Delaware (State or other jurisdiction of incorporation or organization)	2810 (Primary Standard Industrial Classification Code Number)		76-0294959 (I.R.S. Employer Identification Number)
Three Lincoln Centre 5430 LBJ Freeway, Suite 1700 Dallas, Texas  75240-2697 (972) 233-1700 (Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)		Robert D. Graham Executive Vice President and General Counsel Kronos Worldwide, Inc. Three Lincoln Centre 5430 LBJ Freeway, Suite 1700 Dallas, Texas  75240-2697 (972) 233-1700 (972) 448-1445 (facsimile) (Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to: Don M. Glendenning Toni Weinstein Locke Lord Bissell & Liddell LLP 2200 Ross Avenue, Suite 2200 Dallas, Texas 75201 (214) 740-8000 (214) 740-8800 (facsimile)		Copies to: Deanna L. Kirkpatrick Davis Polk & Wardwell LLP 450 Lexington Avenue New York, New York 10017 (212) 450-4135 (212) 701-5135 (facsimile)

 

 

 

 

 

 

 

 

 

 

 

Title of each class of securities to be registered	Amount to be registered	Proposed maximum offering price per unit (1)	Proposed maximum aggregate offering price (1)	Amount of registration fee
Common Stock, par value $0.01 per share	8,970,000	$39.10	$350,727,000	$25,007

(1)	Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) of the Securities Act of 1933, as amended, on the basis of the average of the high and low prices reported on the New York Stock Exchange on October 6, 2010.

 

 

 

	Per Share	Total
Initial price to public	$	$
Underwriting discounts and commissions	$	$
Proceeds, before expenses, to Kronos Worldwide, Inc.	$	$

 

 

 

 

 

 

 

Wells Fargo Securities

Deutsche Bank Securities

Stephens Inc.

Prospectus Summary	1
Risk Factors	11
Special Note Regarding Forward-Looking Statements and Market Data	17
Use of Proceeds	19
Dividend Policy	19
Price Range of Common Stock	19
Capitalization	20
Selected Historical Consolidated Financial and Operating Data	21
Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Industry Overview	46
Business	48
Management	60
Compensation of Executive Officers and Directors and Other Information	66
Principal Stockholders and Ownership of Management	84
Certain Relationships and Related Transactions	89
Description of Capital Stock	93
Material U.S. Federal Tax Considerations for Non-U.S. Holders of Common Stock	97
Underwriting	99
Legal Matters	104
Experts	104
Where You Can Find More Information	104
Index to Financial Statements	F-1

 

 

 

 

 

 

We are one of the leading global producers and marketers of titanium dioxide pigments, or TiO2, a base industrial product used in a wide range of applications.  Our TiO2 products are sold under the widely recognized Kronos™ brand name and are utilized in a diverse range of customer applications and end-use markets, including coatings, plastics, paper, food, cosmetics, inks, textile fibers, rubber, pharmaceuticals, glass, ceramics and other industrial and consumer markets.  Our broad range of over 40 TiO2 pigment prod ucts are “quality-of-life” products that significantly enhance the key characteristics of our customers’ end-products by imparting whiteness, brightness, opacity and durability.  We believe that there are no effective substitutes for TiO2.  In addition, the TiO2 industry is characterized by high barriers to entry consisting of high capital costs, proprietary technology and significant lead times required to construct new facilities or expand existing capacity.  We are committed to producing TiO2 pigments and related products as our core business.  We believe our focused management team and business strategy have enabled us to develop considerable expertise and efficiency in the manufacture, sale and service of our products.

 

Income (Loss) From Operations.  Income (loss) from operations declined by $62.9 million from income from operations of $47.2 million in 2008 to a loss from operations of $15.7 million in 2009.  Income (loss) from operations as a percentage of net sales declined to (2%) in 2009 from 4% in 2008.  This decrease is driven by the decline in gross margin, which fell to 11% for 2009 compared to 17% for 2008.  Our gross margin has decreased primarily because of the significant amount of unabsorbed fixed production costs resulting from the production curtailments we implemented during the first six months of 2009 as well as the effect of lower sales volumes.  However, changes in currency rates have positively affected our gross margin and in come (loss) from operations.  We estimate that changes in currency exchange rates increased income (loss) from operations by approximately $40 million in 2009 as compared to 2008.

 

As a percentage of net sales, selling, general and administrative expenses were relatively constant at approximately 13% for both 2008 and 2009.

 

Other Non-Operating Income and Expense, Net.  Interest expense decreased $.8 million from $42.2 million in 2008 to $41.4 million in 2009 due to changes in currency exchange rates which offset the effect of increased average borrowings under our revolving credit facilities and higher interest rates on our European credit facility.  The interest expense we recognize will vary with fluctuations in the euro exchange rate.

 

Income Tax Benefit.  Our income tax benefit was $22.2 million in 2009 compared to $3.0 million in 2008.  See Note 9 to our Consolidated Financial Statements for a tabular reconciliation of our statutory income tax benefit to our actual tax benefit.  Some of the more significant items impacting this reconciliation are summarized below.

 

·	Our income tax benefit for 2009 includes a non-cash benefit of $4.7 million related to a net decrease in our reserve for uncertain tax positions, primarily as a result of the resolution of tax audits in Belgium and Germany in the third and fourth quarters.

 

·	Our income tax benefit for 2008 includes a non-cash benefit of $7.2 million relating to a European Court ruling that resulted in the favorable resolution of certain income tax issues in Germany and an increase in the amount of our German corporate and trade tax net operating loss carryforwards.

 

Year ended December 31, 2008 compared to year ended December 31, 2007

 

Net Sales.  Net sales increased 1% or $6.6 million for 2008 compared to 2007, primarily due to favorable currency exchange rates, which we estimate increased our net sales for 2008 by approximately $61 million, or 5%, compared to the same period in 2007.  Variations in grades of products sold favorably impacted net sales by 2%, along with a 2% increase in average TiO2 selling prices.  TiO2 selling prices generally follow industry trends and prices will increase or decrease generally as a result of competitive market pressures.  During the early part of 2008, our average selling prices were general ly flat.  During the second and third quarters of 2008, we and our competitors announced various price increases and surcharges in response to higher operating costs.  A portion of these increase announcements were implemented during the second, third and fourth quarters of 2008.  The positive impact of currency, product mix and pricing in 2008 were substantially offset by an 8% decrease in sales volumes.

 

 

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Our 8% decrease in sales volumes in 2008 is primarily due to lower sales volumes in all markets as a result of a global weakening of demand due to poor overall economic conditions.

 

Cost of Sales.  Cost of sales increased 4% or $37.4 million for 2008, compared to 2007, due to the impact of a 22% or approximately $27 million increase in utility costs (primarily energy costs), a 10% or approximately $35 million increase in raw material costs and currency fluctuations (primarily the euro).  The cost of sales as a percentage of net sales increased to 83% in the year ended December 31, 2008 compared to 81% in the same period of 2007 primarily due to the net effects of higher operating costs and slightly higher average selling prices.

 

Income From Operations.  Income from operations in 2008 declined by 44% to $47.2 million compared to 2007; income from operations as a percentage of net sales decreased to 4% in 2008 from 6% for 2007.  The decline in income from operations is driven by the decline in gross margin, which decreased to 17% in 2008 compared to 19% in 2007.  While our average TiO2 selling prices were higher in 2008, our gross margin decreased primarily because of lower sales volumes and higher manufacturing costs, which more than offset the impact of higher sales prices.  Changes in currency rates have also negatively affected our gross margin.  We estimate the negative effect of c hanges in currency exchange rates decreased income from operations by approximately $4 million when comparing 2008 to 2007.

 

As a percentage of net sales, selling, general and administrative expenses were relatively consistent at approximately 12% for 2007 and approximately 13% for 2008.

 

Other Non-Operating Income and Expense, Net.  Interest expense increased $2.8 million from $39.4 million for 2007 to $42.2 million for 2008 due to unfavorable changes in currency exchange rates in 2008 compared to 2007 and increased borrowings in 2008 (primarily under our European credit facility).

 

Provision (Benefit) for Income Taxes.  Our benefit for income taxes was $3.0 million in 2008 compared to an income tax provision of $114.7 million for 2007.  See Note 9 to our Consolidated Financial Statements for a tabular reconciliation of our statutory income tax expense to our actual tax expense.  Some of the more significant items impacting this reconciliation are summarized below.

 

·	Our income tax benefit for 2008 includes a non-cash benefit of $7.2 million relating to a European Court ruling that resulted in the favorable resolution of certain income tax issues in Germany and an increase in the amount of our German corporate and trade tax net operating loss carryforwards.

 

·	Our income tax expense in 2007 includes a non-cash charge of $90.8 million relating to a decrease in our net deferred income tax asset in Germany resulting from the reduction in its income tax rates;

 

·	a non-cash charge of $8.7 million relating to the adjustment of certain German income tax attributes; and

 

·	a non-cash income tax benefit of $2.0 million resulting from a net reduction in our reserve for uncertain tax positions.

 

Effects of Currency Exchange Rates.  We have substantial operations and assets located outside the United States (primarily in Germany, Belgium, Norway and Canada).  The majority of our sales from 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 our sales generated from our non-U.S. operations is 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.  Consequently, the translated U.S. dollar value of our non-U.S. sales and operating results ar e subject to currency exchange rate fluctuations which may favorably or unfavorably impact reported earnings and may affect the comparability of period-to-period operating results.  In addition to the impact of the translation of sales and expenses over time, our non-U.S. operations also generate currency transaction gains and losses which primarily relate to the difference between the currency exchange rates in effect when non-local currency sales or operating costs are initially accrued and when such amounts are settled with the non-local currency.

 

 

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Overall, we estimate that fluctuations in currency exchange rates had the following effects on our sales and income (loss) from operations for the periods indicated.

 

Impact of Changes in Foreign Currency - 2008 vs. 2009
		Transaction gains/(losses) recognized												Translation gain/loss- impact of rate changes				Total currency impact 2008 vs. 2009
		2008				2009				Change
		(in millions)
Impact on:
Net sales		$	-			$	-			$	-			$	(35	)		$	(35	)
Income (loss) from operations			1				10				9				31				40

Impact of Changes in Foreign Currency - 2007 vs. 2008
		Transaction gains/(losses) recognized												Translation gain/loss- impact of rate changes				Total currency impact 2007 vs. 2008
		2007				2008				Change
		(in millions)
Impact on:
Net sales		$	-			$	-			$	-			$	61			$	61
Income (loss) from operations			-				1				1				(5	)			(4	)

The positive impact on income (loss) from operations for the 2008 versus 2009 comparison is due to increased currency transaction gains in 2009 as compared to 2008 which were a function of the timing of currency exchange rate changes and the settlement of non-local currency receivables and payables.  The net impact on operations of changes in currency rates from 2007 to 2008 was not significant.

 

Outlook

 

During 2009 and to-date in 2010, we have announced various TiO2 price increases, a portion of which were implemented during the second half of 2009 and the first six months of 2010, with portions of the remainder expected to be implemented during the second half of 2010.  Our average TiO2 selling prices were 3% higher in the first half of 2010 as compared to the first half of 2009, and our average selling prices at the end of the first half of 2010 were 5% higher as compared to the end of 2009.  Based on an expected continuation of strong demand levels, we anticipate our average selling prices will continue to increase during the remainder of 2010.

 

In response to the worldwide economic slowdown and weak consumer confidence, we reduced our production volumes during the first half of 2009 in order to reduce our finished goods inventory, improve our liquidity and match production to market demand.  Overall industry pigment demand has been and is expected to continue to be higher in 2010 as compared to 2009 as a result of improving worldwide economic conditions.  While we operated our facilities at approximately 58% of capacity during the first half of 2009, we increased our capacity utilization to approximately 94% during the second half of 2009.  We operated our plants at near full capacity utilization during the first half of 2010 and we currently expect to continue to operate our facilities at near full capacity levels during the remainder of 2010. 0; Our expected capacity utilization levels could be adjusted upwards or downwards to match changes in demand for our products.  We also expect relative increases in our raw material, energy and freight costs during the remainder of 2010 and a portion of any future price increases would compensate for such increases in our operating costs.

 

 

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We expect income from operations will be higher in 2010 as compared to 2009, as the favorable effects of the worldwide economic recovery and improving consumer confidence will continue to improve demand in all of our key market segments.  The expected increase in our sales volumes for 2010 should allow us to maintain our near full capacity utilization for the remainder of the year.  With such improved capacity utilization levels and higher expected selling prices, we expect to report improved operating and financial performance in 2010.

 

Overall, we expect to report net income in 2010 as compared to reporting a net loss in 2009 due to higher expected income from operations in 2010 as well as the impact of the $35.2 million non-cash income tax benefit recognized in the first quarter of 2010, as discussed above.

 

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, solvency and continued operation of competitors, unexpected or earlier than expected capacity additions or reductions and technological advances.  If actual developments differ from our expectations, our results of operations could be unfavorably affected.

 

Related Party Transactions

 

We are a party to certain transactions with related parties.  See “Certain Relationships and Related Transactions” and Note 13 to our Consolidated Financial Statements.  It is our policy to engage in transactions with related parties on terms, in our opinion, no less favorable to us than could be obtained from unrelated parties.

 

Recently Adopted Accounting Principles

 

See Note 16 to our Consolidated Financial Statements.

 

Defined Benefit Pension Plans

 

We maintain various defined benefit pension plans in the U.S., Europe and Canada.  See Note 10 to our Consolidated Financial Statements.

 

Under defined benefit pension plan accounting, defined benefit pension plan expense and prepaid and accrued pension costs are each recognized based on certain actuarial assumptions, principally the assumed discount rate, the assumed long-term rate of return on plan assets and the assumed increase in future compensation levels.  We recognize the full funded status of our defined benefit pension plans as either an asset (for overfunded plans) or a liability (for underfunded plans) in our Consolidated Balance Sheet.

 

We recognized consolidated defined benefit pension plan expense of $22.4 million in 2007, $8.8 million in 2008 and $22.3 million in 2009.  In the fourth quarter of 2008, we recognized a $6.9 million pension adjustment in connection with the correction of our pension expense previously recognized for 2006 and 2007.  See Note 10 to our Consolidated Financial Statements.  The amount of funding requirements for these defined benefit pension plans is generally based upon applicable regulations (such as the Employee Retirement Income Security Act, or ERISA, in the U.S.) and will generally differ from pension expense for financial reporting purposes.  We made contributions to all of our plans in each of the last three years which aggregated $27.1 million in 2007, $20.8 million in 2008 and $23.1 million in 2009.

 

The discount rates we use for determining defined benefit pension expense and the related pension obligations are based on current interest rates earned on long-term bonds that receive one of the two highest ratings given by recognized rating agencies in the applicable country where the defined benefit pension benefits are being paid.  In addition, we receive third-party advice about appropriate discount rates, and these advisors may in some cases use their own market indices.  We adjust these discount rates as of each December 31 valuation date to reflect then-current interest rates on such long-term bonds.  We use these discount rates to determine the actuarial present value of the pension obligations as of December 31 of that year.  We also use these discount rates to determine the interest comp onent of defined benefit pension expense for the following year.

 

 

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At December 31, 2009, approximately 63%, 17%, 13% and 3% of the projected benefit obligations related to our plans in Germany, Canada, Norway and the U.S., respectively.  We use several different discount rate assumptions in determining our consolidated defined benefit pension plan obligation and expense.  This is because we maintain defined benefit pension plans in several different countries in Europe and North America and the interest rate environment differs from country to country.

 

We used the following discount rates for our defined benefit pension plans:

 

		Discount rates used for:
		Obligations at December 31, 2007 and expense in 2008				Obligations at December 31, 2008 and expense in 2009				Obligations at December 31, 2009 and expense in 2010
Germany			5.5	%			5.8	%			5.5	%
Canada			5.3	%			6.5	%			6.0	%
Norway			5.5	%			5.8	%			5.3	%
U.S.			6.1	%			6.1	%			5.7	%

The assumed long-term rate of return on plan assets represents the estimated average rate of earnings expected to be earned on the funds invested or to be invested in the plans’ assets provided to fund the benefit payments inherent in the projected benefit obligations.  Unlike the discount rate, which is adjusted each year based on changes in current long-term interest rates, the assumed long-term rate of return on plan assets will not necessarily change based upon the actual short-term performance of the plan assets in any given year.  Defined benefit pension expense each year is based upon the assumed long-term rate of return on plan assets for each plan, the actual fair value of the plan assets as of the beginning of the year and an estimate of the amount of contributions to and distributions from the plan du ring the year.  Differences between the expected return on plan assets for a given year and the actual return are deferred and amortized over future periods based either upon the expected average remaining service life of the active plan participants (for plans for which benefits are still being earned by active employees) or the average remaining life expectancy of the inactive participants (for plans for which benefits are not still being earned by active employees).

 

At December 31, 2009, approximately 54%, 22%, 18% and 4% of the plan assets related to our plans in the Germany, Canada, Norway and the U.S., respectively.  We use several different long-term rates of return on plan asset assumptions in determining our consolidated defined benefit pension plan expense.  This is because the plan assets in different countries are invested in a different mix of investments and the long-term rates of return for different investments differ from country to country.

 

In determining the expected long-term rate of return on plan asset assumptions, we consider the long-term asset mix (i.e., equity vs. fixed income) for the assets for each of our plans and the expected long-term rates of return for such asset components.  In addition, we receive advice about appropriate long-term rates of return from our third-party actuaries.  Such assumed asset mixes are summarized below:

 

·	In Germany, the composition of our plan assets is established to satisfy the requirements of the German insurance commissioner.

 

·

In Canada, we currently have a plan asset target allocation of 55% to equity securities, 45% to fixed income securities and the remainder primarily to cash and liquid investments.  We expect the long-term rate of return for such investments to average approximately 125 basis points above the applicable equity or fixed income index.

 

·	In Norway, we currently have a plan asset target allocation of 14% to equity securities, 72% to fixed income securities, and the remainder primarily to cash and liquid investments.  The expected long-term rate of return for such investments is approximately 9.0%, 5.0%, and 4.0%, respectively.

 

 

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·

In the U.S. substantially all of the assets were invested in The Combined Master Retirement Trust, or the CMRT, a collective investment trust sponsored by Contran to permit the collective investment by certain master trusts which fund certain employee benefits plans sponsored by Contran and certain of its affiliates.  Harold C. Simmons is the sole trustee of the CMRT and is a member of the CMRT investment committee.  The CMRT’s long-term investment objective is to provide a rate of return exceeding a composite of broad market equity and fixed income indices (including the S&P 500 and certain Russell indices), while utilizing both third-party investment managers as well as investments directed by Mr. Simmons.  During the history of the CMRT from its inception in 1988 through December 31, 2009, the average annual rate of return has been 11%.

 

Our pension plan weighted average asset allocations by asset category were as follows:

 

		December 31, 2009
		Germany				Canada				Norway				CMRT
Equity securities and limited partnerships			18	%			58	%			18	%			68	%
Fixed income securities			61				40				80				31
Real estate			12				-				-				1
Cash, cash equivalents and other			9				2				2				-
Total			100	%			100	%			100	%			100	%

		December 31, 2008
		Germany				Canada				Norway				CMRT
Equity securities and limited partnerships			24	%			53	%			14	%			53	%
Fixed income securities			52				39				83				43
Real estate			12				-				-				-
Cash, cash equivalents and other			12				8				3				4
Total			100	%			100	%			100	%			100	%

 

We regularly review our actual asset allocation for each plan and will periodically rebalance the investments in each plan to more accurately reflect the targeted allocation when considered appropriate.

 

Our assumed long-term rates of return on plan assets for 2007, 2008 and 2009 were as follows:

 

		2007				2008				2009
Germany			5.8	%			5.3	%			5.3	%
Canada			6.8	%			6.3	%			6.0	%
Norway			5.5	%			6.1	%			5.8	%
U.S.			10.0	%			10.0	%			10.0	%

 

We currently expect to use the same long-term rate of return on plan asset assumptions in 2010 as we used in 2009 for purposes of determining the 2010 defined benefit pension plan expense.

