SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934 - For the quarterly period ended September 30, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
Commission file number 001-31763
KRONOS WORLDWIDE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 76-0294959
- --------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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
---------------
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 No X
------ ------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
------- -------
Number of shares of common stock outstanding on October 31, 2003: 48,943,049
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - September 30, 2003
and December 31, 2002 3
Consolidated Statements of Income - Three months and
nine months ended September 30, 2003 and 2002 5
Consolidated Statements of Comprehensive Income
- Three months and nine months ended September 30,
2003 and 2002 6
Consolidated Statement of Shareholder's Equity
- Nine months ended September 30, 2003 7
Consolidated Statements of Cash Flows - Nine
months ended September 30, 2003 and 2002 8
Notes to Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 4. Controls and Procedures 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 6. Exhibits and Reports on Form 8-K 29
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
ASSETS 2003 2002
------------- ------------
Current assets:
Cash and cash equivalents .................... $ 39,434 $ 40,685
Restricted cash equivalents .................. 836 --
Accounts and other receivables ............... 175,496 134,243
Receivable from affiliates ................... -- 1,032
Refundable income taxes ...................... 591 1,777
Inventories .................................. 203,321 209,882
Prepaid expenses ............................. 7,613 6,390
Deferred income taxes ........................ 3,675 4,404
---------- ----------
Total current assets ..................... 430,966 398,413
---------- ----------
Other assets:
Notes receivable from NL Industries, Inc. .... -- 44,600
Investment in TiO2 manufacturing joint venture 127,834 130,009
Prepaid pension cost ......................... 17,249 17,572
Other ........................................ 20,031 22,193
---------- ----------
Total other assets ....................... 165,114 214,374
---------- ----------
Property and equipment:
Land ......................................... 29,578 26,568
Buildings .................................... 164,817 148,701
Machinery and equipment ...................... 700,894 636,336
Mining properties ............................ 64,899 65,296
Construction in progress ..................... 19,210 8,702
---------- ----------
979,398 885,603
Less accumulated depreciation and depletion .. 575,081 509,845
---------- ----------
Net property and equipment ............... 404,317 375,758
---------- ----------
$1,000,397 $ 988,545
========== ==========
-3-
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND SHAREHOLDER'S EQUITY September 30, December 31,
2003 2002
------------- ------------
Current liabilities:
Current maturities of long-term debt ..... $ 476 $ 1,298
Accounts payable and accrued liabilities . 131,093 148,257
Payable to affiliates .................... 14,146 7,933
Income taxes ............................. 7,277 6,193
Deferred income taxes .................... 1,684 3,219
----------- -----------
Total current liabilities ............ 154,676 166,900
----------- -----------
Noncurrent liabilities:
Long-term debt ............................ 327,275 324,608
Notes payable to affiliates ............... -- 44,600
Deferred income taxes ..................... 89,797 79,234
Accrued pension cost ...................... 32,434 33,098
Accrued postretirement benefits cost ...... 11,255 11,806
Other ..................................... 13,510 13,742
----------- -----------
Total noncurrent liabilities ......... 474,271 507,088
----------- -----------
Minority interest ............................ 471 383
----------- -----------
Shareholder's equity:
Common stock ............................. 489 489
Additional paid-in capital ............... 1,060,157 1,060,157
Retained deficit ......................... (542,395) (584,909)
Accumulated other comprehensive loss ..... (147,272) (161,563)
----------- -----------
Total shareholder's equity ........... 370,979 314,174
----------- -----------
$ 1,000,397 $ 988,545
=========== ===========
Commitments and contingencies (Notes 8 and 10)
See accompanying notes to consolidated financial statements.
-4-
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales ................................. $ 242,931 $ 234,061 $ 762,535 $ 663,327
Cost of sales ............................. 177,432 177,521 563,498 510,021
--------- --------- --------- ---------
Gross margin .......................... 65,499 56,540 199,037 153,306
Selling, general and administrative expense 29,705 28,479 90,059 78,105
Other operating income (expense):
Currency transaction gains (losses),
net ................................. (458) 648 (4,299) (803)
Disposition of property and equipment . (227) (146) (271) 451
Corporate expense ..................... (930) (954) (2,614) (2,447)
Other income .......................... 137 307 303 407
Other expense ......................... (22) (8) (76) (125)
--------- --------- --------- ---------
Income from operations ............ 34,294 27,908 102,021 72,684
Other income (expense):
Trade interest income ................. 200 757 561 1,312
Interest income from affiliates ....... -- 3,157 723 20,632
Other interest income ................. 54 422 128 493
Foreign currency transaction gain ..... -- -- -- 6,271
Interest expense ...................... (8,338) (7,554) (24,688) (9,252)
Interest expense to affiliates ........ -- -- (703) (12,167)
--------- --------- --------- ---------
Income before income taxes and
minority interest ............... 26,210 24,690 78,042 79,973
Income tax expense ........................ 10,241 7,928 3,567 22,873
Minority interest ......................... 18 8 61 35
--------- --------- --------- ---------
Net income ........................ $ 15,951 $ 16,754 $ 74,414 $ 57,065
========= ========= ========= =========
Basic and diluted net income per share .... $ .33 $ .34 $ 1.52 $ 1.17
========= ========= ========= =========
Basic and diluted weighted-average shares
used in the calculation of net income
per share ............................. 48,943 48,943 48,943 48,943
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
-5-
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three months ended Nine months ended
September 30, September 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income .......................... $ 15,951 $ 16,754 $ 74,414 $ 57,065
-------- -------- -------- --------
Currency translation adjustment ..... 1,579 (5,243) 14,291 45,931
-------- -------- -------- --------
Total other comprehensive income
(loss) ....................... 1,579 (5,243) 14,291 45,931
-------- -------- -------- --------
Comprehensive income .... $ 17,530 $ 11,511 $ 88,705 $102,996
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
- 6 -
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
Nine months ended September 30, 2003
(In thousands)
Accumulated other
comprehensive income (loss)
----------------------------
Additional Retained Currency
Common paid-in earnings translation Pension
stock capital (deficit) adjustment liabilities Total
---------- ---------- ---------- ----------- ----------- ----------
Balance at December 31, 2002 ......... $ 489 $1,060,157 $ (584,909) $ (148,082) $ (13,481) $ 314,174
Net income ........................... -- -- 74,414 -- -- 74,414
Other comprehensive income, net of tax -- -- -- 14,291 -- 14,291
Dividends:
Cash .............................. -- -- (7,000) -- -- (7,000)
Noncash ........................... -- -- (24,900) -- -- (24,900)
---------- ---------- ---------- ---------- ---------- ----------
Balance at September 30, 2003 ........ $ 489 $1,060,157 $ (542,395) $ (133,791) $ (13,481) $ 370,979
========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
- 7 -
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2003 and 2002
(In thousands)
2003 2002
-------- --------
Cash flows from operating activities:
Net income ............................................ $ 74,414 $ 57,065
Depreciation and amortization ......................... 29,127 23,789
