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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 - For the quarterly period ended September 30, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 Commission file number 333-100047
KRONOS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2949593
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes No X
The Registrant is a wholly owned subsidiary of NL Industries, Inc. (File No.
1-640) and meets the conditions set forth in General Instructions H(1)(a) and
H(1)(b) of Form 10-Q for reduced disclosure format.
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - September 30, 2003
and December 31, 2002 3
Consolidated Statements of Income - Three months and
nine months ended September 30, 2003 and 2002 5
Consolidated Statements of Comprehensive Income - Three
months and nine months ended September 30, 2003 and 2002 6
Consolidated Statement of Common Stockholder's
Equity - Nine months ended September 30, 2003 7
Consolidated Statements of Cash Flows - Nine
months ended September 30, 2003 and 2002 8
Notes to Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 4. Controls and Procedures 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 6. Exhibits and Reports on Form 8-K 29
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
ASSETS 2003 2002
-------------- -------------
Current assets:
Cash and cash equivalents .................. $ 16,788 $ 15,023
Restricted cash equivalents ................ 836 --
Accounts and other receivables ............. 115,598 92,493
Receivable from affiliates ................. 3,242 972
Refundable income taxes .................... 88 1,718
Inventories ................................ 145,673 143,664
Prepaid expenses ........................... 5,901 5,266
Deferred income taxes ...................... 764 695
-------- --------
Total current assets ................... 288,890 259,831
-------- --------
Other assets:
Prepaid pension cost ....................... 17,249 17,572
Other ...................................... 13,341 16,135
-------- --------
Total other assets ..................... 30,590 33,707
-------- --------
Property and equipment:
Land ....................................... 28,374 25,487
Buildings .................................. 126,665 115,812
Machinery and equipment .................... 585,667 536,835
Mining properties .......................... 64,899 65,296
Construction in progress ................... 15,989 7,749
-------- --------
821,594 751,179
Less accumulated depreciation .............. 482,273 433,416
-------- --------
Net property and equipment ............. 339,321 317,763
-------- --------
$658,801 $611,301
======== ========
See accompanying notes to consolidated financial statements.
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDER'S EQUITY September 30, December 31,
2003 2002
-------------- ------------
Current liabilities:
Current maturities of long-term debt ....... $ 476 $ 1,298
Accounts payable and accrued liabilities ... 99,059 93,563
Payable to affiliates ...................... 5,057 21,430
Income taxes ............................... 7,238 5,845
Deferred income taxes ...................... 1,684 3,219
----------- -----------
Total current liabilities .............. 113,514 125,355
----------- -----------
Noncurrent liabilities:
Long-term debt ............................. 327,275 324,608
Deferred income taxes ...................... 64,029 49,688
Accrued pension cost ....................... 20,221 21,486
Other ...................................... 12,863 12,933
----------- -----------
Total noncurrent liabilities ........... 424,388 408,715
----------- -----------
Minority interest .............................. 471 383
----------- -----------
Common stockholder's equity:
Common stock ............................... 297 297
Additional paid-in capital ................. 1,944,185 1,944,185
Accumulated deficit ........................ (1,681,245) (1,721,859)
Accumulated other comprehensive loss ....... (142,809) (145,775)
----------- -----------
Total common stockholder's equity ...... 120,428 76,848
----------- -----------
$ 658,801 $ 611,301
=========== ===========
Commitments and contingencies (Notes 9 and 10)
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
Three months ended Nine months ended
September 30, September 30,
------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales ...................................... $ 173,441 $ 154,319 $ 534,516 $ 440,033
Cost of sales .................................. 124,183 120,089 389,153 344,757
--------- --------- --------- ---------
Gross margin ............................... 49,258 34,230 145,363 95,276
Selling, general and administrative expense .... 20,811 19,243 63,018 52,644
Other operating income (expense):