 

To the extent that a plan’s particular pension benefit formula calculates the pension benefit in whole or in part based upon future compensation levels, the projected benefit obligations and the pension expense will be based in part upon expected increases in future compensation levels.  For all of our plans for which the benefit formula is so calculated, we generally base the assumed expected increase in future compensation levels upon average long-term inflation rates for the applicable country.

 

 

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In addition to the actuarial assumptions discussed above, the amount of recognized defined benefit pension expense and the amount of net pension asset and net pension liability will vary based upon relative changes in currency exchange rates.

 

A reduction in the assumed discount rate generally results in an actuarial loss, as the actuarially-determined present value of estimated future benefit payments will increase.  Conversely, an increase in the assumed discount rate generally results in an actuarial gain.  In addition, an actual return on plan assets for a given year that is greater than the assumed return on plan assets results in an actuarial gain, while an actual return on plan assets that is less than the assumed return results in an actuarial loss. Other actual outcomes that differ from previous assumptions, such as individuals living longer or shorter than assumed in mortality tables,  which are also used to determine the actuarially-determined present value of estimated future benefit payments, changes in such mortality table themselves or plan amendments, will also result in actuarial losses or gains.  These amounts are recognized in other comprehensive income.  In addition, any actuarial gains generated in future periods would reduce the negative amortization effect of any cumulative unrecognized actuarial losses, while any actuarial losses generated in future periods would reduce the favorable amortization effect of any cumulative unrecognized actuarial gains.

 

During 2009, all of our defined benefit pension plans generated a combined net actuarial gain of approximately $2.8 million.  This actuarial gain resulted primarily from the net effects of (i) the overall return on plan assets being in excess of the assumed return and (ii) the general reduction in discount rates from December 31, 2008 to December 31, 2009.

 

Based on the actuarial assumptions described above and our current expectation for what actual average currency exchange rates will be during 2010, we expect our defined benefit pension expense will approximate $24.3 million in 2010.  In comparison, we expect to be required to contribute approximately $23.9 million to such plans during 2010.

 

As noted above, defined benefit pension expense and the amounts recognized as accrued pension costs are based upon the actuarial assumptions discussed above.  We believe all of the actuarial assumptions used are reasonable and appropriate.  However, if we had lowered the assumed discount rate by 25 basis points for all plans as of December 31, 2009, our aggregate projected benefit obligations would have increased by approximately $14 million at that date and our defined benefit pension expense would be expected to increase by approximately $1 million during 2009.  Similarly, if we lowered the assumed long-term rate of return on plan assets by 25 basis points for all of our plans, our defined benefit pension expense would be expected to increase by approximately $.8 million during 2009.

 

OPEB Plans

 

Certain subsidiaries of ours in the U.S. and Canada currently provide certain health care and life insurance benefits for eligible retired employees.  See Note 10 to our Consolidated Financial Statements.  Under accounting for other postretirement employee benefits, OPEB expense and accrued OPEB costs are based on certain actuarial assumptions, principally the assumed discount rate and the assumed rate of increases in future health care costs.  We recognize the full unfunded status of our OPEB plans as a liability.

 

We recognized consolidated OPEB cost of approximately $.9 million in each of 2007 and 2008 and $.6 million in 2009.  Similar to defined benefit pension benefits, the amount of funding will differ from the expense recognized for financial reporting purposes and contributions to the plans to cover benefit payments aggregated $.4 million in each of 2007, 2008 and 2009.  Substantially all of our accrued OPEB cost relates to benefits being paid to current retirees and their dependents and no material amount of OPEB benefits are being earned by current employees.  Due to continued increases in healthcare costs, it is expected that our OPEB expense for financial reporting purposes will be consistent with the past two years.  Our expected OPEB benefit payments for 2010 are expected to be similar to 2009 am ounts.

 

The discount rates we use for determining OPEB expense and the related OPEB obligations are based on current interest rates earned on high-quality bond yields in the applicable country where the benefits are being paid.  In addition, we receive third-party advice about appropriate discount rates, and these advisors may in some cases use their own market indices.  We adjust these discount rates as of each valuation date to reflect then-current interest rates on such bonds.  We use these discount rates to determine the actuarial present value of the OPEB obligations as of December 31 of that year.  We also use these discount rates to determine the interest component of OPEB expense for the following year.

 

 

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In estimating the health care cost trend rate, we consider our actual health care cost experience, future benefit structures, industry trends and advice from our third-party actuaries.  During each of the past three years, we have assumed that the relative increase in health care costs will generally trend downward over the next several years, reflecting, among other things, assumed increases in efficiency in the health care system and industry-wide cost containment initiatives.  For example, at December 31, 2009, the expected rate of increase in future health care costs ranges from 8.0% in 2010, declining to 5.0% in 2015 and thereafter.

 

Based on the actuarial assumptions described above and our current expectation for what actual average currency exchange rates will be during 2010, we expect our consolidated OPEB expense will approximate $1.3 million in 2010.  In comparison, we expect to be required to make approximately $.8 million of contributions to such plans during 2010.

 

We believe that all of the actuarial assumptions used are reasonable and appropriate.  However, a 25 basis point change in assumed discount rates would have the following effects:

 

		25 basis point increase				25 basis point decrease
		(In millions)
Effect on net OPEB cost during 2009		$	(.1	)		$	.1
Effect at December 31, 2009 on postretirement obligation			(.6	)			.6

 

Assumed health care cost trend rates have a significant effect on the amounts we report for health care plans.  A one percent change in assumed health care trend rates would have the following effects:

 

		1% increase				1% decrease
		(In millions)
Effect on net OPEB cost during 2009		$	(.2	)		$	.2
Effect at December 31, 2009 on postretirement obligation			(2.7	)			2.2

 

Liquidity and Capital Resources

 

Consolidated Cash Flows

 

Our consolidated cash flows for 2007, 2008 and 2009 and for the six months ended June 30, 2009 and 2010 are presented below:

 

		Years ended December 31,												Six months ended June 30,
		2007				2008				2009				2009				2010
		(In millions)
Operating activities		$	90.0			$	2.7			$	86.3			$	44.5			$	(3.4	)
Investing activities			(47.4	)			(68.1	)			(23.7	)			(14.2	)			(15.0	)
Financing activities			(39.8	)			10.3				(49.8	)			27.7				24.5
Net cash provided by (used in) operating, investing and financing activities		$	2.8			$	(55.1	)		$	12.8			$	58.0			$	6.1

 

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Operating Activities

 

The TiO2 industry is cyclical and changes in economic conditions within the industry significantly impact our earnings and operating cash flows.  Cash flow from operations is considered our primary source of liquidity.  Changes in TiO2 pricing, production volume and customer demand, among other things, could significantly affect our liquidity.  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 our 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 items included in the determination of net income have an impact on cash flows from operating activities, but the impact of such items on cash will differ from their impact on net income.  For example, the amount of income or expense recorded for pension and OPEB assets and obligations (which depend upon a number of factors, including actuarial assumptions used to value obligations) will generally differ from the outflows of cash for such benefits.  See Note 10 to our Consolidated Financial Statements.

 

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.

 

Our cash used in operating activities was $3.4 million in the first six months of 2010 compared to cash provided by $44.5 million in the first six months of 2009.  This $47.9 million increase in the amount of cash used was primarily due to the net effects of the following items:

 

·	Higher income from operations in 2010 of $108.7 million;

 

·	Higher net cash used from relative changes in our inventories, receivables, payables and accruals of $154.2 million in the first six months of 2010 as compared to the first six months of 2009; and

 

·	Higher cash paid for income taxes in 2010 of $6.2 million due to our improved earnings.

 

Cash flows from operating activities provided $86.3 million in 2009 compared to $2.7 million in 2008.  This $83.6 million increase was primarily due to the net effects of the following items:

 

·	lower income (loss) from operations in 2009 of $62.9 million;

 

·	higher net cash provided by relative changes in our inventories, receivables, payables and accruals of $148.3 million in 2009 as compared to 2008, primarily due to relative changes in our inventory levels, as discussed below; and

 

·	lower net distributions from our TiO2 joint venture in 2009 of $2.3 million due to related changes in its cash requirements.

 

 

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Cash flows from operating activities decreased to $2.7 million in 2008 from $90.0 million in 2007.  This $87.3 million decrease was due primarily to the net effect of the following items:

 

·	lower income from operations in 2008 of $37.7 million;

 

·	higher net cash used by relative changes in our inventories, receivables, payables and accruals of $74.7 million in 2008 as compared to 2007, due primarily to relative changes in our inventory levels, as discussed below;

 

·	lower cash paid for income taxes in 2008 of $19.7 million, in part due to lower taxable income and the receipt of tax refunds at our European operating units;

 

·	higher net distributions from our TiO2 joint venture in 2008 of $14.9 million due to related changes in its cash flow;

 

·	higher cash paid for interest in 2008 of $3.2 million, as a result of  increased borrowing and the effects of currency exchange rates on the semiannual interest payments on our 6.5% Senior Secured Notes; and

 

·	higher depreciation expense of $2.4 million in 2008, primarily as a result of the effects of currency exchange rates.

 

Changes in working capital are affected by accounts receivable and inventory changes.  As shown below:

 

·	Our average days sales outstanding decreased at December 31, 2009 compared to December 31, 2008 due to the timing of collections on receivable balances;

 

·	Our average days sales in inventory decreased at December 31, 2009 compared to December 31, 2008, as our TiO2 sales volumes in 2009 exceeded our production volumes;

 

·	Our average days sales outstanding increased from December 31, 2009 to June 30, 2010 due to the timing of collection on receivable balances; and

 

·	Our average days sales in inventory decreased from December 31, 2009 to June 30, 2010 due to strong demand which resulted in TiO2 sales volumes in excess of production volumes.

 

For comparative purposes, we have provided prior year numbers below.

 

	December 31,			June 30,
	2007	2008	2009	2009	2010
Days sales outstanding	63 days	64 days	56 days	67 days	59 days
Days sales in inventory	59 days	113 days	58 days	42 days	49 days

Investing Activities

 

Our capital expenditures of $14.7 million and $15.4 million in the six months ended June 30, 2009 and 2010, respectively, were primarily for improvements and upgrades to existing facilities.

 

Our capital expenditures were $47.3 million in 2007, $68.1 million in 2008 and $23.7 million in 2009.  Capital expenditures are primarily for maintenance to existing facilities.  Our capital expenditures during the past three years include an aggregate of approximately $21 million ($3.1 million in 2009) for our ongoing environmental protection and compliance programs.  We significantly lowered our capital expenditures in 2009 in response to the economic conditions and as part of our efforts to improve our liquidity.

 

 

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Financing Activities

 

During the six months ended June 30, 2010, we:

 

·	had net payments of $16.7 million on our U.S. revolving credit facility;

 

·	had net borrowings of euro 6 million ($10.3 million when borrowed/repaid) on our European credit facility; and

 

·	had net borrowings of $31.6 million on our revolving facility with Contran.

 

During 2009, we:

 

·	made net borrowings of $3.0 million under our U.S. credit facility;

 

·	borrowed and repaid $31.5 million under our European credit facility; and

 

·	made net payments of $19.2 million on our credit facility with our affiliate NL.

 

During 2008, we:

 

·	made net payments of $1.7 million on our U.S. credit facility;

 

·	made net borrowings of $44.4 million on our European credit facility; and

 

·	made net borrowings of $19.2 million on our credit facility with our affiliate NL.

 

During 2007, we made net borrowings of $9.0 million under our U.S. credit facility.

 

During each of 2007 and 2008, we paid a quarterly dividend to our stockholders of $.25 per share for an aggregate dividend $49.0 million in each year.  In February 2009, our board of directors suspended the quarterly dividend after considering the uncertainties in the global economy and credit markets.

 

Outstanding Debt Obligations

 

At June 30, 2010, our consolidated debt was comprised principally of:

 

·	euro 400 million principal amount of our 6.5% Senior Secured Notes ($493.3 million) due in 2013;

 

·	euro 15 million ($18.6 million) under our European revolving credit facility which matures in May 2011;

 

·	$31.6 million under our revolving facility with Contran which matures in December 2011; and

 

·	approximately $7.3 million of other indebtedness.

 

In April 2010, we entered into an unsecured revolving credit facility with Contran pursuant to which we may borrow up to $40 million from Contran.  See Note 6 to our Condensed Consolidated Financial Statements.

 

Our European revolving credit facility currently matures in May 2011.  We have commenced discussions with the lenders in such facility regarding an extension of the facility and we expect to have a new agreement of extension in place prior to such maturity date.

 

 

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Certain of our revolving credit facilities require the respective borrowers to maintain minimum levels of equity, require the maintenance of certain financial ratios, limit dividends and additional indebtedness and contain other provisions and restrictive covenants customary in lending transactions of this type.  We are in compliance with all of our debt covenants at June 30, 2010.  We believe we will be able to comply with the financial covenants contained in all of our credit facilities through the maturity of the respective facilities; however if future operating results differ materially from our expectations we may be unable to maintain compliance.

 

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 obligations 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 for the Senior Secured Notes.  The terms of the indenture governing the 6.5% Senior Secured Notes limits KII’s ability to pay dividends and make other restricted payments.  At June 30, 2010, the maximum amount of dividends and other restricted payme nts that KII could make (the restricted payment basket) was $9.2 million.  The indenture currently prohibits KII from utilizing the restricted payment basket because KII has not met a specified financial ratio contained in this indenture; such prohibition will continue until such time as KII meets the specified financial ratio.

 

Liquidity

 

At June 30, 2010, we and our subsidiaries had current cash and cash equivalents aggregating $34.1 million and current restricted cash equivalents of $1.2 million.

 

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 routinely 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.  In the normal course of our business, we may i nvestigate, evaluate, discuss and engage in acquisition, joint venture, strategic relationship and other business combination opportunities in the TiO2 industry.  In the event of any future acquisition or joint venture opportunity, we may consider using then-available liquidity, issuing our equity securities or incurring additional indebtedness.

 

At June 30, 2010, unused credit available under all of our existing revolving credit facilities was approximately $144.5 million, consisting principally of $80.4 million under our European credit facility, $12.3 million under our Canadian credit facility and $51.8 million under our U.S. credit facility.  At June 30, 2010, we could borrow all such amounts without violating any covenants in such facilities.  In May 2010 we satisfied certain specified financial covenants in our European revolving credit facility, and as a result the maximum borrowing availability under such facility returned to the full euro 80 million facility size at that time.  The amount of unused credit availability under our European credit facility indicated above reflects the full euro 80 million facility size. See Note 6 to our Condens ed Consolidated Financial Statements.  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 and debt service for both the next 12 months and the next five years.

 

Capital Expenditures

 

We currently estimate we will invest approximately $46 million in capital expenditures for major improvements and upgrades to our existing facilities during 2010, including the $15.4 million we have spent through June 30, 2010.  Compared to 2009, we have increased our planned capital expenditures in 2010 as we had significantly lowered our capital expenditures in 2009 in response to the economic conditions and as part of our efforts to improve our liquidity.

 

 

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Commitments and Contingencies

 

See Notes 9 and 14 to our Consolidated Financial Statements for a description of certain income tax examinations underway and certain legal proceedings.

 

Operations Outside the United States

 

As discussed above, 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 amount 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.  At December 31, 2009, we had substantial net assets denominated in the euro, Canadian dollar, Norwegian krone and United Kingdom pound sterling.

 

Off-Balance Sheet Financing

 

Other than operating lease commitments disclosed in Note 14 to our Consolidated Financial Statements, we are not party to any material off-balance sheet financing arrangements.  As of December 31, 2009, the aggregate amount of future minimum payments of such operating leases was $34.9 million.

 

Summary of Debt and Other Contractual Commitments

 

As more fully described in the Notes to our Consolidated Financial Statements, we are a party to various debt, lease and other agreements, which contractually and unconditionally commit us to pay certain amounts in the future.  See Notes 8, 13, 14 and 15 to our Consolidated Financial Statements.  The timing and amount shown for our commitments in the table below are based upon the contractual payment amount and the contractual payment date for such commitments.  The following table summarizes such contractual commitments of ours and our consolidated subsidiaries as of December 31, 2009 by the type and date of payment.

 

		Payment due date
		2010					2011/2012				2013/2014			2015 and after				Total
		(In millions)
Contractual commitment:
Indebtedness(1)		$	2.1			$	34.1			$	576.3			$	.7			$	613.2
Interest payments on indebtedness (2)			38.7				75.8				12.6				-				127.1
Operating leases			5.4				6.4				3.1				20.0				34.9
Long-term supply contracts for the purchase of TiO2 feedstock (3)			227.0				208.0				114.0				-				549.0
Long-term service and other supply contracts (4)			87.7				51.4				30.1				7.2				176.4
Fixed asset acquisitions			18.7				-				-				-				18.7
Estimated tax obligations (5)			3.6				-				-				-				3.6
		$	383.2			$	375.7			$	736.1			$	27.9			$	1,522.9

__________________

 

(1)

A significant portion of the amount shown for indebtedness relates to our 6.5% Senior Secured Notes ($574.6 million at December 31, 2009).  Such indebtedness is denominated in euro.  See “–Quantitative and Qualitative Disclosures About Market Risk” and Note 8 to the Consolidated Financial Statements.  With respect to the revolving credit facilities the amounts shown for indebtedness are based upon the actual amounts outstanding at December 31, 2009.

 

 

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(2)	The amounts shown for interest for any outstanding variable-rate indebtedness is based upon the December 31, 2009 interest rates and assumes that such variable-rate indebtedness remains outstanding until maturity.

 

(3)

Our contracts for the purchase of TiO2 feedstock contain fixed quantities that we are required to purchase, although certain of these contracts allow for an upward or downward adjustment in the quantity purchased, generally no more than 10%, based on our feedstock requirements.  The pricing under these agreements is generally based on a fixed price with price escalation clauses primarily based on consumer price indices, as defined in the respective contracts.  The timing and amount shown for our commitments related to the long-term supply contracts for TiO2 feedstock are based upon our current estimate of the quantity of material that will be purchased in each time period shown, the payment that would be due based upon such estimated purchased quanti ty and an estimate of the effect of the price escalation clause.  The actual amount of material purchased and the actual amount that would be payable by us, may vary from such estimated amounts.  Our obligation for the purchase of TiO2 feedstock is more fully described in Note 14 to our Consolidated Financial Statements and above in “Business—Raw Materials.”

 

(4)	The amounts shown for the long-term service and other supply contracts primarily pertain to agreements we have entered into with various providers of products or services which help to run our plant facilities (electricity, natural gas, etc.), utilizing December 31, 2009 exchange rates.

 

(5)	The amount shown for estimated tax obligations is the consolidated amount of income taxes payable at December 31, 2009, which is assumed to be paid during 2010.

 

The above table does not reflect:

 

·

Any amounts we might pay to fund our defined benefit pension plans and OPEB plans, as the timing and amount of any such future fundings are unknown and dependent on, among other things, the future performance of defined benefit pension plan assets, interest rate assumptions and actual future retiree medical costs.  We expect to be required to contribute approximately $24.7 million to our defined benefit pension plans and OPEB plans during 2010.  Such defined benefit pension plans and OPEB plans are discussed below in greater detail.  See Note 10 to our Consolidated Financial Statements.

 

·	Any amounts we might pay related to our asset retirement obligations as the terms and amounts of such future fundings are unknown;

 

·	Any amounts we might pay to settle any of our uncertain tax positions, as the timing and amount of any such future settlements are unknown and dependent on, among other things, the timing of tax audits.  See Notes 9 and 16 to our Consolidated Financial Statements; and

 

·

Any amounts we might pay to acquire TiO2 from our TiO2 manufacturing joint venture, as the timing and amount of such purchases are unknown and dependent on, among other things, the amount of TiO2 produced by the joint venture in the future and the joint venture’s future cost of producing such TiO2.  However, the table does include amounts related to our share of the joint venture’s ore requirements necessary to produce TiO2 for us.  See Note 6 to our Consol idated Financial Statements.

