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, 2006 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 a large accelerated filer, an
accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the
Securities Exchange Act of 1934).
Large accelerated filer Accelerated filer X Non-accelerated filer
--- --- ---
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes No X
--- ---
Number of shares of the Registrant's common stock outstanding on April 28, 2006:
48,949,549.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
December 31, 2005; March 31, 2006 (Unaudited) 3
Consolidated Statements of Income -
Three months ended March 31, 2005 and 2006 (Unaudited) 5
Consolidated Statements of Comprehensive Income -
Three months ended March 31, 2005 and 2006 (Unaudited) 6
Consolidated Statement of Stockholders' Equity -
Three months ended March 31, 2006 (Unaudited) 7
Consolidated Statements of Cash Flows -
Three months ended March 31, 2005 and 2006 (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 3. Quantitative and Qualitative Disclosure About Market Risk 26
Item 4. Controls and Procedures 26
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 1A. Risk Factors 27
Item 6. Exhibits 27
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, March 31,
2005 2006
------------ -----------
(Unaudited)
Current assets:
Cash and cash equivalents $ 72,029 $ 61,702
Restricted cash 1,355 951
Accounts and other receivables, net 184,584 229,766
Receivables from affiliate 2 -
Refundable income taxes 1,053 864
Inventories, net 259,844 253,669
Prepaid expenses 4,290 5,713
Deferred income taxes 2,187 1,642
---------- ----------
Total current assets 525,344 554,307
---------- ----------
Other assets:
Investment in TiO2 manufacturing joint venture 115,308 118,058
Deferred income taxes 213,722 213,083
Other 25,638 25,473
---------- ----------
Total other assets 354,668 356,614
---------- ----------
Property and equipment:
Land 31,678 32,139
Buildings 184,800 188,212
Equipment 786,953 801,307
Mining properties 68,165 68,949
Construction in progress 13,457 7,555
---------- ----------
1,085,053 1,098,162
Less accumulated depreciation and amortization 666,133 681,308
---------- ----------
Net property and equipment 418,920 416,854
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$1,298,932 $1,327,775
========== ==========
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, March 31,
2005 2006
------------ -----------
(Unaudited)
Current liabilities:
Current maturities of long-term debt $ 958 $ 959
Accounts payable and accrued liabilities 165,545 159,081
Payable to affiliates 10,382 12,992
Income taxes 24,014 24,521
Deferred income taxes 4,211 679
---------- ----------
Total current liabilities 205,110 198,232
---------- ----------
Noncurrent liabilities:
Long-term debt 464,365 493,309
Deferred income taxes 53,383 54,035
Accrued pension costs 139,786 137,888
Accrued postretirement benefits costs 10,174 10,031
Other 16,055 17,652
---------- ----------
Total noncurrent liabilities 683,763 712,915
---------- ----------
Minority interest 75 78
---------- ----------
Stockholders' equity:
Common stock 489 489
Additional paid-in capital 1,061,539 1,061,539
Retained deficit (441,295) (438,501)
Accumulated other comprehensive loss:
Currency translation (114,930) (111,158)
Pension liabilities (95,819) (95,819)
---------- ----------
Total stockholders' equity 409,984 416,550
---------- ----------
$1,298,932 $1,327,775
========== ==========
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, 2005 and 2006
(In thousands, except per share data)
(Unaudited)
2005 2006
---- ----
Net sales $ 291,874 $ 304,279
Cost of sales 207,677 229,495
---------- ----------
Gross margin 84,197 74,784
Selling, general and administrative expense 37,253 37,819
Other operating income (expense):
Currency transaction gains (losses), net 928 (840)
Disposition of property and equipment (34) (432)
Other income 36 9
Corporate expense (1,425) (1,319)
---------- ----------
Income from operations 46,449 34,383
Other income (expense):
Trade interest income 78 475
Other interest income 341 104
Interest expense (11,772) (10,709)
---------- ----------
Income before income taxes and minority interest 35,096 24,253
Provision for income taxes 13,691 9,220
Minority interest in after-tax earnings 4 2