Deferred income taxes ................................. 6,040 9,689
Distributions from TiO2 manufacturing joint
venture, net ........................................ 2,175 6,350
Net losses (gains) from disposition of property
and equipment ....................................... 271 (451)
Noncash interest income ................................ -- (16,630)
Other, net ............................................. (2,827) (2,789)
Change in assets and liabilities:
Accounts and other receivables .................... (31,061) (34,573)
Insurance receivable .............................. 259 11,218
Inventories ....................................... 22,993 72,532
Prepaid expenses .................................. (888) (5,346)
Accounts payable and accrued liabilities .......... (26,268) (42,908)
Income taxes ...................................... 2,333 (479)
Other, net ........................................ 6,878 (127)
-------- --------
Net cash provided by operating activities ..... 83,446 77,340
-------- --------
Cash flows from investing activities:
Capital expenditures .................................. (23,735) (18,059)
Change in restricted cash equivalents ................. (911) (1,467)
Proceeds from the disposition of property and equipment 81 839
-------- --------
Net cash used by investing activities ......... (24,565) (18,687)
-------- --------
- 8 -
KORNOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine months ended September 30, 2003 and 2002
(In thousands)
2003 2002
--------- ---------
Cash flows from financing activities:
Dividends paid ................................... $ (7,000) $ (20,000)
Indebtedness:
Borrowings ................................... 16,106 330,800
Principal payments ........................... (45,868) (77,939)
Deferred financing costs ..................... -- (10,590)
Loans from affiliates:
Loans ........................................ 8,000 --
Repayments ................................... (52,600) (194,000)
Other capital transactions with affiliates, net .. 19,700 (29,149)
Other, net ....................................... (14) (11)
--------- ---------
Net cash used by financing activities .... (61,676) (889)
--------- ---------
Cash and cash equivalents:
Net change from:
Operating, investing and financing activities (2,795) 57,764
Currency translation ......................... 1,544 2,453
--------- ---------
(1,251) 60,217
Balance at beginning of period ................... 40,685 54,717
--------- ---------
Balance at end of period ......................... $ 39,434 $ 114,934
========= =========
Supplemental disclosures - cash paid (received) for:
Interest ......................................... $ 17,048 $ 19,503
Income taxes, net ................................ (11,524) 11,120
See accompanying notes to consolidated financial statements.
-9-
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
Kronos Worldwide, Inc. ("Kronos" or "the Company"), formerly known as
Kronos, Inc., is a wholly-owned subsidiary of NL Industries, Inc. ("NL"). NL
conducts its titanium dioxide pigments ("TiO2") operations through Kronos. At
September 30, 2003, Valhi, Inc., ("Valhi") and its subsidiaries held
approximately 84% of NL's outstanding common stock, and Contran Corporation
("Contran") and its subsidiaries held approximately 90% of Valhi's outstanding
common stock. Substantially all of Contran's outstanding voting stock is held by
trusts established for the benefit of certain children and grandchildren of
Harold C. Simmons, of which Mr. Simmons is sole trustee. Mr. Simmons, the
Chairman of the Board and Chief Executive Officer of NL and Kronos, as well as
the Chairman of the Board of each of Contran and Valhi, may be deemed to control
each of such companies.
The consolidated balance sheet of the Company at December 31, 2002 has
been condensed from the Company's audited consolidated financial statements at
that date. The consolidated balance sheet at September 30, 2003 and the
consolidated statements of income, comprehensive income, shareholder's equity
and cash flows for the interim periods ended September 30, 2003 and 2002 have
been prepared by the Company without audit. In the opinion of management all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the consolidated financial position, results of operations and
cash flows have been made. The results of operations for the interim periods are
not necessarily indicative of the operating results for a full year or of future
operations.
In January 2002, the Company acquired all of the stock and limited
liability company units of EWI RE, Inc. and EWI RE, Ltd. (collectively "EWI"),
respectively, for an aggregate of $9.2 million in cash, including acquisition
costs of $.2 million. An entity controlled by one of Harold C. Simmons'
daughters owned a majority of EWI, and a wholly-owned subsidiary of Contran
owned the remainder of EWI. EWI provides reinsurance brokerage services for
insurance policies of the Company, its joint venture and other affiliates of
Contran as well as external third-party customers. The purchase was approved by
a special committee of NL's board of directors consisting of two of its
directors unrelated to Contran and the Company's board of directors, and the
purchase price was negotiated by the special committee based upon its
consideration of relevant factors, including not limited to due diligence
performed by independent consultants and an appraisal of EWI conducted by an
independent third party selected by the special committee. In June 2003 the
Company distributed its investment in the common stock and limited liability
company units in EWI to NL in the form of a noncash dividend. The Company has
accounted for the distribution of EWI as a change in accounting entity, and
accordingly the Company's consolidated financial statements have been
retroactively restated to exclude the assets, liabilities, results of operations
and cash flows of EWI for all periods presented since the January 2002
acquisition. The effect of the change in accounting entity on the Company's
consolidated net income was immaterial for 2002 and 2003, and the effect of the
change in accounting entity on the Company's previously reported stockholder's
equity was a reduction of approximately $10 million. The $9.2 million purchase
price for EWI is reflected as part of "other capital transactions with
affiliates, net" in the accompanying consolidated statements of cash flows.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP") have been condensed or omitted
in accordance with the GAAP requirements for interim financial statements,
including the applicable requirements of the Securities and Exchange
-10-
Commission's (the "SEC's") Regulation S-X. Certain prior year amounts have been
reclassified to conform to the current year presentation. The accompanying
consolidated financial statements should be read in conjunction with the
Company's audited consolidated financial statements included in the Company's
Registration Statement on Form 10, as amended (the "Registration Statement").
On September 26, 2003, Kronos amended and restated its certificate 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 were
outstanding following effectiveness of the amended and restated certificate of
incorporation.
In November 2003, NL announced that its board of directors had formally
approved a plan to distribute approximately 48.7% of the outstanding shares of
Kronos' common stock to NL shareholders in the form of a pro-rata dividend. The
shares of Kronos' common stock will be distributed on December 8, 2003 to NL
shareholders of record as of November 17, 2003. Upon completion of such
distribution, NL, Valhi and a wholly-owned subsidiary of Valhi will own an
aggregate of approximately 92.5% of Kronos' common stock, and other NL
shareholders would own the remaining 7.5%. As part of the plan, immediately
prior to the distribution of shares of Kronos' common stock, Kronos will
distribute a $200 million dividend to NL in the form of a long-term note
payable. The $200 million long-term note payable to NL will be unsecured and
bear interest at 9% per annum, with interest payable quarterly and all principal
due in 2010. Kronos has applied to list its shares of common stock on the New
York Stock Exchange under the trading symbol "KRO." Completion of the
distribution is subject to the satisfaction or waiver of certain conditions.