 

We occasionally enter into raw material supply arrangements to mitigate the short-term impact of future increases in raw material costs.  While these arrangements do not necessarily commit us to a minimum volume of purchase, they generally provide for stated unit prices based upon achievement of specified volume purchase levels.  This allows us to stabilize raw material purchase prices to a certain extent, provided the specified minimum monthly purchase quantities are met.

 

 

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Quantitative and Qualitative Disclosures About Market Risk

 

General

 

We are exposed to market risk from changes in foreign currency exchange rates, interest rates and raw materials prices.

 

Interest Rates

 

We are exposed to market risk from changes in interest rates, primarily related to indebtedness.  At December 31, 2008 and 2009, the majority of our aggregate indebtedness was comprised of fixed-rate debt instruments.  The large percentage of fixed-rate debt instruments minimizes earnings volatility that would result from changes in interest rates.  The following table presents principal amounts and weighted average interest rates for our aggregate outstanding indebtedness at December 31, 2009.  Information shown below for such non-U.S. denominated indebtedness is presented in its U.S. dollar equivalent at December 31, 2009 using exchange rates of 1.4412 U.S. dollars per euro.  Certain Norwegian krone denominated capital leases totaling $8.9 million in 2009 have been excluded from the tab le below.

 

		Amount
Indebtedness		Carrying value				Fair value				Interest rate				Maturity date
		(In millions)
Fixed rate indebtedness:
Senior secured notes		$	574.6			$	466.2				6.5	%			2013
Variable rate indebtedness:
U.S. credit facility – dollar denominated		$	16.7			$	16.7				3.3	%			2011
Europe credit facility – euro denominated			13.0				13.0				3.5	%			2011
		$	29.7			$	29.7

At December 31, 2008, our euro-denominated fixed-rate indebtedness consisted solely of the 6.5% Senior Secured Notes, which aggregated $560.0 million (fair value - $129.4 million) with a weighted-average interest rate of 6.5%.  At such date, our variable rate, euro-denominated indebtedness consisted of our Europe credit facility ($42.2 million with a weighted-average interest rate of 4.5%), and our U.S. revolving credit facility ($13.7 million with a weighted-average interest rate of 3.3%) and our revolving note with NL ($19.2 million with a weighted-average interest rate of 1.8%).

 

Currency Exchange Rates

 

We are exposed to market risk arising from changes in currency exchange rates as a result of manufacturing and selling our products worldwide.  Earnings are primarily affected by fluctuations in the value of the U.S. dollar relative to the euro, the Canadian dollar, the Norwegian krone and the United Kingdom pound sterling.

 

As described above, at December 31, 2009, we had the equivalent of $587.6 million of outstanding euro-denominated indebtedness (at December 31, 2008 – the equivalent of $602.2 million of euro-denominated indebtedness).  The potential increase in the U.S. dollar equivalent of the principal amount outstanding resulting from a hypothetical 10% adverse change in exchange rates at such date would be approximately $60.5 million and $58.9 million at December 31, 2008 and 2009, respectively.

 

Certain of our sales generated by our non-U.S. operations are denominated in U.S. dollars.  We periodically use currency forward contracts to manage a very nominal portion of currency 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.  At December 31, 2009, we had currency forward contracts to exchange an aggregate euro 21.4 million for an equivalent value of Norwegian kroner at exchange rates ranging from kroner 8.47 to kroner 9.21 per euro.  These contracts with DnB Nor Bank ASA mature from January 2010 through December 2010 and are subject to early redemption provisions at our option.  At December 31, 2009, the actual exchange rate was kroner 8.3 per euro.

 

 

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The estimated fair value of such currency forward contracts at December 31, 2009 was a $1.6 million net asset, which amount is recognized as part of Prepaid Expenses in our Consolidated Balance Sheet and a corresponding $1.6 million currency transaction gain in our Consolidated Statement of Operations.  To the extent we held such contracts during 2007, 2008 and 2009, we did not use hedge accounting for any of our contracts.

 

At June 30, 2010, we had currency forward contracts to exchange:

 

·

an aggregate of $44.0 million for an equivalent value of Canadian dollars at exchange rates ranging from Cdn. $1.04 to Cdn. $1.08 per U.S. dollar.  These contracts with Wachovia Bank, National Association, mature from July 2010 through May 2011 at a rate of $4 million per month, subject to early redemption provisions at our option.  At June 30, 2010, the actual exchange rate was Cdn. $1.03 per U.S. dollar;

 

·

an aggregate $52.1 million for an equivalent value of Norwegian kroner at exchange rates ranging from kroner 5.88 to kroner 6.60 per U.S. dollar.  These contracts with DnB Nor Bank ASA mature from July 2010 through July 2011 at a rate of $2.3 million to $5.5 million per month.  At June 30, 2010, the actual exchange rate was kroner 6.44 per U.S. dollar; and

 

·

an aggregate euro 10.6 million for an equivalent value of Norwegian kroner at exchange rates ranging from kroner 8.47 to kroner 9.08 per euro.  These contracts with DnB Nor Bank ASA mature from July 2010 through December 2010 at a rate of euro 1.6 million to euro 1.8 million per month, subject to early redemption provisions at our option.  At June 30, 2010, the actual exchange rate was kroner 7.97 per euro.

 

The estimated fair value of our currency forward contracts at June 30, 2010 was a $3.1 million net liability, which is included in our Condensed Consolidated Balance Sheet as (i) $1.2 million recognized as part of Prepaid Expenses and Other Current Assets and (ii) $4.3 million recognized as a part of Accounts Payable and Accrued Liabilities.  There is also a corresponding $3.1 million currency transaction loss in our Condensed Consolidated Statements of Operations.  We are not currently using hedge accounting for our outstanding currency forward contracts at June 30, 2010, and we did not use hedge accounting for any of such contracts we previously held earlier in 2010 and during 2009.

 

In addition to the currency forward contracts discussed above, early in the third quarter of 2010 we entered into currency forward contracts to exchange an aggregate of $8 million for an equivalent value of Canadian dollars at an exchange rate of Cdn. $1.06 per U.S. dollar.  These contracts with Wachovia Bank, National Association, mature from June 2011 through July 2011 and are subject to early redemption provisions at our option.

 

See Note 15 to our Consolidated Financial Statements.

 

Raw Materials

 

We are exposed to market risk from changes in commodity prices relating to our raw materials.  As discussed in “Business—Raw Materials,” we generally enter into long-term supply agreements for certain of our raw material requirements including ore.  Many of our raw material contracts contain fixed quantities we are required to purchase, although these contracts allow for an upward or downward adjustment in the quantity purchased.  Raw material pricing under these agreements is generally negotiated annually.  For certain raw material requirements we do not have long-term supply agreements either because we have assessed the risk of the unavailability of those raw materials and/or the risk of a significant change in the cost of those raw materials to be low, or because long-term sup ply agreements for those raw materials are generally not available.

 

 

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Other

 

We believe there may be a certain amount of incompleteness in the sensitivity analyses presented above.  For example, the hypothetical effect of changes in exchange rates discussed above ignores the potential effect on other variables which affect our results of operations and cash flows, such as demand for our products, sales volumes and selling prices and operating expenses.  Accordingly, the amounts presented above are not necessarily an accurate reflection of the potential losses we would incur assuming the hypothetical changes in exchange rates were actually to occur.

 

The above discussion and estimated sensitivity analysis amounts include forward-looking statements of market risk, which assume hypothetical changes in currency exchange rates.  Actual future market conditions will likely differ materially from such assumptions.  Accordingly, such forward-looking statements should not be considered to be projections by us of future events, gains or losses.

 

 

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INDUSTRY OVERVIEW

 

Titanium Dioxide Overview

 

Titanium dioxide, or TiO2, is a white pigment used in a wide range of products for its exceptional ability to impart whiteness, brightness, opacity and durability.  TiO2 is a critical component of everyday applications, such as coatings, plastics and paper, as well as many specialty products such as inks, food and cosmetics. TiO2 is widely considered to be superior to alternative white pigments in large part due to its hiding power, which is the ability to cover or mask other materials effectively and efficiently.  TiO2 is desi gned, marketed and sold based on specific end-use applications.  Two commercial process technologies are available to produce TiO2, the chloride and sulfate processes.

 

Although there are other white pigments on the market, we believe that there are no effective substitutes for TiO2 because no other white pigment has the physical properties for achieving comparable opacity and brightness or can be incorporated in as cost-effective a manner.  Pigment extenders such as kaolin clays, calcium carbonate and polymeric opacifiers are used in a number of end-use markets as white pigments.  However, the opacity in these products is not able to duplicate the performance characteristics of TiO2 and we believe these products are unlikely to have a significant impact on the use of TiO2 .

 

As of December 31, 2009, the TiO2 industry had consumption of approximately 4.7 million mtpa.  Mature industries in the developed world are the primary consumers of TiO2 products.  These industries include coatings (approximately 61% of industry sales volume), plastics (approximately 24%) and paper (approximately 10%).  Demand for TiO2 has generally been driven by worldwide gross domestic product and has generally increased with rising standards of living in various regions of the world.  According to industry estimates, TiO2 consumption, excluding China, has grown at a compound annual growth rate of approximately 2.6% since 1990.

 

Per capita consumption of TiO2 in the United States and Western Europe far exceeds that in other areas of the world, and these regions are expected to continue to be the largest consumers of TiO2.  We believe that North America and Western Europe account for approximately 29% and 33% of global TiO2 consumption, respectively.  Markets for TiO2 are emerging in Eastern Europe, the Far East and China and we believe could become significant as economies in these regions continue to develop and quality-of-life products, including TiO 2, experience greater demand.

 

The top five TiO2 producers account for approximately 63% of the world’s production capacity.  The following chart shows our estimate of worldwide production capacity in 2010:

Recent TiO2 Industry Developments

 

Since TiO2 is not a traded commodity, its pricing is largely a product of negotiation between suppliers and their respective customers.  Over the last two years, several TiO2 manufacturers have permanently reduced capacity at facilities with high operating costs, in part in connection with environmental-related issues.  Decreased capacity, along with the decline in customer inventory which occurred in the first half of 2009, has lead to industry-wide tightness in TiO2 inventories.  As a result of these factors, TiO2 s elling prices began to increase in the second half of 2009, and continued to increase during the first half of 2010.  Further increases in TiO2 selling prices are expected to be implemented in the second half of 2010 and into 2011.  We believe the decreased capacity, higher demand and improved pricing should result in improved operating rates and product margins for TiO2 producers.

 

 

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In recent years, global production capacity for TiO2 has increased modestly due primarily to debottlenecking existing chloride production facilities.  However, also the past few years certain producers have closed both sulfate and chloride process production facilities in Europe, North America and China.  These closures represent an estimated aggregate of approximately 375,000 metric tons of production capacity.

 

Manufacturing Process

 

TiO2 is produced in two crystalline forms: rutile and anatase.  Rutile TiO2 is manufactured using both a chloride production process and a sulfate production process, whereas anatase TiO2 is only produced using a sulfate production process.  Although many end-use applications can use either form, especially during periods of industry tightness such as we currently experiencing, the chloride process is the preferred form for use in coatings and plastics, the two largest end-use markets.  Due to environmental factors and customer considerations, the proportion of TiO2 industry sales represented by chloride process pigments has increased relative to sulfate process pigments and, in 2009, chloride process production facilities represented approximately 60% of industry capacity.  The sulfate process represents a much smaller percentage of annual global TiO2 production and is preferred for use in selected paper products, ceramics, rubber tires, man-made fibers, food and cosmetics.  Once an intermediate TiO2 pigment has been produced by either the chloride or sulfate process, it is “finished” into products with specific performance characteristics for particular end-use applications through proprietary processes involving various chemical surface treatments and intensive micronizing (milling).

 

Chloride Process.  The chloride process is a continuous process in which chlorine is used to extract rutile TiO2.  The chloride process typically has lower manufacturing costs than the sulfate process due to higher yield, less waste, lower energy requirements and lower labor costs.  This process has also gained share over the sulfate process because of the relatively lower upfront capital investment in plant and equipment required.  The chloride process produces less waste than the sulfate process because much of the chlorine is recycled and feedstock bearing higher titanium content is used.  The chloride process produces an intermediate base pigment with a wi de range of properties.

 

Sulfate Process.  The feedstocks used in this process include ilmenite and titanium slag.  The sulfate process is a batch process, whereby the ilmenite or titanium slag is digested with sulfuric acid to form a mixture of soluble sulfates.  After filtration and concentration, the soluble sulfate is hydrolyzed to an insoluble hydrous TiO2 that precipitates out after seeding crystals are added to the solution.  The precipitate is collected, filtered, bleached, washed and calcined to yield a TiO2 ready for finishing treatment.

 

 

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BUSINESS

 

We are one of the leading global producers and marketers of TiO2.  Our TiO2 products are sold under the widely recognized Kronos™ brand name and are utilized in a diverse range of customer applications and end-use markets, including coatings, plastics, paper, food, cosmetics, inks, textile fibers, rubber, pharmaceuticals, glass, ceramics and other industrial and consumer markets.  Our broad range of over 40 TiO2 pigment products are “quality-of-life” products that significantly enhance the key characteristics of our customers’ end-products by imparting whiteness, brightness, o pacity and durability.  The TiO2 industry is characterized by high barriers to entry consisting of high capital costs, proprietary technology and significant lead times required to construct new facilities or expand existing capacity.  We are committed to producing TiO2 pigments and related products as our core business.  We believe our focused management team and business strategy have enabled us to develop considerable expertise and efficiency in the manufacture, sale and service of our products.

 

We serve over 4,000 customers located in over 100 countries.  In Europe and North America, our primary markets, we estimate our current market share at 22% and 18%, respectively.  We believe our strong competitive position is the result of our industry experience, reputation for high quality products, outstanding process technology, highly recognized brand name, vertical integration with respect to our sulfate process and experienced management team.  In addition, we believe our high level of technical service and ability to satisfy our customers’ specific technical needs helps us to maintain strong customer relationships.

 

We conduct our operations through six strategically-located manufacturing facilities, four in Europe and two in North America, which includes our 50% interest in a joint venture in the United States.  We believe our production processes are among the most efficient in the industry, primarily resulting from our high operating rates, proprietary chloride process technology, technical expertise, ongoing debottlenecking programs and strict cost controls.  In addition, we believe we have a significant competitive advantage by operating the only ilmenite ore mines in Western Europe, which supply this key raw material for all of our European sulfate operations and also produce ore for sale to third party customers.

 

Neither our business as a whole nor that of any of our principal product groups is seasonal to any significant extent.  However, TiO2 sales are generally higher in the second and third quarters of the year, due in part to the increase in paint production in the spring to meet demand during the spring and summer painting seasons.  We have historically operated our production facilities at near full capacity rates throughout the entire year, which among other things helps to minimize our per-unit production costs.  As a result, we normally will build inventories during the first and fourth quarters of each year, in order to maximize our product availability during the higher demand periods normally experienced in the second and third qua rters.

 

Towards the end of 2008, worldwide demand for TiO2 products sharply declined.  At that time, it was generally believed that the normal fourth quarter slow down in TiO2 demand was being exaggerated, in part due to a desire by customers to reduce their year-end inventories of raw materials, but that significant inventory restocking by customers would occur in early 2009.  Consequently, we continued operating our production facilities are near full capacity rates, and our inventory levels increased as a result.  Throughout January 2009, the expected increase in demand for inventory restocking did not occur, and our inventory levels increased further.  With the expected increase in demand for inventory restocking that failed to materialize, combined with the now-apparent significant risk for a prolonged global economic downtown and a continuation of the instability in the financial markets for a lengthy period of time, we determined that an appropriate course of action was to significantly reduce our inventory levels and increase our liquidity.  We determined that the best approach was to significantly curtail our production rates, so as to avoid a significant disruption in the market by selling additional volume concurrently from production and our inventories.  By May 2009, our inventory reduction program was completed and the anticipated increase in customer usage of TiO2 began to develop, although we believe such increased demand was generally a result of demand for end-use products and not as a result of customer inventory restocking.  As a result of th ese developments we returned to production rates at near full capacity at all of our production facilities starting towards the end of the second quarter of 2009.  As a result of such temporary production curtailments we implemented, our results of operations in 2009 were negatively impacted by the approximately $80 million of unabsorbed fixed production costs that were charged directly to cost of sales during the first half of the year.

 

 

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Demand for TiO2 remained strong throughout the second half of 2009, and such strong demand has continued into 2010.  With such strong demand, combined with the historic low levels of inventories held by both TiO2 industry producers and customers, industry-wide selling prices for TiO2 started to increase in the second half of 2009.  During 2009 and to-date in 2010, we and our major competitors have announced various TiO2 price increases, a portion of which were implemented during the second half of 2009 and the first six months of 2010, with a portion of the remainder expected to be implemented in the second half of 2010.  Our average TiO2 selling prices were 3% higher in the first half of 2010 as compared to the first half of 2009, and our average selling prices at the end of the first half of 2010 were 5% higher as compared to the end of 2009.  Based on an expected continuation of strong demand levels, we anticipate our average selling prices will continue to increase during the remainder of 2010.

 

As discussed above, our consolidated results for the year ended December 31, 2009 were significantly impacted by production curtailments we implemented in the first half of the year.  For the year ended December 31, 2009, we reported net sales of $1,142.0 million and a net loss of $34.7 million.  Because as noted we returned to near full production capacity levels in the second half of 2009, our operational performance for the first and second halves of 2009 varies greatly.  Our consolidated results for the first six months ended June 30, 2009 included net sales of $530.1 million and a net loss of $48.4 million, compared to net sales of $612.0 million and net income of $13.7 million in the period from July 1, 2009 through December 31, 2009.  With the continuation of the improvement in our operating results for the six months ended June 30, 2010, we reported net sales of $699.8 million and net income of $62.1 million for such period.  Please see “Selected Historical Consolidated Financial and Operating Data.”

 

The following charts show our approximate sales volume by geographic region and end use:

Our Competitive Strengths

 

Highly attractive industry conditions and significant barriers to entry.  The chloride process is the primary TiO2 production process in the industry, representing approximately 60% of TiO2 produced annually and approximately 75% of our TiO2 production capacity.  The closely-held nature of this technology poses a significant barrier to entry for new entrants into the TiO2 industry as substantially all of the chloride process technology is held by the fi ve largest producers.  In addition, adding new TiO2 production capacity by constructing greenfield plants requires significant capital expenditures that we estimate to cost between $5,000 and $6,000 per metric ton, or an aggregate of $750 million to $900 million for a 150,000 metric ton facility, the smallest facility size we believe would be economically feasible.  Lead times of between three to five years before initial production due to permitting and construction also pose significant barriers to entry in the industry.  We built the last chloride plant in the Western hemisphere, which commenced operation in 1993.

 

Diverse product offerings, with superior product traits.  We believe we have one of the broadest product offerings in the TiO2 industry.  We offer over 40 different TiO2 grades, including rutile, anatase and non-pigmentary grades.  We manufacture several key grades that we believe possess superior performance characteristics relative to the products of most of our competitors.  For example, we have a significant share of the European PVC profile market, where we supply a TiO2 product grade that has more th an 30 years of proven performance.  Other TiO2 applications that we believe provide us with an advantage over many of our competitors include chloride grades for engineering plastics and paper laminate applications and sulfate grades for food, pharmaceutical, cosmetics and textile fiber applications.  TiO2 is expected to remain the leading product in its industry as there are essentially no other economically viable substitutes with comparable opacifying power.

 

 

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Leading market positions focusing on TiO2.  Based on current operating capacities, we are the largest producer of TiO2 in Europe and the third largest producer worldwide.  We believe our strong competitive position is the result of our industry experience, reputation for high quality products, outstanding process technology, highly recognized brand name and experienced management team.  The production and sale of TiO2 is our core business.  We believe this focus, comb ined with our long history and experience, help to make our operations among the most efficient in the industry.

