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 June 30, 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 July 28, 2006:
48,953,049.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 2005; June 30, 2006 (unaudited) 3
Condensed Consolidated Statements of Income -
Three and six months ended June 30, 2005 and 2006
(unaudited) 5
Condensed Consolidated Statements of Comprehensive Income -
Six months ended June 30, 2005 and 2006 (unaudited) 6
Condensed Consolidated Statement of Stockholders' Equity -
Six months ended June 30, 2006 (unaudited) 7
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 2005 and 2006 (unaudited) 8
Notes to Condensed Consolidated Financial Statements
(unaudited) 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosure About Market Risk 26
Item 4. Controls and Procedures 26
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 1A. Risk Factors 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 6. Exhibits 28
Items 2, 3, and 5 of Part II are omitted because there is no information to
report
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, June 30,
2005 2006
------------ ----------
(Unaudited)
Current assets:
Cash and cash equivalents
$ 72,029 $ 61,428
Restricted cash 1,355 1,227
Accounts and other receivables, net 184,584 249,592
Receivables from affiliate 2 233
Refundable income taxes 1,053 1,978
Inventories, net 259,844 255,935
Prepaid expenses 4,290 5,643
Deferred income taxes 2,187 1,263
---------- ----------
Total current assets 525,344 577,299
---------- ----------
Other assets:
Investment in TiO2 manufacturing joint venture 115,308 115,558
Deferred income taxes 213,722 228,003
Other 25,638 25,810
---------- ----------
Total other assets 354,668 369,371
---------- ----------
Property and equipment:
Land 31,678 33,820
Buildings 184,800 196,669
Equipment 786,953 840,631
Mining properties 68,165 72,369
Construction in progress 13,457 11,543
---------- ----------
1,085,053 1,155,032
Less accumulated depreciation and amortization 666,133 721,696
---------- ----------
Net property and equipment 418,920 433,336
---------- ----------
Total assets $1,298,932 $1,380,006
========== ==========
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, June 30,
2005 2006
------------ ----------
Current liabilities:
Current maturities of long-term debt $ 958 $ 983
Accounts payable and accrued liabilities 165,545 167,605
Payable to affiliates 10,382 9,889
Income taxes 24,014 6,434
Deferred income taxes 4,211 775
---------- ----------
Total current liabilities 205,110 185,686
---------- ----------
Noncurrent liabilities:
Long-term debt 464,365 539,855
Deferred income taxes 53,383 53,218
Accrued pension costs 139,786 138,269
Accrued postretirement benefits costs 10,174 10,124
Other 16,055 17,310
---------- ----------
Total noncurrent liabilities 683,763 758,776
---------- ----------
Minority interest 75 80
---------- ----------
Stockholders' equity:
Common stock 489 489
Additional paid-in capital 1,061,539 1,061,644
Retained deficit (441,295) (437,170)
Accumulated other comprehensive loss:
Currency translation (114,930) (93,680)
Pension liabilities (95,819) (95,819)
---------- ----------
Total stockholders' equity 409,984 435,464
---------- ----------
Total liabilities, minority interest and
stockholders' equity $1,298,932 $1,380,006
========== ==========
Commitments and contingencies (Notes 10 and 11)
See accompanying Notes to Condensed Consolidated Financial Statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
--------------------- ----------------------
2005 2006 2005 2006
---- ---- ---- ----
(unaudited)
Net sales $311,688 $ 345,101 $ 603,562 $ 649,380
Cost of sales 217,048 263,107 424,725 492,602
-------- --------- --------- ---------
Gross margin 94,640 81,994 178,837 156,778
Selling, general and administrative expense 37,844 41,298 75,097 79,117
Other operating income (expense):
Currency transaction gains (losses), net 2,395 (2,029) 3,323 (2,870)
Disposition of property and equipment (120) (675) (154) (1,107)
Other income 76 47 112 57
Corporate expense (1,448) (1,284) (2,873) (2,602)
-------- --------- --------- ---------
Income from operations 57,699 36,755 104,148 71,139
Other income (expense):
Trade interest income 142 404 220 879
Other interest income 279 926 620 1,030
Securities transaction gain 5,439 - 5,439 -
Loss on prepayment of debt - (22,311) - (22,311)
Interest expense (11,625) (13,095) (23,397) (23,804)
-------- --------- --------- ---------
Income before income taxes and minority interest 51,934 2,679 87,030 26,933
Provision for income taxes (benefit) 19,066 (10,893) 32,757 (1,673)
Minority interest in after-tax earnings 3 2 7 5
-------- --------- --------- ---------
Net income $ 32,865 $ 13,570 $ 54,266 $ 28,601
======== ========= ========= =========
Basic and diluted net income per share $ .67 $ .28 $ 1.11 $ .58
======== ========= ========= =========
Cash dividends per share $ .25 $ .25 $ .50 $ .50
======== ========= ========= =========
Basic and diluted weighted-average shares used in the
calculation of net income per share 48,948 48,951 48,947 48,950
======== ========= ========= =========
See accompanying Notes to Condensed Consolidated Financial Statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Six months ended June 30, 2005 and 2006
(In thousands)
2005 2006
---- ----
(Unaudited)
Net income $54,266 $28,601
Other comprehensive income, net of tax -
currency translation adjustment 4,224 21,250
------- -------
Comprehensive income $58,490 $49,851
======= =======
See accompanying Notes to Condensed Consolidated financial statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended June 30, 2006
(In thousands)
Accumulated other
comprehensive loss
Additional ----------------------------- Total
Common paid-in Retained Currency Pension stockholders'
stock capital deficit translation liabilities equity
------ ---------- -------- ----------- ----------- -------------
(unaudited)
Balance at December 31, 2005 $ 489 $1,061,539 $(441,295) $(114,930) $(95,819) $409,984
Net income - - 28,601 - - 28,601
Other comprehensive income - - - 21,250 - 21,250
Dividends - - (24,476) - - (24,476)
Issuance of common stock - 105 - - - 105
------ ---------- --------- --------- -------- --------
Balance at June 30, 2006 $ 489 $1,061,644 $(437,170) $ (93,680) $(95,819) $435,464
====== ========== ========= ========= ======== ========
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2005 and 2006
(In thousands)
2005 2006
---- ----
(Unaudited)
Cash flows from operating activities:
Net income $ 54,266 $ 28,601
Depreciation and amortization 22,136 21,741
Loss on prepayment of debt - 22,311
Call premium paid - (20,898)
Noncash interest expense 1,546 1,141
Deferred income taxes 12,615 (9,199)
Minority interest 7 5
Net loss from disposition of property and equipment 154 1,107
Distributions from (contributions to) TiO2 manufacturing
joint venture, net 650 (250)