The Company has not issued any stock options to purchase Kronos' common
stock. However, certain employees of the Company have been granted options by NL
to purchase NL common stock. As disclosed in the Registration Statement, the
Company accounts for stock-based employee compensation in accordance with
Accounting Principles Board Opinion ("APBO") No. 25, "Accounting for Stock
Issued to Employees," and its various interpretations. Under APBO No. 25, no
compensation cost is generally recognized for fixed stock options in which the
exercise price is not less than the market price on the grant date. During the
fourth quarter of 2002, and following NL's cash settlement of options to
purchase NL common stock held by certain individuals, NL, including 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). Net compensation income recognized by the Company in accordance with
APBO No. 25 was $300,000 in each of the third quarter and first nine months of
2003, and net compensation expense (income) recognized by the Company was nil in
each of the third quarter and first nine months of 2002.
-11-
The following table presents what the Company's consolidated net income,
and related per share amounts, would have been in the 2002 and 2003 periods
presented if the Company had elected to account for its stock-based employee
compensation related to stock options in accordance with the fair-value based
recognition provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, Accounting for Stock-Based Compensation, for all awards granted
subsequent to January 1, 1995.
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
(In thousands, except per share amounts)
Net income - as reported ................ $ 15,951 $ 16,754 $ 74,414 $ 57,065
Deduct: Stock-based compensation income,
net of tax, included in reported net
income ................................ (187) -- (187) --
Deduct: Stock-based compensation cost,
net of tax, determined under fair-value
based method for all awards ........... (81) (186) (246) (556)
-------- -------- -------- --------
Net income - pro forma .................. $ 15,683 $ 16,568 $ 73,981 $ 56,509
======== ======== ======== ========
Net income per basic and diluted
common share:
As reported ......................... $ .33 $ .34 $ 1.52 $ 1.17
Pro forma ........................... $ .32 $ .34 $ 1.51 $ 1.15
The Company adopted SFAS No. 143, "Accounting for Asset Retirement
Obligations," effective 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 is 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 would either settle the obligation for its recorded amount
or incur 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 were measured using information, assumptions
and interest rates all as of January 1, 2003. The amount recognized as the asset
retirement cost was 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, were 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 between the
amounts recognized as described above and the associated amounts recognized in
the Company's balance sheet as of December 31, 2002 was recognized as a
cumulative effect of change in accounting principle as of January 1, 2003. The
effect of adopting SFAS No. 143 as of January 1, 2003, as summarized in the
table below (in millions), did not have a material effect on the Company's
consolidated financial position, results of operations or liquidity, and is not
separately recognized in the accompanying statement of income.
-12-
Increase in carrying value of net property,
plant and equipment:
Cost ................................................................ $ .4
Accumulated depreciation ............................................ (.1)
Decrease in liabilities previously accrued
for closure and post closure activities ........................... .3
Asset retirement obligation recognized .................................. (.6)
----
Net impact ...................................................... $ --
====
At September 30, 2003, the asset retirement obligation was approximately
$700,000 and was included in other noncurrent liabilities. Accretion expense on
the asset retirement obligation during the first nine months of 2003, included
in cost of sales, was nil. If the Company had adopted SFAS No. 143 as of January
1, 2002, the asset retirement obligation would have been approximately $500,000
at January 1, 2002 and $600,000 at September 30, 2002, and the effect on the
Company's reported net income for the nine months ended September 30, 2002 would
not have been material.
Note 2 - Accounts and other receivables:
September 30, December 31,
2003 2002
------------- ------------
(In thousands)
Trade receivables .............................. $ 164,425 $ 124,044
Insurance claims receivable .................... 53 312
Recoverable VAT and other receivables .......... 13,654 12,492
Allowance for doubtful accounts ................ (2,636) (2,605)
--------- ---------
$ 175,496 $ 134,243
========= =========
Note 3 - Inventories:
September 30, December 31,
2003 2002
------------- ------------
(In thousands)
Raw materials ............................ $ 33,049 $ 54,077
Work in process .......................... 17,028 15,936
Finished products ........................ 119,414 109,203
Supplies ................................. 33,830 30,666
-------- --------
$203,321 $209,882
======== ========
Note 4 - Other noncurrent assets:
September 30, December 31,
2003 2002
------------- ------------
(In thousands)
Deferred financing costs, net .................. $10,008 $10,550
Unrecognized net pension obligations ........... 6,439 5,561
Restricted marketable debt securities .......... 2,034 2,492
Other .......................................... 1,550 3,590
------- -------
$20,031 $22,193
======= =======
-13-
Note 5 - Accounts payable and accrued liabilities:
September 30, December 31,
2003 2002
------------- ------------
(In thousands)
Accounts payable ....................... $ 55,061 $ 89,602
-------- --------
Accrued liabilities:
Employee benefits .................. 29,397 27,042
Interest ........................... 7,451 240
Other .............................. 39,184 31,373
-------- --------
76,032 58,655
-------- --------
$131,093 $148,257
======== ========
Note 6 - Other noncurrent liabilities:
September 30, December 31,
2003 2002
------------- ------------
(In thousands)
Insurance claims and expenses .............. $ 1,260 $ 1,480
Employee benefits .......................... 4,422 4,025
Environmental costs ........................ 4,927 5,921
Other ...................................... 2,901 2,316
------- -------
$13,510 $13,742
======= =======
Note 7 - Long-term debt:
September 30, December 31,
2003 2002
------------- ------------
(In thousands)
8.875% Senior Secured Notes,(euro)285 million
principal amount ............................... $326,924 $296,942
Revolving credit facility ........................ -- 27,077
Other ............................................ 827 1,887
-------- --------
327,751 325,906
Less current maturities .......................... 476 1,298
-------- --------
$327,275 $324,608
======== ========
In March 2003 the Company borrowed (euro)15.0 million ($16.1 million
when borrowed), in April 2003 the Company repaid NOK 80 million ($11.0 million
when repaid), and in the third quarter of 2003 the Company repaid (euro)30.0
million ($33.9 million when repaid) under the revolving credit facility.
Note 8 - Income taxes:
The difference between the provision for income tax expense attributable
to income before income taxes and minority interest and the amount that would be
expected using the U.S. federal statutory income tax rate of 35% is presented
below.