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Net income $ 21,401 $ 15,031
========== ==========
Cash dividend per share $ .25 $ .25
========== ==========
Basic and diluted net income per share $ .44 $ .31
========== ==========
Basic and diluted weighted-average shares used
in the calculation of net income per share 48,946 48,950
========== ==========
See accompanying notes to consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended March 31, 2005 and 2006
(In thousands)
(Unaudited)
2005 2006
---- ----
Net income $ 21,401 $ 15,031
Other comprehensive income, net of tax - currency translation
adjustment 2,289 3,772
---------- ----------
Comprehensive income $ 23,690 $ 18,803
========== ==========
See accompanying notes to consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three months ended March 31, 2006
(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, 2005 $ 489 $1,061,539 $(441,295) $(114,930) $(95,819) $409,984
Net income - - 15,031 - - 15,031
Dividends - - (12,237) - - (12,237)
Other comprehensive income - - - 3,772 - 3,772
------ ---------- --------- --------- -------- --------
Balance at March 31, 2006 $ 489 $1,061,539 $(438,501) $(111,158) $(95,819) $416,550
====== ========== ========= ========= ======== ========
See accompanying notes to consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2005 and 2006
(In thousands)
(Unaudited)
2005 2006
---- ----
Cash flows from operating activities:
Net income $ 21,401 $ 15,031
Depreciation and amortization 11,182 10,625
Noncash interest expense 780 614
Deferred income taxes 4,963 404
Minority interest 4 2
Net loss from disposition of property and equipment 34 432
Contributions to TiO2 manufacturing joint venture, net (850) (2,750)
Benefit plan expense less than cash funding:
Defined benefit pension plans (1,737) (1,499)
Other postretirement benefits, net (265) (99)
Other, net 2 (350)
Change in assets and liabilities:
Accounts and other receivables (39,179) (44,726)
Inventories (14,232) 8,530
Prepaid expenses (2,003) (1,395)
Accounts payable and accrued liabilities 13,746 (5,494)
Income taxes 4,004 245
Accounts with affiliates 1,763 2,747
Other, net (4,570) (159)
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Net cash used in operating activities (4,957) (17,842)
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Cash flows from investing activities:
Capital expenditures (5,203) (4,075)
Change in restricted cash equivalents 529 411
Other, net 21 31
---------- ----------
Net cash used in investing activities (4,653) (3,633)
---------- ----------
Cash flows from financing activities:
Indebtedness:
Borrowings - 72,635
Principal payments (41) (50,039)
Dividends paid (12,236) (12,237)
---------- ----------
Net cash provided by (used in)
financing activities (12,277) 10,359
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KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Three months ended March 31, 2005 and 2006
(In thousands)
(Unaudited)
2005 2006
---- ----
Cash and cash equivalents - net change from:
Operating, investing and financing activities $ (21,887) $ (11,116)
Currency translation (497) 789
Cash and cash equivalents at beginning of period 60,790 72,029
---------- ----------
Cash and cash equivalents at end of period $ 38,406 $ 61,702
========== ==========
Supplemental disclosures - cash paid for:
Interest, net of amounts capitalized $ 171 $ 117
Income taxes, net 3,783 6,079
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, 2006, (i) Valhi held approximately 59% 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 92% 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, 2005 has been
condensed from the Company's audited consolidated financial statements at that
date. The consolidated balance sheet data as of December 31, 2005 was derived
from the Company's audited consolidated financial statements at that date, but
does not include all disclosures required by GAAP, as permitted by regulations
of the SEC. The consolidated balance sheet at March 31, 2006, and the
consolidated statements of income, comprehensive income, stockholders' equity
and cash flows for the interim periods ended March 31, 2005 and 2006, 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, 2005 (the
"2005 Annual Report").