Securities transaction gain (5,439) -
Benefit plan expense less than cash funding:
Defined benefit pension plans (2,639) (303)
Other postretirement benefits, net (437) (198)
Other, net (1,504) (642)
Change in assets and liabilities:
Accounts and other receivables (46,936) (54,888)
Inventories (20,596) 17,534
Prepaid expenses (2,978) (1,029)
Accounts payable and accrued liabilities (12,054) (4,987)
Income taxes 5,683 (20,869)
Accounts with affiliates 2,900 850
Other, net (4,969) 1,016
-------- --------
Net cash provided by (used in) operating activities 2,405 (18,957)
-------- --------
Cash flows from investing activities:
Capital expenditures (11,524) (13,426)
Change in restricted cash equivalents 437 225
Proceeds from disposal of interest in Norwegian
smelting operation 3,542 -
Other, net 32 40
-------- --------
Net cash used in investing activities (7,513) (13,161)
-------- --------
Cash flows from financing activities:
Indebtedness:
Borrowings - 649,159
Principal payments (13,015) (596,194)
Deferred financing costs paid - (8,789)
Dividends paid (24,474) (24,476)
Other, net 641 105
-------- --------
Net cash provided by (used in) financing activities (36,848) 19,805
-------- --------
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Six months ended June 30, 2005 and 2006
(In thousands)
2005 2006
---- ----
(Unaudited)
Cash and cash equivalents - net change from:
Operating, investing and financing activities $(41,956) $(12,313)
Currency translation (1,189) 1,712
Cash and cash equivalents at beginning of period 60,790 72,029
-------- --------
Cash and cash equivalents at end of period $ 17,645 $ 61,428
======== ========
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized $ 21,360 $ 15,202
Income taxes, net 13,016 28,359
Noncash investing activity - inventory received
as partial consideration for disposal of
interest in Norwegian smelting operation $ 1,897 $ -
See accompanying Notes to Condensed Consolidated Financial Statements.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
Note 1 - Organization and basis of presentation:
Organization - We are a majority-owned subsidiary of Valhi, Inc. (NYSE:
VHI). At June 30, 2006, Valhi held approximately 59% of our outstanding common
stock and NL Industries, Inc. (NYSE:NL) held an additional 36% of our common
stock. Valhi owns approximately 83% of NL's outstanding common stock.
Approximately 92% of Valhi's outstanding common stock is held by Contran
Corporation and its subsidiaries. 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 these companies.
Basis of presentation - The unaudited Condensed Consolidated Financial
Statements contained in this Quarterly Report have been prepared on the same
basis as the audited Consolidated Financial Statements in our Annual Report on
Form 10-K for the year ended December 31, 2005 that we filed with the Securities
and Exchange Commission ("SEC") on March 16, 2006 (the "2005 Annual Report"). In
our opinion, we have made all necessary adjustments (which include only normal
recurring adjustments) in order to state fairly, in all material respects, our
consolidated financial position, results of operations and cash flows as of the
dates and for the periods presented. We have condensed the Consolidated Balance
Sheet at December 31, 2005 contained in this Quarterly Report as compared to our
audited Consolidated Financial Statements at that date, and we have omitted
certain information and footnote disclosures (including those related to the
Consolidated Balance Sheet at December 31, 2005) normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America ("GAAP"). Our results of operations for the
interim periods ended June 30, 2006 may not be indicative of our operating
results for the full year. The Condensed Consolidated Financial Statements
contained in this Quarterly Report should be read in conjunction with our 2005
Consolidated Financial Statements contained in our 2005 Annual Report.
Unless otherwise indicated, references in this report to "we", "us" or
"our" refer to Kronos Worldwide, Inc. and its subsidiaries (NYSE: KRO) taken as
a whole.
Note 2 - Accounts and other receivables, net:
December 31, June 30,
2005 2006
------------ ----------
(In thousands)
Trade receivables $ 170,619 $ 231,229
Recoverable VAT and other receivables 15,930 20,676
Allowance for doubtful accounts (1,965) (2,313)
--------- ---------
Total $ 184,584 $ 249,592
========= =========
Note 3 - Inventories, net:
December 31, June 30,
2005 2006
------------ ----------
(In thousands)
Raw materials $ 52,343 $ 46,769
Work in process 17,959 16,871
Finished products 149,900 145,934
Supplies 39,642 46,361
--------- ---------
Total $ 259,844 $ 255,935
========= =========
Note 4 - Other noncurrent assets:
December 31, June 30,
2005 2006
------------ ----------
(In thousands)
Unrecognized net pension obligations $ 11,916 $ 12,534
Deferred financing costs, net 8,150 9,438
Restricted marketable debt securities 2,572 2,765
Other 3,000 1,073
--------- ---------
Total $ 25,638 $ 25,810
========= =========
Note 5 - Accounts payable and accrued liabilities:
December 31, June 30,
2005 2006
------------ ----------
(In thousands)
Accounts payable $ 91,397 $ 82,945
Employee benefits 35,610 30,550
Interest 191 7,633
Other 38,347 46,477
--------- ---------
Total $ 165,545 $ 167,605
========= =========
Note 6 - Long-term debt:
December 31, June 30,
2005 2006
------------ ----------
(In thousands)
Kronos International, Inc.:
8.875% Senior Secured Notes $ 449,298 $ -
6.5% Senior Secured Notes - 499,354
Revolving credit facilities:
Kronos U.S. subsidiaries 11,500 32,250
Kronos Canada - 4,453
Other 4,525 4,781
--------- ---------
Total debt
465,323 540,838
Less current maturities 958 983
--------- ---------
Total long-term debt $ 464,365 $ 539,855
========= =========
Senior Secured Notes - On April 11, 2006, our wholly-owned subsidiary,
Kronos International, Inc. ("KII") issued an aggregate of euro 400 million
principal amount of new 6.5% Senior Secured Notes due April 2013, at 99.306% of
their principal amount ($498.5 million when issued). These Senior Secured Notes
were issued pursuant to an indenture that contains covenants, restrictions and
collateral substantially identical to the covenants, restrictions and collateral
of our 8.875% Senior Secured Notes. On May 11, 2006, we redeemed all of our
8.875% Senior Secured Notes at 104.437% of the aggregate principal amount of
euro 375 million for an aggregate of $491.4 million, including the $20.9 million
call premium. We used the proceeds from the 6.5% Senior Secured Notes issued in
April 2006 to fund the redemption. We recognized a $22.3 million pre-tax
interest charge in the second quarter related to the prepayment of the 8.875%
Senior Secured Notes, consisting of the call premium on the notes and the
write-off of deferred financing costs and unamortized premium related to the
notes.