-14-
Nine months ended
September 30,
--------------------
2003 2002
-------- --------
(In thousands)
Expected tax expense ................................... $ 27,314 $ 27,991
Non-U.S. tax rates ..................................... (222) (3,918)
Incremental tax on income of companies not included
in NL's consolidated U.S. federal income tax return .. 120 403
Refund of prior year German taxes ...................... (24,564) --
Valuation allowance .................................... (732) (460)
U.S. state income taxes ................................ 58 36
Tax contingency reserve adjustments, net ............... -- (1,083)
Other, net ............................................. 1,593 (96)
-------- --------
Income tax expense ............................ $ 3,567 $ 22,873
======== ========
The Company reduced its deferred income tax valuation allowance by
$732,000 in the first nine months of 2003 and $460,000 in the first nine months
of 2002, primarily as a result of utilization of certain tax attributes for
which the benefit had not been previously recognized under the
"more-likely-than-not" recognition criteria.
Certain of the Company's tax returns in various U.S. and non-U.S.
jurisdictions are being examined, and tax authorities have proposed or may
propose tax deficiencies, including penalties and interest.
The Company has received preliminary tax assessments for the years 1991
to 1997 from the Belgian tax authorities proposing tax deficiencies, including
related interest, of approximately (euro)10.1 million ($11.6 million at
September 30, 2003). The Company has filed protests to the assessments with
respect to such years. The Company is in discussions with the Belgian tax
authorities and believes that a significant portion of the assessments is
without merit. In April 2003 the Company received a notification from the
Belgian tax authorities of their intent to assess a tax deficiency related to
1999. The anticipated assessment, including interest, is expected to approximate
(euro)13.3 million ($15.2 million at September 30, 2003). The Company believes
the proposed assessment related to 1999 is without merit, and in April 2003
filed a written response in opposition to the notification of intent to assess.
The Belgian tax authorities have indicated they intend to file a lien on the
fixed assets of the Company's Belgian TiO2 operations.
In 2002, the Company received a notification from the Norwegian tax
authorities of their intent to assess tax deficiencies of approximately NOK 12.2
million ($1.7 million at September 30, 2003) relating to 1998 through 2000. The
Company has objected to this proposed assessment in a written response to the
Norwegian tax authorities.
In the first quarter of 2003, the Company was notified by the German
Federal Fiscal Court (the "Court") that the Court had ruled in the Company's
favor concerning a claim-for-refund suit in which the Company sought refunds of
prior taxes paid during the periods 1990 through 1997. The Company has filed
certain amended German tax returns claiming such refunds for all years affected
by the Court's decision, which is expected to result in an estimated refund of
taxes and interest of approximately $40 million. Receipt of the German tax
refunds is subject to satisfaction of various procedural requirements, including
a review and acceptance of the amended German tax returns by the German tax
-15-
authorities. Certain of these procedural requirements were satisfied in the
second quarter of 2003 with respect to a portion of the refund claim, and in
July 2003 the German tax authorities refunded The Company a portion of the total
anticipated refund. The portion received in July was (euro)21.5 million ($24.6
million when paid). The Company has reflected this tax refund in its second
quarter 2003 results of operations. The Company expects to receive the remaining
refunds over the next four to six months, a portion of which may result in an
additional income tax benefit.
No assurance can be given that the Company's tax matters will be
favorably resolved due to the inherent uncertainties involved in 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 the Company's
consolidated financial position, results of operations or liquidity.
At September 30, 2003, the Company had the equivalent of approximately
$452 million of income tax loss carryforwards in Germany with no expiration
date. However, the Company has provided a deferred tax valuation allowance
against substantially all of these income tax loss carryforwards because the
Company currently believes it does not meet the "more-likely-than-not"
recognition criteria. In August 2003, the German federal government proposed new
tax law amendments that would limit the annual utilization of income tax loss
carryforwards, to become effective in 2004. This proposal is similar to a
proposal the German federal government introduced in 2002 that was never
enacted. There can be no assurance that these proposed law amendments will be
enacted, and if enacted, when they would become effective. Such proposal, if
enacted as proposed, would significantly affect the Company's future income tax
expense and cash tax payments.
At September 30, 2003, the Company had net deferred tax liabilities of
$88 million. The Company operates in numerous tax jurisdictions, in certain of
which it has temporary differences that net to deferred tax assets (before
valuation allowance). The Company has provided a deferred tax valuation
allowance of $165 million at September 30, 2003, principally related to Germany,
partially offsetting deferred tax assets which the Company believes do not
currently meet the "more-likely-than-not" recognition criteria.
Note 9 - Other income (expense):
Operating items
Corporate expense includes certain administrative expenses (primarily
legal, finance, accounting and tax).
Nonoperating items
In the first nine months of 2002, the Company recognized a foreign
currency transaction gain of $6.3 million related to the extinguishment of
certain intercompany indebtedness with Kronos International, Inc. ("KII"), a
wholly-owned subsidiary of the Company.
Note 10 - Commitments and contingencies:
The Company's Belgian subsidiary and various of its Belgian employees
are the subject of civil and criminal proceedings relating to an accident that
resulted in two fatalities at the Company's Langerbrugge, Belgium facility in
October 2000. The investigation stage of these proceedings was completed in
2002. In May 2003 the Belgian authorities referred the proceedings against the
-16-
Company's Belgian subsidiary and certain of its Belgian employees to the
criminal court for trial. Trial briefs have been submitted to the criminal court
by the parties and a final hearing and determination by the court is scheduled
for January 2004.
The Company currently believes the disposition of all claims and
disputes, individually and in the aggregate, should not have a material adverse
effect on the Company's consolidated financial position, results of operations
or liquidity.
For descriptions of certain other commitments and contingencies related
to the Company, reference is made to the Company's Registration Statement.
Note 11 - Accounting principle not yet adopted:
The Company is required to comply with the consolidation requirements of
FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest
Entities," an interpretation of Accounting Research Bulletin ("ARB") No. 51,
beginning no later than the period ending December 31, 2003. The Company is
still studying this newly-issued interpretation. While the Company currently
does not believe it has any involvement with any variable interest entity (as
that term is defined in FIN No. 46), the interpretation is complex, and the
staff of the FASB continues to provide implementation guidance, and therefore
the impact of adopting the consolidation requirements of FIN No. 46 has not yet
been determined.
Note 12 - Notes receivable from and payable to affiliates:
Notes receivable from affiliates
At December 31, 2002, the Company had $44.6 million of loans outstanding
to NL under the terms of a $55 million revolving credit facility entered into
with NL during 2002. The loan bore interest at U.S. LIBOR plus 1.75% (3.1% at
December 31, 2002), with interest payable quarterly, and all principal was due
on December 31, 2005. This note receivable from NL is included in noncurrent
assets at December 31, 2002, as settlement of the note was currently
contemplated within the foreseeable future. During the first six months of 2003,
NL repaid a net $19.7 million to the Company. In June 2003 the Company
distributed the remaining $24.9 million of notes receivable from affiliate to NL
in the form of a noncash dividend. The revolving credit agreement with NL was
terminated on June 30, 2003.