Note 2 - Accounts and other receivables, net:
December 31, March 31,
2005 2006
------------ ----------
(In thousands)
Trade receivables $170,619 $213,786
Recoverable VAT and other receivables 15,930 17,883
Allowance for doubtful accounts (1,965) (1,903)
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$184,584 $229,766
======== ========
Note 3 - Inventories, net:
December 31, March 31,
2005 2006
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(In thousands)
Raw materials $ 52,343 $ 39,649
Work in process 17,959 19,483
Finished products 149,900 152,361
Supplies 39,642 42,176
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$259,844 $253,669
======== ========
Note 4 - Other noncurrent assets:
December 31, March 31,
2005 2006
------------ ----------
(In thousands)
Deferred financing costs, net $ 8,150 $ 7,650
Restricted marketable debt securities 2,572 2,635
Unrecognized net pension obligations 11,916 11,979
Other 3,000 3,209
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$ 25,638 $ 25,473
======== ========
Note 5 - Accounts payable and accrued liabilities:
December 31, March 31,
2005 2006
------------ ----------
(In thousands)
Accounts payable $ 91,397 $ 77,166
Employee benefits 35,610 30,099
Interest 191 10,474
Other 38,347 41,342
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$165,545 $159,081
======== ========
Note 6 - Long-term debt:
December 31, March 31,
2005 2006
------------ ----------
(In thousands)
Kronos U.S. subsidiaries - bank credit facility $ 11,500 $ 29,800
Kronos Canada bank credit facility - 4,264
Kronos International, Inc. and subsidiaries:
8.875% Senior Secured Notes 449,298 455,609
Other 4,525 4,595
-------- --------
465,323 494,268
Less current maturities 958 959
-------- --------
$464,365 $493,309
======== ========
During the first quarter of 2006, the Company borrowed an aggregate of Cdn.
$5.0 million ($4.3 million) under its Canadian revolving credit facility, and
also borrowed an additional net $18.3 million under its U.S. bank credit
facility.
In April 2006, the Company's wholly-owned subsidiary, Kronos International,
Inc. ("KII") called all of it's 8.875% Senior Secured Notes for redemption on
May 11, 2006 at 104.437% of their aggregate principal amount of euro 375 million
(including such call premium, an aggregate of $470.2 million at March 31, 2006
exchange rates). Funds for such redemption were provided by KII's issuance of an
aggregate of euro 400 million principal amount of new 6.5% Senior Secured Notes
due April 2013, issued on April 11, 2006 at 99.306% of their principal amount.
The new Senior Secured Notes were issued pursuant to an indenture that contains
covenants, restrictions and collateral substantially identical to the covenants,
restrictions and collateral of the 8.875% Senior Secured Notes. The Company
expects to recognize a $21 million pre-tax charge in the second quarter related
to the early extinguishment of KII's 8.875% Senior Secured Notes, consisting of
the call premium on such Notes and the net write-off of deferred financing costs
and existing unamortized premium related to such Notes.
Note 7 - Other noncurrent liabilities:
December 31, March 31,
2005 2006
------------ ----------
(In thousands)
Employee benefits $ 4,735 $ 5,960
Insurance claims and expenses 1,733 2,071
Asset retirement obligations 934 968
Other 8,653 8,653
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$ 16,055 $ 17,652
======== ========
Note 8 - Provision for income taxes:
Three months ended
March 31,
----------------------
2005 2006
---- ----
(In millions)
Expected tax expense $12.3 $ 8.5
Incremental U.S. tax and rate differences on .5
equity in earnings of non-tax group companies .2
Non-U.S. tax rates .1 (.4)
Nondeductible expenses 1.0 1.2
Adjustment of prior year income taxes, net - (.9)
Other, net .1 .3
----- -----
$13.7 $ 9.2
===== =====
Certain of the Company's 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 received a preliminary tax assessment related to 1993 from the
Belgian tax authorities proposing tax deficiencies, including related
interest, of approximately euro 6 million ($7 million at March 31, 2006).
Kronos 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.
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.
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,
----------------------
2005 2006
---- ----
(In thousands)
Service cost $ 1,987 $ 1,844
Interest cost 4,580 4,573
Expected return on plan assets (4,114) (3,891)
Amortization of prior service cost 154 112
Amortization of net transition obligations 157 139
Recognized actuarial losses 951 2,073
-------- --------
$ 3,715 $ 4,850
======== ========
The components of net periodic postretirement benefits other than pensions
("OPEB") cost are presented in the table below.
Three months ended
March 31,
----------------------
2005 2006
---- ----
(In thousands)
Service cost $ 55 $ 71
Interest cost 145 156
Amortization of prior service credit (160) (50)
Recognized actuarial losses 18 28
-------- --------
$ 58 $ 205
======== ========
Note 10 - Commitments and contingencies:
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.