Revolving credit facilities - For the six months ended June 30, 2006, we
borrowed an aggregate of Cdn. $5 million ($4.5 million when borrowed) under our
Canadian revolving credit facility and a net $20.8 million under our U.S. bank
credit facility. The average interest rates on the outstanding borrowings under
these facilities at June 30, 2006 were 6.75% and 8.25%, respectively.
Note 7 - Other noncurrent liabilities:
December 31, June 30,
2005 2006
------------ ----------
(In thousands)
Employee benefits $ 4,735 $ 6,197
Insurance claims and expenses 1,733 1,069
Asset retirement obligations 934 1,033
Other 8,653 9,011
--------- ---------
Total $ 16,055 $ 17,310
========= =========
Note 8 - Employee benefit plans:
Defined benefit plans - The components of net periodic defined benefit
pension cost are presented in the table below.
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2005 2006 2005 2006
---- ---- ---- ----
(In thousands) (In thousands)
Service cost $ 1,914 $ 1,991 $ 3,901 $ 3,835
Interest cost 4,454 4,747 9,034 9,320
Expected return on plan assets (4,004) (4,027) (8,118) (7,918)
Amortization of prior service cost 150 114 304 226
Amortization of net transition obligations 153 144 310 283
Recognized actuarial losses 927 2,157 1,878 4,230
------- ------- ------- -------
Total $ 3,594 $ 5,126 $ 7,309 $ 9,976
======= ======= ======= =======
Postretirement benefits - The components of net periodic postretirement
benefit costs are presented in the table below.
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2005 2006 2005 2006
---- ---- ---- ----
(In thousands) (In thousands)
Service cost $ 54 $ 71 $109 $142
Interest cost 144 157 289 313
Amortization of prior service credit (160) (50) (320) (100)
Recognized actuarial losses 17 29 35 57
---- ---- ---- ----
Total $ 55 $207 $113 $412
==== ==== ==== ====
Contributions. We expect our 2006 contributions for our pension and post
retirement benefit plans to be consistent with the amount we disclosed in our
2005 Annual Report.
Note 9 - Accounts with affiliates:
December 31, June 30,
2005 2006
------------ ----------
(In thousands)
Current receivables from affiliates:
Income taxes receivable from Valhi $ - $ 233
Other 2 -
--------- ---------
Total $ 2 $ 233
========= =========
Current payable to affiliates:
Louisiana Pigment Company, L.P. $ 9,803 $ 9,791
Income taxes payable to Valhi 434 -
NL 145 98
--------- ---------
Total $ 10,382 $ 9,889
========= =========
Note 10 - Commitments and contingencies:
We and our affiliates are also involved in various environmental,
contractual, product liability, patent (or intellectual property), employment
and other claims and disputes incidental to our present and former operations.
In certain cases, we have insurance coverage for these items. We currently
believe the disposition of all claims and disputes, individually or in the
aggregate, should not have a material adverse effect on our consolidated
financial position, results of operations or liquidity.
Please refer to our 2005 Annual Report for a discussion of certain other
legal proceedings to which we are a party.
Note 11 - Provision for income taxes (benefit):
Six months ended
June 30,
-------------------------
2005 2006
---- ----
(In millions)
Expected tax expense $30.5 $ 9.4
Incremental U.S. tax and rate differences on
equity in earnings of non-tax group companies .2 .4
Non-U.S. tax rates (.1) (.7)
Nondeductible expenses 1.8 1.4
Resolution of prior year income tax issues, net - (2.0)
U.S. state income tax expense, net .2 .4
Contingency reserve adjustment, net .2 (9.5)
Canadian tax rate change - (1.1)
----- -----
Total $32.8 $(1.7)
===== =====
In June 2006, Canada enacted a 2% reduction in the Canadian federal income
tax rate and the elimination of the federal surtax. The 2% reduction will be
phased in from 2008 to 2010, and the federal surtax will be eliminated in 2008.
As a result, during the second quarter of 2006 we recognized a $1.1 million
income tax benefit related to the effect of such reduction of our previously
recorded net deferred income tax liability.
Due to the favorable resolution of certain income tax issues related to our
German and Belgian operations during the first six months of 2006, we recognized
a $2 million income tax benefit ($1 million in the second quarter of 2006)
related to adjustments of prior year income taxes.
Tax authorities are examining certain of our non-U.S. tax returns and have
or may propose tax deficiencies, including penalties and interest. For example:
o We previously received a preliminary tax assessment related to 1993
from the Belgian tax authorities proposing tax deficiencies, including
related interest, of approximately euro 6 million ($7.2 million at
June 30, 2006). The Belgian tax authorities filed a lien on the fixed
assets of our Belgian TiO2 operations in connection with their
assessment. This lien does not interfere with on-going operations at
the facility. We filed a protest to this assessment, and in July 2006
the Belgian tax authorities withdrew the assessment. We believe the
lien will be released by the end of 2006.
o The Norwegian tax authorities previously notified us of their intent
to assess tax deficiencies of approximately kroner 12 million ($2.4
million at June 30, 2006) relating to the years 1998 through 2000. We
objected to this proposed assessment, and in May 2006 the Norwegian
tax authorities withdrew the assessment.