Currency transaction (losses) gains, net ... (439) 13 (1,449) (903)
Royalty income ............................. 1,411 1,496 4,786 4,386
Disposition of property and equipment ...... (227) (92) (271) 505
Other income ............................... 139 307 302 407
Other expense .............................. (23) (9) (75) (126)
--------- --------- --------- ---------
Income from operations ................. 29,308 16,702 85,638 46,901
Other income (expense):
Trade interest income ...................... 165 713 503 1,250
Interest income from affiliates ............ -- 3,597 30 22,754
Foreign currency transaction gain .......... -- -- -- 15,839
Interest expense ........................... (8,213) (7,606) (24,349) (9,303)
Interest expense to affiliates ............. (5) -- (75) (18,699)
--------- --------- --------- ---------
Income before income taxes and
minority interest .................... 21,255 13,406 61,747 58,742
Income tax expense (benefit) ................... 7,059 2,148 (3,928) 9,880
Minority interest .............................. 18 8 61 35
--------- --------- --------- ---------
Net income ............................. 14,178 11,250 65,614 48,827
Dividends and accretion applicable to redeemable
preferred stock and profit participation
certificates ............................... -- (1,228) -- (78,600)
--------- --------- --------- ---------
Net income (loss) available to common stock .... $ 14,178 $ 10,022 $ 65,614 $ (29,773)
========= ========= ========= =========
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three months ended Nine months ended
September 30, September 30,
----------------- --------------------
2003 2002 2003 2002
------- ------- ------- --------
Net income ............................. $14,178 $11,250 $65,614 $48,827
------- ------- ------- -------
Other comprehensive income:
Currency translation adjustment .... 1,702 2,283 2,966 24,937
------- ------- ------- -------
Total other comprehensive income 1,702 2,283 2,966 24,937
------- ------- ------- -------
Comprehensive income ....... $15,880 $13,533 $68,580 $73,764
======= ======= ======= =======
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMMON STOCKHOLDER'S EQUITY
Nine months ended September 30, 2003
(In thousands)
Accumulated other
comprehensive loss
----------------------- Total
Additional Currency common
Common paid-in Accumulated translation Pension stockholder's
stock capital deficit adjustment liabilities equity
---------- ----------- ------------- ----------- ----------- -------------
Balance at December 31, 2002 $ 297 $1,944,185 $(1,721,859) $(139,025) $(6,750) $ 76,848
Net income ................... -- -- 65,614 -- -- 65,614
Dividends .................... -- -- (25,000) -- -- (25,000)
Other comprehensive income ... -- -- -- 2,966 -- 2,966
----- ---------- ----------- --------- ------- ---------
Balance at September 30, 2003$ 297 $1,944,185 $(1,681,245) $(136,059) $(6,750) $ 120,428
=== ========== =========== ========= ======= =========
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2003 and 2002
(In thousands)
2003 2002
--------- --------
Cash flows from operating activities:
Net income ........................................ $ 65,614 $ 48,827
Depreciation and amortization ..................... 24,884 20,030
Noncash currency transaction gain ................. -- (13,121)
Noncash interest income from affiliates ........... -- (21,849)
Noncash interest expense to affiliates ............ -- 5,521
Noncash interest expense .......................... 1,438 404
Deferred income taxes ............................. 10,948 6,443
Minority interest ................................. 61 35
Net loss (gain) from disposition of property
and equipment ................................... 271 (505)
Other, net ........................................ (2,651) (2,438)
Change in assets and liabilities:
Accounts and other receivables ............. (14,424) (15,488)
Insurance receivable ....................... 259 11,218
Inventories ................................ 10,051 19,520
Prepaid expenses ........................... (402) (5,132)
Accounts payable and accrued liabilities ... (1,731) (2,518)
Income taxes ............................... 3,047 (951)
Accounts with affiliates ................... (19,248) (2,427)
Other, net ................................. (839) 2,516
-------- --------
Net cash provided by operating activities ..... 77,278 50,085
-------- --------
Cash flows from investing activities:
Capital expenditures .............................. (21,111) (15,267)
Change in restricted cash equivalents ............. (911) (1,467)
Proceeds from disposition of property and equipment 81 839
-------- --------
Net cash used by investing activities ......... (21,941) (15,895)
-------- --------
See accompanying notes to consolidated financial statements.