 

Long-standing relationships across attractive and diverse end-use markets.  We serve over 4,000 customers across a diverse range of end-use markets and market segments in over 100 countries worldwide with the majority of sales in Europe and North America.  We have strong sales penetration in the two largest TiO2 end-use markets, coatings and plastics, and participate in a diverse range of other end-use markets and market segments.  We work closely with our customers to optimize their formulations, thereby enhancing the use of TiO2 in their production processes.  We believe this consistent dialogue assists us in developing and maintaining strong customer relationships.  We sell the majority of our products through a direct sales force that we believe has contributed to our customer retention rate and strengthened our competitive position.  Our top ten customers represented approximately 28% of net sales in 2009, with no single customer accounting for more than 10% of our 2009 net sales.

 

Global integrated infrastructure with high operating efficiency.  Our business is geographically diversified, with manufacturing operations in North America and Western Europe, and has a worldwide distribution, sales and technical support network.  We believe this diversification minimizes the potential impact of volatility from any one customer, industry or geographic region.  We believe our manufacturing facilities are among the most efficient in the industry.  All of our manufacturing facilities are ISO 9001 or ISO 14001 certified and our chloride production facilities use the same proprietary technology, equipment and process control systems, achieving implementation efficiencies with regard to production enhancements.& #160; We have achieved operating efficiencies through the standardization of equipment across our manufacturing facilities, employee training, innovative technology changes, and processing by-products to sell as co-products into the marketplace.  Due in part to ongoing debottlenecking programs, our production capacity has increased by approximately 30% over the past ten years with only moderate capital investment.  In addition, our research and development and process technology efforts focus on improving production processes and yields and product grades and quality.

 

We operate additional businesses that are related to our TiO2 business, which we believe further enhance our operational efficiencies.  We operate two ilmenite mines in Norway that supply all of the feedstock for our European sulfate operations, which reduces our production costs at these plants.  We also sell ilmenite to third parties.  We manufacture and sell iron-based chemicals, which are co-products and processed co-products of TiO2 pigment production.  Our co-products business provides important efficiencies and cost savings to our production process.  We also manufacture and sell specialty titanium chemicals.  Our ilmenite min es, chemicals co-product and specialty titanium chemical businesses represented approximately 10% of our 2009 net sales.

 

Strong track record through industry cycles.  We have generated positive cash flows from operating activities for 17 consecutive years, throughout various industry cycles.  Through ongoing process improvements we have reduced labor and other manufacturing costs and have added production capacity with moderate disciplined capital investment, resulting in a reduction in fixed costs, a significant improvement in margins and high free cash flow.  We continue to focus on increasing manufacturing efficiencies through selected capital projects, process improvements and best practices in order to lower unit costs and improve margins.  We also seek to increase margins by focusing our sales efforts on particular end-use and geographi c markets where we believe we can realize relatively higher selling prices.

 

State-of-the-art R&D and technological innovation.  We employ customer and end-use market feedback, technological expertise and fundamental research to create next-generation products and processes.  Our technology development efforts include building value-added properties into our TiO2 to enhance its performance in our customers’ end-use applications.  Our research and development teams support our future business strategies, and we manage those teams using disciplined project management tools and a team approach to technological development.  We have a strong focus on new product development as a result of an increasingly global market pl ace.

 

 

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Experienced management team.  Each member of our senior operating management team has over 25 years of experience in the TiO2 and related industries and an average of 25 years of experience with us.  This team is responsible for developing and executing our strategy, which has generated a track record of production growth, high operating rates, cost reductions, steady sales volume growth, strong customer relationships and significant cash flows.  In addition to our strong senior operating management team, we have an experienced group of employees who work to maintain our market position by developing and maintaining customer relationships, expanding our product offerings and implementing innovative technological enhancements.

 

Our Business Strategy

 

Enhance operating efficiencies and improve margins.  We are continually evaluating our business to identify opportunities to increase operational efficiency.  We intend to continue focusing on increasing manufacturing efficiencies through selected capital projects, process improvements and best practices in order to lower unit costs and improve our margins.

 

Expand global leadership.  We plan to continue to capitalize on our strong global market position and drive profitable growth by enhancing existing customer relationships, providing high quality products and offering technical expertise to our customers.  Our broad product offering allows us to participate in a variety of end-use markets, and pursue those market segments that we believe have attractive growth prospects and profit margins.  Our operations position us to participate in markets in Eastern Europe, Asia and North Africa, which we expect to provide attractive growth opportunities as these areas develop.  We also seek to increase margins by focusing our sales efforts on those end-use and geographic markets where w e believe we can realize relatively higher selling prices than in alternate markets.  We believe our global commercial organization, distribution infrastructure, and local fulfillment capabilities will enable us to continue to pursue global growth.

 

Pursue technology-driven growth.  We intend to continue to improve our competitive position by developing new products for coatings, plastics and other applications that increase sales volumes and drive higher margins.  As an example, we recently developed a new coatings grade that has improved performance in certain coating applications, from interior water-based house paints to high gloss solvent-based industrial or original equipment manufacturer applications.  We are also developing innovative TiO2 products for applications in the growing catalyst markets, to be used in water purification and pollution reduction markets.  We believe these developm ents will help to maintain or improve our market position.

 

Pursue a disciplined acquisition strategy.  We believe we are well positioned to capitalize on growth initiatives. We plan to continue to evaluate and pursue opportunities that improve our existing business and to seek acquisition opportunities that increase our production capacity, enhance our product portfolio, expand our market presence or provide operational synergies and cost savings.

 

Products and End-Use Markets

 

Our titanium dioxide pigments are used for imparting whiteness, brightness, opacity and durability to a wide range of end-use products, including paints, plastics, paper, ink, textiles, ceramics, food and cosmetics.  We offer our customers a broad portfolio of products that includes over 40 different TiO2 pigment grades.

 

Sales of our core TiO2 pigments represented over 90% of our net sales in 2009.  We and our agents and distributors primarily sell and provide technical services for our products in three major end-use markets:  coatings, plastics and paper.  In 2009, our sales volumes in each of these three end-use markets were 52%, 35% and 4%, respectively, of our total sales volume.

 

 

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Some of the principal applications for our products include the following:

 

TiO2 for Coatings.  Our TiO2 is used to provide opacity, durability, tinting strength and brightness in industrial coatings, as well as for coatings for home interiors and exteriors, automobiles, aircraft, machines, appliances, traffic paint and other special purpose coatings.  The amount of TiO2 used in coatings varies widely depending on the opacity, color and quality desired.  Generally, the higher the opacity requirement of the coating, the greater the Ti O2 content.

 

TiO2 for Plastics.  We produce TiO2 pigments that improve the optical and physical properties in plastics, including whiteness and opacity.  TiO2 is used to provide opacity in items such as containers and packaging materials, and vinyl products such as windows, door profiles and siding.  TiO2 also generally provides hiding power, neutral undertone, brightness and surface durability for housewares, appliances, toys, computer cases and food packages.  TiO2’s high brightness, along with its opacity, is used in some engineering plastics to help mask their undesirable natural color.  TiO2 is also used in masterbatch, which is a concentrate of TiO2 and other additives and is one of the largest uses for TiO2 in the plastics end-use market.  The TiO2 is dispersed at high concentrations into a plastic resin and is then used by manufacturers of plastic containers, bottles and packaging and agricultural films.

 

TiO2 for Paper.  Our TiO2 is used in the production of several types of paper, including laminate (decorative) paper, filled paper and coated paper, to provide whiteness, brightness, opacity and color stability.  Although we sell our TiO2 to all segments of the paper end-use market, our primary focus is on the TiO2 grades used in paper laminates, where several layers of paper are laminated togeth er using melamine resin under high temperature and pressure.  The top layer of paper contains as much as 50% TiO2 and is the layer that is printed with decorative patterns.  Paper laminates are used to replace materials such as wood and tile for such applications as counter tops, furniture and wallboard.  TiO2 is beneficial in these applications because it assists in preventing the material from fading or changing color after prolonged exposure to sunlight and other weathering agents.

 

TiO2 for Other Applications.  We produce TiO2 to improve the opacity and hiding power of printing inks.  TiO2 allows inks to achieve very high print quality while not interfering with the technical requirements of printing machinery, including low abrasion, high printing speed and high temperatures.  Our TiO2 is also used in textile applications.  TiO2 functions as an opacifying and delustering agent.  In man-made fibers such as rayon and polyester, TiO2 corrects an otherwise undesirable glossy and translucent appearance.  Without the presence of TiO2, these materials would be unsuitable for use in many textile applications.

 

We produce high purity sulfate process anatase TiO2 used to provide opacity, whiteness and brightness in a variety of cosmetic and personal care products, such as skin cream, lipstick, eye shadow and toothpaste.  Our TiO2 is also found in food products, such as candy and confectionaries, and in pet foods where it is used to obtain uniformity of color and appearance.  In pharmaceuticals, our TiO2 is used commonly as a colorant in pill and capsule coatings as well as in liquid medicines to provide uniformity of color and appearance.  Kronos purified anatase grades meet the applicable requirem ents of the CTFA (Cosmetics, Toiletries and Fragrances Association), USP and BP (United States Pharmacopoeia and British Pharmacopoeia) and the FDA (United States Food and Drug Administration).

 

Related Businesses

 

Our TiO2 business is enhanced by the following three complementary businesses, which comprised approximately 10% of our net sales in 2009:

 

·

We own and operate two ilmenite mines in Norway pursuant to a governmental concession with an unlimited term.  We commenced production from our second mine in 2009.  Ilmenite is a raw material used directly as a feedstock by some sulfate-process TiO2 plants, including all of our European sulfate-process plants. We also sell ilmenite ore to third-parties, some of whom are our competitors.  The mine has estimated ilmenite reserves that are expected to last at least 60 years.

 

·

We manufacture and sell iron-based chemicals, which are co-products and processed co-products of the sulfate and chloride process TiO2 pigment production.  These co-product chemicals are marketed through our Ecochem division and are primarily used as treatment and conditioning agents for industrial effluents and municipal wastewater as well as in the manufacture of iron pigments, cement and agricultural products.

 

 

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·

We manufacture and sell  titanium oxychloride and titanyl sulfate, which are side-stream specialty products from the production of TiO2.  Titanium oxychloride is used in specialty applications in the formulation of pearlescent pigments, production of electroceramic capacitors for cell phones and other electronic devices.  Titanyl sulfate productions are used in pearlescent pigments, natural gas pipe and other specialty applications.

 

Manufacturing, Operations and Properties

 

We currently operate four TiO2 plants in Europe (one in each of Leverkusen, Germany; Nordenham, Germany; Langerbrugge, Belgium; and Fredrikstad, Norway).  In North America, we have a TiO2 plant in Varennes, Quebec, Canada and, through the manufacturing joint venture described below in “—TiO2 Manufacturing Joint Venture,” a 50% interest in a TiO2 plant in Lake Charles, Louisiana.  We operate two ilmenite mines in Hauge i Dalane, Norway pursuant to a governmental concession and also own a TiO2 slurry plant in Lake Charles, Louisiana.

 

Our production capacity in 2009 was 532,000 metric tons, approximately three-fourths  of which was for the chloride production process.  The following table presents the division of our 2009 manufacturing capacity by plant location and type of manufacturing process:

 

			Percent of Capacity by TiO2 Manufacturing Process
Facility	Description		Chloride				Sulfate
Leverkusen, Germany (1)	TiO2 production, chloride and sulfate process, co-products			41	%			26	%
Nordenham, Germany	TiO2 production, sulfate process, co-products			-				40
Langerbrugge, Belgium	TiO2 production, chloride process, co-products, titanium chemicals products			20				-
Fredrikstad, Norway (2)	TiO2 production, sulfate process, co-products			-				20
Varennes, Canada	TiO2 production, chloride and sulfate process, slurry facility, titanium chemicals products			20				14
Lake Charles, Louisiana (3)	TiO2 production, chloride process			19				-
Total				100	%			100	%

 

(1)

The Leverkusen facility is located within an extensive manufacturing complex owned by Bayer AG.  We own the Leverkusen facility, which represents about one-third of our current TiO2 production capacity, but we lease the land under the facility from Bayer under a long term agreement which expires in 2050.  Lease payments are periodically negotiated with Bayer for periods of at least two years at a time.  Bayer or its affiliates provides some raw materials, including chlorine, auxiliary and operating materials, utilities and services necessary to operate the Leverkusen facility under separate supplies and services agreements.

 

(2)

The Fredrikstad plant is located on public land and is leased until 2013 with an option to extend the lease for an additional 50 years.

 

(3)

We operate this facility in a 50/50 joint venture with Huntsman.  See Note 6 to our Consolidated Financial Statements and “—TiO2 Manufacturing Joint Venture.”

 

We own the land underlying all of our principle production facilities unless otherwise indicated in the table above.

 

 

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Our production capacity has increased by approximately 30% over the past ten years due to debottlenecking programs, with only moderate capital expenditures.  We believe that our annual attainable production capacity for 2010 is approximately 532,000 metric tons and we currently expect we will operate at near full production capacity for the year.

 

We also operate two ilmenite mines in Norway pursuant to a governmental concession with an unlimited term.  In addition, we operate a rutile slurry manufacturing plant in Lake Charles, Louisiana, which converts dry pigment manufactured at the Lake Charles TiO2 facility into a slurry form that is then shipped to customers.

 

We have various corporate and administrative offices located in the U.S., Germany and Norway and various sales offices located in the U.S., Canada, Belgium, France, the Netherlands and the U.K.

 

TiO2 Manufacturing Joint Venture

 

Kronos Louisiana, Inc., one of our subsidiaries, and Huntsman each own a 50%-interest in a manufacturing joint venture, Louisiana Pigment Company, L.P., or LPC.  LPC owns and operates a chloride-process TiO2 plant located in Lake Charles, Louisiana.  We and Huntsman share production from the plant equally pursuant to separate offtake agreements.

 

A supervisory committee directs the business and affairs of the joint venture, including production and output decisions.  This committee is composed of four members, two of whom we appoint and two of whom Huntsman appoints.  Two general managers manage the operations of the joint venture acting under the direction of the supervisory committee.  We appoint one general manager and Huntsman appoints the other.

 

We are required to purchase one-half of the TiO2 produced by the joint venture.  The joint venture is not consolidated in our financial statements, because we do not control it.  We account for our interest in the joint venture by the equity method.  The joint venture operates on a break-even basis and therefore we do not have any equity in earnings of the joint venture.  We share all costs and capital expenditures equally with Huntsman with the exception of raw material and packaging costs for the pigment grades produced.  Our share of net costs is reported as cost of sales as the TiO2 is sold.  See Notes 6 and 13 to our Consolidate d Financial Statements.

 

Raw Materials

 

The primary raw materials used in chloride process TiO2 are titanium-containing feedstock (natural rutile ore or purchased slag), chlorine and coke.  Chlorine and coke are available from a number of suppliers.  Titanium-containing feedstock suitable for use in the chloride process is available from a limited but increasing number of suppliers principally in Australia, South Africa, Canada, India and the United States.  We purchase chloride process grade slag from Rio Tinto Iron and Titanium under a long-term supply contract that expires at the end of 2011.  We purchase natural rutile ore primarily from Iluka Resources, Limited under a long-term supply contract that expires at the end of 2010.  We have in the past be en, and expect in the future will continue to be, successful in obtaining long-term extensions to these and other existing supply contracts prior to their expiration.  We expect the raw materials purchased under these contracts to meet our chloride process feedstock requirements over the next several years.

 

The primary raw materials used in sulfate process TiO2 are titanium-containing feedstock, primarily ilmenite or purchased sulfate grade slag and sulfuric acid.  Sulfuric acid is available from a number of suppliers.  Titanium-containing feedstock suitable for use in the sulfate process is available from a limited number of suppliers principally in Norway, Canada, Australia, India and South Africa.  As one of the few vertically-integrated producers of sulfate process TiO2, we operate two rock ilmenite mines in Norway, which provided all of the feedstock for our European sulfate process TiO2 plants in 2009.  We expect ilmenite production from our mines to meet our European sulfate process feedstock requirements for the foreseeable future.  For our Canadian sulfate process plant, we also purchase sulfate grade slag primarily from Q.I.T. Fer et Titane Inc. (a subsidiary of Rio Tinto Iron and Titanium), under a long-term supply contract that expires at the end of 2014 and Eramet Titanium & Iron ASA (formerly Tinfos Titan and Iron KS) under a supply contract that expires in December 2010.  We expect the raw materials purchased under these contracts to meet our sulfate process feedstock requirements over the next several years.

 

 

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Many of our raw material contracts contain fixed quantities we are required to purchase, although these contracts allow for an upward or downward adjustment in the quantity purchased.  The pricing under these agreements is generally negotiated annually.

 

The following table summarizes our raw materials purchased or mined in 2009.

 

Production Process/Raw Material		Raw Materials Procured or Mined
		(In thousands of metric tons)
Chloride process plants:
Purchased slag or natural rutile ore			351
Sulfate process plants:
Raw ilmenite ore mined & used internally			226
Purchased slag			13

Please see “Risk Factors—Higher costs or limited availability of our raw materials may reduce our earnings and decrease our liquidity.”

 

Sales and Marketing

 

Our marketing strategy is aimed at developing and maintaining strong customer relationships with new and existing accounts.  Because TiO2 is a significant raw material cost for our customers, the purchasing decisions are often made by our customers’ senior management.  We work to maintain close relationships with the key decision makers, through in-depth frequent calling on these accounts.  We endeavor to extend these commercial and technical relationships to multiple levels within our customers’ organization using our direct sales force and technical service group to accomplish this objective.  We believe this has helped build customer loyalty to Kronos and strengthen our competitive position.  Close co operation and strong customer relationships enables us to stay closely attuned to trends in our customers’ businesses.  Where appropriate, we work in conjunction with our customers to solve formulation or application problems by modifying specific product properties or developing new pigment grades.  We also focus our sales and marketing efforts on those geographic and end-use market segments where we believe we can realize higher selling prices.  This focus includes continuously reviewing and optimizing our customer and product portfolios.

 

Our marketing strategy is also aimed at working directly with customers to monitor the success of our products in their end-use applications, evaluate the need for improvements in product and process technology and identify opportunities to develop new product solutions for our customers.  Our marketing staff closely coordinates with our sales force and technical specialists to ensure that all of the needs of our customers are met, and helps develop and commercialize new grades where appropriate.

 

We sell a majority of our products through our direct sales force comprised of over 30 persons operating from six sales offices in Europe and one sales office in North America.  We also utilize sales agents and distributors who are authorized to sell our products in specific geographic areas.  In Europe, our sales are made primarily through our direct sales force and our sales agents.  Our agents do not sell any TiO2 products other than Kronos® brand products.  In North America, our sales are made primarily through our direct sales force and supported by a network of distributors.  In addition to our direct sales force and sales agents, many of our sales agents also act as distributors to service our smaller cu stomers in all regions.  We offer our customers who purchase our products through distributors the same high level of customer and technical service as we offer to our larger customers.

 

New Product Development

 

We have approximately 110 scientists, chemists, process engineers and technicians engaged in research and development, process technology and quality assurance activities in Leverkusen, Germany.  They have the responsibility for improving chloride and sulfate production processes, improving product quality and strengthening our competitive position by developing new applications.  Our expenditures for these activities were approximately $12 million in each of 2007, 2008 and 2009.

 

 

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We continually seek to improve the quality of our grades and have been successful at developing new grades for existing and new applications to meet the needs of our customers and increase product life cycles.  Since 2004, we have added five new grades for plastics and coatings.

 

Competition

 

The TiO2 industry is highly competitive.  We compete primarily on the basis of price, product quality, technical service and the availability of high performance pigment grades.  Although certain TiO2 grades are considered specialty pigments, the majority of our grades and substantially all of our production are considered commodity pigments with price being one of the most significant competitive factors along with quality and customer service.  During 2009, we had an estimated 13% share of worldwide TiO2 sales volume, and based on sales volumes, we believe we are the leading seller of TiO 2 in several countries, including Germany.

