SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2005 Commission file number 1-31763
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KRONOS WORLDWIDE, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 76-0294959
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes X No
--- ---
Number of shares of the Registrant's common stock outstanding on April 29, 2005:
48,946,049.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
December 31, 2004; March 31, 2005 (Unaudited) 3
Consolidated Statements of Income -
Three months ended March 31, 2004 and 2005 (Unaudited) 5
Consolidated Statements of Comprehensive Income -
Three months ended March 31, 2004 and 2005 (Unaudited) 6
Consolidated Statement of Stockholders' Equity -
Three months ended March 31, 2005 (Unaudited) 7
Consolidated Statements of Cash Flows -
Three months ended March 31, 2004 and 2005 (Unaudited) 8
Notes to Consolidated Financial Statements (Unaudited) 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 4. Controls and Procedures 25
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 6. Exhibits 26
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, March 31,
2004 2005
------------ -----------
(Unaudited)
Current assets:
Cash and cash equivalents $ 60,790 $ 38,406
Restricted cash 1,529 965
Accounts and other receivables 190,319 213,702
Refundable income taxes 3,272 1,121
Receivables from affiliates 16 -
Inventories 233,858 239,384
Prepaid expenses 4,529 6,551
Deferred income taxes 1,205 1,995
---------- ----------
Total current assets 495,518 502,124
---------- ----------
Other assets:
Investment in TiO2 manufacturing joint venture 120,251 121,101
Deferred income taxes 238,284 235,909
Other 32,340 30,287
---------- ----------
Total other assets 390,875 387,297
---------- ----------
Property and equipment:
Land 35,511 33,869
Buildings 196,983 189,371
Equipment 857,714 823,381
Mining properties 71,980 68,596
Construction in progress 16,753 18,752
---------- ----------
1,178,941 1,133,969
Less accumulated depreciation and amortization 712,051 692,216
---------- ----------
Net property and equipment 466,890 441,753
---------- ----------
$1,353,283 $1,331,174
========== ==========
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, March 31,
2004 2005
----------- -----------
(Unaudited)
Current liabilities:
Current maturities of long-term debt $ 13,792 $ 13,108
Accounts payable and accrued liabilities 170,009 168,571
Payable to affiliates 9,231 11,209
Income taxes 17,129 18,406
Deferred income taxes 2,722 2,386
---------- ----------
212,883 213,680
---------- ----------
Total current liabilities
Noncurrent liabilities:
Long-term debt 519,403 493,145
Deferred income taxes 60,081 58,900
Accrued pension costs 61,300 57,027
Accrued postretirement benefits costs 11,288 11,024
Other 17,407 15,022
---------- ----------
Total noncurrent liabilities 669,479 635,118
---------- ----------
Minority interest 76 76
---------- ----------
Stockholders' equity:
Common stock 489 489
Additional paid-in capital 1,060,643 1,060,644
Retained deficit (463,352) (454,187)
Accumulated other comprehensive loss:
Currency translation (88,181) (85,892)
Pension liabilities (38,754) (38,754)
---------- ----------
Total stockholders' equity 470,845 482,300
---------- ----------
$1,353,283 $1,331,174
========== ==========
Commitments and contingencies (Notes 8 and 10)
See accompanying notes to consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three months ended March 31, 2004 and 2005
(In thousands, except per share data)
(Unaudited)
2004 2005
---- ----
Net sales $ 263,267 $ 291,874
Cost of sales 202,231 207,677
---------- ----------
Gross margin 61,036 84,197
Selling, general and administrative expense 35,244 37,253
Other operating income (expense):
Currency transaction gains, net 254 928
Disposition of property and equipment (23) (34)
Other income 14 36
Corporate expense (438) (1,425)
---------- ----------
Income from operations 25,599 46,449
Other income (expense):
Trade interest income 206 78
Other interest income 151 341
Interest expense to affiliates (4,475) -
Interest expense (9,215) (11,772)
---------- ----------
Income before income taxes and minority interest 12,266 35,096
Provision for income taxes 2,450 13,691
Minority interest in after-tax earnings 8 4
---------- ----------
Net income $ 9,808 $ 21,401
========== ==========
Cash dividend per share $ .25 $ .25
========== ==========
Basic and diluted net income per share $ .20 $ .44
========== ==========
Basic and diluted weighted-average shares
used in the calculation of net income per share 48,943 48,946
========== ==========
See accompanying notes to consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended March 31, 2004 and 2005
(In thousands)
(Unaudited)
2004 2005
---- ----
Net income $ 9,808 $ 21,401
Other comprehensive income (loss), net of tax - currency
translation adjustment (437) 2,289
---------- ----------
Comprehensive income $ 9,371 $ 23,690
========== ==========
See accompanying notes to consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three months ended March 31, 2005
(In thousands)
(Unaudited)
Accumulated other
comprehensive loss
Additional -------------------------- Total
Common paid-in Retained Currency Pension stockholders'
stock capital deficit translation liabilities equity
------- ----------- ---------- ----------- ----------- -------------