Principally as a result of the withdrawal of the Belgian and Norwegian
assessments discussed above, we have recognized a $9.5 million income tax
benefit in the first six months of 2006 (mostly in the second quarter) related
to the reduction in our income tax contingency reserve. Other income tax
examinations related to our operations continue, and we cannot guarantee that
these tax matters will be resolved in our favor due to the inherent
uncertainties involved in settlement initiatives and court and tax proceedings.
We believe we have adequate accruals for additional taxes and related interest
expense which could ultimately result from tax examinations. We believe the
ultimate disposition of tax examinations should not have a material adverse
effect on our consolidated financial position, results of operations or
liquidity.
Note 12 - Recent accounting pronouncements:
Inventory costs - Statement of Financial Accounting Standards ("SFAS") No.
151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, became effective
for us for inventory costs incurred on or after January 1, 2006. SFAS No. 151
requires that the allocation of fixed production overhead costs to inventory be
based on normal capacity of the production facilities, as defined by SFAS No.
151. SFAS No. 151 also clarifies the accounting for abnormal amounts of idle
facility expense, freight handling costs and wasted material, requiring those
items be recognized as current-period charges. Our existing production cost
policies complied with the requirements of SFAS No. 151, therefore the adoption
of SFAS No. 151 did not affect our Consolidated Financial Statements.
Stock options - We adopted the fair value provisions of SFAS No. 123R,
"Share-Based Payment," on January 1, 2006, using the modified prospective
application method. SFAS No. 123R, among other things, requires the cost of
employee compensation paid with equity instruments to be measured based on the
grant-date fair value. That cost is then recognized over the vesting period.
Using the modified prospective method, we will apply the provisions of the
standard to all new equity compensation granted after January 1, 2006 and any
existing awards vesting after January 1, 2006. We have not issued any stock
options to purchase Kronos common stock. However, certain of our employees have
been granted options by NL to purchase NL common stock. The number of non-vested
equity awards issued by NL as of December 31, 2005 is not material. Prior to the
adoption of SFAS No. 123R we accounted for equity compensation in accordance
with APBO No. 25, Accounting for Stock Issued to Employees. Our affiliate NL
accounted for their equity awards under the variable accounting method whereby
the equity awards were revalued based on the current trading price at each
balance sheet date. We now account for these awards using the liability method
under SFAS No. 123R, which is substantially identical to the variable accounting
method we previously used. We recorded no material income or compensation
expense in the quarter ended June 30, 2006 for stock-based employee
compensation. We recorded income for stock-based employee compensation of
approximately $1 million in the quarter ended June 30, 2005 and $900,000 and
$400,000 in the six months ended June 30, 2005 and 2006, respectively. If we
grant a significant number of equity awards or modify, repurchase or cancel
existing equity awards in the future, the amount of equity compensation expense
in our Consolidated Financial Statements could be material.
Effective January 1, 2006, SFAS No. 123R requires the cash income tax
benefit resulting from the exercise of stock options in excess of the cumulative
income tax benefit previously recognized for GAAP financial reporting purposes
to be reflected as a component of cash flows from financing activities in our
Consolidated Financial Statements. Because we account for these options to
purchase NL common stock under the liability method of SFAS No. 123R, the cash
income tax benefit resulting from the exercise of such stock options will always
be equal to the cumulative income tax benefit we would have previously
recognized for GAAP financial reporting purposes. SFAS No. 123R also requires
certain expanded disclosures regarding equity compensation, and we provided
these expanded disclosures in our 2005 Annual Report.
Uncertain tax positions - In the second quarter of 2006 the Financial
Accounting Standards Board ("FASB") issued FASB Interpretation No. ("FIN") 48,
Accounting for Uncertain Tax Positions, which will become effective for us on
January 1, 2007. FIN No. 48 clarifies when and how much of a benefit we can
recognize in our Consolidated Financial Statements for certain positions taken
in our income tax returns under SFAS No. 109, Accounting for Income Taxes, and
enhances the disclosure requirements for our income tax policies and reserves.
Among other things, FIN No. 48 will prohibit us from recognizing the benefits of
a tax position unless we believe it is more-likely-than-not our position will
prevail with the applicable tax authorities and limits the amount of the benefit
to the largest amount for which we believe the likelihood of realization is
greater than 50%. FIN No. 48 also requires companies to accrue penalties and
interest on the difference between tax positions taken on their tax returns and
the amount of benefit recognized for financial reporting purposes under the new
standard. Our current income tax accounting policies comply with this aspect of
the new standard. We will also be required to reclassify any reserves we have
for uncertain tax positions from deferred income tax liabilities, where they are
currently recognized, to a separate current or noncurrent liability, depending
on the nature of the tax position. We are currently evaluating the impact of FIN
No. 48 on our Consolidated Financial Statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
Business and results of operations overview
We are a leading global producer and marketer of value-added titanium
dioxide pigments ("TiO2"). TiO2 is used for a variety of manufacturing
applications, including plastics, paints, paper and other industrial products.
For the six months ended June 30, 2006, approximately one-half of our sales
volumes were attributable to markets in Europe. We believe we are the second
largest producer of TiO2 in Europe with an estimated 20% share of European TiO2
sales volumes. In addition, we also have an estimated 15% share of North
American TiO2 sales volumes. Our production facilities are located throughout
Europe and North America.
We reported net income of $13.6 million, or $.28 per diluted share, in the
second quarter of 2006 as compared to net income of $32.9 million, or $.67 per
diluted share, in the second quarter of 2005. For the first six months of 2006,
we reported net income of $28.6 million, or $.58 per diluted share, compared to
net income of $54.3 million, or $1.11 per diluted share, in the first six months
of 2005. Our diluted earnings per share declined from the 2005 periods to the
2006 periods primarily due to the unfavorable effect of lower income from
operations in 2006, a gain from the sale of our passive interest in a Norwegian
smelting operation in 2005 and a charge in the second quarter 2006 from the
redemption of our 8.875% Senior Secured Notes more than offset the favorable
effect of certain income tax benefits recognized in 2006.