Notes payable to affiliates
At December 31, 2002, the Company had $44.6 million outstanding of loans
from NL Environmental Management Services, Inc. ("EMS"), a majority-owned
subsidiary of NL, under the terms of a $55 million revolving credit facility
entered into with EMS in 2002. The loan bore interst at U.S LIBOR plus 1.75%
(3.1% at December 31, 2002), with interest payable quarterly, and all principal
was due on December 31, 2005. During the first six months of 2003, the Company
repaid this outstanding balance in full, and the revolving credit agreement with
EMS was terminated on June 30, 2003.
-17-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three months ended Nine months ended
September 30, September 30,
------------------------------- -----------------------------
2003 2002 %Change 2003 2002 %Change
------ ------ ------- ------ ------ -------
(In millions, except percentages and metric tons)
Net sales and operating
income
Net sales .................. $242.9 $234.1 +4% $762.5 $663.3 +15%
Cost of sales .............. 177.4 177.5 * 563.5 510.0 10%
------ ------ ------ ------
Gross margin ................ 65.5 56.6 16% 199.0 153.3 30%
Selling, general and
administrative expense .... 29.7 28.5 4% 90.1 78.1 15%
Other operating income
(expense):
Currency transaction
gains (losses), net ....... (.5) .7 (4.3) (.8)
Disposition of property
and equipment .............. (.2) (.2) (.2) .4
Corporate expense ........... (.9) (1.0) (2.6) (2.4)
Other income ................ .1 .3 .3 .4
Other expense ............... -- -- (.1) (.1)
------ ------ ------ ------
Income from operations .... $ 34.3 $ 27.9 +23% $102.0 $ 72.7 +40%
====== ====== ====== ======
TiO2 operating statistics
Percent change in
average selling price:
Using actual
foreign currency
exchange rates ....... +10% +15%
Impact of changes in
foreign currency
exchange rates ....... -8% -10%
---- ----
In billing currencies .. +2% +5%
Sales volume (metric
tons in thousands) ....... 110.9 117.4 -6% 350.3 352.4 -1%
Production volume
(metric tons in thousands) 117.5 116.0 +1% 354.2 334.9 +6%
- --------------
* less than 1%
-18-
Comparison of three months ended September 30, 2003 and 2002 - Sales, cost of
sales, gross margin, selling general and administrative expenses and income from
operations
The Company's sales and gross margin increased $8.8 million (4%) and
$8.9 million (16%), respectively, in the third quarter of 2003 compared to the
third quarter of 2002 due primarily to higher average TiO2 selling prices
partially offset by lower TiO2 sales volumes. Excluding the effect of
fluctuations in the value of the U.S. dollar relative to other currencies, the
Company's average TiO2 selling prices in billing currencies in the third quarter
of 2003 were 2% higher than the third quarter of 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 the third quarter of 2003 increased 10% compared to the third quarter
of 2002. 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 were 1% lower in the third quarter of 2003
as compared to the second quarter of the year.
The Company's sales are denominated in various currencies, including the
U.S. dollar, the euro, other major European currencies and the Canadian dollar.
The disclosure of the percentage change in the Company's average TiO2 selling
prices in billing currencies (which excludes the effects of fluctuations in the
value of the U.S. dollar relative to other currencies) is considered a
"non-GAAP" financial measure under regulations of the SEC. The disclosure of the
percentage change in the Company's average TiO2 selling prices using actual
foreign currency exchange rates prevailing during the respective periods is
considered the most directly comparable financial measure presented in
accordance with accounting principles generally accepted in the United States
("GAAP measure"). The Company discloses percentage changes in its average TiO2
prices in billing currencies because the Company believes such disclosure
provides useful information to investors to allow them to analyze such changes
without the impact of changes in foreign currency exchange rates, thereby
facilitating period-to-period comparisons of the relative changes in average
selling prices in the actual various billing currencies. Generally, when the
U.S. dollar either strengthens or weakens against other currencies, the
percentage change in average selling prices in billing currencies will be higher
or lower, respectively, than such percentage changes would be using actual
exchange rates prevailing during the respective periods. The difference between
the 10% changes in the Company's average TiO2 selling prices during the third
quarter of 2003 as compared to the same period in 2002 using actual foreign
currency exchange rates prevailing during the respective periods (the GAAP
measure) and the 2% change in the Company's average TiO2 selling prices in
billing currencies (the non-GAAP measure) during such period is due to the
effect of changes in foreign currency exchange rates. The above table presents
in a tabular format (i) the percentage change in the Company's average TiO2
selling prices using actual foreign currency exchange rates prevailing during
the respective periods (the GAAP measure), (ii) the percentage change in the
Company's average TiO2 selling prices in billing currencies (the non-GAAP
measure) and (iii) the percentage change due to changes in foreign currency
exchange rates (or the reconciling item between the non-GAAP measure and the
GAAP measure).
The Company's TiO2 sales volume in the third quarter of 2003 was 6%
lower than the third quarter of 2002, with substantially all of the decrease
occurring in export markets. The Company's TiO2 production volume in the third
quarter of 2003 was 1% higher than the third quarter of 2002, with operating
rates at near full capacity in both the third quarter of 2003 and 2002.
The increase in average TiO2 selling prices increased gross margin by
$5.5 million, while the lower TiO2 sales volume decreased gross margin by $5.4
million. The effect of the increase in TiO2 production volumes during the third
quarter of 2003 as compared to the third quarter of 2002 was not material.
-19-
The Company's cost of sales in the third quarter of 2003 was comparable
to the third quarter of 2002. The Company's cost of sales as a percentage of net
sales decreased from 76% in the third quarter of 2002 to 73% in the third
quarter of 2003 primarily due to the higher average selling prices and higher
production volumes.
The increase in the Company's gross margin, quantified above, is due to
the net effects of the changes in sales and cost of sales during such periods.
The Company's selling, general and administrative expenses in the third
quarter of 2003 were approximately $1.2 million (4%) higher than the third
quarter of 2002 primarily due to the effects of foreign currency translation,
which increased the Company's expenses in the third quarter of 2003 as compared
to the same period in 2002. Offsetting the effect of changes in foreign currency
exchange rates, distribution and selling expenses associated with the lower
sales volume were approximately $600,000 (3%) lower in the third quarter of 2003
as compared to the same period in 2002. The Company's selling, general and
administrative expenses were approximately 12% of sales in both the third
quarter of 2003 and 2002.
The Company has substantial operations and assets located outside the
United States (primarily in Germany, Belgium, Norway and Canada). A significant
amount of the Company's sales generated from its non-U.S. operations are
denominated in currencies other than the U.S. dollar, principally the euro,
other major European currencies and the Canadian dollar. A portion of the
Company's sales generated from its non-U.S. operations are denominated in the
U.S. dollar. Certain raw materials, primarily titanium-containing feedstocks,
are purchased in U.S. dollars, while labor and other production costs are
denominated primarily in local currencies. Consequently, the translated U.S.
dollar value of the Company's foreign sales and operating results are subject to
currency exchange rate fluctuations which may favorably or adversely impact
reported earnings and may affect the comparability of period-to-period operating
results. Overall, fluctuations in the value of the U.S. dollar relative to other
currencies, primarily the euro, increased the Company's sales in the third
quarter of 2003 by a net $16.6 million compared to the same period in 2002.