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine months ended September 30, 2003 and 2002
(In thousands)
2003 2002
---------- ----------
Cash flows from financing activities:
Indebtedness:
Borrowings .................................. $ 16,106 $ 330,800
Principal payments .......................... (45,868) (77,939)
Deferred financing costs .................... -- (9,963)
Repayments of loans from affiliates ............. -- (301,432)
Other capital transactions with affiliates, net . -- 2,925
Distribution to minority interest ............... (14) (11)
Dividends paid .................................. (25,000) --
-------- ---------
Net cash used by financing activities ........... (54,776) (55,620)
-------- ---------
Cash and cash equivalents:
Net change from:
Operating, investing and financing activities 561 (21,430)
Currency translation ........................ 1,204 2,762
-------- ---------
1,765 (18,668)
Balance at beginning of period .................. 15,023 30,343
-------- ---------
Balance at end of period ........................ $ 16,788 $ 11,675
======== =========
Supplemental disclosures - cash paid (received) for:
Interest ........................................ $ 16,321 $ 20,641
Income taxes, net ............................... (17,904) 4,388
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
Kronos International, Inc. ("KII") is incorporated in the state of
Delaware, U.S.A., with its seat of management in Leverkusen, Germany. KII is a
wholly-owned subsidiary of Kronos Worldwide, Inc. ("Kronos"), formerly known as
Kronos, Inc., a wholly-owned subsidiary of NL Industries, Inc. ("NL"). NL
conducts its titanium dioxide pigments ("TiO2") operations through Kronos. KII
conducts Kronos' European TiO2 operations. At September 30, 2003, Valhi, Inc.,
("Valhi") and its subsidiaries held approximately 84% of NL's outstanding common
stock, and Contran Corporation ("Contran") and its subsidiaries held
approximately 90% of Valhi's outstanding common stock. Substantially all of
Contran's outstanding voting stock is held by trusts established for the benefit
of certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons
is sole trustee. Mr. Simmons, the Chairman of the Board and Chief Executive
Officer of NL and Kronos, the Chief Executive Officer of KII and the Chairman of
the Board of each of Contran and Valhi, may be deemed to control each of such
companies and KII.
KII's operations are conducted primarily through its German, Belgian and
Norwegian subsidiaries with three TiO2 plants in Germany, one TiO2 plant in
Belgium and one TiO2 plant and an ilmenite ore mining operation in Norway. KII
also operates TiO2 sales and distribution facilities in England, France, Denmark
and The Netherlands. Prior to April 30, 2002, KII also conducted operations in
Canada through Kronos Canada, Inc. ("KC"), its wholly-owned subsidiary.
Effective April 30, 2002, in anticipation of a proposed debt securities
offering, KII sold 100% of KC's capital stock to Kronos in exchange for a
promissory note receivable in the amount of $217 million bearing interest of
7.87% per annum with a maturity date of April 30, 2012. KII has accounted for
the disposition of KC as a change in accounting entity. Accordingly, KII's
consolidated financial statements have been retroactively restated to exclude
the results of operations and cash flows of KC for all periods presented. KII's
cash dividends received from KC and cash capital contributions to KC prior to
April 30, 2002 are reflected as part of "other capital transactions with
affiliates, net" in the accompanying consolidated statements of cash flows.
The consolidated balance sheet of KII and its majority-owned subsidiaries
(collectively, the "Company") at December 31, 2002 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at September 30, 2003 and the consolidated statements
of income, comprehensive income, common stockholder's equity and cash flows for
the interim periods ended September 30, 2003 and 2002 have been prepared by the
Company without audit. In the opinion of management all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the
consolidated financial position, results of operations and cash flows have been
made. The results of operations for the interim periods are not necessarily
indicative of the operating results for a full year or of future operations.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America ("GAAP") have been condensed or omitted in
accordance with the GAAP requirements for interim financial statements,
including the applicable requirements of the Securities and Exchange
Commission's ("SEC") Regulation S-X. Certain prior-year amounts have been
reclassified to conform to the current year presentation. The accompanying
consolidated financial statements should be read in conjunction with the
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2002 (the "2002 Annual Report").
The Company has not issued any stock options to purchase KII's common
stock. However, certain employees of the Company have been granted options by NL
to purchase NL common stock. The Company accounts for stock-based employee
compensation in accordance with Accounting Principles Board Opinion ("APBO") No.
25, "Accounting for Stock Issued to Employees," and its various interpretations.
Under APBO No. 25, no compensation cost is generally recognized for fixed stock
options in which the exercise price is not less than the market price on the
grant date. During the fourth quarter of 2002, and following NL's cash
settlement of options to purchase NL common stock held by certain individuals,
NL, including the Company, commenced accounting for its stock options using the
variable accounting method because NL could not overcome the presumption that it
would not similarly cash settle its remaining stock options. Under the variable
accounting method, the intrinsic value of all unexercised stock options
(including those with an exercise price at least equal to the market price on
the date of grant) are accrued as an expense over their vesting period, with
subsequent increases (decreases) in NL's market price resulting in additional
compensation expense (income). Upon exercise of such options to purchase NL
common stock held by employees of the Company, the Company pays NL an amount
equal to the difference between the market price of NL's common stock on the
date of exercise and the exercise price of such stock option. Net compensation
income recognized by the Company in accordance with APBO No. 25 was $100,000 in
each of the third quarter and first nine months of 2003, and net compensation
expense (income) recognized by the Company was nil in each of the third quarter
and first nine months of 2002.
