash equivalents and restricted
cash includes $38.1 million invested in U.S. Treasury securities purchased under
short-term agreements to resell (2003 - $13.7 million).
Capital expenditures. At December 31, 2004 the estimated cost to complete
capital projects in process approximated $6.7 million.
Long-term contracts. The Company has long-term supply contracts that
provide for the Company's TiO2 feedstock requirements through 2009. The
agreements require the Company to purchase certain minimum quantities of
feedstock with minimum purchase commitments aggregating approximately $525
million at December 31, 2004.
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 ownership and 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 $10 million
in 2002, $12 million in 2003 and $11 million in 2004. At December 31, 2004,
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)
2005 $ 4,759
2006 3,359
2007 2,968
2008 2,524
2009 1,961
2010 and thereafter 21,133
-------
$36,704
=======
Approximately $25.3 million of the $36.7 million aggregate future minimum
rental commitments at December 31, 2004 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, 2004.
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,
2003 2004
-------------------------- -------------------------
Carrying Fair Carrying Fair
amount value amount value
---------- ---------- ---------- ----------
(In millions)
Cash, cash equivalents, restricted
cash and noncurrent restricted
marketable debt securities $ 59.8 $ 59.8 $ 65.2 $ 65.2
Notes payable and long-term debt:
Fixed rate with market quotes -
8.875% Senior Secured Notes $ 356.1 $ 356.1 $519.2 $ 549.1
Variable rate debt $ - $ - $ 13.6 $ 13.6
Other fixed rate debt $ .6 $ .6 $ .4 $ .4
Note payable to affiliate $ 200.0 * $ - $ -
Common stockholders' equity $ 159.4 $1,086.5 $470.8 $1,994.6
____________________________________
* 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, the
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, 2003 or 2004. See Note 1.
Note 18 - Accounting principles newly adopted in 2002, 2003 and 2004:
Impairment of long-lived assets. The Company adopted SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," effective
January 1, 2002. SFAS No. 144 retains the fundamental provisions of prior GAAP
with respect to the recognition and measurement of long-lived asset impairment
contained in SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Lived-Lived Assets to be Disposed Of." However, SFAS No. 144 provides
new guidance intended to address certain implementation issues associated with
SFAS No. 121, including expanded guidance with respect to appropriate cash flows
to be used to determine whether recognition of any long-lived asset impairment
is required, and if required how to measure the amount of the impairment. SFAS
No. 144 also requires that net assets to be disposed of by sale are to be
reported at the lower of carrying value or fair value less cost to sell, and
expands the reporting of discontinued operations to include any component of an
entity with operations and cash flows that can be clearly distinguished from the
rest of the entity. Adoption of SFAS No. 144 did not have a significant effect
on the Company.
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) and to December 31, 2004 ($1 million)
is due primarily to accretion expense and the effects of currency translation.
Accretion expense, which is reported as a component of cost of sales in the
accompanying Consolidated Statements of Income, approximated $100,000 for each
of the years ended December 31, 2003 and 2004.
Estimates of the ultimate cost to be incurred to settle the Company's asset
retirement obligations require a number of assumptions, are inherently difficult
to develop and the ultimate outcome may differ from current estimates. As
additional information becomes available, cost estimates will be adjusted as
necessary. It is possible that technological, regulatory or enforcement
developments, the results of studies or other factors could necessitate the
recording of additional liabilities.
Costs associated with exit or disposal activities. The Company adopted SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," on
January 1, 2003 for exit or disposal activities initiated on or after that date.
Under SFAS No. 146, costs associated with exit activities, as defined, that are
covered by the scope of SFAS No. 146 will be recognized and measured initially
at fair value, generally in the period in which the liability is incurred. Costs
covered by the scope of SFAS No. 146 include termination benefits provided to
employees, costs to consolidate facilities or relocate employees, and costs to
terminate contracts (other than a capital lease). Under prior GAAP, a liability
for such an exit cost is recognized at the date an exit plan is adopted, which
may or may not be the date at which the liability has been incurred. The effect
of adopting SFAS No. 146 as of January 1, 2003 was not material as the Company
was not involved in any exit or disposal activities covered by the scope of the
new standard as of such date.
Variable interest entities. The Company complied with the consolidation
requirements of FASB Interpretation ("FIN") No. 46R, "Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51," as amended, as of March 31,
2004. The Company does not have any involvement with any variable interest
entity (as that term is defined in FIN No. 46R) covered by the scope of FIN No.
46R that would require the Company to consolidate such entity under FIN No. 46R
which had not already been consolidated under prior applicable GAAP, and
therefore the impact to the Company of adopting the consolidation requirements
of FIN No. 46R was not material.
Note 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, 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 $ 15.9 $ 13.1
Basic and diluted earnings
per common share $ .34 $ .85 $ .33 $ .27
Year ended December 31, 2004
Net sales $263.3 $ 295.8 $286.0 $283.5
Cost of sales 202.2 227.5 219.4 217.2
Net income $ 9.8 $ 284.8 $ 10.1 $ 10.2
Basic and diluted earnings per common share $ .20 $ 5.82 $ .21 $ .21
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.