Balance at December 31, 2004 $ 489 $1,060,643 $(463,352) $(88,181) $(38,754) $470,845
Net income - - 21,401 - - 21,401
Dividends - - (12,236) - - (12,236)
Other comprehensive income - - - 2,289 - 2,289
Other - 1 - - - 1
------ ---------- --------- -------- -------- --------
Balance at March 31, 2005 $ 489 $1,060,644 $(454,187) $(85,892) $(38,754) $482,300
====== ========== ========= ======== ======== ========
See accompanying notes to consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2004 and 2005
(In thousands)
(Unaudited)
2004 2005
---- ----
Cash flows from operating activities:
Net income $ 9,808 $ 21,401
Depreciation and amortization 11,038 11,182
Noncash interest expense 619 780
Deferred income taxes (1,357) 4,963
Minority interest 8 4
Net loss from disposition of property and equipment 23 34
Distributions from (contributions to) TiO2
manufacturing joint venture, net 1,800 (850)
Pension cost, net 1,027 (1,737)
Other postretirement benefits, net (258) (265)
Other, net 700 2
Change in assets and liabilities:
Accounts and other receivables (31,008) (39,179)
Inventories 33,494 (14,232)
Prepaid expenses (66) (2,003)
Accounts payable and accrued liabilities (27,339) 13,746
Income taxes 21,286 4,004
Accounts with affiliates 279 1,763
Other, net (940) (4,570)
-------- --------
Net cash provided by (used in)
operating activities 19,114 (4,957)
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Cash flows from investing activities:
Capital expenditures (4,501) (5,203)
Change in restricted cash equivalents 556 529
Other, net 30 21
-------- --------
Net cash used in investing activities (3,915) (4,653)
-------- --------
Cash flows from financing activities:
Indebtedness:
Borrowings 99,968 -
Principal payments (67,468) (41)
Dividends paid (12,236) (12,236)
-------- --------
Net cash provided by (used in)
financing activities 20,264 (12,277)
-------- --------
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Three months ended March 31, 2004 and 2005
(In thousands)
(Unaudited)
2004 2005
---- ----
Cash and cash equivalents - net change from:
Operating, investing and financing activities $ 35,463 $(21,887)
Currency translation (979) (497)
Cash and cash equivalents at beginning of period 55,876 60,790
-------- --------
Cash and cash equivalents at end of period $ 90,360 $ 38,406
======== ========
Supplemental disclosures - cash paid (received) for:
Interest, net of amounts capitalized $ 5,559 171
Income taxes, net (18,165) $ 3,783
See accompanying notes to consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Organization and basis of presentation:
Kronos Worldwide, Inc. ("Kronos") (NYSE: KRO) is a subsidiary of Valhi,
Inc. (NYSE: VHI). At March 31, 2005, (i) Valhi held approximately 57% of Kronos'
outstanding common stock and NL Industries, Inc. (NYSE:NL) held an additional
36% of Kronos' common stock, (ii) Valhi owned approximately 83% of NL's
outstanding common stock and (iii) Contran Corporation and its subsidiaries held
approximately 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.
The consolidated balance sheet of Kronos at December 31, 2004 has been
condensed from the Company's audited consolidated financial statements at that
date. The consolidated balance sheet at March 31, 2005, and the consolidated
statements of income, comprehensive income, stockholders' equity and cash flows
for the interim periods ended March 31, 2004 and 2005, have been prepared by the
Company, without audit, in accordance with accounting principles generally
accepted in the United States of America ("GAAP"). In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary to
state fairly the consolidated financial position, results of operations and cash
flows have been made.
The results of operations for the interim periods are not necessarily
indicative of the operating results for a full year or of future operations.
Certain information normally included in financial statements prepared in
accordance with GAAP has been condensed or omitted. The accompanying
consolidated financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 2004 (the
"2004 Annual Report").
The Company has not issued any stock options to purchase Kronos common
stock. However, certain employees of the Company have been granted options by NL
to purchase NL common stock. As disclosed in the 2004 Annual Report, the Company
accounts for stock-based employee compensation in accordance with Accounting
Principles Board Opinion ("APBO") No. 25, "Accounting for Stock Issued to
Employees," and its various interpretations. See Note 11. Under APBO No. 25, no
compensation cost is generally recognized for fixed stock options in which the
exercise price is greater than or equal to the market price on the grant date.
Prior to 2004, and following the cash settlement of certain stock options held
by employees of NL and the Company, the Company commenced accounting for its
stock options using the variable accounting method of APBO No. 25 because Kronos
could not overcome the presumption that it would not similarly cash settle the
remaining stock options. Under the variable accounting method, the intrinsic
value of all unexercised stock options (including stock options with an exercise
price at least equal to the market price on the date of grant) is accrued as an
expense, with subsequent increases (decreases) in the Company's market price
resulting in the recognition of additional compensation expense (income).