The following table presents what the Company's consolidated net income
(loss) available to common stock would have been in the 2002 and 2003 periods if
the Company had elected to account for its stock-based employee compensation
related to stock options in accordance with the fair value based recognition
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123
"Accounting for Stock-Based Compensation," for all awards granted subsequent to
January 1, 1995.
Three months ended Nine months ended
September 30, September 30,
--------------------- -------------------
2003 2002 2003 2002
--------- --------- -------- --------
(In thousands)
Net income (loss) available to common stock
- as reported ............................. $ 14,178 $ 10,022 $ 65,614 $(29,773)
Deduct: Stock-based compensation income,
net of tax, included in reported net income (78) -- (78) --
Deduct: Stock-based compensation cost, net
of tax, determined under fair value based
method for all awards ..................... (34) (78) (104) (233)
-------- -------- -------- --------
Net income (loss) available to common stock
- pro forma ............................... $ 14,066 $ 9,944 $ 65,432 $(30,006)
======== ======== ======== ========
The Company adopted SFAS No. 143, "Accounting for Asset Retirement
Obligations," effective January 1, 2003. Under SFAS No. 143, the fair value of a
liability for an asset retirement obligation covered under the scope of SFAS No.
143 is recognized in the period in which the liability is incurred, with an
offsetting increase in the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its future value, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity would either settle the obligation for its recorded amount
or incur a gain or loss upon settlement.
Under the transition provisions of SFAS No. 143, at the date of adoption on
January 1, 2003 the Company recognized (i) an asset retirement cost capitalized
as an increase to the carrying value of its property, plant and equipment, (ii)
accumulated depreciation on such capitalized cost and (iii) a liability for the
asset retirement obligation. Amounts resulting from the initial application of
SFAS No. 143 were measured using information, assumptions and interest rates all
as of January 1, 2003. The amount recognized as the asset retirement cost was
measured as of the date the asset retirement obligation was incurred. Cumulative
accretion on the asset retirement obligation, and accumulated depreciation on
the asset retirement cost, were recognized for the time period from the date the
asset retirement cost and liability would have been recognized had the
provisions of SFAS No. 143 been in effect at the date the liability was
incurred, through January 1, 2003. The difference between the amounts recognized
as described above and the associated amounts recognized in the Company's
balance sheet as of December 31, 2002 was recognized as a cumulative effect of
change in accounting principle as of January 1, 2003. The effect of adopting
SFAS No. 143 as of January 1, 2003, as summarized in the table below, did not
have a material effect on the Company's consolidated financial position, results
of operations or liquidity, and is not separately recognized in the accompanying
statement of income.
Amount
-------------------
(In millions)
Increase in carrying value of net property, plant and equipment:
Cost $ .4
Accumulated depreciation (.1)
Decrease in liabilities previously
accrued for closure and post closure activities .3
Asset retirement obligation recognized (.6)
-------------------
Net impact $ -
===================
At September 30, 2003, the asset retirement obligation was approximately
$.7 million and was included in other noncurrent liabilities. Accretion expense
on the asset retirement obligation during the first nine months of 2003,
included in cost of sales, was nil. If the Company had adopted SFAS No. 143 as
of January 1, 2002, the asset retirement obligation would have been
approximately $.5 million at January 1, 2002 and $.6 million at September 30,
2002, and the effect on the Company's reported net income for the nine months
ended September 30, 2002 would not have been material.