 

Our principal competitors are E.I. du Pont de Nemours & Co., or Dupont; Millennium Inorganic Chemicals, Inc. (a subsidiary of National Titanium Dioxide Company Ltd.), or Cristal; Huntsman; Tronox Incorporated; and Sachtleben Chemie.  These competitors have estimated individual shares of TiO2 production capacity ranging from 4% (for Sachtleben Chemie) to 22% (for DuPont) and an estimated aggregate share of worldwide TiO2 production volume of approximately 60%.  DuPont has over one-half of total North American TiO2 production capacity and is our principal North American competitor.  Trono x filed for Chapter 11 bankruptcy protection in January 2009, and has continued to operate as a debtor-in-possession since that date.  In December 2009, Tronox announced its intention to restructure and emerge from Chapter 11.  It remains unclear how and to what extent Tronox or its successor will compete in the TiO2 industry at the conclusion of Tronox’s bankruptcy proceedings.

 

Over the past ten years, we and our competitors have increased industry capacity through debottlenecking projects.  Although overall industry pigment demand is expected to be higher in 2010 as compared to 2009 as a result of improving worldwide economic conditions, we do not expect any significant efforts will be undertaken by us or our competitors to further increase capacity through such projects for the foreseeable future, other than debottlenecking projects.  If actual developments differ from our expectations, ours and the TiO2 industry’s performance could be unfavorably affected.

 

Worldwide capacity additions in the TiO2 market resulting from construction of new plants require significant capital expenditures and substantial lead time (typically three to five years in our experience).  We are not aware of any TiO2 plants currently under construction and we believe it is not likely that any new plants will be constructed in Europe or North America in the foreseeable future.

 

Patents, Trademarks, Trade Secrets and Other Intellectual Property Rights

 

We have a comprehensive intellectual property protection strategy that includes obtaining, maintaining and enforcing our patents, primarily in the United States, Canada and Europe.  We also protect our trademark and trade secret rights.  In addition, we have entered into license agreements with third parties concerning various intellectual property matters.  We have also from time to time been involved in disputes over intellectual property.

 

Patents. We have obtained patents and have numerous patent applications pending that cover our products and the technology used in the manufacture of our products.  Our patent strategy is important to us and our continuing business activities.  In addition to maintaining our patent portfolio, we seek patent protection for our technical developments, principally in the United States, Canada and Europe.   U.S. Patents  are generally in effect for 20 years from the date of filing.  Our U.S. patent portfolio includes patents having remaining terms ranging from about one year to 19 years.

 

Trademarks and Trade Secrets.  Our trademarks, including Kronos™, are covered by issued and or pending registrations, including in Canada and the United States.  We protect the marks that we use in connection with  the products we manufacture and sell and have developed goodwill in connection with our long-term use of our marks.  We conduct research activities in secret and we protect the confidentiality of our trade secrets through reasonable measures, including confidentiality agreements and security procedures.  We rely upon unpatented proprietary knowledge and continuing technological innovation and other trade secrets to develop and maintain our competitive position.  Our proprietary chloride production process is an important part of our technology and our business could be harmed if we fail to maintain confidentiality of our trade secrets used in this technology.

 

 

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For a further description of the risks associated with our intellectual property rights, see “Risk Factors—Failure to protect our intellectual property rights or claims by others that we infringe their intellectual property rights could substantially harm our business.”

 

Operations Outside the United States

 

As discussed above, 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 amount 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.  At December 31, 2009, we had substantial net assets denominated in the euro, Canadian dollar, Norwegian krone and United Kingdom pound sterling.

 

Our chemical businesses have operated in non-U.S. markets since the 1920s.  Most of our current production capacity is located in Europe and Canada with non-U.S. net property and equipment aggregating approximately $497 million at December 31, 2009.  Net property and equipment in the U.S., including 50% of the property and equipment of LPC, was approximately $85 million at December 31, 2009.  Our European operations include production facilities in Germany, Belgium and Norway.  Approximately $857 million of our 2009 consolidated sales were to non-U.S. customers, including $153 million to customers in areas other than Europe and Canada.  Sales to customers in the U.S. aggregated $286 million in 2009.  Foreign operations are subject to, among other things, currency exchange rate f luctuations and our results of operations have in the past been both favorably and unfavorably affected by fluctuations in currency exchange rates.  Effects of fluctuations in exchange rates on our results of operations are discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Employees

 

As of June 30, 2010, we employed approximately 2,440 persons, excluding LPC employees, with approximately 2,000 employees in Europe and 440 in North America.  Certain of our employees are highly trained and highly educated.  We have approximately 25 employees with Ph.D. or equivalent degrees.  Our key plant managers possess an average of over 15 years of experience with us.

 

The employees at each of our production facilities are organized by labor unions.  In Europe, our union employees are covered by master collective bargaining agreements for the chemical industry that are generally renewed annually.  In Canada, our union employees are covered by a collective bargaining agreement that expires in 2010.

 

Regulatory and Environmental Matters

 

Our operations and properties are governed by various environmental laws and regulations, which are complex, change frequently and have tended to become stricter over time.  These environmental laws govern, among other things, the generation, storage, handling, use and transportation of hazardous materials; the emission and discharge of hazardous materials into the ground, air or water; and the health and safety of our employees.  Certain of our operations are, or have been, engaged in the generation, storage, handling, manufacture or use of substances or compounds that may be considered toxic or hazardous within the meaning of applicable environmental laws and regulations.  As with other companies engaged in similar businesses, certain of our past and current operations and products have the potential to ca use environmental or other damage.  We have implemented and continue to implement various policies and programs in an effort to minimize these risks.  Our policy is to comply with applicable environmental laws and regulations at all our facilities and to strive to improve our environmental performance.  It is possible that future developments, such as stricter requirements in environmental laws and enforcement policies, could adversely affect our operations, including production, handling, use, storage, transportation, sale or disposal of hazardous or toxic substances or require us to make capital and other expenditures to comply, and could adversely affect  our consolidated financial position and results of operations or liquidity.

 

 

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Our U.S. manufacturing operations are governed by federal, state and local environmental and worker health and safety laws and regulations.  These include the Resource Conservation and Recovery Act, or RCRA, the Occupational Safety and Health Act, the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act, the Toxic Substances Control Act and the Comprehensive Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act, or CERCLA, as well as the state counterparts of these statutes.  Some of these laws hold current or previous owners or operators of real property liable for the costs of cleaning up contamination, even if these owners or operators did not know of, and were not responsible for, such contamination.  These laws also assess liabi lity on any person who arranges for the disposal or treatment of hazardous substances, regardless of whether the affected site is owned or operated by such person.  Although we have not incurred and do not currently anticipate any material liabilities in connection with such environmental laws, we may be required to make expenditures for environmental remediation in the future.

 

While the laws regulating operations of industrial facilities in Europe vary from country to country, a common regulatory framework is provided by the European Union, or the EU.  Germany and Belgium are members of the EU and follow its initiatives.  Norway is not a member but generally patterns its environmental regulatory actions after the EU.

 

At our sulfate plant facilities in Germany, we recycle weak sulfuric acid either through contracts with third parties or at our own facilities.  In addition, at our German locations we have a contract with a third-party to treat certain sulfate-process effluents.  At our Norwegian plant, we ship spent acid to a third party location where it is used as a neutralization agent.  These contracts may be terminated by either party after giving three or four years advance notice, depending on the contract.

 

From time to time, our facilities may be subject to environmental regulatory enforcement under U.S. and non-U.S. statutes.  Typically we establish compliance programs to resolve these matters.  Occasionally, we may pay penalties.  To date such penalties have not involved amounts having a material adverse effect on our consolidated financial position, results of operations or liquidity.

 

In December 2006, the EU approved Registration, Evaluation and Authorization of Chemicals, or REACH, which took effect on June 1, 2007 and will be phased in over an 11-year period from the implementation date.  Under REACH, companies that manufacture or import more than one ton of a chemical substance per year in the EU will be required to register such chemical substances in a central data base.  REACH affects our European operations by imposing a testing, evaluation and registration program for many of the chemicals we use or produce in Europe.  Under REACH, substances of very high concern may require authorization for further use and may also be restricted in the future, which could increase our production costs.  We have established a REACH team that is working to identify and list all substanc es purchased, manufactured or imported by or for us in the EU.  We spent $.4 million in 2007, $.5 million in 2008 and $.7 million in 2009 on REACH compliance and we do not anticipate that future compliance costs will be material to us.

 

Our capital expenditures related to ongoing environmental compliance, protection and improvement programs in 2009 were $3.1 million, and are currently expected to be approximately $12 million in 2010, including approximately $9.7 million for a desulfurization unit at our Belgian facility.

 

Legal Proceedings

 

We are involved in various other environmental, contractual, intellectual property, product liability and other claims and disputes incidental to our business.  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 condition, results of operations or liquidity.

 

 

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In March 2010, we were served with two complaints:  Haley Paint v. E.I. Dupont de Nemours and Company, et al. (United States District Court, Northern Division of Maryland, Case No. 1:10-cv-00318-RDB); and Issac Industries, Inc. v. E.I. Dupont de Nemours and Company, et al. (United States District Court, Northern Division of Maryland, Case No. 1:10-cv-00323-RDB).  Defendants in both cases include us, DuPont, Huntsman, Millennium Inorganic Chemicals, Inc. and the National Titanium Dioxide Company Limited (d/b/a Cristal).  In each case, the nominal plaintiff seeks to represent a class consisting of all persons and entities that purchased titanium dioxide in the United States directly from one or mor e of the defendants on or after March 1, 2002.  The complaints allege that the defendants conspired and combined to fix, raise, maintain, and stabilize the price at which TiO2 was sold in the United States and engaged in other anticompetitive conduct.  We intend to deny all allegations of wrongdoing and liability and will defend vigorously against all claims.

 

Insurance

 

We have customary levels of insurance for a company of our size in our industry.  Our insurance policies are subject to customary deductibles and limits.  For a discussion of our insurance program, please see “Certain Relationships and Related Transactions—Insurance Matters.”  For a discussion of our participation in the Contran control group’s insurance program, please see Note 13 to our Consolidated Financial Statements.

 

Principal Executive Offices

 

Our principal executive offices are located at Three Lincoln Centre, 5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240, and our telephone number is (972) 233-1700.

 

 

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MANAGEMENT

 

Controlled Company

 

Because of the ownership of our common stock by Valhi and its subsidiary, NL, as described below under “Principal Stockholders and Ownership of Management,” we are considered a controlled company under the listing standards of NYSE, and we will continue to be considered a controlled company following the completion of this offering.  Pursuant to the listing standards, a controlled company may choose not to have a majority of independent directors, independent compensation, nominations or corporate governance committees or charters for these committees.  We have chosen not to have an independent nominations or corporate governance committee or charters for these committees.  Our board of directors believes that the full board of directors best represents the interests of all of our stockholders an d that it is appropriate for all matters that would otherwise be considered by a nominations, corporate governance or risk oversight committee to be considered and acted upon by the full board of directors.  Applying the NYSE director independence standards without any additional categorical standards, our board of directors has determined that Keith R. Coogan, Cecil H. Moore, Jr., George E. Poston and R. Gerald Turner are independent and have no material relationship with us other than serving as our directors.  These directors are referred to in this prospectus as the “independent directors.”  While the members of our management development and compensation committee currently satisfy the independence requirements of the NYSE, we have chosen not to satisfy all of the NYSE listing standards for a compensation committee.

 

In determining that Dr. Turner has no material relationship with us other than serving as our director, the board of directors considered the following relationship:

 

·	in 2007, Harold C. and Annette C. Simmons made a commitment to donate $20 million to Southern Methodist University, of which Dr. Turner is the president;

 

·	pursuant to the commitment they contributed, or caused to be contributed, $7.7 million in each of 2008 and 2009; and

 

·	$7.7 million is less than 2.3% of SMU’s consolidated gross revenues and 3.3% of SMU’s consolidated gross revenues net of scholarship allowances for its most recently completed fiscal year.

 

Directors and Executive Officers

 

Set forth below is certain information relating to our current directors and executive officers.  The term of office for each director will expire at the 2011 annual meeting.  Each executive officer serves at the pleasure of the board of directors.

 

Name	Age	Position(s)
Harold C. Simmons	79	Chairman of the Board
Steven L. Watson	59	Vice Chairman of the Board and Chief Executive Officer
Keith R. Coogan	58	Director
Cecil H. Moore, Jr.	71	Director
George E. Poston	74	Director
Glenn R. Simmons	82	Director
Dr. R. Gerald Turner	64	Director
Douglas C. Weaver	68	Chairman of the Executive Management Committee
Ulfert Fiand	62	Vice Chairman of the Executive Management Committee and Chief Technology Officer
H. Joseph Maas	58	President, Sales and Marketing
Klemens Schlüter	54	President, Manufacturing
Robert D. Graham	55	Executive Vice President and General Counsel
Gregory M. Swalwell	53	Executive Vice President and Chief Financial Officer
Tim C. Hafer	48	Vice President and Controller
Kelly D. Luttmer	47	Vice President and Tax Director
John A. St. Wrba	54	Vice President and Treasurer

 

 

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Harold C. Simmons has served as our chairman of the board since 2003.  He served as our chief executive officer from 2003 to February 2009.  Since prior to 2005, Mr. Simmons has served as chairman of the board and chief executive officer of NL and chairman of the board of Contran and Valhi.  He also has served as chairman of the board of Titanium Metals Corporation, or TIMET (one of our publicly-held sister corporations that is an integrated producer of titanium metal products) since 2005 and chief executive officer of TIMET from 2005 to 2006.  Mr. Simmons has been an executive officer or director of various companies related to Contran and Valhi since 1961.  He is a brother of Glenn R. Simmons.

 

Mr. Simmons has a long and extensive experience with our business.  He also has senior executive, operating, corporate governance, finance and financial accounting oversight experience from other publicly and privately held entities affiliated with us for which he currently serves or formerly served.

 

Steven L. Watson has served as our chief executive officer since 2009, our vice chairman of the board since 2004 and on our board of directors since 2003.  Since prior to 2005, Mr. Watson has been president and a director of Contran and president, chief executive officer and a director of Valhi.  He has also served as TIMET’s vice chairman of the board since 2005 and its chief executive officer from 2006 to December 2009.  Mr. Watson has served as a director of CompX, Keystone Consolidated Industries, Inc., or Keystone, one of our publicly-held sister corporations that manufactures steel fabricated wire products, industrial wire, bar products, billets and wire rod, and NL since prior to 2005.  Mr. Watson has served as an executive office r or director of various companies related to Contran and Valhi since 1980.

 

Mr. Watson has a long and extensive experience with our business.  He also has senior executive, operating, corporate governance, finance and financial accounting oversight experience from other publicly and privately held entities affiliated with us for which he currently serves or formerly served.

 

Keith R. Coogan has served on our board of directors since 2004.  From 2007 to 2009, Mr. Coogan served as president and chief executive officer of Pomeroy IT Solutions, Inc., an information technology services and solutions provider.  From 2002 to 2006, Mr. Coogan served as chief executive officer of Software Spectrum, Inc., a global business-to-business software services provider that Level 3 Communications, Inc. sold to Insight Enterprises Inc. in 2006.  From 1991 to 2002, Software Spectrum was a publicly-held corporation.  From 1990 to 2002, he served in various other executive officer positions with Software Spectrum, including vice president of finance and operations and chief operating officer.  He also has served as a director of TIMET since prior to 2005 and is a member of TIMET’s audit committee, management development and compensation committee and nominations committee.  Mr. Coogan was a director of Software Spectrum from 1998 to 2006, Pomeroy from 2007 to 2009, CompX from 2002 to 2006 and Keystone from 2003 to 2005.  Mr. Coogan is a member of our audit committee and management development and compensation committee.

 

Mr. Coogan has over five years of experience on our board of directors and audit committee and four years of experience on our management development and compensation committee.  He also has senior executive, operating, corporate governance, finance and financial accounting experience from other publicly and privately held entities for which he currently serves or formerly served.

 

Cecil H. Moore, Jr. has served on our board of directors since 2003.  Mr. Moore is currently a private investor and retired from KPMG LLP in 2000 after 37 years in which he served in various capacities with the public accounting firm.  Among other positions, he served as managing partner of the firm’s Dallas, Texas office from 1990 to 1999.  Prior to 1990, Mr. Moore was partner-in-charge of the audit and accounting practice of the firm’s Dallas, Texas office for 12 years.  From 2003 until 2009, Mr. Moore served as a director and chairman of the audit committee of Perot Systems Corporation, a worldwide provider of information technology services and business solutions.  Perot Systems became privately held upon its acquisit ion by Dell, Inc. in 2009.  Since prior to 2005, he has served as a director and on the audit committee of NL.  He is the chairman of our audit committee.

 

Mr. Moore has over six years of experience on our board of directors and audit committee.  He also has senior executive, operating, corporate governance, finance, financial accounting and auditing experience from one of the largest independent international public accounting firms and from other publicly-held entities for which he currently serves or formerly served.

 

 

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George E. Poston has served on our board of directors since 2003.  He has been president of Poston Real Estate Co., a privately held commercial real estate investment company, and president of Poston Capital Co., a privately held investment company, since 1970.  Mr. Poston is a member of our audit committee and management development and compensation committee.

 

Mr. Poston has over six years of experience on our board of directors, audit committee and management development and compensation committee.  He also has senior executive, operating, corporate governance, finance and financial accounting oversight experience from privately held real estate and investment companies.

 

Glenn R. Simmons has served on our board of directors since 2003.  Since prior to 2005, Mr. Simmons has been vice chairman of the board of Contran and Valhi and chairman of the board of CompX and Keystone.  He also has served on the board of directors of NL and TIMET since prior to 2005.  In 2004, Keystone filed a voluntary petition for reorganization under federal bankruptcy laws and emerged from the bankruptcy proceedings in 2005.  Mr. Simmons has been an executive officer or director of various companies related to Contran and Valhi since 1969.  He is a brother of Harold C. Simmons.

 

Mr. Simmons has a long and extensive experience with our business.  He also has senior executive, operating, corporate governance, finance and financial accounting oversight experience from other publicly and privately held entities affiliated with us for which he currently serves or formerly served.

 

Dr. R. Gerald Turner has served on our board of directors since 2003.  He has served since 1995 as president of Southern Methodist University in Dallas, Texas.  He held previous executive and administrative positions at the University of Mississippi, the University of Oklahoma and Pepperdine University.  He has served on the board of directors of J.C. Penney Company, Inc. since 1995 and since 2001 as a trustee of the American Beacon Funds, American Beacon Master Trust, American Beacon Mileage Funds and American Beacon Select Funds, each a registered management investment company.  Dr. Turner is a member of our audit committee and chairman of our management development and compensation committee.

 

Dr. Turner has over six years of experience on our board of directors, audit committee and management development and compensation committee.  He also has senior executive, operating, corporate governance, finance and financial accounting oversight experience from a large, non-profit, private educational institution for which he currently serves and from other publicly-held entities for which he currently serves or formerly served.

 

Douglas C. Weaver is chairman of our executive management committee that assists our chief executive officer in managing our operations and has served as our senior vice president, development since 2003.  Mr. Weaver served as our vice president, development from 1998 to 2003.  Prior to that, Mr. Weaver served in various manufacturing, engineering and planning capacities with NL since joining NL in 1973.

 

Dr. Ulfert Fiand is vice chairman of our executive management committee that assists our chief executive officer in managing our operations and has served as our chief technology officer since 2009.  He previously served as our president, manufacturing and technology since 2004 and our senior vice president, manufacturing and technology in 2004 and prior years.  Since 2009, he has served as chief technology officer of KII and from prior to 2004 to 2009 he served as its president, manufacturing and technology.  Dr. Fiand joined KII in 1988, and previously served as group leader and director of chloride process technology, director of process technology and vice president of production & process technology.

 

Robert D. Graham has served as our executive vice president and general counsel since 2009 and our vice president and general counsel from 2003 to 2009.  He also has served as NL’s vice president and general counsel since prior to 2005, TIMET’s executive vice president since 2006 and its vice president from 2004 to 2006.  He has served as vice president of Contran and Valhi since 2002.