Aggregate compensation expense related to NL stock options held by employees of
the Company was approximately $700,000 in the first quarter of 2004 and
approximately $100,000 in the first quarter of 2005.
The following table presents what the Company's consolidated net income,
and related per share amounts, would have been in the first quarter of 2004 and
2005 if the Company and its subsidiaries had each elected to account for their
respective stock-based employee compensation related to stock options in
accordance with the fair value-based recognition provisions of 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 March 31,
----------------------------
2004 2005
---- ----
(In millions, except
per share amounts)
Net income as reported $ 9.8 $21.4
Adjustments, net of applicable income
tax effects and minority interest:
Stock-based employee compensation expense
determined under APBO No. 25 .5 .1
Stock-based employee compensation expense
determined under SFAS No. 123 - -
----- -----
Pro forma net income $10.3 $21.5
===== =====
Basic and diluted earnings per share:
As reported $ .20 $ .44
Pro forma .21 .44
Note 2 - Accounts and other receivables:
December 31, March 31,
2004 2005
------------ ----------
(In thousands)
Trade receivables $176,332 $200,183
Insurance claims 32 113
Recoverable VAT and other receivables 16,332 15,608
Allowance for doubtful accounts (2,377) (2,202)
-------- --------
$190,319 $213,702
======== ========
Note 3 - Inventories:
December 31, March 31,
2004 2005
------------ ----------
(In thousands)
Raw materials $ 45,962 $ 43,596
Work in process 16,612 17,256
Finished products 130,385 138,168
Supplies 40,899 40,364
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$233,858 $239,384
======== ========
Note 4 - Other noncurrent assets:
December 31, March 31,
2004 2005
------------ ----------
(In thousands)
Deferred financing costs, net $ 10,921 $ 9,742
Restricted marketable debt securities 2,877 2,741
Unrecognized net pension obligations 13,518 13,152
Other 5,024 4,652
-------- --------
$ 32,340 $ 30,287
======== ========
Note 5 - Accounts payable and accrued liabilities:
December 31, March 31,
2004 2005
------------ ----------
(In thousands)
Accounts payable $ 91,713 $ 77,259
Employee benefits 36,861 34,708
Interest 152 11,036
Other 41,283 45,568
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$170,009 $168,571
======== ========
Note 6 - Long-term debt:
December 31, March 31,
2004 2005
------------ ----------
(In thousands)
Kronos International, Inc. and subsidiaries:
8.875% Senior Secured Notes $519,225 $493,015
European bank credit facility 13,622 12,946
Other 348 292
-------- --------
533,195 506,253
Less current maturities 13,792 13,108
-------- --------
$519,403 $493,145
======== ========
In April 2005, the Company repaid euro 5.0 million ($6.5 million) on its
European bank credit facility.
Note 7 - Other noncurrent liabilities:
December 31, March 31,
2004 2005
------------ ----------
(In thousands)
Employee benefits $ 5,107 $ 4,827
Insurance claims and expenses 1,927 2,204
Asset retirement obligations 958 962
Other 9,415 7,029
-------- --------
$ 17,407 $ 15,022
======== ========
Note 8 - Provision for income taxes:
Three months ended March 31,
----------------------------
2004 2005
---- ----
(In millions)
Expected tax expense $ 4.3 $12.3
Incremental U.S. tax and rate differences on
equity in earnings of non-tax group companies (.1) .2
Non-U.S. tax rates .1 .1
Change in deferred income tax valuation
allowance, net (3.0) -
Nondeductible expenses .8 1.0
Other, net .4 .1
----- -----
$ 2.5 $13.7
===== =====
Certain of the Company's U.S. and non-U.S. tax returns are being examined
and tax authorities have or may propose tax deficiencies, including penalties
and interest. For example:
o Kronos has received a preliminary tax assessment related to 1993 from the
Belgian tax authorities proposing tax deficiencies, including related
interest, of approximately euro 6 million ($8 million at March 31, 2005).
Kronos has filed a protest to this assessment, and believes that a
significant portion of the assessment is without merit. The Belgian tax
authorities have filed a lien on the fixed assets of Kronos' Belgian TiO2
operations in connection with this assessment. In April 2003, Kronos
received a notification from the Belgian tax authorities of their intent to
assess a tax deficiency related to 1999 that, including interest, is
expected to be approximately euro 9 million ($12 million). Kronos believes
the proposed assessment is substantially without merit, and Kronos has
filed a written response.
o The Norwegian tax authorities have notified Kronos of their intent to
assess tax deficiencies of approximately kroner 12 million ($2 million)
relating to the years 1998 through 2000. Kronos has objected to this
proposed assessment.
o Kronos has received a preliminary tax assessment from the Canadian tax
authorities related to the years 1998 and 1999 proposing tax deficiencies
of Cdn. $11 million ($9 million). Kronos has filed 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.
Note 9 - Employee benefit plans:
The components of net periodic defined benefit pension cost are presented
in the table below.