Note 2 - Accounts and other receivables:
September 30, December 31,
2003 2002
-------------- -------------
(In thousands)
Trade receivables ............................. $ 109,406 $ 83,929
Insurance claims receivable ................... 53 312
Recoverable VAT and other receivables ......... 8,054 10,159
Allowance for doubtful accounts ............... (1,915) (1,907)
--------- --------
$ 115,598 $ 92,493
========= ========
Note 3 - Inventories:
September 30, December 31,
2003 2002
------------- ------------
(In thousands)
Raw materials ............................ $ 27,730 $ 36,960
Work in process .......................... 13,641 14,009
Finished products ........................ 77,012 67,469
Supplies ................................. 27,290 25,226
-------- --------
$145,673 $143,664
======== ========
Note 4 - Other noncurrent assets:
September 30, December 31,
2003 2002
------------- ------------
(In thousands)
Deferred financing costs ........................... $ 9,461 $ 9,879
Restricted marketable debt securities .............. 2,034 2,492
Unrecognized net pension obligations ............... 321 292
Other .............................................. 1,525 3,472
------- -------
$13,341 $16,135
======= =======
Note 5 - Accounts payable and accrued liabilities:
September 30, December 31,
2003 2002
------------- ------------
(In thousands)
Accounts payable ........................... $37,158 $49,630
------- -------
Accrued liabilities:
Employee benefits ...................... 23,535 20,131
Interest ............................... 7,451 217
Other .................................. 30,915 23,585
------- -------
61,901 43,933
------- -------
$99,059 $93,563
======= =======
Note 6 - Long-term debt:
September 30, December 31,
2003 2002
---------- ----------
(In thousands)
8.875% Senior Secured Notes,(euro)285 million principal amount $326,924 $296,942
Revolving credit facility .................................... -- 27,077
Other ........................................................ 827 1,887
-------- --------
327,751 325,906
Less current maturities ...................................... 476 1,298
-------- --------
$327,275 $324,608
======== ========
In March 2003 the Company borrowed (euro)15.0 million ($16.1 million when
borrowed), in April 2003 the Company repaid NOK 80 million ($11.0 million when
repaid), and in the third quarter of 2003 the Company repaid (euro) 30.0 million
($33.9 million when repaid) under the revolving credit facility.
Note 7 - Other noncurrent liabilities:
September 30, December 31,
2003 2002
------------- ------------
(In thousands)
Insurance claims and expenses .................. $ 814 $ 889
Employee benefits .............................. 4,422 4,025
Environmental costs ............................ 4,927 5,921
Other .......................................... 2,700 2,098
------- -------
$12,863 $12,933
======= =======
Note 8 - Other income (expense):
Operating items
Royalty income relates to royalties received from KC for use of certain of
the Company's intellectual property.
Nonoperating items
Foreign currency transaction gain in the first nine months of 2002 included
$13.1 million of noncash gains associated with the Company's dollar-denominated
notes payable to affiliates which were repaid in June 2002.
Note 9 - Income taxes:
The difference between the provision for income tax expense attributable to
income before income taxes and minority interest and the amount that would be
expected using the U.S. federal statutory income tax rate of 35% is presented
below.
Nine months ended
September 30,
---------------------
2003 2002
---------- ---------
(In thousands)
Expected tax expense ................................... $ 21,611 $ 20,560
Non-U.S. tax rates ..................................... (236) (3,514)
Valuation allowance .................................... (732) (1,491)
Refund of prior-year German taxes ...................... (24,564) --
Currency transaction gains for which no income taxes
were provided ........................................ -- (4,592)
Other, net ............................................. (7) (1,083)
-------- --------
Income tax (benefit) expense ................... $ (3,928) $ 9,880
======== ========
The Company reduced its deferred income tax valuation allowance by $732,000
in the first nine months of 2003 and $1.5 million in the first nine months of
2002, primarily as a result of utilization of certain tax attributes for which
the benefit had not been previously recognized under the "more-likely-than-not"
recognition criteria.
Certain of the Company's tax returns in various U.S. and non-U.S.
jurisdictions are being examined and tax authorities have proposed or may
propose tax deficiencies, including penalties and interest.
The Company has received preliminary tax assessments for the years 1991 to
1997 from the Belgian tax authorities proposing tax deficiencies, including
related interest, of approximately (euro)10.1 million ($11.6 million at
September 30, 2003). The Company has filed protests to the assessments with
respect to such years. The Company is in discussions with the Belgian tax
authorities and believes that a significant portion of the assessments is
without merit. In April 2003 the Company received a notification from the
Belgian tax authorities of their intent to assess a tax deficiency related to
1999. The anticipated assessment, including interest, is expected to approximate
(euro)13.3 million ($15.2 million at September 30, 2003). The Company believes
the proposed assessment related to 1999 is without merit and in April 2003 filed
a written response in opposition to the notification of intent to assess. The
Belgian tax authorities have indicated they intend to file a lien on the fixed
assets of the Company's Belgian TiO2 operations.