Reference is made to the 2005 Annual Report for a discussion of certain
other legal proceedings to which the Company is a party.
Note 11 - Accounting principles newly adopted in 2006:
Inventory costs. The Company adopted SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4," as of January 1, 2006 for inventory costs
incurred on or after such date. Statement of Financial Accounting Standards
("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's production cost accounting had already complied with the
requirements of SFAS No. 151, and therefore adoption of SFAS No. 151 did not
have a material effect on its consolidated financial statements.
Stock options. As permitted by regulations of the Securities and Exchange
Commission ("SEC"), the Company adopted 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 Accounting Principles Board Opinion
("APBO") No. 25, "Accounting for Stock Issued to Employees." The Company is now
generally required to recognize the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value
of the award, with the cost recognized over the period during which an employee
is required to provide services in exchange for the award (generally, the
vesting period of the award). No compensation cost will be recognized in the
aggregate for equity instruments for which the employee does not render the
requisite service (generally, the instrument is forfeited before it has vested).
The grant-date fair value will be estimated using option-pricing models (e.g.
Black-Scholes or a lattice model). Under the transition alternatives permitted
under SFAS No. 123R, the Company will apply the new standard to all new awards
granted on or after January 1, 2006, and to all awards existing as of December
31, 2005 which are subsequently modified, repurchased or cancelled (referred to
as the modified prospective method in SFAS No. 123R). Additionally, as of
January 1, 2006, the Company recognizes 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 was not material,
the effect of adopting SFAS No. 123R, in so far as it relates to existing stock
options, did not have a material effect on the Company's consolidated financial
statements. 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.
Under the requirements of SFAS No. 123R, the cash income tax benefit
resulting from the exercise of stock options in excess of the cumulative income
tax benefit related to such options previously recognized for GAAP financial
reporting purposes in the Company's consolidated statements of income, if any,
is reflected as a cash inflow from financing activities in the Company's
consolidated statements of cash flows, and the Company's cash flows from
operating activities reflects the effect of cash paid for income taxes exclusive
of such cash income tax benefit. The aggregate amount of such income tax
benefits recognized as a component of cash flows from financing activities was
nil in the first quarter of 2006.
SFAS No. 123R also requires certain expanded disclosures regarding the
Company's stock options, and such expanded disclosures were provided in the 2005
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. The Company accounted for stock-based employee
compensation in accordance with APBO No. 25, and its various interpretations.
Under APBO No. 25, no compensation cost is generally recognized for fixed stock
options in which the exercise price is greater than or equal to the market price
on the grant date. Prior to 2005, 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). Following adoption of SFAS No. 123R effective January 1, 2006,
the Company will continue to account for NL's remaining stock options in a
manner similar to the variable accounting method of APBO No. 25, as required by
the guidance of SFAS No. 123R.
Aggregate compensation expense related to NL stock options held by
employees of the Company was approximately $100,000 in the first quarter of 2005
and compensation income was approximately $400,000 in the first quarter of 2006.
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 SFAS No. 123 for
all awards granted subsequent to January 1, 1995, the effect on the Company's
results of operations in the first quarter of 2005 would not have been material.
Note 12 - Accounts with affiliates:
December 31, March 31,
2005 2006
------------ ----------
(In thousands)
Current receivables from affiliates -
Titanium Metals Corporation $ 2 $ -
======== ========
Current payable to affiliates:
Income taxes payable to Valhi $ 434 $ 3,043
NL 145 467
Louisiana Pigment Company, L.P. 9,803 9,482
-------- --------
$ 10,382 $ 12,992
======== ========
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 2005 and 2006 periods presented are primarily due to (i) relative
changes in TiO2 average selling prices (ii) relative changes in selling volumes
and (iii) relative changes in foreign currency exchange rates. Selling prices
for TiO2 (in billing currencies) were generally: increasing in the first half of
2005, decreasing during the last half of 2005 and increasing during the first
quarter of 2006.