During the fourth quarter of 2004, Kronos determined that it should have
recognized an additional $17.3 million net deferred income tax benefit during
the second quarter of 2004, primarily related to the amount of the valuation
allowance related to Kronos' German operations which should have been reversed.
While the additional tax benefit is not material to the Company's second quarter
2004 results, the quarterly results of operations for 2004, as presented above,
reflects this additional tax benefit. Accordingly, net income for the second
quarter of 2004 of $284.8 million ($5.82 per basic share), as reflected above,
differs from the $267.5 million ($5.47 per basic share), previously reported by
the Company due to such $17.3 million deferred income tax benefit.
Note 20- Accounting principles not yet adopted:
Inventory costs. The Company will adopt SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4," for inventory costs incurred on or after
January 1, 2006. SFAS No. 151 requires that the allocation of fixed production
overhead costs to inventory shall be based on normal capacity. Normal capacity
is not defined as a fixed amount; rather, normal capacity refers to a range of
production levels expected to be achieved over a number of periods under normal
circumstances, taking into account the loss of capacity resulting from planned
maintenance shutdowns. The amount of fixed overhead allocated to each unit of
production is not increased as a consequence of idle plant or production levels
below the low end of normal capacity, but instead a portion of fixed overhead
costs are charged to expense as incurred. Alternatively, in periods of
production above the high end of normal capacity, the amount of fixed overhead
costs allocated to each unit of production is decreased so that inventories are
not measured above cost. SFAS No. 151 also clarifies existing GAAP to require
that abnormal freight and wasted materials (spoilage) are to be expensed as
incurred. The Company believes its production cost accounting already complies
with the requirements of SFAS No. 151, and the Company does not expect adoption
of SFAS No. 151 will have a material effect on its consolidated financial
statements.
Stock options. The Company will adopt SFAS No. 123R, "Share-Based Payment",
as of July 1, 2005. SFAS No. 123R, among other things, eliminates the
alternative in existing GAAP to use the intrinsic value method of accounting for
stock-based employee compensation under APBO No. 25. Upon adoption of SFAS No.
123R, the Company will generally be required to recognize the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award, with the cost recognized over the period
during which an employee is required to provide services in exchange for the
award (generally, the vesting period of the award). No compensation cost will be
recognized in the aggregate for equity instruments for which the employee does
not render the requisite service (generally, the instrument is forfeited before
it has vested). The grant-date fair value will be estimated using option-pricing
models (e.g. Black-Scholes or a lattice model). Under the transition
alternatives permitted under SFAS No. 123R, the Company will apply the new
standard to all new awards granted on or after July 1, 2005, and to all awards
existing as of June 30, 2005 which are subsequently modified, repurchased or
cancelled. Additionally, as of July 1, 2005, the Company will be required to
recognize compensation cost for the portion of any non-vested award existing as
of June 30, 2005 over the remaining vesting period. Because the Company has not
granted any options to purchase its common stock and is not expected to grant
any options prior to July 1, 2005, and because the number of non-vested awards
as of June 30, 2005 with respect to options granted by NL to employees of the
Company is not expected to be material, the effect of adopting SFAS No. 123R is
not expected to be significant in so far as it relates to existing stock
options. Should the Company, however, grant a significant number of options in
the future, the effect on the Company's Consolidated Financial Statements could
be material.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of Kronos Worldwide, Inc.:
Our audits of the consolidated financial statements, of management's
assessment of the effectiveness of internal control over financial reporting and
the effectiveness of internal control over financial reporting referred to in
our report dated March 30, 2005 appearing in this Annual Report on Form 10-K
also included an audit of the financial statement schedules listed in Item
15(a)(2) of this Form 10-K. In our opinion, these financial statement schedules
present 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 30, 2005
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Balance Sheets
December 31, 2003 and 2004
(In thousands)
2003 2004
---- ----
Current assets:
Cash and cash equivalents $ 3,073 $ 7,734
Receivables from affiliates 1,209 2,776
Prepaid expenses - 337
---------- ----------
Total current assets 4,282 10,847
---------- ----------
Other assets:
Notes receivable from subsidiaries
and affiliates 50,250 51,250
Investment in subsidiaries 303,808 638,821
Deferred income taxes 4,018 -
---------- ----------
Total other assets 358,076 690,071
---------- ----------