Fluctuations in the value of the U.S. dollar relative to other currencies
similarly impacted the Company's foreign currency-denominated operating
expenses. The Company's operating costs that are not denominated in the U.S.
dollar, when translated into U.S. dollars, were higher in the third quarter of
2003 compared to the same period in 2002. Overall, the net impact of currency
exchange rate fluctuations slightly increased the Company's income from
operations in the third quarter of 2003 as compared to the third quarter of
2002.
Other operating income (expense) in each of the third quarter of 2003
and 2002 were comprised principally of foreign currency transaction gains and
losses, ordinary course of business gains and losses on the disposal of property
and equipment used in the Company's TiO2 operations and corporate expenses. See
Note 9 to the Consolidated Financial Statements.
As a net result of the items discussed above, the Company's income from
operations increased 23% from $27.9 million in the third quarter of 2002 to
$34.3 million in the third quarter of 2003.
Comparison of nine months ended September 30, 2003 and 2002 - Sales, cost of
sales, gross margin, selling, general and administrative expenses and income
from operations
The Company's sales and gross margin increased $99.2 million (15%) and
$45.7 million (30%), respectively, in the first nine months of 2003 compared to
the first nine months of 2002 due primarily to higher average TiO2 selling
prices and higher TiO2 production volume, partially offset by slightly lower
TiO2 sales volume and higher operating costs (particularly energy costs, which
-20-
increased by approximately $8 million). 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 billing currencies in the first nine months of 2003 was 5%
higher than the first nine months of 2002. 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 the first nine months of 2003 increased 15% compared to the first nine
months of 2002.
The difference between the 15% change in the Company's average TiO2
selling prices during the first nine months of 2003 as compared to the same
period in 2002 using actual foreign currency exchange rates prevailing during
the respective periods (the GAAP measure) and the 5% change in the Company's
average TiO2 selling prices in billing currencies (the non-GAAP measure) during
such period is due to the effect of changes in foreign currency exchange rates.
The above table presents in a tabular format (i) the percentage change in the
Company's average TiO2 selling prices using actual foreign currency exchange
rates prevailing during the respective periods (the GAAP measure), (ii) the
percentage change in the Company's average TiO2 selling prices in billing
currencies (the non-GAAP measure) and (iii) the percentage change due to changes
in foreign currency exchange rates (or the reconciling item between the non-GAAP
measure and the GAAP measure).
The Company's TiO2 sales volumes in the first nine months of 2003 were
1% lower than the first nine months of 2002. The Company's TiO2 production
volumes in the first nine months of 2003 were 6% higher than the first nine
months of 2002, with operating rates at near full capacity in both the first
nine months of 2003 and 2002.
The increase in average TiO2 selling prices and higher TiO2 production
volumes increased gross margin by $28.8 million and $9.1 million, respectively.
The effect of the decrease in TiO2 sales volumes during the first nine months of
2003 as compared to the same period in 2002 was not material.
The Company's cost of sales increased $53.5 million (10%) in the first
nine months of 2003 compared to the first nine months of 2002. The Company's
cost of sales as a percentage of net sales decreased from 77% in the first nine
months of 2002 to 74% in the first nine months of 2003 primarily due to the
higher average selling prices and higher production volume, partially offset by
the higher operating costs.
The increase in the Company's gross margin, quantified above, is due to
the net effects of the changes in sales and cost of sales during such periods.
The Company's selling, general and administrative expenses increased
$12.0 million (15%) in the first nine months of 2003 as compared to the first
nine months of 2002 primarily due to the effects of foreign currency
translation, which increased the Company's expenses in the first nine months of
2003 as compared to the same period in 2002. The Company's selling, general and
administrative expenses were approximately 12% of sales in the first nine months
of both 2003 and 2002.
As discussed above, the Company has substantial operations and assets
located outside the United States (primarily in Germany, Belgium, Norway and
Canada). Overall, fluctuations in the value of the U.S. dollar relative to other
currencies, primarily the euro, increased the Company's sales in the first nine
months of 2003 by a net $71.0 million compared to the same period in 2002, and
decreased the Company's income from operations by $2.3 million.
-21-
Other operating income (expense) in each of the third quarter of 2003
and 2002 were comprised principally of foreign currency transaction gains and
losses, ordinary course of business gains and losses on the disposal of property
and equipment used in the Company's TiO2 operations and corporate expenses. See
Note 9 to the Consolidated Financial Statements.
As a net result of the items discussed above, the Company's income from
operations increased increased 40% from $72.7 million in the first nine months
of 2002 to $102.0 million in the first nine months of 2003.
Outlook
The Company expects that its income from operations in 2003 will be
higher than in 2002 primarily due to higher average TiO2 selling prices and
higher sales and production volumes, partially offset by higher operating costs
(particularly energy costs). The Company's TiO2 production volume in 2003 is
expected to be higher than the Company's 2003 TiO2 sales volume, with finished
goods inventories rising modestly. The Company's expectations as to the future
prospects for the Company 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 market place, unexpected or
earlier-than-expected capacity additions by competitors and technological
advances. If actual developments differ from the Company's expectations, the
Company's results of operations could be unfavorably affected.
Other income (expense) items
The following table sets forth certain information regarding general
corporate income (expense).
Three months ended Nine months ended
September 30, September 30,
----------------------------------- ----------------------------------
2003 2002 Difference 2003 2002 Difference
----------- ----------- ----------- ---------- ----------- -----------
(In millions)
Trade interest income $ .2 $ .7 $ (.5) $ .6 $ 1.3 $ (.7)
Interest income from
affiliates ........ -- 3.2 (3.2) .7 20.6 (19.9)
Other interest
income ............ .1 .4 (.3) .1 .5 (.4)
Foreign currency
transaction gain .. -- -- -- -- 6.3 (6.3)
Interest expense .... (8.3) (7.6) (.7) (24.7) (9.2) (15.5)
Interest expense to
affiliates ........ -- -- -- (.7) (12.2) 11.5
------ ------ ------- ------- ------- -------
$ (8.0) $ (3.3) $ (4.7) $ (24.0) $ 7.3 $ (31.3)
====== ====== ======= ======= ======= =======
Interest income was lower in the third quarter and the first nine months
of 2003 as compared to the year earlier periods due to lower levels of available
funds invested and lower average yields. The Company expects interest income to
be lower for full-year 2003 than full-year 2002 due to lower average yields and
lower average levels of funds available for investment.
The foreign currency transaction gain in the first nine months of 2002
related to the extinguishment of certain intercompany indebtedness with KII.