Three months ended March 31,
----------------------------
2004 2005
---- ----
(In thousands)
Service cost $ 1,611 $ 1,987
Interest cost 4,328 4,580
Expected return on plan assets (3,832) (4,114)
Amortization of prior service cost 141 154
Amortization of net transition obligations 160 157
Recognized actuarial losses 742 951
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$ 3,150 $ 3,715
======= =======
The components of net periodic postretirement benefits other than pensions
("OPEB") cost are presented in the table below.
Three months ended March 31,
----------------------------
2004 2005
---- ----
(In thousands)
Service cost $ 57 $ 55
Interest cost 181 145
Amortization of prior service credit (183) (160)
Recognized actuarial losses 39 18
----- -----
$ 94 $ 58
===== =====
Note 10 - Commitments and contingencies:
Reference is made to the 2004 Annual Report for a discussion of certain
other legal proceedings to which the Company is a party.
As noted in the 2004 Annual Report, the Company's principal German
operating subsidiary, Kronos Titan GmbH, leases the land under its Leverkusen
TiO2 production facility pursuant to a lease with Bayer AG that expires in 2050.
The Leverkusen facility, with approximately one-third of the Company's current
TiO2 production capacity, is located within Bayer's extensive manufacturing
complex. Rent for the Leverkusen facility is periodically established by
agreement with Bayer for periods of at least two years at a time. The lease
agreement provides for no formula, index or other mechanism to determine changes
in the rent for the Leverkusen facility; rather, any change in the rent is
subject solely to periodic negotiation between Bayer and the Company. Any change
in the rent based on such negotiations is recognized as part of lease expense
starting from the time such change is agreed upon by both parties, as any such
change in the rent is deemed "contingent rentals" under GAAP.
The Company and its affiliates are from time to time involved in various
environmental, contractual, product liability, patent (or intellectual
property), employment and other claims and disputes incidental to its past and
current operations. In certain cases, the Company has insurance coverage for
such items. The Company currently believes that the disposition of all claims
and disputes, individually or in the aggregate, should not have a material
adverse effect on its consolidated financial position, results of operations or
liquidity.
Note 11 - Accounting principles not yet implemented:
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 is 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. As permitted by regulations of the Securities and Exchange
Commission ("SEC"), the Company will adopt SFAS No. 123R, "Share-Based Payment,"
as of January 1, 2006. 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, if the vesting period of the award). No compensation cost will
be recognized in the aggregate for equity instruments for which the employee
does not render the requisite service (generally, the instrument is forfeited
before it has vested). The grant-date fair value will be estimated using
option-pricing models (e.g. Black-Scholes or a lattice model). Under the
transition alternatives permitted under SFAS No. 123R, the Company will apply
the new standard to all new awards granted on or after January 1, 2006, and to
all awards existing as of December 31, 2005 which are subsequently modified,
repurchased or cancelled. Additionally, as of January 1, 2006, the Company will
be required to recognize compensation cost for the portion of any non-vested
award existing as of December 31, 2005 over the remaining vesting period.
Because the number of non-vested awards as of December 31, 2005 with respect to
options granted by NL to employees of the Company is not expected to be
material, the effect of adopting SFAS No. 123R is not expected to be significant
in so far as it relates to existing stock options. Should the Company or its
subsidiaries and affiliates, however, either grant a significant number of
options to employees of the Company or modify, repurchase or cancel existing
options in the future, the effect on the Company's consolidated financial
statements could be material.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
Executive summary
Relative changes in the Company's TiO2 sales and income from operations
during the 2004 and 2005 periods presented are primarily due to (i) relative
changes in TiO2 average selling prices and (ii) relative changes in foreign
currency exchange rates. Selling prices for TiO2 (in billing currencies) were
generally: decreasing during the first half of 2004 and increasing in the last
half of 2004 and the first quarter of 2005.
Forward-looking information
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts
are forward-looking statements that represent management's beliefs and
assumptions based on currently available information. Forward-looking statements
can be identified by the use of words such as "believes," "intends," "may,"
"should," "could," "anticipates," "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. The factors that could cause actual future results to
differ materially are the risks and uncertainties discussed in this Quarterly
Report and those described from time to time in the Company's other filings with
the SEC include, but are 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.