Our net income in the first six months of 2005 includes a second quarter
gain from the sale of our passive interest in a Norwegian smelting operation of
$.07 per diluted share. Our net income in the first six months of 2006 includes
(1) a charge related to the prepayment of our 8.875% Senior Secured Notes of
$.30 per diluted share and (2) an aggregate income tax benefit of $.26 per
diluted share ($.24 per diluted share for the second quarter of 2006) related to
the withdrawal of certain income tax assessments previously made by the Belgian
and Norwegian tax authorities, the favorable resolution of certain income tax
issues related to our German and Belgian operations and the enactment of a
reduction in the Canadian federal income tax rate.
Forward-looking information
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Statements in this Quarterly
Report on Form 10-Q that are not historical in nature are forward-looking in
nature about our future that are not statements of historical fact. Statements
in this report including, but not limited to, statements found in Item 2 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," are forward-looking statements that represent our beliefs and
assumptions based on currently available information. In some cases you can
identify these forward-looking statements 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 we
believe the expectations reflected in forward-looking statements are reasonable,
we do not know if these expectations will be correct. Forward-looking statements
by their nature involve substantial risks and uncertainties that could
significantly impact expected results. Actual future results could differ
materially from those predicted. While it is not possible to identify all
factors, we continue to face many risks and uncertainties. Among the factors
that could cause our actual future results to differ materially from those
described herein are the risks and uncertainties discussed in this Quarterly
Report and those described from time to time in our other filings with the SEC
including, but not limited to, the following:
o Future supply and demand for our products,
o The extent of our dependence on certain market sectors,
o The cyclicality of our businesses,
o Customer inventory levels (such as the extent to which our 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 Our ability 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. We
disclaim any intention or obligation to update or revise any forward-looking
statement whether as a result of changes in information, future events or
otherwise.
Results of operations
We consider TiO2 to be a "quality of life" product, with demand affected by
gross domestic product (or "GDP") in various regions of the world. Over the
long-term, we expect that demand for TiO2 will grow by 2% to 3% per year,
consistent with our expectations for the long-term growth in GDP. However, even
if we and our competitors maintain consistent shares of the worldwide market,
demand for TiO2 in any interim or annual period may not change in the same
proportion as the change in GDP, in part due to relative changes in the TiO2
inventory levels of our customers. We believe that our customers' inventory
levels are partly influenced by their expectation for future changes in market
TiO2 selling prices.
The factors having the most impact on our reported operating results are:
o Our TiO2 average selling prices,
o Foreign currency exchange rates (particularly the exchange rate for
the U.S. dollar relative to the euro and the Canadian dollar),
o Our TiO2 sales and production volumes, and
o Manufacturing costs, particularly maintenance and energy-related
expenses.
Our key performance indicators are our TiO2 average selling prices, and our
level of TiO2 sales and production volumes.
Quarter ended June 30, 2005 compared to the
quarter ended June 30, 2006 -
Three months ended
June 30,
-------------------------------------------
2005 2006
----------------- ------------------
(Dollars in millions)
Net sales $311.7 100% $345.1 100%
Cost of sales 217.1 70% 263.1 76%
------ ---- ------ ----
Gross margin 94.6 30% 82.0 24%
Other operating income and costs, net 36.9 12% 45.2 13%
------ ---- ------ ----
Income from operations $ 57.7 18% $ 36.8 11%
====== ==== ====== ====
%
Change
Ti02 operating statistics:
Sales volumes* 122 139 +14%
Production volumes* 127 130 +2%
Percent change in net sales:
TiO2 product pricing -1%
TiO2 sales volumes +14%
TiO2 product mix -1%
Changes in currency exchange rates -1%
----
Total +11%
====
* Thousands of metric tons
Net sales - Net sales increased 11% or $33.4 million compared to the second
quarter of 2005 primarily due to a 14% increase in TiO2 sales volumes. The
benefit of higher sales volumes was offset somewhat by a 1% decrease in average
TiO2 selling prices and the impact of currency exchange rates. We estimate the
unfavorable effect of changes in currency exchange rates decreased our net sales
by approximately $4 million, or 1%, compared to the same period in 2005. We
expect selling prices to remain reasonably stable in the second half of 2006
compared to the second quarter of 2006.
Our 14% increase in sales volume in the second quarter of 2006 is primarily
due to higher sales volumes in the United States, Europe and export markets,
which were somewhat offset by lower sales volumes in Canada. We believe sales
volumes in Canada have decreased as our customers' demand has been affected by
the effects of the strengthened Canadian dollar. We expect overall demand will
continue to remain high for the remainder of the year.
Cost of sales - Cost of sales increased $46.1 million or 21% in the second
quarter of 2006 compared to 2005 primarily due to the impact of increased sales
volumes and higher operating costs (including energy costs). The cost of sales
as a percentage of net sales increased to 76% in the second quarter of 2006
compared to 70% in the second quarter of 2005 primarily due to increases in raw
material and other operating costs (including energy costs).
The negative impact of the increase in raw materials and energy costs was
somewhat offset by record production levels. TiO2 production volumes increased
2% in the second quarter of 2006 compared to the same period in 2005, which
favorably impacted our operating income comparisons. We continued to gain
operational efficiencies at our existing TiO2 facilities by debottlenecking
production to meet long-term demand. Our operating rates were near full capacity
in both periods, and we set a new production volume record in the second quarter
of 2006.
Through our debottlenecking program, we added finishing capacity in the
German chloride-process facility and also equipment upgrades and enhancements in
several locations have allowed us to reduce downtime for maintenance activities.
Our production capacity has increased by approximately 30% over the past ten
years with only moderate capital expenditures. We believe our annual attainable
TiO2 production capacity for 2006 is approximately 510,000 metric tons, with
some additional capacity expected to be available in 2007 through our continued
debottlenecking efforts.
Income from operations - Income from operations for the second quarter of
2006 declined by 36% to $36.8 million compared to the same period in 2005 and as
a percentage of net sales, income from operations declined to 11% in the second
quarter of 2006 from 18% in the same period for 2005. This decrease is driven by
the decline in gross margin, which fell to 24% in 2006 compared to 30% in 2005.
Our gross margin decrease is due to lower selling prices for TiO2, the increases
we experienced in raw materials and energy costs in 2006, as well as the
negative effect of changes in currency exchange rates, partially offset by the
higher sales and production volumes. We estimate the negative effect of changes
in foreign currency exchange rates decreased income from operations by
approximately $11 million. We expect income from operations for the second half
of 2006 will continue to be lower than the second half of 2005.