Interest expense to third parties in the third quarter and first nine
months of 2003 increased $.7 million and $15.5 million, respectively, from the
comparable prior year periods, primarily due to higher levels of outstanding
debt and associated currency effects, partially offset by lower interest rates.
Interest expense in the first nine months of 2002 included $2.0 million related
-22-
to the early extinguishment of the Company's 11.75% Senior Secured Notes.
Assuming no significant change in interest rates, interest expense for full-year
2003 is expected to be higher than full-year 2002 due to higher levels of
outstanding indebtedness, partially offset by lower average interest rates. As a
result of the repayment of the loans from affiliates in June 2002, the Company
does not expect a material amount of interest expense to affiliates in 2003.
Interest income from affiliates decreased $3.2 million and $19.9
million, respectively, from the third quarter and first nine months of 2002 due
to the redemption and extinguishment of all notes receivable from affiliates in
July 2002. As a result of the redemption and extinguishment of affiliate notes
receivable, the Company does not expect a material amount of interest income
from affiliates in 2003.
Provision for income taxes
See Note 8 to the Consolidated Financial Statements.
Recently adopted accounting principle
As described in Note 1 to the Consolidated Financial Statements, the
Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligations,"
effective January 1, 2003.
Accounting principle not yet adopted
See Note 11 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows from operating, investing and
financing activities for the nine months ended September 30, 2003 and 2002 are
presented below.
Nine months ended
September 30,
--------------------
2003 2002
------ ------
(In millions)
Net cash provided (used) by:
Operating activities ............................. $ 83.4 $ 77.3
Investing activities ............................. (24.5) (18.7)
Financing activities ............................. (61.7) (.8)
------ ------
Net cash used by operating, investing
and financing activities ..................... $ (2.8) $ 57.8
====== ======
-23-
Operating activities
The TiO2 industry is cyclical and changes in economic conditions within
the industry significantly affect the earnings and operating cash flows of the
Company. Cash flows from operations is the primary source of liquidity for the
Company. Changes in TiO2 pricing, production volume and customer demand, among
other things, could significantly affect the liquidity of the Company. Relative
changes in assets and liabilities generally result from the timing of
production, sales, purchases and income tax payments. Such relative changes can
significantly impact the comparability of cash flow from operations from period
to period, as the statement of income impact of such items may occur in a
different period from when the underlying cash transaction occurs. For example,
raw materials may be purchased in one period, but the payment for such raw
materials may occur in a subsequent period. Similarly, inventory may be sold in
one period, but the cash collection of the receivable may occur in a subsequent
period.
Cash flows from operating activities increased from $77.3 million in the
first nine months of 2002 to $83.4 million in the first nine months of 2003.
This $6.1 million increase was due primarily to the net effect of (i) higher net
income of $17.3 million, (ii) higher depreciation expense of $5.3 million, (iii)
lower distributions from the manufacturing joint venture of $4.2 million and
(iv) a higher amount of net cash used to fund changes in the Company'
inventories, receivables, payables and accruals of $40.3 million in the first
nine months of 2003. 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 volume and sales volume.
Investing activities
The Company's capital expenditures were $23.7 million and $18.1 million
in the first nine months of 2003 and 2002, respectively. Capital expenditures in
the first nine months of 2002 included approximately $2.6 million related to
reconstruction of the Company's Leverkusen, Germany sulfate plant damaged in the
March 2001 fire.
Financing activities
In March 2002, the Company repaid $25 million principal amount of
affiliate indebtedness owed to NL. In June 2002, the Company repaid $169 million
principal amount, plus accrued interest, of affiliate indebtedness owed to NL,
with proceeds from the offering of the Senior Secured Notes discussed below.
In June 2002, KII, a wholly-owned subsidiary of the Company, issued
(euro)285 million principal amount of the KII 8.875% Senior Secured Notes ($280
million when issued). Also in June 2002, KII's primary operating subsidiaries in
Germany, Belgium and Norway entered into a new three-year (euro)80 million
secured revolving credit facility ("European Credit Facility") and borrowed
(euro)13 million ($13 million when borrowed) and NOK 200 million ($26 million
when borrowed) which, along with available cash, was used to repay and terminate
KII's short term notes payable ($53.2 million when repaid). In the third quarter
of 2002, the Company repaid a net euro-equivalent 12.7 million ($12.4 million
when repaid) of the European Credit Facility. See Note 7 to the Consolidated
Financial Statements.
In March 2003 the Company borrowed (euro)15 million ($16.1 million when
borrowed), in April 2003 the Company repaid NOK 80 million ($11.0 million when
repaid) and in the third quarter of 2003 the Company repaid (euro)30.0 million
($33.9 million when repaid) under the European Credit Facility.
-24-
In September 2002 the Company's U.S. operating subsidiaries entered into
a three-year $50 million asset-based revolving credit facility ("U.S. Credit
Facility").
Deferred financing costs of $10.6 million for the KII 8.875% Senior
Secured Notes, the European Credit Facility and the U.S. Credit Facility are
being amortized over the life of the respective agreements and are included in
other noncurrent assets as of September 30, 2003.
In June 2003, the Company paid a $7 million dividend to NL. No dividends
were paid in the first or third quarters of 2003. In the third quarter of 2002,
the Company paid a $20 million dividend to NL.
Cash flows related to capital contributions and other transactions with
affiliates aggregated a net cash outflow of $29.1 million in the first nine
months of 2002, and aggregated a net cash inflow of $19.7 million in the first
nine months of 2003. Such amounts related principally to loans that Kronos made
to affiliates (such notes receivable from affiliates being reported as
reductions to Kronos' stockholder's 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 July 2002, Kronos transferred certain such notes receivable from affiliates
to NL, and as a result Kronos will no longer report cash flows related to
certain such notes receivable from affiliates. Such net cash flows in 2002 also
included $9.1 million related to the Company's purchase of EWI. See Note 1 to
the Consolidated Financial Statements.
Cash, cash equivalents, restricted cash and restricted marketable debt
securities and borrowing availability
At September 30, 2003, the Company had cash and cash equivalents
aggregating $39.4 million, current restricted cash equivalents of $800,000 and
noncurrent restricted marketable debt securities of $2.0 million. Of such
aggregate $42.3 million amount, $21.9 million was held by non-U.S. subsidiaries.
At September 30, 2003, certain of the Company's subsidiaries had
approximately $136 million available for borrowing with approximately $92
million available under non-U.S. credit facilities (including approximately $89
million under the European Credit Facility) and approximately $44 million under
the U.S. Credit Facility. At September 30, 2003, the Company had complied with
all financial covenants governing its debt agreements.
Based upon the Company's expectations for the TiO2 industry and
anticipated demands on the Company's cash resources as discussed herein, the
Company expects to have sufficient liquidity to meet its near-term obligations,
including operations, capital expenditures, debt service and current dividend
policy. To the extent actual developments differ from the Company's
expectations, the Company could be adversely affected.