$ 362,358 $ 700,918
========== ==========
Current liabilities:
Accounts payable and accrued liabilities $ 16 $ 4
Payable to affiliates 2,991 742
Deferred income taxes - 2
---------- ----------
Total current liabilities 3,007 748
---------- ----------
Noncurrent liabilities:
Notes payable to subsidiaries and affiliates 200,000 222,168
Deferred income taxes - 7,157
---------- ----------
Total noncurrent liabilities 200,000 229,325
---------- ----------
Stockholders' equity 159,351 470,845
---------- ----------
$ 362,358 $ 700,918
========== ==========
Contingencies (Note 4)
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
Condensed Statements of Income
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
Revenues and other income:
Equity in earnings of subsidiaries $ 60,943 $ 92,051 $336,922
Interest income from affiliates 23,776 3,009 2,678
Interest and dividends 483 29 382
Other income 3,555 8 -
-------- -------- --------
88,757 95,097 339,982
-------- -------- --------
Costs and expenses:
General and administrative (102) 269 1,601
Intercompany interest and other 17,421 1,917 17,973
Other expense - - 130
-------- -------- --------
17,319 2,186 19,704
-------- -------- --------
Income before income taxes 71,438 92,911 320,278
Provision for income taxes 5,174 5,362 5,425
-------- -------- --------
Net income $ 66,264 $ 87,549 $314,853
======== ======== ========
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
Condensed Statements of Cash Flows
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
Cash flows from operating activities:
Net income $ 66,264 $ 87,549 $314,853
Cash distributions from subsidiaries 48,900 - 60,000
Noncash interest income, net (302) - -
Deferred income taxes (21) (538) 10,831
Equity in earnings of subsidiaries (60,943) (92,051) (336,922)
Other, net - - 90
Net change in assets and liabilities (4,490) 1,295 (4,379)
-------- -------- --------
Net cash provided (used)
by operating activities 49,408 (3,745) 44,473
-------- -------- --------
Cash flows from investing activities:
Loans to affiliates (83,200) (16,550) (8,000)
Collections of loans to affiliates 295,182 46,404 7,000
Investments in subsidiaries (9,149) - -
-------- -------- --------
Net cash provided (used) by
investing activities 202,833 29,854 (1,000)
-------- -------- --------
Cash flows from financing activities:
Loans from affiliates 46,675 8,000 209,524
Repayments of loans from affiliates (194,000) (52,600) (200,000)
Dividends paid (111,000) 18,000 (48,945)
Capital contributions - - 609
-------- -------- --------
Net cash used by financing
activities: (258,325) (26,600) (38,812)
-------- -------- --------
Net change during the year from operating,
investing and financing activities (6,084) (491) 4,661
Balance at beginning of year 9,648 3,564 3,073
-------- -------- --------
Balance at end of year $ 3,564 $ 3,073 $ 7,734
======== ======== ========
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,
-------------------------
2003 2004
---- ----
(In thousands)
Current:
Receivable from:
NL - income taxes $ 1,209 $ -
Kronos Louisiana, Inc. ("KLA") - 2,681
Kronos International, Inc. ("KII") - 95
--------- ---------
$ 1,209 $ 2,776
========= =========
Payable to:
Kronos (US), Inc. ("KUS") $ 200 $ 204
NL - income taxes 2,291 -
Valhi - income taxes - 387
Kronos Cananda, Inc. ("KC") 500 56
Other - 95
--------- ---------
$ 2,991 $ 742
========= =========
Noncurrent:
Receivable from KUS $ 50,250 $ 51,250
========= =========
Payable to:
NL $ 200,000 $ -
KII - 222,168
--------- ---------
$ 200,000 $ 222,168
========= =========
During 2004, KII loaned the Company the equivalent of $222,168. Such
amounts are eliminated upon consolidation. See also Note 10 of the Consolidated
Financial Statements for a description of noncurrent receivables and payables.
Note 3 - Investment in subsidiaries:
December 31,
-------------------------
2003 2004
---- ----
(In thousands)
Investment in:
KLA $ 110,336 $ 136,749
KC 81,910 86,066
KII 111,562 416,006
---------- ----------
$ 303,808 $ 638,821
========== ==========
2002 2003 2004
---- ---- ----
Equity in income from continuing
operations of subsidiaries:
KLA $ 8,904 $ 6,086 $ 12,969
KC 11,288 2,192 (2,302)
KII 40,751 83,773 326,255
-------- -------- --------
$ 60,943 $ 92,051 $336,922
======== ======== ========
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, 2002:
Allowance for doubtful accounts $ 2,239 $ 481 $ (414) $ 299 $ - $ 2,605
======= ======= ======= ======= ======= =======
Accrual for planned major
maintenance activities $ 3,389 $ 3,848 $(3,746) $ 495 $ - $ 3,986
======= ======= ======= ======= ======= =======
Year ended December 31, 2003:
Allowance for doubtful accounts $ 2,605 $ 367 $ (439) $ 387 $ - $ 2,920
======= ======= ======= ======= ======= =======
Accrual for planned major
maintenance activities $ 3,986 $ 5,337 $(3,896) $ 900 $ - $ 6,327
======= ======= ======= ======= ======= =======
Year ended December 31, 2004:
Allowance for doubtful accounts $ 2,920 $ (125) $ (577) $ 159 $ - $ 2,377
======= ======= ======= ======= ======= =======
Accrual for planned major
maintenance activities $ 6,327 $ 6,602 $(8,001) $ 425 $ - $ 5,353
======= ======= ======= ======= ======= =======
Note - Certain information has been omitted from this Schedule because it is
disclosed in the Notes to the Consolidated Financial Statements.