The Company reported net income of $15.0 million, or $.31 per diluted
share, in the first quarter of 2006 as compared to net income of $21.4 million,
or $.44 per diluted share, in the first quarter of 2005. The Company reported
lower net income in the first quarter of 2006 as higher sales volumes and a
modest increase in average selling prices were more than offset by the effect of
higher production costs, particularly raw material and energy costs.
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, natural disasters, fires, explosions, unscheduled or unplanned
downtime and transportation interruptions),
o The timing and amounts of insurance recoveries,
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,
---------------------- %
2005 2006 Change
---- ---- ------
(In millions, except percentages and volumes)
Net sales $291.9 $304.3 +4%
Cost of sales 207.7 229.5 +10%
------ ------
Gross margin 84.2 74.8 -11%
Selling, general and administrative expense (37.2) (37.8) +2%
Currency transaction gains (losses), net .9 (.8)
Corporate expense (1.4) (1.3)
Other operating expense, net - (.5)
------ ------
Income from operations $ 46.5 $ 34.4 -26%
====== ======
TiO2 operating statistics:
Percent change in average selling prices:
Using actual foreign currency exchange rates -3%
Impact of changes in foreign currency exchange rates +5%
---
In billing currencies +2%
===
Sales volumes* 114 124 +9%
Production volumes* 122 127 +4%
________________________________
* Thousands of metric tons
Kronos' sales increased $12.4 million (4%) in the first quarter of 2006
compared to the first quarter of 2005 due to the net effects of higher average
TiO2 selling prices (in billing currencies), higher TiO2 selling volumes and the
unfavorable effect of fluctuations in foreign currency exchange rates, which
decreased sales by approximately $16 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 2006 were 2% higher as compared to the first quarter of
2005. 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 2006 decreased 3%
compared to the first quarter of 2005.
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 3% decrease
in Kronos' average TiO2 selling prices during the first quarter of 2006 as
compared to the first quarter of 2005 using actual foreign currency exchange
rates prevailing during the respective periods (the GAAP measure), and the 2%
increase in Kronos' average TiO2 selling prices in billing currencies (the
non-GAAP measure) during such periods is due to the net 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 2006 increased 9%
compared to the first quarter of 2005, due primarily to higher sales volumes in
the United States and slightly higher sales volumes in Europe and in export
markets offsetting the effects of lower sales volumes in Canada. Demand for TiO2
has remained strong in the first quarter of 2006, 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 2006 as compared to the same period in 2005. Kronos'
operating rates were near full capacity in both periods, and Kronos' production
and sales volumes in the first quarter of 2006 were new records for Kronos for a
first quarter.
The Company's cost of sales increased $21.8 million (10%) in the first
quarter of 2006 compared to the first quarter of 2005 largely due to higher
sales volumes. As a result of lower average TiO2 selling prices using actual
foreign currency exchange rates as well as the unfavorable effect of higher raw
material and other operating costs (including energy), the Company's cost of
sales, as a percentage of net sales, increased from 71% in the first quarter of
2005 to 75% in the first quarter of 2006.
The Company's gross margins for the first quarter of 2006 decreased $9.4
million (11%) from the first quarter of 2005 due to the net effects of the
aforementioned increases in net sales and cost of sales as well as the
unfavorable effect of relative changes in foreign currency exchange rates, as
discussed below.
Selling, general and administrative expenses increased $600,000 (2%) in the
first quarter of 2006 as compared to the corresponding period in 2005. This
increase is largely attributable to the increased sales volumes.
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, decreased TiO2 sales by a net $16 million in the
first quarter of 2006 as compared to the same period in 2005. 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 2006 as compared to the
first quarter of 2005. Overall, the net impact of currency exchange rate
fluctuations on the Company's operating income comparisons resulted in
approximately a net $5 million decrease in the Company's income from operations
in the first quarter of 2006 as compared to the first quarter of 2005.