Three months ended
March 31,
---------------------- %
2004 2005 Change
---- ---- ------
(In millions, except
percentages and volumes)
Net sales $263.3 $291.9 +11%
Cost of sales 202.3 207.7 +3%
Gross margin 61.0 84.2 +38%
Selling, general and administrative expense (35.2) (37.2)
Currency transaction gains, net .2 .9
Corporate expense (.4) (1.4)
------ ------
Income from operations $ 25.6 $ 46.5 +81%
====== ======
TiO2 operating statistics:
Percent change in average selling prices:
Using actual foreign currency exchange rates +13%
Impact of changes in foreign currency
exchange rates -5%
----
In billing currencies +8%
====
Sales volumes* 118 114 -3%
Production volumes* 117 122 +4%
________________________________
* Thousands of metric tons
Kronos' sales increased $28.6 million (11%) in the first quarter of 2005
compared to the first quarter of 2004 due to the net effects of higher average
TiO2 selling prices, lower TiO2 selling volumes and the favorable effect of
fluctuations in foreign currency exchange rates, which increased sales by
approximately $11 million, as further discussed below. Excluding the effect of
fluctuations in the value of the U.S. dollar relative to other currencies,
Kronos' average TiO2 selling prices in billing currencies in the first quarter
of 2005 were 8% higher as compared to the first quarter of 2004. When translated
from billing currencies to U.S. dollars using actual foreign currency exchange
rates prevailing during the respective periods, Kronos' average TiO2 selling
prices in the first quarter of 2005 increased 13% compared to the first quarter
of 2004.
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%
increase in Kronos' average TiO2 selling prices during the first quarter of 2005
as compared to the first quarter of 2004 using actual foreign currency exchange
rates prevailing during the respective periods (the GAAP measure), and the 8%
increase in Kronos' average TiO2 selling prices in billing currencies (the
non-GAAP measure) during such periods is due to the effect of changes in foreign
currency exchange rates. The above table presents in a tabular format (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' TiO2 sales volumes in the first quarter of 2005 decreased 3%
compared to the first quarter of 2004, due primarily to lower volumes in export
markets. Demand for TiO2 has remained strong throughout 2004 and 2005, and while
Kronos believes that the strong demand for TiO2 is largely attributable to the
end-use demand of its customers, it is possible that some portion of the strong
demand resulted from customers increasing their inventory levels of TiO2 in
advance of implementation of announced or anticipated price increases. Kronos'
income from operations comparisons were favorably impacted by higher production
levels, which increased 4% in the first quarter of 2005 as compared to the same
period in 2004. Kronos' operating rates were near full capacity in both periods,
and Kronos' production volume in the first quarter of 2005 was a new record for
Kronos for a first quarter.
The Company's cost of sales increased $5.4 million (3%) in the first
quarter of 2005 compared to the first quarter of 2004 largely due to the effects
of translating foreign currencies (primarily the euro) into U.S. dollars. As a
result of the higher average TiO2 selling prices in billing currencies, the
Company's cost of sales, as a percentage of net sales, decreased from 77% in the
first quarter of 2004 to 71% in the first quarter of 2005.
The Company's gross margins for the first quarter of 2005 increased $23.2
million (38%) from the first quarter of 2004 due to the net effects of the
aforementioned increases in net sales and cost of sales.
Selling, general and administrative expenses increased $2.0 million (6%) in
the first quarter of 2005 as compared to the corresponding period in 2004. This
increase is largely attributable to the impact of translating foreign currencies
(primarily the euro) into U.S. dollars. Corporate expense increased $1.0 million
in the first quarter of 2005 as compared to the first quarter of 2004 due
primarily to higher professional fees and other costs associated with Kronos
being a public company.
The Company has substantial operations and assets located outside the
United States (particularly in Germany, Belgium, Norway and Canada). A
significant amount of the Company's sales generated from its non-U.S. operations
are denominated in currencies other than the U.S. dollar, 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 TiO2 sales by a net $11 million in the
first quarter of 2005 as compared to the same period in 2004. Fluctuations in
the value of the U.S. dollar relative to other currencies similarly impacted the
Company's foreign currency-denominated operating expenses. The Company's
operating costs that are not denominated in the U.S. dollar, when translated
into U.S. dollars, were higher in the first quarter of 2005 as compared to the
first quarter of 2004. Overall, the net impact of currency exchange rate
fluctuations on the Company's operating income comparisons resulted in
approximately a net $1 million increase in the Company's income from operations
in the first quarter of 2005 as compared to the first quarter of 2004.
In April 2005, the Company sold its passive interest in a Norwegian
smelting operation, which had a nominal carrying value for financial reporting
purposes, for approximately $5 million. The Company expects to recognize a gain
of approximately $5 million related to such sale in the second quarter of 2005,
and will report such gain as part of income from operations.
Outlook
Reflecting the continued implementation of price increase announcements,
Kronos' average TiO2 selling prices in billing currencies in the first quarter
of 2005 were 4% higher than the fourth quarter of 2004. Kronos expects its TiO2
production volumes in the remainder of 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 and continued to increase during the first
quarter of 2005, are expected to continue to increase during the remainder of
2005, and consequently, Kronos currently expects its average TiO2 selling
prices, in billing currencies, will be higher in 2005 as compared to 2004. The
anticipated higher selling prices in 2005 reflect the expected continued
implementation of selling price announcements, including Kronos' latest price
increases announced in March 2005. The extent to which all of such price
increases, and any additional price increases which may be announced
subsequently in 2005, will be realized will depend on, among other things,
economic factors. 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 Kronos' control, including worldwide
growth of gross domestic product, competition in the marketplace, unexpected or
earlier-than-expected capacity additions and technological advances. If actual
developments differ from Kronos' expectations, Kronos' results of operations
could be unfavorably affected.