In 2002, the Company received a notification from the Norwegian tax
authorities of their intent to assess tax deficiencies of approximately NOK 12.2
million ($1.7 million at September 30, 2003) relating to 1998 through 2000. The
Company has objected to this proposed assessment in a written response to the
Norwegian tax authorities.
In the first quarter of 2003, the Company was notified by the German
Federal Fiscal Court (the "Court") that the Court had ruled in the Company's
favor concerning a claim-for-refund suit in which the Company sought refunds of
prior taxes paid during the periods 1990 through 1997. The Company has filed
certain amended German tax returns and expects to file additional amended German
tax returns claiming such refunds for all years affected by the Court's
decision, which is expected to result in an estimated refund of taxes and
interest of approximately $40 million. Receipt of the German tax refunds is
subject to satisfaction of various procedural requirements, including a review
and acceptance of the amended German tax returns by the German tax authorities.
Certain of these procedural requirements were satisfied in the second quarter of
2003 with respect to a portion of the refund claim, and in July 2003 the German
tax authorities refunded the Company a portion of the total anticipated refund.
The portion received in July was (euro)21.5 million ($24.6 million). The Company
reflected this tax refund in its second quarter 2003 results of operations. The
Company expects to receive the remaining refunds over the next four to six
months, a portion of which may result in an additional income tax benefit.
No assurance can be given that the Company's tax matters will be favorably
resolved due to the inherent uncertainties involved in court and tax
proceedings. The Company believes that it has provided adequate accruals for
additional taxes and related interest expense which may ultimately result from
all such examinations and believes that the ultimate disposition of such
examinations should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
At September 30, 2003 the Company had the equivalent of approximately $452
million of income tax loss carryforwards in Germany with no expiration date.
However, the Company has provided a deferred tax valuation allowance against
substantially all of these income tax loss carryforwards because the Company
currently believes they do not meet the "more-likely-than-not" recognition
criteria. In August 2003, the German federal government proposed new tax law
amendments that would limit the annual utilization of income tax loss
carryforwards, to become effective in 2004. This proposal is similar to a
proposal the German federal government introduced in 2002 that was never
enacted. There can be no assurance that these proposed law amendments will be
enacted and, if enacted, when they would become effective. Such proposal, if
enacted as proposed, would significantly affect the Company's future income tax
expense and cash tax payments.
At September 30, 2003, the Company had net deferred tax liabilities of $65
million. The Company operates in numerous tax jurisdictions, in certain of which
it has temporary differences that net to deferred tax assets (before valuation
allowance). The Company has provided a deferred tax valuation allowance of $165
million at September 30, 2003, principally related to Germany, partially
offsetting deferred tax assets which the Company believes do not currently meet
the "more-likely-than-not" recognition criteria.
Note 10 - Commitments and contingencies:
The Company's Belgian subsidiary and various of its Belgian employees are
the subject of civil and criminal proceedings relating to an accident that
resulted in two fatalities at the Company's Langerbrugge, Belgium facility in
October 2000. The investigation stage of these proceedings was completed in
2002. In May 2003 the Belgian authorities referred the proceedings against the
Company's Belgian subsidiary and certain of its Belgian employees to the
criminal court for trial. Trial briefs have been submitted to the criminal court
by the parties and a final hearing and determination by the court is scheduled
for January 2004.
The Company currently believes the disposition of all claims and disputes,
individually and in the aggregate, should not have a material adverse effect on
the Company's consolidated financial condition, results of operations or
liquidity.
For descriptions of certain other legal proceedings, environmental, income
tax and other commitments and contingencies related to the Company, reference is
made to (i) the 2002 Annual Report, (ii) the Company's Quarterly Reports on Form
10-Q for the quarters ended March 31, 2003 and June 30, 2003, and (iii) Note 9.