Outlook
On September 22, 2005, the chloride-process TiO2 facility operated by
Kronos' 50%-owned joint venture, Louisiana Pigment Company ("LPC"), temporarily
halted production due to Hurricane Rita. Although storm damage to core
processing facilities was not extensive, a variety of factors, including loss of
utilities, limited access and availability of employees and raw materials,
prevented the resumption of partial operations until October 9, 2005 and full
operations until late 2005. The joint venture expects the majority of its
property damage and unabsorbed fixed costs for periods in which normal
production levels were not achieved will be covered by insurance, and Kronos
believes insurance will cover its lost profits (subject to applicable
deductibles) resulting from its share of the lost production from LPC. Insurance
proceeds from the lost profit for product that Kronos was not able to sell as a
result of the loss of production from LPC are expected to be recognized by
Kronos during the remainder of 2006, although the amount and timing of such
insurance recoveries is not presently determinable. The effect on Kronos'
financial results will depend on the timing and amount of insurance recoveries.
Kronos' efforts to debottleneck its production facilities to meet long-term
demand continue to prove successful. Such debottlenecking efforts included,
among other things, the addition of finishing capacity in the German chloride
process facility and equipment upgrades and enhancements in several locations to
allow for reduced downtime for maintenance activities. Kronos' production
capacity has increased by approximately 30% over the past ten years due to
debottlenecking programs, with only moderate capital expenditures. Kronos
believes its annual attainable production capacity for 2006 is approximately
510,000 metric tons, with some additional capacity expected to be available in
2007 through its continued debottlenecking efforts.
Kronos expects its income from operations in 2006 will continue to be
somewhat lower than 2005. 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.
Other income (expense)
Kronos has a significant amount of outstanding indebtedness denominated in
the euro, including KII's euro 375 million Senior Secured Notes. Accordingly,
the reported amount of interest expense will vary depending on relative changes
in foreign currency exchange rates. Interest expense in the first quarter of
2006 was $10.7 million, a decrease of $1.1 million from the first quarter of
2005. The decrease was due primarily to relative changes in foreign currency
exchange rates, which decreased the U.S. dollar equivalent of interest expense
on the euro 375 million KII Senior Secured Notes outstanding by approximately
$1.1 million in the first quarter of 2006 as compared to the first quarter of
2005.
In April 2006, KII called all of it's 8.875% Senior Secured Notes for
redemption on May 11, 2006 at 104.437% of their aggregate principal amount of
euro 375 million (an aggregate of $470.2 million at March 31, 2006 exchange
rates). Funds for such redemption were provided by KII's issuance of an
aggregate of euro 400 million principal amount of new 6.5% Senior Secured Notes
due April 2013, issued on April 11, 2006 at 99.306% of their principal amount.
The Company expects to recognize a $21 million pre-tax charge in the second
quarter related to the early extinguishment of the 8.875% Senior Secured Notes,
consisting of the call premium on such Notes and the net write-off of deferred
financing costs and existing unamortized premium related to such Notes. See Note
6.
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, 2006, Kronos has the equivalent of $597 million and $93
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 2005 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. 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 newly adopted in 2006
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, 2005 and 2006 are
presented below:
Three months ended
March 31,
----------------------
2005 2006
---- ----
(In millions)
Net cash provided by (used in) by:
Operating activities $ (5.0) $ (17.8)
Investing activities (4.6) (3.6)
Financing activities (12.3) 10.3
-------- --------
Net cash used in operating, investing
and financing activities $ (21.9) $ (11.1)
======== ========
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 used in operating activities increased from $5.0 million used in
the first three months of 2005 to $17.8 million of cash used in the first three
months of 2006. This $12.8 million increase was due primarily to the net effects
of (i) lower net income of $6.4 million, (ii) lower depreciation and
amortization expense of $600,000, (iii) lower deferred income taxes of $4.6
million, (iv) higher net contributions to the TiO2 manufacturing joint venture
of $2.8 million in the first three months of 2006 compared to a $850,000
contribution in the first three months of 2005, (v) a higher amount of net cash
used from relative changes in the Company's inventories, receivables, payables
and accruals of $1.0 million in the first three months of 2006 as compared to
the first three months of 2005 and (vi) higher cash paid for income taxes of
$2.3 million. Relative changes in accounts receivable are affected by, among
other things, the timing of sales and the collection of the resulting
receivables. Relative changes in inventories and accounts payable and accrued
liabilities are affected by, among other things, the timing of raw material
purchases and the payment for such purchases and the relative difference between
production volumes and sales volumes. The Company's average days sales
outstanding ("DSO") increased from 55 days at December 31, 2005 to 68 days at
March 31, 2006, due to the timing of collection on the higher accounts
receivable balance at the end of March. At March 31, 2006, the average number of
days in inventory ("DII") decreased to 100 days from 102 days at December 31,
2005 due to the effects of higher sales volume.