 

Gregory M. Swalwell has served as our executive vice president and chief financial officer since 2009 and our vice president and chief financial officer from 2004 to 2009.  Since prior to 2005, he also has served as vice president, finance and chief financial officer of NL, vice president of TIMET and vice president and controller of Contran and Valhi.  Mr. Swalwell has served in accounting and financial positions with various companies related to Contran and Valhi since 1988.

 

 

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H. Joseph Maas has served as our president, sales and marketing since 2004 and served as our senior vice president, sales and marketing from 2003 to 2004.  From 1985 to 2003, Mr. Maas served as our director of marketing and later as our vice president of marketing.  From 1978 to 2003, Mr. Maas held several positions in commercial development, marketing and planning for various divisions of NL (Rheox and Spencer Kellogg).

 

Klemens Schlüter has served as our president, manufacturing since 2009.  Since 2009, he has served as president, manufacturing of KII and from prior to 2004 to 2009 he served as its vice president-manufacturing.  Mr. Schlüter has served in various engineering positions of increasing responsibility with KII.  He joined KII in 1996 as director of corporate engineering.

 

Tim C. Hafer has served as our vice president and controller since 2006 and our director – finance and control from 2003 to 2006.  He also served as NL’s vice president and controller since 2006 and its director – finance and control from 2003 to 2006.  Mr. Hafer has served in financial accounting positions with various companies related to Contran and Valhi since 1999.

 

Kelly D. Luttmer has served as our vice president and tax director since 2004.  She also has served as vice president and tax director of CompX, Contran, NL and Valhi since prior to 2005 and vice president and tax director of TIMET since 2006.  Ms. Luttmer has served in tax accounting positions with various companies related to Contran and Valhi since 1989.

 

John A. St. Wrba has served as our vice president and treasurer since prior to 2005.  Since prior to 2005, he also served as vice president and treasurer of Contran and NL.  Mr. St. Wrba has also served as vice president and treasurer of TIMET since 2006 and Valhi since 2005.

 

Committees of the Board of Directors

 

Our board of directors has established and delegated authority to the following two standing committees.

 

Audit Committee

 

Our audit committee assists with the board of directors’ oversight responsibilities relating to our financial accounting and reporting processes and auditing processes.  The purpose, authority, resources and responsibilities of our audit committee are more specifically set forth in its charter, which is available on our website.  Applying the requirements of the NYSE listing standards (without additional categorical standards) and SEC regulations, as applicable, the board of directors has determined that:

 

·	each member of our audit committee is independent, financially literate and has no material relationship with us other than serving as our director; and

 

·	Mr. Cecil H. Moore, Jr. is an “audit committee financial expert.”

 

No member of our audit committee serves on more than three public company audit committees.  The current members of our audit committee are Cecil H. Moore, Jr. (chairman), Keith R. Coogan, George E. Poston and R. Gerald Turner.

 

Management Development and Compensation Committee

 

The principal responsibilities of our management development and compensation committee are:

 

·

to recommend to the board of directors whether or not to approve any proposed charge to us or any of our privately held subsidiaries pursuant to an intercorporate services agreement, or ISA, between Contran and a related company pursuant to which employees of Contran provide certain services, including executive officer services, to such related company on a fixed fee basis;

 

 

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·	to review certain matters regarding our employee benefit plans or programs, including discretionary incentive bonuses and salaries we pay;

 

·	to review, approve, administer and grant awards under our equity compensation plan; and

 

·	to review and administer such other compensation matters as the board of directors may direct from time to time.

 

In certain instances under our 2003 Long-Term Incentive Plan, a plan allowing for grants of cash or equity performance awards, the management development and compensation committee may delegate its authority to administer this plan to certain individuals, which delegation authority the committee has not utilized.  With respect to the role of our executive officers in determining or recommending the amount or form of executive compensation, see “Compensation of Executive Officers and Directors and Other Information—Compensation Discussion and Analysis.”  With respect to director compensation, our executive officers make recommendations on such compensation directly to our board of directors for its consideration without involving the management development and compensation committee.

 

As discussed above, the board of directors has determined that each member of our management development and compensation committee is independent by applying the NYSE director independence standards (without additional categorical standards).  The current members of our management development and compensation committee are R. Gerald Turner (chairman), Keith R. Coogan and George E. Poston.

 

Corporate Governance Matters

 

Risk Oversight

 

Our board of directors oversees the actions we take in managing our material risks.  Our management is responsible for our day-to-day management of risk.  The board’s oversight of our material risks is undertaken through, among other things, various reports and assessments that management presents to the board and the related board discussions.  The board has delegated some of its primary risk oversight to our audit committee and management development and compensation committee.  Our audit committee annually receives management’s reports and assessments on, among other things, the risk of fraud, certain material business risks and a ranking of such material business risks and on our insurance program.  The audit committee also receives reports from our independent registered public accounting firm regarding, among other things, financial risks and the risk of fraud.  Our management development and compensation committee receives management’s assessments on the likelihood that our compensation policies and practices could have a material adverse effect on us, as more fully described in “Compensation of Executive Officers and Directors and Other Information—Compensation Policies and Practices as They Relate to Risk Management.”  The audit committee and management development and compensation committee report to the board of directors about their meetings. We believe the leadership structure of the board of directors is appropriate for our risk oversight.

 

Identifying and Evaluating Director Nominees

 

Historically, our management has recommended director nominees to the board of directors.  As stated in our corporate governance guidelines:

 

·	our board of directors has no specific minimum qualifications for director nominees;

 

·	each nominee should possess the necessary business background, skills and expertise at the policy-making level and a willingness to devote the required time to the duties and responsibilities of membership on the board of directors; and

 

 

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·	the board of directors believes that experience as our  director is a valuable asset and that directors who have served on the board for an extended period of time are able to provide important insight into our operations and future.

 

In identifying, evaluating and determining our director nominees, the board of directors follows such corporate governance guidelines.  The board also considers the nominee’s ability to satisfy the need, if any, for required expertise on the board of directors or one of its committees.  While we do not have any policy regarding the diversity of our nominees, the board does consider the diversity in the background, skills and expertise at the policy making level of our director nominees, and as a result our board believes our director nominees do possess a diverse range of senior management experience that aids the board in fulfilling its responsibilities.  The board of directors believes its procedures for identifying and evaluating director nominees are appropriate for a controlled company under the N YSE listing standards.

 

Leadership Structure of the Board Of Directors and Non-Management and Independent Director Meetings

 

As discussed before, Harold C. Simmons serves as our chairman of the board and Steven L. Watson serves as our chief executive officer.  Pursuant to our amended and restated corporate governance guidelines, our independent directors are entitled to meet on a regular basis throughout the year, and will meet at least once annually, without the participation of our other directors who are not independent.  While we do not have a lead independent director, the chairman of our audit committee presides at all of the meetings of our independent directors.  The board of directors believes its leadership structure is appropriate because the board recognizes that while there is no single organizational structure that is ideal in all circumstances, the board believes that having different individuals serve as our chairm an of the board and as our chief executive officer provides an appropriate breadth of experience and perspective that effectively facilitates the formulation of our long-term strategic direction and business plans.  In addition, the board of directors believes that since Harold C. Simmons personally and indirectly through related entities may be deemed to be the beneficial holder of a majority of our outstanding stock, his service as our chairman of the board is beneficial in providing strategic leadership for us since there is a commonality of interest that is closely aligned in building long-term shareholder value for all of our stockholders.  In 2009, we complied with the NYSE requirements for meetings of our non-management directors (who are the following directors who are not one of our executive officers:  Keith R. Coogan, Cecil H. Moore, Jr., George E. Poston, Glenn R. Simmons and R. Gerald Turner) and independent directors.

 

Compensation Committee Interlocks and Insider Participation

 

As discussed above, for 2009 the management development and compensation committee was composed of R. Gerald Turner, Keith R. Coogan and George E. Poston.  No member of the committee:

 

·	was an officer or employee of ours during 2009 or any prior year;

 

·	had any related party relationships with us that requires disclosure under applicable SEC rules; or

 

·	had any interlock relationships under applicable SEC rules.

 

For 2009, no executive officer of ours had any interlock relationships within the scope of the intent of applicable SEC rules.  However, our chairman of the board and vice chairman of the board are on the board of directors of Contran and Contran employs each of them and Glenn R. Simmons, who each serve as one of our directors.

 

Code of Business Conduct and Ethics

 

We have adopted a code of business conduct and ethics.  The code applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer and controller.  Only the board of directors may amend the code.  Only our audit committee or other committee of the board of directors with specifically delegated authority may grant a waiver of this code.  We will disclose amendments to or waivers of the code as required by law and the applicable rules of the NYSE.

 

 

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Corporate Governance Guidelines

 

We have adopted corporate governance guidelines to assist the board of directors in exercising its responsibilities.  Among other things, the corporate governance guidelines provide for director qualifications, for independence standards and responsibilities, for approval procedures for ISAs and that our audit committee chairman presides at all meetings of the independent directors.

 

Availability of Corporate Governance Documents

 

A copy of each of our audit committee charter, code of business conduct and ethics and corporate governance guidelines is available on our website at www.kronosww.com under the corporate governance section in accordance with NYSE listing standards.  See “Where You Can Find More Information.”

 

COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS AND OTHER INFORMATION

 

Compensation Discussion and Analysis

 

This compensation discussion and analysis describes the key principles and factors underlying our executive compensation policies for our named executive officers.  We employed two of our named executive officers in each of the last three years.  The rest of our named executive officers who provided their services to us in the last three years under our ISA with Contran were employed and compensated directly by Contran.  The phrase “named executive officers” refers to the five persons whose compensation is summarized in the Summary Compensation Table in this prospectus.  Such phrase is not intended, and does not, refer to all of our executive officers.

 

Compensation of Our Named Executive Officers Employed By Us

 

In each of the last three years, we employed the following named executive officers:

 

Name	Position(s)
Douglas C. Weaver	Chairman of the Executive Management Committee
Ulfert Fiand	Vice Chairman of the Executive Management Committee and Chief Technology Officer

Overview.  Prior to 2007, we decided to forego long-term compensation (other than defined benefit and contribution retirement plans), and implemented a compensation program that is primarily cash-based, with minimal perquisites.  Our objectives for the primarily cash-based compensation program as it relates to our named executive officers employed by us are to:

 

·	have a total individual compensation package that is easy to understand; and

 

·	achieve a balanced compensation package that would attract and retain highly qualified executive officers and appropriately reflect each such officer’s individual performance, contributions and general market value.

 

As a result, annual compensation for our named executive officers employed by us primarily consists of base salaries and bonuses.

 

As previously disclosed, for 2008 and prior years, we paid segment profit bonuses to our key employees, including our employed named executive officers, based on our achieving annual predetermined levels of segment profit.  Given the market and economic conditions that confronted us for 2009 and upon management’s recommendation, our management development and compensation committee:

 

·	determined that establishing target levels of segment profit for segment profit bonuses for 2009 would not be appropriate; and

 

 

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·

authorized senior management in the first quarter of 2010 to perform an evaluation of all relevant factors affecting us, determine whether or not it would be appropriate to pay discretionary incentive bonuses for 2009, and if so in what amounts, and then pay such appropriate amounts, if any, to our key employees, including our employed named executive officers.

 

For each of the last three years for compensation not based upon achieving certain predetermined levels of segment profit, we considered our financial performance as one factor, without any specific weighing of this factor, in determining the compensation to be paid to our named executive officers employed by us.  We determined the amount of each component of such compensation solely in our collective business judgment and experience, without performing any independent market research.  We have not entered into any written employment agreements with our employed named executive officers other than for Dr. Fiand.  Pursuant to European law, we provide all our employees in Europe, including Dr. Fiand, with written documentation of the essential aspects of their employment relationship with us including their ba se compensation, notice periods and pension program.

 

Base Salaries.  We have established the annual base salaries for our employed named executive officers on a position-by-position basis based on responsibility and experience.  We pay this portion of each of our employed named executive officer’s compensation to provide him with a reliable amount of compensation for the year, subject to his continued at-will employment and satisfactory performance for his services at the level of his responsibilities.  Based on the recommendation of our chief financial officer, our chief executive officer approved any annual adjustments to the salaries of our employed named executive officers.  These salary adjustments were subsequently reported to our management development and compensation committee.&# 160; All of these recommendations and the determinations are based on:

 

·

our evaluations of the past year annual base-salary amounts with adjustments made as a result of our past and expected future financial performance, inflation, past and potential future individual performance and contributions or alternative career opportunities that might be available to our named executive officers employed by us, although we do not have any specific formula for applying these factors; and

 

·	our collective business judgment and experience, without performing any independent market research.

 

In the first quarter of 2007 and 2008, our chief executive officer approved an increase in the base salary of Dr. Fiand of approximately 2.4% and 2.1%, respectively.  In the first quarter of 2009, we instituted a general salary freeze for certain of our employees, including all of our named executive officers employed by us.  The salary freeze was subject to certain exceptions such as, among other things, requirements of local law and union agreements or promotions or realignments of responsibilities.  In this regard, in the fourth quarter of 2009 our chief executive officer approved an increase in Mr. Weaver’s salary due to a significant increase in his responsibilities.

 

We did not utilize any specific measure of, or formula based upon, our financial performance in determining the amount of these increases.  We do consider our financial performance as one factor, without any specific weighting of this factor, in determining these increases.  These salaries for our named executive officers employed by us are disclosed in their salary column in the 2009 Summary Compensation Table under “Compensation of Executive Officers and Directors and Other Information—Summary of Cash and Certain Other Compensation of Executive Officers.”

 

Discretionary Incentive Bonuses For 2009.  As discussed, given the market and economic conditions that confronted us for 2009 and upon management’s recommendation, our management development and compensation committee determined that establishing target levels of segment profit for segment profit bonuses for 2009 would not be appropriate.  As also recommended by management, the committee authorized senior management in the first quarter of 2010 to:

 

·	evaluate all relevant factors at that time, such as our actual results achieved for 2009 and financial condition and liquidity and the level of performance of our key employees, including our employed named executive officers;

 

 

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·	determine whether or not it would be appropriate to pay discretionary incentive bonuses for 2009 and if so in what amounts; and

 

·	pay such discretionary incentive bonuses in the amounts senior management determines to be appropriate, if any.

 

For 2009, after considering all relevant factors, and based on the recommendation of our chief financial officer, our chief executive officer approved the payment of discretionary incentive bonuses in cash to our key employees, including each of our employed named executive officers.  We paid these bonuses in order to, among other things, reward each key employee for his performance in 2009 and motivate him to achieve higher levels of performance in attaining our corporate goals.  In considering whether it would be appropriate to pay discretionary incentive bonuses for 2009, and in what amounts, our chief executive officer performed a discretionary evaluation of all relevant factors, such as our actual results achieved for 2009, our financial condition and liquidity and the responsibility, performance, attitude and po tential of each of our key employees, including our employed named executive officers.  The payment of these bonuses was spread over two equal payments during 2010, one-half in March 2010 and the other half in September 2010.  Management gave a report to our management development and compensation committee on the 2009 discretionary incentive bonuses that we paid.

 

In determining the amount of the discretionary incentive bonuses for 2009 paid to our employed named executive officers, we did not utilize any specific overall performance measures or any specific measure of, or formula based upon, our financial results.  As already discussed, however, we did consider our overall financial performance as one factor in determining to pay such bonuses.  Additionally, we used no specific weighting of factors in the determination of the 2009 discretionary incentive bonuses paid to our key employees, including our named executive officers employed by us.  These 2009 discretionary incentive bonuses for our named executive officers employed by us are disclosed in their bonus column in the 2009 Summary Compensation Table under “Compensation of Executive Officers and Directors and Other Information—Summary of Cash and Certain Other Compensation of Executive Officers.”

 

If we pay any bonuses for 2010 to our key employees, including our employed named executive officers, they will also be determined on a similar discretionary basis as 2009.

 

Segment Profit Bonuses for 2007 and 2008.  For 2007 and 2008, we paid segment profit bonuses to our key employees, including our employed named executive officers, to motivate them to achieve higher levels of performance in attaining our corporate goals and reward them for such performance.  The segment profit bonuses paid for 2007 and 2008 under our Share-in-Performance Plan constituted a significant portion of the annual cash compensation for our employed named executive officers.  As discussed, such bonuses were based on our achieving annual predetermined levels of segment profit.  For purposes of this plan, segment profit was defined as income before taxes, interest expense and certain general corporate items.  The general corpo rate items excluded from segment profit included corporate expenses and interest income not attributable to our titanium dioxide operations.  We used segment profit to determine these bonuses because segment profit was how we assessed the performance of our titanium dioxide operations.

 

In the first quarter of 2007 and 2008, our chief financial officer made recommendations to our board of directors regarding our business plan for the year after reviewing market conditions and our operations, competitive position, marketing opportunities and strategies for maximizing financial performance.  Our board of directors approved our business plan with such modifications as it deemed appropriate, if any.

 

For 2007 and 2008 and based on the recommendations of our chief financial officer, our chief executive officer determined the three levels of segment profit that management recommended to our management development and compensation committee.  These three levels were a threshold, target and maximum.  Pursuant to the Share-in-Performance Plan, if segment profits fell below the minimum level (or a reduced level entitling the participant to a reduced minimum level bonus), we would not pay any segment profit bonus.  We paid target level bonuses if we achieved at, around or in excess of the target level but not the maximum level.  The maximum level bonus was paid only if we achieved segment profit at or above the maximum level.  The amount of segment profit we used to determine the amount of t he segment profit bonuses paid was generally the amount of segment profit we reported for financial reporting purposes.  However, in its discretion, the committee could make adjustments to the amount of segment profit we reported for financial reporting purposes in order to determine the segment profit used for purposes of paying the segment profit bonuses.

 

 

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For 2007 and 2008, the target level was set at the segment profit projected by the applicable business plan.  The threshold level was generally set in a range around $40 million lower than the target level.  The maximum level was generally set in a range from $50 to $65 million higher than the target level.  In considering where to set the threshold and maximum levels, we considered the absolute dollar amount of the target level, the key assumptions inherent in the business plan and our expectations regarding the potential of achieving our business plan.  The key assumptions inherent in our business plan related to the level of our titanium dioxide selling prices and sales and production volumes, changes in our manufacturing costs and relative levels of foreign currency exchange rates.  W e annually determined these ranges solely in our collective business judgment and experience, without applying any formulas, specific weighting of factors or performing any independent market research.  For 2007 and 2008, we set the segment profit levels with an expectation that we would pay bonuses based on the target level.  The segment profit levels were then presented to our management development and compensation committee.  The committee considered the recommended levels and approved them.

 

For 2007 and 2008, our management development and compensation committee approved in the first quarter of the year, based on management’s recommendation, the following segment profit levels:

 

	Segment Profit Level
Year	Threshold	Target	Maximum
2008	$40 million lower than the target level	Segment profit set by the 2008 business plan	$65 million higher than the target level
2007	$41 million lower than the target level	Segment profit set by the 2007 business plan	$54 million higher than the target level

Based on management’s recommendation and in order to lessen the effect of certain uncontrollable events that might affect performance under the business plan, the committee also approved the payment of reduced target level bonuses if we were to achieve segment profit at the following amounts but not achieve the target level, each of which target level bonuses would be reduced by the pro rata amount by which the achieved segment profit was less than the target level:

 

Year	Minimum Approximate Percentage of the Target Level that Would Entitle a Participant to a Prorated Reduced Target Level Bonus
2008	70%
2007	85%

In the first quarter of 2009, we determined that the 2008 segment profit we achieved for purposes of determining segment profit bonuses was 80% of the target level, which was in excess of the 70% minimum of the target level that the committee had determined would entitle a participant to a prorated reduced target level bonus.  Therefore, the committee approved the payment of bonuses for 2008 at a level that approximated 80% of each target level bonus.