Note 11 - Accounting principle not yet adopted:
The Company is required to comply with the consolidation requirements of
FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest
Entities," an interpretation of Accounting Research Bulletin No. 51, beginning
in the fourth quarter of 2003. The Company is still studying this newly-issued
interpretation. While the Company currently does not believe it has any
involvement with any variable interest entity (as that term is defined in FIN
No. 46), the interpretation is complex, and the staff of the FASB continues to
provide implementation guidance, and therefore the impact of adopting the
consolidation requirements of FIN No. 46 has not yet been determined.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three months ended Nine months ended
September 30, September 30,
-------------------------- ------------- -------------------------- -------------
2003 2002 %Change 2003 2002 %Change
------------ ------------ ------------- ------------ ------------ -------------
(In millions, except percentages and metric tons)
Net sales and operating
income
Net sales $ 173.4 $ 154.3 +12% $ 534.5 $ 440.0 +21%
Cost of sales 124.1 120.1 +3% 389.1 344.7 +13%
------------ ------------ ------------ ------------
Gross margin 49.3 34.2 +44% 145.4 95.3 +53%
Selling, general and
administrative expense 20.8 19.2 +8% 63.0 52.6 +20%
Other operating income
(expense):
Currency transaction
gains (losses), net (.4) - (1.5) (.9)
Royalty income 1.4 1.5 4.8 4.4
Disposition of property
and equipment (.2) (.1) (.3) .5
Other income .1 .3 .3 .4
Other expense (.1) - (.1) (.2)
------------ ------------ ------------ ------------
Income from operations $ 29.3 $ 16.7 +75% $ 85.6 $ 46.9 +83%
============ ============ ============ ============
TiO2 operating statistics
Percent change in average
selling price:
Using actual foreign
currency exchange rates +14% +22%
Impact of changes in
foreign currency exchange rates -10% -15%
------------- -------------
In billing currencies +4% +7%
Sales volume (metric tons in
thousands) 74.1 75.0 -1% 232.1 232.7 *
Production volume (metric
tons in thousands) 79.7 77.3 +3% 237.9 223.8 +6%
* less than 1%
Comparison of three months ended September 30, 2003 and 2002 - Sales, cost
of sales, gross margin, selling general and administrative expenses and income
from operations
The Company's sales and gross margin increased $19.1 million (12%) and
$15.1 million (44%), respectively, in the third quarter of 2003 compared to the
third quarter of 2002 due primarily to higher average TiO2 selling prices
partially offset by lower TiO2 sales volumes. Excluding the effect of
fluctuations in the value of the U.S. dollar relative to other currencies, the
Company's average TiO2 selling prices in billing currencies in the third quarter
of 2003 were 4% higher than the third quarter of 2002. When translated from
billing currencies to U.S. dollars using actual foreign currency exchange rates
prevailing during the respective periods, the Company's average TiO2 selling
prices in the third quarter of 2003 increased 14% compared to the third quarter
of 2002. When translated from billing currencies to U.S. dollars using actual
foreign currency exchange rates prevailing during the respective periods, the
Company's average TiO2 selling prices in the third quarter of 2003 were
comparable to the second quarter of the year.
The Company's sales are denominated in various currencies, including the
euro, other major European currencies and the U.S. dollar. The disclosure of the
percentage change in the Company's average TiO2 selling prices in billing
currencies (which excludes the effects of fluctuations in the value of the U.S.
dollar relative to other currencies) is considered a "non-GAAP" financial
measure under regulations of the SEC. The disclosure of the percentage change in
the Company's average TiO2 selling prices using actual foreign currency exchange
rates prevailing during the respective periods is considered the most directly
comparable financial measure presented in accordance with GAAP ("GAAP measure").
The Company discloses percentage changes in its average TiO2 prices in billing
currencies because the Company believes such disclosure provides useful
information to investors to allow them to analyze such changes without the
impact of changes in foreign currency exchange rates, thereby facilitating
period-to-period comparisons of the relative changes in average selling prices
in the actual various billing currencies. Generally, when the U.S. dollar either
strengthens or weakens against other currencies, the percentage change in
average selling prices in billing currencies will be higher or lower,
respectively, than such percentage changes would be using actual exchange rates
prevailing during the respective periods. The difference between the 14% change
in the Company's average TiO2 selling prices during the third quarter of 2003 as
compared to the same period in 2002 using actual foreign currency exchange rates
prevailing during the respective periods (the GAAP measure) and the 4% change in
the Company's average TiO2 selling prices in billing currencies (the non-GAAP
measure) during such period is due to the effect of changes in foreign currency
exchange rates. The above table presents in a tabular format (i) the percentage
change in the Company's average TiO2 selling prices using actual foreign
currency exchange rates prevailing during the respective periods (the GAAP
measure), (ii) the percentage change in the Company's average TiO2 selling
prices in billing currencies (the non-GAAP measure) and (iii) the percentage
change due to changes in foreign currency exchange rates (or the reconciling
item between the non-GAAP measure and the GAAP measure).