The Company's efforts to debottleneck its production facilities to meet
long-term demand continues to prove successful. Such debottlenecking efforts
included, among other things, the addition of back-end finishing capacity to be
able to process a larger quantity of the base TiO2 produced and equipment
upgrades and enhancements to allow for reduced downtime for maintenance
activities. The Company's 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 its continued debottlenecking
efforts.
Other income (expense)
Three months ended
March 31,
----------------------
2004 2005 Difference
---- ---- ----------
(In millions)
Trade interest income $ .2 $ .1 $ (.1)
Other interest income .2 .3 .1
Interest expense to affiliates (4.5) - 4.5
Other interest expense (9.2) (11.8) (2.6)
------ ------ ------
$(13.3) $(11.4) $ 1.9
====== ====== ======
Interest expense to affiliates decreased $4.5 million from the first
quarter of 2004 to nil in the first quarter of 2005 due to the prepayment and
cancellation, in the fourth quarter of 2004 of the $200 million long-term note
payable to NL.
Kronos has a significant amount of outstanding indebtedness denominated in
the euro, including Kronos International, Inc.'s ("KII") euro 375 million Senior
Secured Notes. Accordingly, the reported amount of interest expense will vary
depending on relative changes in foreign currency exchange rates. Other interest
expense in the first quarter of 2005 was $11.8 million, an increase of $2.6
million from the first quarter of 2004. The increase was due primarily to higher
levels of outstanding indebtedness resulting from the issuance of an additional
euro 90 million principal amount of KII's Senior Secured Notes in November 2004.
In addition, the increase in interest expense was due to relative changes in
foreign currency exchange rates, which increased the U.S. dollar equivalent of
interest expense on the euro 285 million KII Senior Secured Notes outstanding
during both periods by approximately $500,000 in the first quarter of 2005 as
compared to the first quarter of 2004. Assuming no significant change in
interest rates or foreign currency exchange rates, other interest expense for
the full-year 2005 is expected to be higher than amounts for the same periods in
2004.
Provision for income taxes
The principal reasons for the difference between the Company's effective
income tax rates and the U.S. federal statutory income tax rates are explained
in Note 8 to the Consolidated Financial Statements.
At March 31, 2005, Kronos has the equivalent of $633 million and $205
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 the 2004 Annual Report, during 2004 Kronos concluded the benefit of
such income tax loss carryforwards met the "more-likely-than-not" recognition
criteria of GAAP, and accordingly in 2004 Kronos reversed the deferred income
tax asset valuation allowance related to such German carryforwards and other net
deductible temporary differences related to Germany. 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 the
first quarter of 2005 is higher than its effective income tax rate in the first
quarter of 2004, although its current and future cash income tax rate was not
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.
Accounting principles not yet implemented
See Note 11 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES:
Consolidated cash flows
The Company's consolidated cash flows from operating, investing and
financing activities for the three months ended March 31, 2004 and 2005 are
presented below:
Three months ended March 31,
----------------------------
2004 2005
---- ----
(In thousands)
Net cash provided (used) by:
Operating activities $ 19.1 $ (5.0)
Investing activities (3.9) (4.6)
Financing activities 20.3 (12.3)
------ ------
Net cash provided (used) by operating,
investing and financing activities $ 35.5 $(21.9)
====== ======
Summary
The Company's primary source of liquidity on an ongoing short-term and
long-term basis is its cash flows from operating activities, which is generally
used to (i) fund capital expenditures, (ii) repay any 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 will 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) make investments in marketable and other securities, (iii)
fund major capital expenditures or the acquisition of other assets outside the
ordinary course of business or (iv) pay dividends.
Operating activities
The TiO2 industry is cyclical and changes in economic conditions within the
industry significantly impact the earnings and operating cash flows of the
Company. Cash flow from operations is considered the primary source of liquidity
for the Company. Changes in TiO2 pricing, production volume and customer demand,
among other things, could significantly affect the liquidity of the Company.
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, deferred income taxes and non-cash interest expense.
Non-cash interest expense consists of 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.
Relative changes in assets and liabilities generally result from the timing
of production, sales, purchases and income tax payments. Such relative changes
can significantly impact the comparability of cash flow from operations from
period to period, as the income statement impact of such items may occur in a
different period from when the underlying cash transaction occurs. For example,
raw materials may be purchased in one period, but the payment for such raw
materials may occur in a subsequent period. Similarly, inventory may be sold in
one period, but the cash collection of the receivable may occur in a subsequent
period.