 

As compared to the award of bonuses for 2008, the committee awarded bonuses for 2007 in its discretion upon determining that our 2007 segment profit was approximately 83% of the target level.  Such segment profit was less than the pre-approved minimum 85% that would have otherwise entitled the participants to a reduced prorated target level bonus and would have resulted in the payment of bonuses at the threshold level.  However, in determining to use its discretion to adjust the amount of bonuses paid for 2007, the committee considered certain factors that prevented us from achieving our 2007 business plan as well as the fact that for 2008 the committee had approved the payment of reduced target level bonuses if we were to achieve segment profit at 70% or higher of the target level but not achieve the target level.
60; For further comparative purposes, in 2006 we achieved segment profit at the target level and we granted segment profit bonuses at that level.

 

 

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For 2007 and 2008, the actual amount of the segment profit bonus paid to each participant as a percentage of his or her base salary was determined by using a pre-established payment matrix that did not change from year to year.  The factors that determined the percentage in the payment matrix that was used to determine the bonus were:

 

·	the participant’s individual performance rating;

 

·	the participant’s responsibility and experience level; and

 

·	the segment profit achieved.

 

If applicable, the resulting segment profit bonus amount was adjusted in the event of a prorated reduced target level bonus.  For each of 2007 and 2008, our chief financial officer determined the performance rating of our employed named executive officers in the first quarter of the following year in consultation with their immediate supervisor.

 

As a function of the segment profit achieved for each of 2007 and 2008 and the payment matrix, Dr. Fiand received the segment profit bonus set forth next to his name in the non-equity incentive plan compensation column of the 2009 Summary Compensation Table under “Compensation of Executive Officers and Directors and Other Information—Summary of Cash and Certain Other Compensation of Executive Officers.”

 

Defined Benefit Plans.  Historically, we offered pension plan benefits to our employees, including our employed named executive officers.  However, to reduce our pension liabilities and promote retirement savings through defined contribution plans or as similar a plan as foreign jurisdictions may allow:

 

·	in 1996, we suspended all future accruals under our domestic pension plan and closed the plan to new participants; and

 

·	we closed participation in the Bayer Pensionskasse defined benefit pension plan to employees hired by our German operations on or after January 1, 2005.

 

Mr. Weaver participates in the domestic pension plan.  Dr. Fiand participates in the Bayer Pensionskasse and is the only employed named executive officer who participates in a pension plan that continues to accrue benefits on behalf of its participants.  The increase or decrease for financial statement reporting purposes in the actuarial present value of accumulated pension benefits under these plans for Dr. Fiand for each of the last three years and for Mr. Weaver for 2009, is disclosed in their change in pension value and nonqualified deferred compensation earnings column (or related footnote) in the 2009 Summary Compensation Table under “Compensation of Executive Officers and Directors and Other Information—Summary of Cash and Certain Other Compensation of Executive Officers” for the applicable ye ar.

 

Historically, we offered non-qualified, unfunded, defined benefit supplemental retirement plans to our executive officers to compensate them for certain income restrictions that affected their participation level under our pension plans.  Prior to 2007, we terminated these supplemental retirement plans for our domestic employees.  Currently, Dr. Fiand is the only named executive officer that continues to accrue benefits under such a supplemental plan.  Dr. Fiand’s supplement defined benefit compensation is provided by the Supplemental Pension Promise and the Individual Pension Promise provided by our German operations.  The increase or decrease for financial statement reporting purposes in the actuarial present value of Dr. Fiand’s accumulated benefit under these supplemental plans for each of the last three years is disclosed in his change in pension value and nonqualified deferred compensation earnings column (or related footnote) in the 2009 Summary Compensation Table under “Compensation of Executive Officers and Directors and Other Information—Summary of Cash and Certain Other Compensation of Executive Officers” for the applicable year.

 

 

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See “—Summary of Cash and Certain Other Compensation of Executive Officers—Pension Benefits” for descriptions of each of these plans and additional information regarding Dr. Fiand’s and Mr. Weaver’s benefits under them.

 

Defined Contribution Plans.  To promote retirement savings for our employees, we pay annual contributions to our domestic employees, including one of our employed named executive officers, under our savings plan, which is a 401(k) defined contribution plan.  Our annual contributions to this plan consist of three components:  matching contributions pursuant to the savings feature of the plan, retirement contributions and transition contributions.  We added the retirement and transition contribution features to the plan in 1996 when we terminated future accruals for our domestic employees under our defined benefit pension plan, as discussed above.

 

As previously disclosed for 2008 and prior years, the same segment profit levels approved by the management development and compensation committee with respect to the Share-in-Performance Plan determined the amount of the matching contribution we made to a participant’s account under our savings plan.  Beginning in 2009, the amount (if any) of the matching contribution was determined by our chief executive officer, after consultation with our chief financial officer, on a discretionary basis.  In the first quarter of 2010, and based upon the recommendation of our chief financial officer, our chief executive officer approved the payment of a discretionary matching contribution to each participant’s account under our savings plan at 25% of the  participant’s contributions for the plan year up to 8% of the participant’s annual eligible compensation as defined in the plan.  We considered our financial performance and the desire to motivate the participants to save for their retirement as two factors, without any specific weighting of any factors, in making this discretionary determination.  Our management development and compensation committee then received a general report from management on the 2009 matching contribution we paid under our savings plan.  If we pay any discretionary matching contributions to the participants in our savings plan for 2010, the matching contributions will be determined on a similar discretionary basis as 2009.

 

We also annually make:

 

·	retirement contributions to a participant’s account under the savings plan equal to 4% of the participant’s annual eligible compensation as defined in the plan; and

 

·	transition contributions for participants actively employed by us on April 1, 1996.

 

The transition contributions are a function of each participant’s compensation, age and years of service on April 1, 1996.  Each participant who receives these annual contributions has a different formula for determining the contribution.  The formula for Mr. Weaver is 4.0% of his annual eligible compensation as defined in the plan.

 

Mr. Weaver received all of these contributions for 2009 under the savings plan, which are included in his all other compensation column in the 2009 Summary Compensation Table under “Compensation of Executive Officers and Directors and Other Information—Summary of Cash and Certain Other Compensation of Executive Officers.”

 

Equity-Based Compensation.  Prior to 2007, we decided to forego the grant of any equity compensation to our employees, although we continue to grant annual awards of stock to our directors as a portion of their annual retainers, including our chairman of the board and chief executive officer.  We also do not have any security ownership requirements or guidelines for our management or directors.  We do not currently anticipate any equity-based compensation will be granted in 2010, other than the annual grants of stock to our directors.  See “Compensation of Executive Officers and Directors and Other Information—Board Compensation” and the 2009 Grant of Plan-Based Awards under “Compensation of Executive Officers and Dire ctors and Other Information—Summary of Cash and Certain Other Compensation of Executive Officers” for a discussion of these annual grants and the method by which the amount of such stock awards are determined.  The dollar amount of stock awards appearing in the 2009 Summary Compensation Table under “Compensation of Executive Officers and Directors and Other Information—Summary of Cash and Certain Other Compensation of Executive Officers” represents the value recognized for financial statement reporting purposes of shares of our common stock we granted to Messrs. Harold Simmons and Watson in each of the last three years for their director services.

 

 

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Perquisites and Other Personal Benefits.  In each of the last three years, we paid certain perquisites or other personal benefits to our named executive officers employed by us.  For each of the last three years, we paid annual automobile expenses for Dr. Fiand and life insurance for our domestic named executive officers employed by us.  The cost of these perquisites and other personal benefits for each of our employed named executive officers is included in his all other compensation column of the 2009 Summary Compensation Table under “Compensation of Executive Officers and Directors and Other Information—Summary of Cash and Certain Other Compensation of Executive Officers.”

 

Compensation of Our Named Executive Officers Employed By Contran

 

For each of the last three years, we paid Contran a fee for services provided pursuant to our ISA with Contran, which fee was approved by our independent directors after receiving the recommendation of our management development and compensation committee and the concurrence of our chief financial officer.  Such services provided under this ISA included the services of our current executive officers employed by Contran, including certain of our named executive officers, and as a result a portion of the aggregate ISA fee we pay to Contran is paid for services provided to us by such named executive officers.  Our current executive officers employed by Contran who provide services to us pursuant to our ISA with Contran are as follows:

 

Name	Position(s) with Kronos Worldwide
Harold C. Simmons	Chairman of the Board
Steven L. Watson	Vice Chairman of the Board and Chief Executive Officer
Robert D. Graham	Executive Vice President and General Counsel
Gregory M. Swalwell	Executive Vice President and Chief Financial Officer
Tim C. Hafer	Vice President and Controller
Kelly D. Luttmer	Vice President and Tax Director
John A. St. Wrba	Vice President and Treasurer

The nature of the duties of each of our named executive officers who are employees of Contran is consistent with the duties normally associated with the officer titles and positions such officer holds with us.  Other than Mr. Hafer, each of these persons also serves as an executive officer of Contran.

 

The charge under this ISA reimburses Contran for its cost of employing the personnel who provide the services by allocating such cost to us based on the estimated percentage of time such personnel were expected to devote to us over the year.  The amount of the fee we paid for each year under this ISA for a person who provided services to us represents, in management’s view, the reasonable equivalent of “compensation” for such services.  See “Certain Relationships and Transactions—Intercorporate Services Agreements” for the aggregate amount we paid to Contran in 2009 under this ISA.  Under the various ISAs among Contran and its subsidiaries, we share the cost of the employment of our named executive officers employed by Contran with Contran and certain of its other publicly and privately held subsidiaries.  For our named executive officers employed by Contran, the portion of the annual charge we paid for each of the last three years to Contran under this ISA attributable to each of their services is set forth in footnote 2 to the 2009 Summary Compensation Table under “Compensation of Executive Officers and Directors and Other Information—Summary of Cash and Certain Other Compensation of Executive Officers.”  Footnote 2 also sets forth the cash fees we paid to each of Messrs. Simmons and Watson for their director services.  The amount charged under the ISA and the cash director fees are not dependent upon our financial performance.  As discussed further below, the amount charged under the ISA is a function of Contran’s cost of employing or engaging the personnel who provide the services to us (including the services of our named executive officers employed by Contran) by allocating such cost to us based o n the estimated percentage of time such personnel were expected to devote to us over the year.

 

We believe the cost of the services received under our ISA with Contran, after considering the quality of the services received, is fair to us and is no less favorable to us than we could otherwise obtain from an unrelated third party for comparable services, based solely on our collective business judgment and experience without performing any independent market research.

 

 

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In the early part of each year, Contran’s senior management, including certain of our named executive officers, estimates the percentage of time that each Contran employee, including certain of our named executive officers, is expected to devote in the upcoming year to Contran and its subsidiaries, including us.  Contran’s senior management then allocates Contran’s cost of employing each of its employees among Contran and its various subsidiaries based on such estimated percentages.  Contran’s aggregate cost of employing each of its employees comprises:

 

·	the annualized base salary of such employee at the beginning of the year;

 

·	an estimate of the bonus Contran will pay or accrue for such employee (other than bonuses for specific matters) for the year, using as a reasonable approximation for such bonus the actual bonus that Contran paid or accrued for such employee in the prior year; and

 

·

Contran’s portion of the social security and medicare taxes on such base salary and an estimated overhead factor (17% for 2009 as compared to 17% for 2008 and 19% for 2007) applied to the base salary for the cost of medical and life insurance benefits, unemployment taxes, disability insurance, defined benefit and defined contribution plan benefits, professional education and licensing and costs of providing an office, equipment and supplies related to providing such services.

 

The overhead factor declined in 2008 as compared to 2007 as a result of Contran achieving additional economies of scale and being able to spread the fixed costs included in determining the overhead factor over a greater number of employees providing services under various ISAs.  Contran’s senior management subsequently made such adjustments to the details of the proposed ISA charge as they deemed necessary for accuracy, overall reasonableness and fairness to us.

 

In the first quarter of each year, the proposed charge for that year under our ISA with Contran was presented to our management development and compensation committee, and the committee considered whether to recommend that our board of directors approve the ISA charge.  Among other things during such presentation, the committee was informed of:

 

·	the quality of the services Contran provides to us, including the quality of the services certain of our executive officers provide to us;

 

·	the $1.0 million charge to us for the services of Harold C. Simmons as our chairman of the board;

 

·	the comparison of the ISA charge and number of full-time equivalent employees reflected in the charge by department for the prior year and proposed for the current year;

 

·	the comparison of the prior year and proposed current year charges by department and in total and such amounts as a percentage of Contran’s similarly calculated costs for its departments and in total for those years;

 

·	the comparison of the prior year and proposed current year average hourly rate; and

 

·	the concurrence of our chief financial officer as to the reasonableness of the proposed charge.

 

In determining whether to recommend that the board of directors approve the proposed ISA fee, the management development and compensation committee considers the three elements of Contran’s cost of employing the personnel who provide services to us, including the cost of employing certain of our named executive officers, in the aggregate and not individually.  After considering the information contained in such presentations, and following further discussion and review, our management development and compensation committee recommended that our board of directors approve the proposed ISA fee after concluding that:

 

·	the cost to employ the additional personnel necessary to provide the quality of the services provided by Contran would exceed the proposed aggregate fee to be charged by Contran to us under our ISA with Contran; and

 

 

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·	the cost for such services would be no less favorable than could otherwise be obtained from an unrelated third party for comparable services.

 

In reaching its recommendation, our management development and compensation committee did not review:

 

·	any ISA charge from Contran to any other publicly-held parent or sister company, although such charge was separately reviewed by the management development and compensation committee of the applicable company; and

 

·	the compensation policies of Contran or the amount of time our named executive officers employed by Contran are expected to devote to us because:

 

o	each of our named executive officers employed by Contran provides services to many companies related to Contran, including Contran itself;

 

o	the fee we pay to Contran under our ISA with Contran each year does not represent all of Contran’s cost of employing each of such named executive officers;

 

o	Contran and these other companies related to Contran absorb the remaining amount of Contran’s cost of employing each of such named executive officers; and

 

o	the members of our management development and compensation committee consider the other factors discussed above in determining whether to recommend that the proposed ISA fee for each year be approved by the full board of directors.

 

Based on the recommendation of our management development and compensation committee as well as the concurrence of our chief financial officer, our independent directors approved the proposed annual ISA charge effective January 1, 2009, with our other directors abstaining.

 

For financial reporting and income tax purposes, the ISA fee is expensed as incurred on a quarterly basis.  Contran has implemented a limit of $1.0 million on any individual’s charge to a publicly-held company in order to enhance the deductibility by the company of the charge for tax purposes under Section 162(m) of the Internal Revenue Code of 1986, if such section were to be deemed applicable.  Section 162(m) generally disallows a tax deduction to publicly-held companies for non-performance based compensation over $1.0 million paid to the company’s chief executive officer and four other most highly compensated executive officers. Because of this policy, the portion of the aggregate ISA fee we paid to Contran in each of the last three years that is attributable to the services of Harold C. Simmons has bee n limited to such $1.0 million amount.

 

Deductibility of Compensation.  It is our general policy to structure the performance-based portion of the compensation of our executive officers, if any, in a manner that enhances our ability to deduct fully such compensation under Section 162(m) of the Internal Revenue Code.

 

Compensation Committee Report.  The management development and compensation committee has reviewed with management the Compensation Discussion and Analysis above.  Based on the committee’s review and a discussion with management, the committee recommended to the board of directors that our compensation discussion and analysis be included in this prospectus.

 

The following individuals, in the capacities indicated, hereby submit the foregoing report.

 

R. Gerald Turner	Keith R. Coogan	George E. Poston
Chairman of our Management Development and Compensation Committee	Member of our Management Development and Compensation Committee	Member of our Management Development and Compensation Committee

 

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Summary of Cash and Certain Other Compensation of Executive Officers

 

The 2009 Summary Compensation Table below provides information concerning compensation we and our subsidiaries paid or accrued for services rendered during the last three years by our chief executive officer, chief financial officer and each of the three other most highly compensated individuals (in certain instances, based on ISA charges to us) who were our executive officers at December 31, 2009.  Messrs. Harold C. Simmons, Steven L. Watson and Gregory M. Swalwell were employees of Contran for the last three years and provided their services to us and our subsidiaries pursuant to our  ISA with Contran.  For a discussion of this ISA, see “Certain Relationships and Related transactions—Intercorporate Services Agreements.”

 

2009 SUMMARY COMPENSATION TABLE (1)

 

Name and Principal Position	Year	Salary		Bonus		Stock Awards		Non-Equity Incentive Plan Compensation		Change in Pension Value and Nonqualified Deferred Compensation Earnings		All Other Compensation		Total
Harold C. Simmons	2009	$1,023,000	(2)	$       0		$11,880	(3)	$          0		$           0		$         0		$1,034,880
Chairman of the Board	2008	1,022,000	(2)	0		11,985	(3)	0		0		0		1,033,985
	2007	1,022,000	(2)	0		15,120	(3)	0		0		0		1,037,120
Steven L. Watson	2009	693,000	(2)	0		11,880	(3)	0		0		0		704,880
Vice Chairman of the	2008	611,900	(2)	0		11,985	(3)	0		0		0		623,885
Board and Chief Executive Officer	2007	513,800	(2)	0		15,120	(3)	0		0		0		528,920
Douglas C. Weaver (4)	2009	257,625		150,000	(5)	0		0		35,632	(6)	29,392	(7)	472,649
Chairman of the
Executive Management Committee
Ulfert Fiand (8)	2009	310,664		139,310	(5)	0		0		24,069	(10)	14,318	(11)	488,361
Vice Chairman of the	2008	320,999		0		0		158,225	(9)	10,181	(10)	14,918	(11)	504,323
Executive Management Committee and Chief Technology Officer	2007	287,679		0		0		162,809	(9)	0		12,241	(11)	462,729
Gregory M. Swalwell	2009	272,400	(2)	0		0		0		0		0		272,400
Executive Vice	2008	272,400	(2)	0		0		0		0		0		272,400
President and Chief	2007	218,800	(2)	0		0		0		0		0		218,800
Financial Officer

__________________

 

(1)	Certain non-applicable columns have been omitted from this table.

 

(2)

The amounts shown in the 2009 Summary Compensation Table as salary for each of these named executive officers include the portion of the fees we paid to Contran pursuant to our ISA with Contran with respect to the services such officer rendered to us and our subsidiaries.  The ISA charges disclosed for Contran employees who perform executive officer services to us and our subsidiaries are based on various factors described in “—Compensation Discussion and Analysis,” including without limitation the estimated percentage of time such individual were expected to devote to us and our subsidiaries.  Our management development and compensation committee considers the factors described in “—Compensation Discussion and Analysis” in determining whether to recommend that the board of directors approve the aggregate proposed ISA fee with Contran.  The amount sh own in the table as salary for Messrs. Simmons and Watson also includes director cash compensation we paid to each of them for each of the last three years.  The components of salary shown in the 2009 Summary Compensation Table for each of these named executive officers are as follows:

 

 

 

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	2007		2008		2009
Harold C. Simmons
Contran ISA Fee	$1,000,000		$1,000,000		$1,000,000
Director Fees Earned or Paid in Cash	22,000		22,000		23,000
	$1,022,000		$1,022,000		$1,023,000
Steven L. Watson
Contran ISA Fee	$     490,800	(a)	$     588,900	(a)	$     670,000	(a)
Director Fees Earned or Paid in Cash	23,000		23,000		23,000
	$     513,800		$     611,900		$     693,000
Gregory M. Swalwell
Contran ISA Fee	$     218,800	(a)	$     272,400	(a)	$     272,400	(a)

 

(a)           Includes amounts allocated to KII under the ISA between us and Contran.

 

(3)

Stock awards to these named executive officers in the last three years consisted of shares of our common stock we granted to Messrs. Simmons and Watson for their director services.  See the 2009 Grants of Plan-Based Awards Table below for more details regarding the 2009 grants.  The 2008 and 2007 grants consisted of the following:

 

Shares of our Common Stock	Date of Grant	Closing Price on Date of Grant	Grant Date Value of Shares of our Common Stock
500	May 15, 2008	$23.97	$11,985
500	May 17, 2007	$30.24	$15,120

These stock awards were valued at the closing price of a share of our common stock on the date of grant, consistent with the requirements of Financial Accounting Standards Board Accounting Standards Codification Topic 718.