Other non-operating income (expense) - In April 2006, we issued our euro
400 million principal amount of 6.5% Senior Secured Notes, and used the proceeds
to redeem our euro 375 million principal amount of 8.875% Senior Secured Notes.
As a result of our prepayment of the 8.875% Senior Secured Notes, we recognized
a $22.3 million pre-tax interest charge ($14.8 million net of income tax
benefit) in the second quarter of 2006 for the prepayment of the notes,
representing (1) the call premium on the notes, (2) the write-off of deferred
financing costs and (3) write off of the existing unamortized premium on the
notes. See Note 6 to the Condensed Consolidated Financial Statements. Annual
interest expense on the 6.5% Senior Secured Notes will be approximately euro 6
million less than on the 8.875% Senior Secured Notes.
Interest expense increased $1.5 million from $11.6 million in the second
quarter of 2005 to $13.1 million in the second quarter of 2006 due primarily to
the 8.875% Senior Secured Notes and the 6.5% Senior Secured Notes both being
outstanding for 30 days during the quarter. This additional interest expense was
partially offset by changes in currency exchange rates in 2006 compared to 2005.
Excluding the effect of currency exchange rates, we expect interest expense will
be lower in second half of 2006 as compared to the first half of 2006.
We have a significant amount of indebtedness denominated in the euro,
primarily the Senior Secured Notes. The interest expense we recognize will vary
with fluctuations in the euro exchange rate.
Provision for income taxes (benefit) - An income tax benefit of $10.9
million was recorded in the second quarter of 2006 compared to an expense of
$19.1 million in the same period last year. The income tax benefit in 2006 is
primarily due to a $9.5 million reduction in our income tax contingency reserves
related to favorable developments with income tax audits for our Belgian and
Norwegian operations, a $1 million benefit associated with favorable
developments with certain income tax issues related to our Belgian operations
and a $1.1 million benefit resulting from the enactment of a reduction in
Canadian income tax rates. See Note 11 to the Condensed Consolidated Financial
Statements.
Six months ended June 30, 2005 compared to the
six months ended June 30, 2006 -
Three months ended
June 30,
-------------------------------------------
2005 2006
----------------- ------------------
(Dollars in millions)
Net sales $603.5 100% $649.4 100%
Cost of sales 424.7 70% 492.6 76%
------ ---- ------ ----
Gross margin 178.8 30% 156.8 24%
Other operating income and costs, net 74.7 12% 85.7 13%
------ ---- ------ ----
Income from operations $104.1 18% $ 71.1 11%
====== ==== ====== ====
%
Change
Ti02 operating statistics:
Sales volumes* 237 264 +11%
Production volumes* 249 257 +3%
Percent change in net sales:
TiO2 product pricing +1%
TiO2 sales volumes +11%
TiO2 product mix -1%
Changes in currency exchange rates -3%
----
Total +8%
====
* Thousands of metric tons
Net sales - Net sales increased 8% or $45.9 million compared to the six
months ended June 30, 2005, primarily due to an 11% increase in TiO2 sales
volumes, offset somewhat by the impact of currency exchange rates. We estimate
the unfavorable effect of changes in currency exchange rates decreased our net
sales by approximately $19 million, or 3%, compared to the same period in 2005.
Our 11% increase in sales volume in the six months ended June 30, 2006 is
primarily due to higher sales volumes in the United States, Europe and in export
markets, which were somewhat offset by lower sales volumes in Canada.
Cost of sales - Cost of sales increased $67.9 million or 16% in the six
months ended June 30, 2006, compared to the same period in 2005, primarily due
to the impact of increased sales volumes and higher operating costs (including
energy costs). The cost of sales percentage of net sales increased to 76% in the
six months ended June 30, 2006, compared to 70% in the same period of 2005
primarily due to increases in higher raw material and other operating costs
(including energy costs).
The negative impact of the increase in raw materials and energy costs was
somewhat offset by record production levels. TiO2 production volumes increased
3% in the six months ended June 30, 2006 compared to the same period in 2005,
which favorably impacted our income from operations comparisons. Our operating
rates were near full capacity in both periods. Production volume was a record
aided by our continuing debottlenecking.
Income from operations - Income from operations for the six months ended
June 30, 2006 declined by 32% to $71.1 million compared to the same period in
2005; the income from operations as a percentage of net sales declined to 11% in
the six months ended June 30, 2006 from 18% in the same period for 2005. The
decline in income from operations is driven by the decline in gross margin,
which fell to 24% in 2006 compared to 30% in 2005, due primarily to the
increases we experienced in raw materials and energy costs in 2006, as well as
the negative effect of changes in currency exchange rates, partially offset by
the higher sales and production volumes. We estimate the negative effect of
changes in foreign currency exchange rates decreased income from operations by
approximately $16 million.
Other non-operating income (expense) - Interest expense increased $400,000
from $23.4 million in the six months ended June 30, 2005 to $23.8 million in the
six months ended June 30, 2006 primarily due to the 8.875% Senior Secured Notes
and the 6.5% Senior Secured Notes both being outstanding for 30 days during the
six months ended June 30, 2006. This additional interest expense was partially
offset by changes in currency exchange rates in 2006 compared to 2005.
Provision for income taxes (benefit) - An income tax benefit of $1.7
million was recorded in the first six months of 2006 compared to an income tax
expense of $32.8 million in the same period last year. The income tax benefit in
2006 is primarily due to a $9.5 million reduction in our income tax contingency
reserves related to favorable developments with income tax audits for our
Belgian and Norwegian operations, a $2 million benefit associated with favorable
developments with certain income tax issues related to our Belgian and German
operations and a $1.1 million benefit resulting from the enactment of a
reduction in Canadian income tax rates. Our tax rate varies as the mix of
earnings contributed by our various subsidiaries changes. See Note 11 to the
Condensed Consolidated Financial Statements for a tabular reconciliation of our
statutory tax expense to our actual tax benefit.
Currency exchange
We have substantial operations and assets located outside the United States
(primarily in Germany, Belgium, Norway and Canada). The majority of our foreign
operations' sales are denominated in foreign currencies, primarily the euro,
other major European currencies and the Canadian dollar. A portion of our sales
generated from our foreign operations are denominated in the U.S. dollar.