Cash flows from operating activities decreased from $19.1 million provided
by operating activities in the first three months of 2004 to $5.0 million of
cash used in operating activities in the first three months of 2005. This $24.1
million decrease was due primarily to the net effects of (i) higher net income
of $11.6 million, (ii) higher depreciation and amortization expense of $100,000,
(iii) higher deferred income taxes of $6.3 million, (iv) lower net contributions
to the TiO2 manufacturing joint venture of $850,000 in the first three months of
2005 compared to a $1.8 million distribution in the first three months of 2004,
(v) a higher amount of net cash used from relative changes in the Company's
inventories, receivables, payables and accruals of $13.3 million in the first
three months of 2005 as compared to the first three months of 2004 and (vi)
higher cash paid for income taxes of $21.9 million, due in large part to a $20.1
million tax refund received during the first three months of 2004. Relative
changes in accounts receivable are affected by, among other things, the timing
of sales and the collection of the resulting receivables. Relative changes in
inventories and accounts payable and accrued liabilities are affected by, among
other things, the timing of raw material purchases and the payment for such
purchases and the relative difference between production volumes and sales
volumes.
Investing and financing activities
The Company's capital expenditures were $4.5 million and $5.2 million in
the first three months of 2004 and 2005, respectively.
In the first quarter of 2005, the Company paid a regular quarterly dividend
to stockholders of $.25 per share, aggregating $12.2 million.
At March 31, 2005, unused credit available under Kronos' existing credit
facilities approximated $143 million, which was comprised of: $89 million under
its European revolving credit facility, $11 million under its Canadian credit
facility, $40 million under its U.S. credit facility and $3 million under other
non-US facilities. At March 31, 2005, KII had approximately $62 million
available for payment of dividends and other restrictive payments as defined in
the Senior Secured Notes indenture. Based upon Kronos' expectation for the TiO2
industry and anticipated demands on Kronos' cash resources as discussed herein,
Kronos expects to have sufficient liquidity to meets its future obligations
including operations, capital expenditures, debt service and current dividend
policy. To the extent that actual developments differ from Kronos' expectations,
Kronos' liquidity could be adversely affected.
Provisions contained in certain of Kronos' credit agreements could result
in the acceleration of the applicable indebtedness prior to its stated maturity
for reasons other than defaults from failing to comply with typical financial
covenants. 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 leases discussed
in the 2004 Annual Report, neither Kronos nor any of its subsidiaries or
affiliates are parties to any off-balance sheet financing arrangements.
At March 31, 2005, the Company and its subsidiaries had (i) current cash
and cash equivalents aggregating $38.4 million ($18.8 million held by non-U.S.
subsidiaries), (ii) current restricted cash of $965,000 and (iii) noncurrent
restricted marketable debt securities of $2.7 million.
At March 31, 2005, Kronos' outstanding debt was comprised of (i) $493.0
million related to KII's Senior Secured Notes and (ii) approximately $13.3 of
other indebtedness, principally $12.9 million related to the Company's European
revolving bank credit facility which matures in June 2005. KII expects to seek
to renew such facility during the second quarter of 2005.
Kronos' assets consist primarily of investments in its operating
subsidiaries, and Kronos' ability to service its parent level obligations,
including the Senior Secured Notes, depends in large part upon the distribution
of earnings of its subsidiaries, whether in the form of dividends, advances or
payments on account of intercompany obligation, or otherwise. None of Kronos'
subsidiaries have guaranteed the Senior Secured Notes, although KII has pledged
65% of the common stock or other ownership interest of certain of KII's
first-tier operating subsidiaries as collateral of such Senior Secured Notes.
As disclosed in the 2004 Annual Report, KII may redeem up to 35% of the
Senior Secured Notes on or before June 30, 2005 with the net proceeds of a
qualified public offering of equity securities of either Kronos or KII. KII
currently has no plans to so redeem the Senior Secured Notes, although until the
June 30, 2005 date passes, KII retains the right to so redeem the Senior Secured
Notes.
Pricing within the TiO2 industry is cyclical, and changes in industry
economic conditions significantly impact Kronos' earnings and operating cash
flows. Cash flows from operations is considered the primary source of liquidity
for Kronos. Changes in TiO2 pricing, production volumes and customer demand,
among other things, could significantly affect the liquidity of Kronos.
Based upon Kronos' expectations for the TiO2 industry and anticipated
demand for Kronos' cash resources as discussed herein, Kronos expects to have
sufficient short-term and long-term liquidity to meet its obligations including
operations, capital expenditures, debt service and dividends. To the extent that
actual developments differ from Kronos' expectations, Kronos' liquidity could be
adversely affected.
See Note 8 to the Consolidated Financial Statements for certain income tax
examinations currently underway with respect to certain of Kronos' income tax
returns in various U.S. and non-U.S. jurisdictions, and see Note 10 to the
Consolidated Financial Statements with respect to certain legal proceedings with
respect to Kronos.