Income tax contingencies
See Note 8 to the Consolidated Financial Statements.
Litigation and other contingencies
See Note 10 to the Consolidated Financial Statements and Part II, Item 1
"Legal Proceedings."
-25-
Non-GAAP financial measures
In an effort to provide investors with additional information regarding
the Company's results as determined by GAAP, the Company 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 the Company's
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 would be using actual exchange rates prevailing during the respective
periods.
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; 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, and loans to, related companies. In the event of any acquisition
or joint venture transaction, the Company may consider using available cash,
issuing equity securities or increasing its indebtedness to the extent permitted
by the agreements governing the Company's existing debt.
Special note regarding forward-looking statements
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts
are forward-looking statements that represent management's beliefs and
assumptions based on currently available information. Forward-looking statements
can be identified by the use of words such as "believes," "intends," "may,"
"should," "could," "anticipates," "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 future results to
differ materially from those described herein are the risks and uncertainties
discussed in this Quarterly Report and those described from time to time in the
Company's other filings with the SEC including, but not limited to, the
following:
-26-
o Future supply and demand for the Company's products,
o The cyclicality of the Company's TiO2 business,
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 ope-+rating 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, among other things, TiO2),
o Competitive products and substitute products,
o Customer and competitor strategies,
o The impact of pricing and production decisions,
o Competitive technology positions,
o Fluctuations in currency exchange rates (such as changes in the exchange
rate between the U.S. dollar and each of the euro, the Norwegian kroner
and the Canadian dollar),
o Operating interruptions (including, but not limited to, labor disputes,
leaks, fires, explosions, unscheduled or unplanned downtime and
transportation interruptions), o Recoveries from insurance claims and the
timing thereof, o The ability of the Company to renew or refinance credit
facilities, o The ultimate outcome of income tax audits or other tax
matters, and o Possible future litigation.
Should one or more of these risks materialize (or the consequences of
such a development worsen), or should the underlying assumptions prove
incorrect, actual results could differ materially from those forecasted or
expected. The Company disclaims any intention or obligation to update or revise
any forward-looking statement whether as a result of new information, future
events or otherwise.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures.
The term "disclosure controls and procedures," as defined by regulations of the
SEC, means controls and other procedures that are designed to ensure that
information required to be disclosed in the reports that the Company files or
submits to the SEC under the Securities Exchange Act of 1934, as amended (the
"Act"), is recorded, processed, summarized and reported, within the time periods
specified in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by the Company in the reports that it files
or submits to the SEC under the Act is accumulated and communicated to the
Company's management, including its principal executive officer and its
principal financial officer, 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, have evaluated the Company's
disclosure controls and procedures as of September 30, 2003. Based upon their
evaluation, these executive officers have concluded that the Company's
disclosure controls and procedures are effective as of the date of such
evaluation.
The Company also maintains a system of internal controls over financial
reporting. The term "internal control over financial reporting," as defined by
regulations of the SEC, means a process designed by, or under the supervision
of, the Company's principal executive and principal financial officers, or
persons performing similar functions, and effected by the Company's board of
directors, management and other personnel, to provide reasonable assurance
-27-
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with GAAP, and includes
those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the Company,
o Provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with GAAP,
and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the
Company, and
o Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the Company's consolidated financial
statements.
There has been no change to the Company's system of internal controls
over financial reporting during the quarter ended September 30, 2003 that has
materially affected, or is reasonably likely to materially affect, the Company's
system of internal controls over financial reporting.
-28-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Note 10 to the Consolidated Financial Statements
and the Registration Statement for descriptions of certain previously reported
legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Company has retained a signed original of any exhibit
listed below that contains signatures, and the Company
will provide any such exhibit to the SEC or its staff upon
request.
2.1 - Form of Distribution Agreement between NL
Industries, Inc. and Kronos Worldwide, Inc. - incorporated
by reference to Exhibit 2.1 to the Kronos Worldwide, Inc.
Registration Statement on Form 10 (File No. 001-31763).
10.1 - Form of Tax Agreement between Valhi, Inc. and
Kronos Worldwide, Inc. - incorporated by reference to
Exhibit 10.1 to the Kronos Worldwide, Inc. Registration
Statement on Form 10 (File No. 001-31763).
10.2 - Form of Intercorporate Services Agreement between
Contran Corporation and Kronos Worldwide, Inc. -
incorporated by reference to Exhibit 10.2 to the Kronos
Worldwide, Inc. Registration Statement on Form 10 (File
No. 001-31763).
10.3 - Form of Kronos Worldwide, Inc. Long-Term Incentive
Plan - incorporated by reference to Exhibit 10.4 to the
Kronos Worldwide, Inc. Registration Statement on Form 10
(File No. 001-31763).
10.4 - 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 to the Kronos Worldwide, Inc. Registration
Statement on Form 10 (File No. 001-31763).
31.1 - Certification.
31.2 - Certification.
32.1 - Certification.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended September 30,
2003 through the date of this report:
None.
-29-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KRONOS WORLDWIDE, INC
---------------------
(Registrant)
Date: November 13, 2003 By /s/ Gregory M. Swalwell
- ------------------------ ----------------------------------
Gregory M. Swalwell
Vice President, Finance
(Principal Financial Officer and
Accounting Officer)
-30-
EXHIBIT 31.1
CERTIFICATION
I, Harold C. Simmons, the Chief Executive Officer of Kronos Worldwide, Inc.,
certify that:
1) I have reviewed this quarterly report on Form 10-Q of Kronos Worldwide,
Inc.;
2) Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and we have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 13, 2003
/s/ Harold C. Simmons
-------------------------
Harold C. Simmons
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION
I, Gregory M. Swalwell, the Vice President, Finance of Kronos Worldwide, Inc.,
certify that:
1) I have reviewed this quarterly report on Form 10-Q of Kronos Worldwide,
Inc.;
2) Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and we have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 13, 2003
/s/ Gregory M. Swalwell
-----------------------
Gregory M. Swalwell
Vice President, Finance
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Kronos Worldwide, Inc. (the Company)
on Form 10-Q for the period ended September 30, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the Report), I, Harold C.
Simmons, Chief Executive Officer of the Company, and I, Gregory M. Swalwell,
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/ Harold C. Simmons
---------------------
Harold C. Simmons
Chief Executive Officer
/s/ Gregory M. Swalwell
-----------------------
Gregory M. Swalwell
Chief Financial Officer
November 13, 2003
Note: The certification the registrant furnishes in this exhibit is not deemed
"filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended, or otherwise subject to the liabilities of that Section. Registration
Statements or other documents filed with the Securities and Exchange Commission
shall not incorporate this exhibit by reference, except as otherwise expressly
stated in such filing.