Certain raw materials used worldwide, primarily titanium-containing feedstocks,
are purchased in U.S. dollars, while labor and other production costs are
purchased primarily in local currencies. As a result, the translated U.S. dollar
value of our 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 foreign currency exchange rates had the following
effects on our sales and income from operations in 2006 as compared to 2005.
Three months ended Six months ended
June 30, 2006 June 30, 2006
vs. 2005 vs. 2005
------------------ ----------------
Increase (decrease), in millions
----------------------------------------------
Impact on:
Net sales $ (4) $(19)
Income from operations (11) (16)
Outlook
We expect income from operations for the second half of 2006 will be lower
than the second half of 2005. Our expectations as to the future of the TiO2
industry are based upon a number of factors beyond our 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 our expectations, our results of
operations could be unfavorably affected.
Other
On September 22, 2005, the chloride-process TiO2 facility operated by our
50%-owned joint venture, Louisiana Pigment Company ("LPC"), temporarily halted
production due to Hurricane Rita. Although there was minimal storm damage to
core processing facilities, 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. LPC 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 we believe insurance will cover our lost profits
(subject to applicable deductibles) resulting from the loss of production at
LPC. Both we and LPC have filed claims with our insurers. We expect to recover
our losses through the insurer in the second half of 2006, although the amount
and timing of the insurance recovery is not yet known. We have not accrued a
receivable for the amount of the insurance claim and will not record the claim
until negotiations with LPC's insurer are finalized. The effect on our financial
results will depend on the timing and amount of insurance recoveries.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated cash flows
Operating activities
Trends in cash flows as a result of our operating activities (excluding the
impact of significant asset dispositions and relative changes in assets and
liabilities) are generally similar to trends in our earnings.
Our cash flows from operating activities provided $2.4 million in the first
six months of 2005, compared to $19 million used in the first six months of
2006. This decrease was due primarily to the net effects of the following items:
o Lower income from operations in 2006 of $33 million;
o Payment of the $20.9 million call premium as a result of the May 2006
prepayment of our 8.875% Senior Secured Notes, which GAAP requires to
be included in the determination of cash flows from operating
activities.
o Higher cash paid for income taxes in 2006 of $15.3 million;
o Lower cash paid for interest in 2006 of $6.2 million, primarily as a
result of the May 2006 redemption of our 8.875% Senior Secured Notes
(which paid interest semiannually in June and December) and the April
2006 issuance of our 6.5% Senior Secured Notes (which will pay
interest semiannually in April and October); and
o A lower amount of net cash used from relative changes in our
inventories, receivables, payables and accruals of $29.7 million in
the first six months of 2006 as compared to the first six months of
2005.
Changes in working capital were affected by accounts receivable and
inventory changes. Our average days sales outstanding ("DSO") increased from 55
days at December 31, 2005 to 65 days at June 30, 2006 due to the timing of
collection on higher accounts receivable balances at the end of June. For
comparative purposes, our average DSO increased from 60 days at December 31,
2004 to 64 days at June 30, 2005. Our average days sales in inventory ("DSI")
decreased from 102 days at December 31, 2005 to 88 days at June 30, 2006, as our
strong TiO2 sales volumes in the first six months of 2006 exceeded our strong
TiO2 production volumes during the period by approximately 7 thousand metric
tons. For comparative purposes, our TiO2 production volumes were higher than our
TiO2 sales volumes in the first six months of 2005, and our average DSI remained
constant at 97 days at December 31, 2004 and at June 30, 2005.
Investing activities
Capital expenditures were $11.5 million and $13.4 million in the six months
ended June 30, 2005 and 2006, respectively. Capital expenditures are primarily
for improvements and upgrades to existing facilities.
Financing activities
In the second quarter of 2006 we redeemed our euro 375 million principal
amount of 8.875% Senior Secured Notes ($470.5 million when redeemed) and issued
euro 400 million principal amount of 6.5% Senior Secured Notes at 99.306%
($498.5 million when issued). See Note 6 to the Condensed Consolidated Financial
Statements. During the six months ended June 30, 2006, we had net borrowings of
$20.8 million under our placecountry-regionU.S. credit facility and $4.5 million
under our Canadian credit facility.
In each of the six months ended June 30, 2005 and 2006, we paid a quarterly
dividend to stockholders of $.25 per share for an aggregate dividend $24.5
million in each six-month period.
Outstanding debt obligations
At June 30, 2006, our consolidated debt was comprised of:
o euro 400 million principal amount of our 6.5% Senior Secured Notes
($499.4 million at June 30, 2006) due in 2013;
o $32.3 million under our U.S. revolving credit facility which matures
in September 2008;
o Cdn. 5 million ($4.5 million at June 30, 2006) under our Canadian
revolving credit facility which matures in January 2009; and
o Approximately $4.8 million of other indebtedness.
Certain of our credit agreements contain provisions which could result in
the acceleration of indebtedness prior to its stated maturity for reasons other
than defaults for failure to comply with certain financial covenants. For
example, certain credit agreements allow the lender to accelerate the maturity
of the indebtedness upon a change of control (as defined in the agreement) 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. We are in compliance with all of our
debt covenants at June 30, 2006. See Note 6 to the Condensed Consolidated
Financial Statements.
Our assets consist primarily of investments in operating subsidiaries, and
our ability to service parent level obligations, including the Senior Secured
Notes, depends in large part upon the distribution of earnings of our
subsidiaries, whether in the form of dividends, advances or payments on account
of intercompany obligation or otherwise. None of our subsidiaries have
guaranteed the Senior Secured Notes, although KII has pledged 65% of the common
stock or other ownership interests of certain of KII's first-tier operating
subsidiaries as collateral of the Senior Secured Notes.
Future cash requirements
Liquidity
Our primary source of liquidity on an ongoing basis is cash flows from
operating activities. From time-to-time we 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. We will also from time-to-time sell
assets outside the ordinary course of business, the proceeds of which are
generally used to (i) repay existing indebtedness, (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.
Pricing within the TiO2 industry is cyclical, and changes in industry
economic conditions significantly impact earnings and operating cash flows.