 

(4)	2009 was Mr. Weaver’s first year as a named executive officer.

 

(5)	Represents a discretionary incentive bonus we paid to this named executive officer for 2009.  See our discussion of the discretionary bonuses in “—Compensation Discussion and Analysis.”

 

(6)

Represents the change from December 31, 2008 to December 31, 2009 in the actuarial present value of Mr. Weaver’s accumulated benefit under our domestic pension plan.  Mr. Weaver’s pension benefits consist of a guaranteed annuity that he earned prior to 1987 and pension benefits earned subsequently.  Based on his age, he is currently eligible to retire and receive his benefits under the plan without reducing his benefits for age, but under the terms of the plan he cannot start to receive his benefits until he actually retires.  For purposes of calculating the change in the present value of his accumulated benefit under this plan from one year to the next, we assumed the following (actual benefits will be based on actual future facts and circumstances):

 

·	his retirement at December 31, 2008 and 2009, respectively, since at both dates he was eligible to retire without reducing his benefits;

 

·	the commencement of the payments of his benefits under this plan at December 31, 2008 and 2009, respectively, since he is eligible to retire without reducing his benefits;

 

·	the choice of a single life annuity as the method to receive payments under the plan commencing at December 31, 2008 and 2009, respectively;

 

 

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·	the choice of a life lump sum payment for his accrued pension benefits he earned from age 65 to December 31, 2008 and 2009, respectively, plus interest;

 

·	payments continuing for his life expectancy derived from a mortality table; and

 

·	discount rates for present value calculations at December 31, 2008 and 2009 of 6.1% and 5.7%, respectively, which rates are the same rates we used for financial statement reporting purposes in determining the present value of our aggregate accumulated benefits for all participants under this plan.

 

(7)	As shown below, all other compensation for Mr. Weaver consisted of the following payments for his benefit:

 

·	matching contributions pursuant to the savings feature of our savings plan;

 

·	retirement contributions pursuant to our savings plan;

 

·	transition payments paid pursuant to our savings plan; and

 

·	life insurance premiums.

 

Named Executive Officer	Year		Savings Plan Match				Savings Plan Retirement Contributions				Savings Plan Transition Contributions				Life Insurance Premiums (a)				Total
Douglas C. Weaver	2009		$	4,900			$	9,800			$	9,800			$	4,892			$	29,392

__________________

(a)

Under the terms of the life insurance policy provided by these premiums, Mr. Weaver was entitled to a cash surrender value of approximately $42,004 at December 31, 2009.

 

See the discussion of our savings plan contributions in “—Compensation Discussion and Analysis.”

 

(8)	Dr. Fiand receives his cash compensation in euros.  We report these amounts in the 2009 Summary Compensation Table above in U.S. dollars based on an average exchange rate of $1.3931, $1.4829 and $1.3647 per €1.00 for 2009, 2008 and 2007, respectively.

 

(9)	Represents amounts we granted and awarded for services provided in the reported year pursuant to our Share-in-Performance Plan.  See our discussion of the segment profit bonuses in “—Compensation Discussion and Analysis.”

 

(10)	These amounts represent the following changes in the actuarial present value of Dr. Fiand’s accumulated benefit under the following plans for financial statement reporting purposes:

 

Year		Bayer Pensionskasse (a)				Supplemental Pension Promise (b)				Individual Pension Promise (c)				Total
2009		$	1,511			$	21,613			$	945			$	24,069
2008			12,167				3,499				(5,485	)			10,181
2007			(4,029	)			(8,891	)			(10,192	)			(23,112	)

__________________

(a)

A defined benefit pension plan for employees of our German operations.

 

(b)

A non-qualified, unfunded defined benefit supplemental retirement plan for employees of our German operations that supplements their pension benefits.

 

 

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(c)

A non-qualified, unfunded defined benefit supplemental retirement plan for certain highly compensated employees of our German operations that also supplements their pension benefits.

 

For purposes of calculating these changes in the present value of his accumulated benefits, we assumed the following (actual benefits will be based on actual future facts and circumstances):

 

·	his credited service and eligible earnings as of the measurement date for each fiscal year we used for financial statement reporting purposes for these plans would not change;

 

·	his retirement at December 31, 2008 and 2009, respectively, since he is eligible to retire without reducing his benefits;

 

·	the commencement of the payments of his benefits under these plans at December 31, 2008 and 2009, respectively, since he is eligible to retire without reducing his benefits;

 

·	payments continuing for his life expectancy derived from a mortality table; and

 

·

discount rates for present value calculations at December 31, 2007, 2008 and 2009 of 5.5%, 5.8% and 5.5%, respectively, which rates are the same rates we used for financial statement reporting purposes in determining the present value of our aggregate accumulated benefits for all participants under these plans.

 

Pursuant to SEC rules, we do not report any aggregate negative changes in this column, but instead disclose the negative change in this footnote.  For more details regarding these pension plan benefits, see “—Pension Benefits.”

 

(11)	Represents an annual car allowance we pay for the benefit of Dr. Fiand.

 

2009 Grants of Plan-Based Awards.  The following table sets forth details of the stock awards we granted to certain of our named executive officers in 2009 for their services as directors.  Other than such stock awards, and as already discussed, we did not pay any plan-based incentive compensation in 2009.  Messrs. Fiand, Weaver and Swalwell were not eligible to receive any of our plan-based awards in 2009.

 

2009 GRANTS OF PLAN-BASED AWARDS (1)

 

Name	Grant Date	Date of Approval		All Other Stock Awards:  Number of Shares of Stock or Units (#) (2)		Grant Date Fair Value of Stock and Option Awards (2)
Harold C. Simmons	05/14/09	01/01/04	(2)	1,500	(2)	$11,880	(2)
Steven L. Watson	05/14/09	01/01/04	(2)	1,500	(2)	11,880	(2)

 

(1)	Certain non-applicable columns have been omitted from this table.

 

(2)

As preapproved in 2004 by our management development and compensation committee, on the day of each of our annual stockholder meetings each of our directors elected on that day receives a grant of shares of our common stock under our 2003 Long-Term Incentive Plan as determined by the following formula based on the closing price of a share of the common stock on the date of such meeting.

 

 

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Range of Closing Price Per Share on the Date of Grant	Shares of Common Stock to Be Granted
Under $5.00	2,000
$5.00 to $9.99	1,500
$10.00 to $20.00	1,000
Over $20.00	500

These shares are fully vested and tradable immediately on the date of grant, other than restrictions under applicable securities laws.  For the purposes of this table and financial statement reporting, these stock awards were valued at the $7.92 closing price per share of our common stock on their date of grant, consistent with the requirements of Financial Accounting Standards Board Accounting Standards Codification Topic 718.

 

Outstanding Equity Awards at December 31, 2009.  We have never granted any stock options to purchase shares of our common stock.  The following table provides information with respect to the outstanding stock options to purchase shares of NL common stock held by our named executive officers as of December 31, 2009 that were granted for services they provided to us when we were a wholly owned subsidiary of NL.  Mr. Weaver and Dr. Fiand were the only named executive officers that held such stock options at December 31, 2009.

 

OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2009 (1)

 

		Option Awards
		Number of Shares Underlying Unexercised Options at December 31, 2009 (#)								Option Exercise Price			Option Expiration Date
Name		Exercisable				Unexercisable
Douglas C. Weaver			4,000	(2)			0			$	11.485		02/07/11
Ulfert Fiand			1,200	(2)			0				11.485		02/07/11

 

(1)	Certain non-applicable columns have been omitted from this table.

 

(2)	These stock options vested at a rate of 20% on each of the first five anniversary dates of the date of grant of the stock option, which date of grant was the tenth anniversary prior to the expiration date of the stock option.

 

Option Exercises and Stock Vested.  During 2009, no named executive officer held any stock awards that had not vested.  For stock awards granted to Messrs. Harold Simmons and Watson in 2009 that had no vesting restrictions, see the 2009 Grants of Plan-Based Awards Table above.  During 2009, the only named executive officer to exercise stock options was Douglas C. Weaver.  The value he realized upon the exercise of his stock option to purchase NL common stock in 2009 is set forth below.

 

2009 OPTION EXERCISES AND STOCK VESTED (1)

 

		Option Awards
Name		Number of Shares Acquired on Exercise (#)				Value Realized on Exercise
Douglas C. Weaver			3,000	(2)		$	16,395	(2)

__________________

 

(1)	Certain non-applicable columns have been omitted from this table.

 

(2)

NL granted this stock option to Mr. Weaver when we were a wholly owned subsidiary of NL.  This stock option was exercisable for NL common stock.  The value realized for this exercise is based on the difference between the closing sale price per share of the underlying NL common stock on the day of the exercise and the exercise price per share.

 

 

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Pension Benefits.  Dr. Fiand and Mr. Weaver are the only named executive officers who are eligible for pension benefits for which we are obligated to pay.  The following table sets forth, among other things, information regarding the actuarial present value of their accumulated pension benefits as of December 31, 2009.

 

2009 PENSION BENEFITS (1)

 

Name	Plan Name		Number of Years Credited Service				Present Value of Accumulated Benefit
Douglas C. Weaver	Retirement Program of NL Industries, Inc.			22			$	417,200	(2)
Ulfert Fiand	Bayer Pensionskasse			22			$	163,900	(3)
	Supplemental Pension Promise			22				332,300	(3)
	Individual Pension Promise			22				102,600	(3)
							$	598,800	(3)

(1)	Certain non-applicable columns have been omitted from this table.

 

(2)	We froze the credited service of all participants under this pension plan, including Mr. Weaver, in 1996.  For purposes of calculating the present value of Mr. Weaver’s accumulated benefit, we assumed the following (actual benefits will be based on future facts and circumstances):

 

·	his retirement at December 31, 2009, since he is eligible to retire without reducing his benefits at such date;

 

·	the commencement of the payments of his benefits under these plans at December 31, 2009, since he is eligible to retire without reducing his benefits;

 

·	the choice of a single life annuity as the method to receive payments under the plan commencing at December 31, 2009;

 

·	the choice of a life lump sum payment for his accrued pension benefits he earned from age 65 to December 31, 2009, plus interest;

 

·	payments continuing for his life expectancy derived from a mortality table; and

 

·	a discount rate for the present value calculation at December 31, 2009 of 5.7%, which rate is the same rate we used for financial statement reporting purposes in determining the present value of our aggregate accumulated benefits for all participants under this plan.

 

(3)

Dr. Fiand will receive his pension and supplemental pension benefits in euros.  We report these amounts in the table above in U.S. dollars based on an average exchange rate for 2009 of $1.3931 per €1.00.  For purposes of calculating the present values of his accumulated benefits, we assumed the following (actual benefits will be based on future facts and circumstances):

 

·	his credited service and eligible earnings as of December 31, 2009 (the last measurement date used for financial statement reporting purposes for these plans) would not change;

 

·	his retirement at December 31, 2009 since he is eligible to retire without reducing his benefits;

 

 

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·	the commencement of the payments of his benefits under these plans at December 31, 2009 since he is eligible to retire without reducing his benefits;

 

·	payments continuing for his life expectancy derived from a mortality table; and

 

·	a discount rate for the present value calculation at December 31, 2009 of 5.5%, which rate is the same rate we used for financial statement reporting purposes in determining the present value of our aggregate accumulated benefits for all participants under these plans.

 

Bayer Pensionskasse, Supplemental Pension Promise and Individual Pension Promise.  Employees of our German operations who have been employed since prior to January 1, 2005 are covered by the Bayer Pensionskasse.  Each employee contributes 2% of eligible earnings excluding bonus, up to the social security contribution ceiling (currently €66,000) and the Bayer Pensionskasse provides an annual benefit of 44% of such employee’s accumulated contributions (with a minimum benefit of approximately €13 per month).  The purpose of this plan is to provide funded, tax-qualified benefits up to the German social security contribution ceiling.

 

The Supplemental Pension Promise also covers all employees of the German operations who have completed ten years of service.  Our German operations accrue 11.25% of the participants’ eligible annual earnings excluding bonus in excess of the social security contribution ceiling, up to a maximum of €115,800.  The Supplemental Pension Promise provides an annual retirement benefit of 20% of all accruals made by our German operations.  The purpose of this plan is to provide participants with a benefit in excess of what would be provided under the Bayer Pensionskasse due to the German social security contribution ceiling.

 

The Individual Pension Promise covers each of the sixteen department heads of our German operations.  The Individual Pension Promise provides an annual retirement benefit of €6,135 to the sixteen department heads.  The purpose of this plan is to provide certain of our more highly compensated German employees with a benefit in excess of what would be provided under the Bayer Pensionskasse and the Supplemental Pension Promise due to the combined ceiling of €115,800 of those plans.

 

Dr. Fiand is eligible to receive a pension through the Bayer Pensionskasse, the Supplemental Pension Promise and the Individual Pension Promise.  Benefits for each of these plans are payable upon retirement and the attainment of ages specified in the plans.  In each case under these three plans, he is currently eligible to retire and receive unreduced benefits since he is already 60 years old.

 

Domestic Defined Benefit Pension Plan.  In 1996, we suspended all future accruals under our domestic defined benefit pension plan and closed the plan to new participants.  The pension benefits are payable upon retirement and attainment of ages specified in the plan.  Normal retirement is 65 years of age with five years of participation in the plan.  However, participants can retire at age 62 with 30 years of service with unreduced benefits.  After retirement, married participants, unless they choose otherwise with the consent of their spouse, receive a qualified joint and survivor annuity in exchange for a reduced benefit payout to the participant (as compared to the straight life annuity option).  The purpose of this plan was to provide funded, tax-qualified benefits up to specified statutory limits on compensation and benefits.  Generally, a participant’s years of credited service under the plan equals the years he or she has worked for us.  However, in certain instances, we adjusted such years of credited service on an ad hoc basis.  Mr. Weaver is the only named executive officer who participates in this plan.  He currently is eligible to retire and receive unreduced benefits under this plan (without any deviation from his actual service).

 

Nonqualified Deferred Compensation.  We do not owe any nonqualified deferred compensation to our named executive officers.

 

Compensation Policies and Practices As They Relate to Risk Management.  We believe that the risks arising from our compensation policies and practices are not reasonably likely to have a material adverse effect on us.  In reaching this conclusion, we considered the following:

 

 

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·	other than stock grants to our directors, we do not grant equity awards to our employees, officers or other persons who provide services to us under our ISA with Contran, which mitigates taking excessive or inappropriate risk for short-term gain that might be rewarded by equity compensation;

 

·

certain of our employees, including our executive officers employed by us, are eligible to receive incentive bonus payments determined on a discretionary basis that do not guarantee an employee a particular level of bonus based on the achievement of a specified performance or financial target, which also mitigates taking excessive or inappropriate risk for short-term gain;

 

·	our officers and other persons who provide services to us under our ISA with Contran do not receive compensation from us directly and are employed by Contran, one of our parent corporations, which aligns such officers and persons with the long-term interests of our stockholders;

 

·	since we are a controlled company, as previously discussed, management has a strong incentive to understand and perform in the long-term interests of our stockholders; and

 

·	our experience is that our employees are appropriately motivated by our compensation policies and practices to achieve profits and other business objectives in compliance with our oversight of material short and long-term risks.

 

For a discussion of our compensation policies and practices for our executive officers, see “—Compensation Discussion and Analysis.”

 

Board Compensation

 

Our directors are entitled to receive compensation for their services as directors.  Our directors receive an annual retainer of $20,000, paid in quarterly installments, plus a fee of $1,000 per day for attendance at meetings of the board of directors or its committees and at a daily rate ($125 per hour) for other services rendered on behalf of our board of directors or its committees.  In addition to the annual retainers for service on the board of directors, the chairman of our audit committee and any member of our audit committee whom the board identified as an “audit committee financial expert” for purposes of the annual prospectus receive an annual retainer of $20,000, paid in quarterly installments (provided that if one person serves in both capacities only one such retainer is paid), and other membe rs of our audit committee receive an annual retainer of $10,000, paid in quarterly installments, for their service on the audit committee.  Members of our management development and compensation committee also receive an annual retainer of $2,000, paid in quarterly installments, for their service on that committee.  If a director dies while serving on our board of directors, his designated beneficiary or estate will be entitled to receive a death benefit equal to the annual retainer then in effect.  We reimburse our directors for reasonable expenses incurred in attending meetings and in the performance of other services rendered on behalf of our board of directors or its committees.

 

On the day of each annual meeting of stockholders, each director is expected to receive a grant of shares of our common stock as determined by the following formula based on the closing price of a share of our common stock on the date of such meeting.

 

Range of Closing Price Per Share on the Date of Grant	Shares of Common Stock to Be Granted
Under $5.00	2,000
$5.00 to $9.99	1,500
$10.00 to $20.00	1,000
Over $20.00	500

The following table provides information with respect to compensation our directors earned or received for their 2009 director services provided to us.

 

 

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2009 DIRECTOR COMPENSATION (1)

 

Name		Fees Earned or Paid in Cash (2)				Stock Awards (3)				Total
Keith R. Coogan		$	39,000			$	11,880			$	50,880
Cecil H. Moore, Jr.			47,000				11,880				58,880
George E. Poston			39,000				11,880				50,880
Glenn R. Simmons			23,000				11,880				34,880
R. Gerald Turner			39,000				11,880				50,880

__________________

 

(1)

Certain non-applicable columns have been omitted from this table.  See footnotes 2 and 3 to the 2009 Summary Compensation Table and 2009 Grants of Plan-Based Awards Table under “Compensation of Executive Officers and Directors and Other Information—Summary of Cash and Certain Other Compensation of Executive Officers” for compensation Harold C. Simmons and Steven L. Watson earned or received from us for director services.

 

(2)	Represents retainers and meeting fees the director received or earned for director services he provided to us in 2009.

 

(3)

Represents the value of 1,500 shares of our common stock we granted to each of these directors.  For the purposes of this table and financial statement reporting, these stock awards were valued at the closing price per share of such shares on their date of grant, which closing price and date of grant were $7.92 and May 14, 2009, respectively.

 

 

 

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PRINCIPAL STOCKHOLDERS AND OWNERSHIP OF MANAGEMENT

 

Ownership of Our Common Stock

 

The following table and footnotes set forth as of October 7, 2010 the beneficial ownership, as defined by regulations of the SEC, of our common stock held and, as adjusted to reflect the sale of common stock in this offering, by each person or group of persons known to us to own beneficially more than 5% of our outstanding shares of common stock, each named executive officer and all current directors and executive officers as a group.  See footnote 4 below for information concerning individuals and entities that may be deemed to own indirectly and beneficially those shares of our common stock that NL or Valhi directly hold.  All information is taken from or based upon ownership filings made by such persons with the SEC or upon information provided by such persons.

 

		Shares Beneficially Owned Prior to this Offering (1)(2)								Percent of Class Owned After this Offering (1)
Name of Beneficial Owner		Number				Percent of Class				Before Exercise of Over-Allotment Option				After Exercise of Over-Allotment Option
Harold C. Simmons (3)			258,720	(4)			*				*				*
Valhi, Inc. (3)			28,995,021	(4)			59.2	%			51.1	%			50.0	%
NL Industries, Inc (3)			17,609,635	(4)			36.0	%			31.0	%			30.4	%
TIMET Finance Management Company (3)			86,667	(4)			*				*				*
Contran Corporation (3)			2,686	(4)			*				*				*
Annette C. Simmons (3)			54,856	(4)			*				*				*
			47,007,585				96.0	%			82.8	%			81.1	%
Keith R. Coogan			4,500				*				*				*
Cecil H. Moore, Jr.			5,012	(4)			*				*				*
George E. Poston			6,000				*				*				*
Glenn R. Simmons			6,881	(4)			*				*				*
R. Gerald Turner			5,655				*				*				*
Steven L. Watson			13,133	(4)			*				*				*
Douglas C. Weaver			0				0				0				0
Ulfert Fiand			0				0				0				0
Gregory M. Swalwell			0				0				0				0
All our directors and executive officers as a group (16 persons)			47,051,955	(4)			96.1	%			82.9	%			81.2	%