Certain of Kronos' sales generated by its non-U.S. operations are
denominated in U.S. dollars. Kronos periodically uses currency forward contracts
to manage a very nominal portion of foreign exchange rate risk associated with
receivables denominated in a currency other than the holder's functional
currency or similar exchange rate risk associated with future sales. Kronos has
not entered into these contracts for trading or speculative purposes in the
past, nor does Kronos currently anticipate entering into such contracts for
trading or speculative purposes in the future. Derivatives used to hedge
forecasted transactions and specific cash flows associated with foreign currency
denominated financial assets and liabilities which meet the criteria for hedge
accounting are designated as cash flow hedges. Consequently, the effective
portion of gains and losses is deferred as a component of accumulated other
comprehensive income and is recognized in earnings at the time the hedged item
affects earnings. Contracts that do not meet the criteria for hedge accounting
are marked-to-market at each balance sheet date with any resulting gain or loss
recognized in income currently as part of net currency transactions. To manage
such exchange rate risk, at March 31, 2005, Kronos held a contract, which
matured in April 2005, to exchange an aggregate of U.S. $5 million for an
equivalent amount of Canadian dollars at an exchange rate of Cdn. $1.24 per U.S.
dollar. At March 31, 2005, the actual exchange rate was Cdn. $1.21 per U.S.
dollar. The estimated fair value of such foreign currency forward contract at
March 31, 2005 is insignificant.
Kronos 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, Kronos has in the past and may in the future 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, Kronos may review opportunities for
acquisitions, divestitures, joint ventures or other business combinations in the
chemicals or other industries, as well as the acquisition of interests in, and
loans to, related entities. In the event of any such transaction, Kronos may
consider using its available cash, issuing its equity securities or increasing
its indebtedness to the extent permitted by the agreements governing Kronos'
existing debt.
Kronos has substantial operations located outside the United States for
which the functional currency is not the U.S. dollar. As a result, the reported
amounts of Kronos' assets and liabilities related to its non-U.S. operations,
and therefore Kronos' consolidated net assets, will fluctuate based upon changes
in currency exchange rates.
Non-GAAP financial measures
In an effort to provide investors with additional information regarding the
Company's results of operations as determined by GAAP, the Company has disclosed
certain non-GAAP information which the Company believes provides useful
information to investors.
o The Company discloses percentage changes in its average TiO2 selling prices
in billing currencies, which excludes the effects of foreign currency
translation. The Company believes disclosure of such percentage changes
allows investors to analyze such changes without the impact of changes in
foreign currency exchange rates, thereby facilitating period-to-period
comparisons of the relative changes in average selling prices in the actual
various billing currencies. Generally, when the U.S. dollar either
strengthens or weakens against other currencies, the percentage change in
average selling prices in billing currencies will be higher or lower,
respectively, than such percentage changes would be using actual exchange
rates prevailing during the respective periods.
ITEM 4. CONTROLS AND PROCEDURES
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, has evaluated the Company's disclosure
controls and procedures as of March 31, 2005. 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.
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 an
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the Company's Consolidated Financial
Statements.
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. However, the Company's assessment of internal control over financial
reporting with respect to the Company's equity method investees did include the
Company's controls over the recording of amounts related to the Company's
investment that are recorded in the Company's consolidated financial statements,
including controls over the selection of accounting methods for the Company's
investments, the recognition of equity method earnings and losses and the
determination, valuation and recording of the Company's investment account
balances.
There has been no change to the Company's internal control over financial
reporting during the quarter ended March 31, 2005 that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 10 of the Consolidated Financial Statements and
to the 2004 Annual Report for descriptions of certain legal proceedings.
Item 6. Exhibits
31.1 - Certification
31.2 - Certification
32.1 - Certification
The Company has retained a signed original of any of the above exhibits
that contains signatures, and the Company will provide such exhibit to the
Commission or its staff upon request. Kronos will also furnish, without charge,
a copy of its Code of Business Conduct and Ethics, its Audit Committee Charter
and its Corporate Governance Guidelines, each as adopted by the Company's board
of directors, upon request. Such requests should be directed to the attention of
Kronos's Corporate Secretary at Kronos's corporate offices located at 5430 LBJ
Freeway, Suite 1700, Dallas, Texas 75240.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Kronos Worldwide, Inc.
-------------------------------
(Registrant)
Date May 4, 2005 By /s/ Gregory M. Swalwell
--------------- ----------------------------------
Gregory M. Swalwell
Vice President, Finance and Chief
Financial Officer (Principal
Financial Officer)
Date May 4, 2005 By /s/ James W. Brown
--------------- ----------------------------------
James W. Brown
Vice President and Controller
(Principal Accounting Officer)
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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) 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) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, 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;
c) 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
d) 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: May 4, 2005
/s/ Harold C. Simmons
- -------------------------------
Harold C. Simmons
Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Gregory M. Swalwell, the Chief Financial 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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) 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) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, 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;
c) 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
d) 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: May 4, 2005
/s/ Gregory M. Swalwell
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Gregory M. Swalwell
Chief Financial Officer
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 quarter ended March 31, 2005 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
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Harold C. Simmons
Chief Executive Officer
/s/ Gregory M. Swalwell
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Gregory M. Swalwell
Chief Financial Officer
May 4, 2005
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.