Investing and financing activities
The Company's capital expenditures were $5.2 million and $4.1 million in
the first three months of 2005 and 2006, respectively.
During the first three months of 2006, the Company borrowed $68.3 million
and repaid $50.0 million under its U.S. credit facility and borrowed $4.3
million under its Canadian credit facility.
In each of the first quarters of 2005 and 2006, the Company paid a regular
quarterly dividend to stockholders of $.25 per share. Such cash dividends
aggregated $12.2 million in each of the first quarters ended March 31, 2005 and
2006.
At March 31, 2006, unused credit available under Kronos' existing credit
facilities approximated $124 million, which was comprised of: $94 million under
its European revolving credit facility, $11 million under its Canadian credit
facility, $15 million under its U.S. credit facility and $4 million under other
non-US facilities. At March 31, 2006, KII had approximately $101 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.
Off-balance sheet financing arrangements.
Other than operating leases discussed in the 2005 Annual Report, neither
Kronos nor any of its subsidiaries or affiliates are parties to any off-balance
sheet financing arrangements.
Other
At March 31, 2006, the Company and its subsidiaries had (i) current cash
and cash equivalents aggregating $61.7 million ($58.2 million held by non-U.S.
subsidiaries), (ii) current restricted cash of $951,000 and (iii) noncurrent
restricted marketable debt securities of $2.6 million.
At March 31, 2006, Kronos' outstanding debt was comprised of (i) $455.6
million related to KII's Senior Secured Notes and (ii) approximately $38.7
million of other indebtedness, principally $29.8 million related to the
Company's U.S. bank credit facility which matures in September 2008 and $4.3
million related to its Canadian bank credit facility which matures in January
2009.
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.
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 (defined as the twelve-month period ending March 31, 2007)
and long-term (defined as the five-year period ending December 31, 2010, the
time period for which the Company generally does long-term budgeting) 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, 2006, Kronos held a series of contracts,
with expiration dates ranging from April to September 2006, to exchange an
aggregate of U.S. $25.5 million for an equivalent amount of Canadian dollars at
exchange rates ranging from Cdn. $1.16 to Cdn. $1.17 per U.S. dollar. At March
31, 2006, the actual exchange rate was Cdn. $1.17 per U.S. dollar. The estimated
fair value of such foreign currency forward contracts at March 31, 2006 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 TiO2 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 TiO2 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Reference is made to the 2005 Annual Report for a discussion of the market
risks associated with changes in foreign currency exchange rates, interest rates
and security prices that affect the Company. There have been no material changes
in such market risks since the Company filed the 2005 Annual Report.
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, have evaluated the Company's disclosure
controls and procedures as of March 31, 2006. Based upon their evaluation, these
executive officers have concluded that the Company's disclosure controls and
procedures are effective as of March 31, 2006.
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.
Changes in Internal Control Over Financial Reporting. There has been no
change to the Company's internal control over financial reporting during the
quarter ended March 31, 2006 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 2005 Annual Report for descriptions of certain legal proceedings.
Item 1A. Risk Factors.
Reference is made to the 2005 Annual Report for a discussion of risk
factors related to the Company's businesses. There have been no material changes
in such risk factors since the Company filed the 2005 Annual Report.
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 5, 2006 By /s/ Gregory M. Swalwell
------------- ------------------------------------
Gregory M. Swalwell
Vice President, Finance and Chief
Financial Officer (Principal
Financial Officer)
Date May 5, 2006 By /s/ James W. Brown
------------- ------------------------------------
James W. Brown
Vice President and Controller
(Principal Accounting Officer)
Exhibit 31.1
CERTIFICATION
I, Harold C. Simmons, 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 5, 2006
/s/ Harold C. Simmons
- ------------------------------
Harold C. Simmons
Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Gregory M. Swalwell, 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 5, 2006
/s/ Gregory M. Swalwell
- --------------------------------
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, 2006 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
May 5, 2006
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.