Changes in TiO2 pricing, production volumes and customer demand, among other
things, could significantly affect our liquidity.
We periodically evaluate our liquidity requirements, alternative uses of
capital, capital needs and availability of resources in view of, among other
things, our dividend policy, our debt service and capital expenditure
requirements and estimated future operating cash flows. As a result of this
process, we have in the past and may in the future seek to reduce, refinance,
repurchase or restructure indebtedness, raise additional capital, repurchase
shares of our common stock, modify our dividend policy, restructure ownership
interests, sell interests in our subsidiaries or other assets, or take a
combination of these steps or other steps to manage our liquidity and capital
resources. Such activities have in the past and may in the future involve
related companies.
At June 30, 2006, unused credit available under all of our existing credit
facilities was approximately $118 million. Based upon our expectation for the
TiO2 industry and anticipated demands on cash resources, we expect to have
sufficient liquidity to meet our future obligations including operations,
capital expenditures, debt service and current dividend policy. If actual
developments differ from our expectations, our liquidity could be adversely
affected.
Capital expenditures
We intend to spend approximately $45 million for major improvements and
upgrades to our existing facilities during 2006, including the $13.4 million we
have spent though June 30, 2006.
Off-balance sheet financing
We do not have any off-balance sheet financing agreements other than the
operating leases discussed in our 2005 Annual Report.
Commitments and contingencies
See Notes 10 and 11 to the Condensed Consolidated Financial Statements for
a description of certain legal proceedings and income tax examinations currently
underway.
Recent accounting pronouncements
See Note 12 to the Condensed Consolidated Financial Statements.
Critical accounting policies
For a discussion of our critical accounting policies, refer to Part I, Item
7 - "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our 2005 Annual Report. There have been no changes in our
critical accounting policies during the first six months of 2006.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to market risk, including foreign currency exchange rates,
interest rates and security prices. For a discussion of such market risk items,
refer to Part I, Item 7A. - "Quantitative and Qualitative Disclosure About
Market Risk" in our 2005 Annual Report. There have been no material changes in
these market risks during the first six months of 2006.
We have 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 our assets and liabilities related to our non-U.S. operations, and
therefore our consolidated net assets, will fluctuate based upon changes in
currency exchange rates.
We periodically use currency forward contracts to manage a very nominal
portion of foreign exchange rate risk associated with trade receivables
denominated in a currency other than the holder's functional currency or similar
exchange rate risk associated with future sales. We have not entered into these
contracts for trading or speculative purposes in the past, nor do we currently
anticipate entering into such contracts for trading or speculative purposes in
the future.
To manage our exchange rate risk, at June 30, 2006, we held a series of
contracts, with expiration dates ranging from July to September 2006, to
exchange an aggregate of U.S. $16.8 million for an equivalent amount of Canadian
dollars at exchange rates ranging from Cdn. $1.1084 to Cdn. $1.1642 per U.S.
dollar. At June 30, 2006, the actual exchange rate was Cdn. $1.1163 per U.S.
dollar. The estimated fair value of such foreign currency forward contracts at
June 30, 2006 is insignificant.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
We maintain 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
we are required to disclose in the reports we file or submit to the SEC under
the Act is accumulated and communicated to our management, including our
principal executive officer and our 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, our Chief
Executive Officer, and Gregory M. Swalwell, our Vice President, Finance and
Chief Financial Officer, have evaluated the design and effectiveness of our
disclosure controls and procedures as of June 30, 2006. Based upon their
evaluation, these executive officers have concluded that our disclosure controls
and procedures are effective as of June 30, 2006.
Internal control over financial reporting
We also maintain 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, our principal
executive and principal financial officers, or persons performing similar
functions, and effected by our 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 our
assets,
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with GAAP, and that our receipts and expenditures are being made only
in accordance with authorizations of our management and directors, and
o Provide reasonable assurance regarding prevention or timely detection
of an unauthorized acquisition, use or disposition of our assets that
could have a material effect on our Condensed Consolidated Financial
Statements.
As permitted by the SEC, our 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 our financial
statement schedules required by Article 12 of Regulation S-X. However, our
assessment of internal control over financial reporting with respect to our
equity method investees did include our controls over the recording of amounts
related to our investment that are recorded in our Condensed Consolidated
Financial statements, including controls over the selection of accounting
methods for our investments, the recognition of equity method earnings and
losses and the determination, valuation and recording of our investment account
balances.
Changes in internal control over financial reporting
There has been no change to our internal control over financial reporting
during the quarter ended June 30, 2006 that has materially affected, or is
reasonably likely to materially affect, the internal control over financial
reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Refer to Note 10 of the Condensed Consolidated Financial Statements and to
the 2005 Annual Report for descriptions of certain legal proceedings.
Item 1A. Risk Factors
For a discussion of the risk factors related to our businesses, refer to
Part I, Item 1A., "Risk Factors," in our 2005 Annual report. There have been no
material changes to such risk factors during the six months ended June 30, 2006.
Item 4. Submission of Matters to a Vote of Security Holders
We held our 2006 Annual Meeting of Shareholders on May 24, 2006. Keith R.
Coogan, Cecil H. Moore, Jr., George E. Poston, Glenn R. Simmons, Harold C.
Simmons, R. Gerald Turner and Steven L. Watson were elected as directors, each
receiving votes "For" their election from at least 98.7% of the 48.9 million
common shares eligible to vote at the Annual Meeting.
Item 6. Exhibits
31.1 - Certification
31.2 - Certification
32.1 - Certification
We have retained a signed original of any of the above exhibits that contains
signatures, and will provide such exhibit to the Commission or its staff upon
request. We will also furnish, without charge, a copy of our Code of Business
Conduct and Ethics, our Audit Committee Charter and our Corporate Governance
Guidelines, each as adopted by the board of directors, upon request. Requests
should be directed to the attention of the Corporate Secretary at our 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 August 4, 2006 By /s/ Gregory M. Swalwell
--------------- ----------------------------------
Gregory M. Swalwell
Vice President, Finance and Chief
Financial Officer (Principal
Financial Officer)
Date August 4, 2006 By /s/ Tim C. Hafer
--------------- ----------------------------------
Tim C. Hafer
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: August 4, 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: August 4, 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 June 30, 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
August 4, 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.