The Company's TiO2 sales volume in the third quarter of 2003 was 1% lower
than the third quarter of 2002. The Company's TiO2 production volume in the
third quarter of 2003 was 3% higher than the third quarter of 2002, with
operating rates at near full capacity in both the third quarter of 2003 and
2002.
The increase in average TiO2 selling prices increased gross margin by $5.2
million, while the lower TiO2 sales volume decreased gross margin by $.5
million. The effect of the increase in TiO2 production volumes during the third
quarter of 2003 as compared to the third quarter of 2002 was not material.
The Company's cost of sales increased $4.0 million (3%) in the third
quarter of 2003 compared to the third quarter of 2002. The Company's cost of
sales as a percentage of net sales decreased from 78% in the third quarter of
2002 to 72% in the third quarter of 2003 primarily due to the higher average
selling prices and higher production volumes.
The increase in the Company's gross margin, quantified above, is due to the
net effects of the changes in sales and cost of sales during such periods.
The Company's selling, general and administrative expenses in the third
quarter of 2003 were approximately $1.6 million (8%) higher than the third
quarter of 2002 primarily due to the effects of foreign currency translation,
which increased the Company's expenses in the third quarter of 2003 as compared
to the same period in 2002. The Company's selling, general and administrative
expenses were approximately 12% of sales in both the third quarter of 2003 and
2002.
A significant amount of the Company's sales and operating costs are
denominated in currencies other than the U.S. dollar, principally the euro and
other major European currencies. A portion of the Company's sales are
denominated in the U.S. dollar. Certain raw materials, primarily
titanium-containing feedstocks, are purchased in U.S. dollars, while labor and
other production costs are denominated primarily in local currencies.
Consequently, the translated U.S. dollar value of the Company's foreign sales
and operating results are subject to currency exchange rate fluctuations which
may favorably or adversely impact reported earnings and may affect the
comparability of period-to-period operating results. Overall, fluctuations in
the value of the U.S. dollar relative to other currencies, primarily the euro,
increased the Company's sales in the third quarter of 2003 by a net $15.7
million compared to the same period in 2002. Fluctuations in the value of the
U.S. dollar relative to other currencies similarly impacted the Company's
foreign currency-denominated operating expenses. The Company's operating costs
that are not denominated in the U.S. dollar, when translated into U.S. dollars,
were higher in the third quarter of 2003 compared to the same period in 2002.
Overall, the net impact of currency exchange rate fluctuations increased the
Company's income from operations in the third quarter of 2003 by a net $2.7
million compared to the third quarter of 2002.
Other operating income (expense) in each of the third quarter of 2003 and
2002 were comprised principally of foreign currency transaction gains and
losses, royalty income and ordinary course of business gains and losses on the
disposal of property and equipment used in the Company's TiO2 operations. See
Note 8 to the Consolidated Financial Statements.
As a net result of the items discussed above, the Company's income from
operations increased 75% from $16.7 million in the third quarter of 2002 to
$29.3 million in the third quarter of 2003.
Comparison of nine months ended September 30, 2003 and 2002 - Sales, cost
of sales, gross margin, selling general and administrative expenses and income
from operations
The Company's sales and gross margin increased $94.5 million (21%) and
$50.1 million (53%), respectively, in the first nine months of 2003 compared to
the first nine months of 2002 due primarily to higher average TiO2 selling
prices and higher TiO2 production volume, partially offset by slightly lower
TiO2 sales volume and higher operating costs (particularly energy costs, which
increased by approximately $2 million). Excluding the effect of fluctuations in
the value of the U.S. dollar relative to other currencies, the Company's average
TiO2 selling price in billing currencies in the first nine months of 2003 was 7%
higher than the first nine months of 2002. When translated from billing
currencies to U.S. dollars using actual foreign currency exchange rates
prevailing during the respective periods, the Company's average TiO2 selling
prices in the first nine months of 2003 increased 22% compared to the first nine
months of 2002.
The difference between the 22% change in the Company's average TiO2 selling
prices during the first nine months of 2003 as compared to the same period in
2002 using actual foreign currency exchange rates prevailing during the
respective periods (the GAAP measure) and the 7% change in the Company's average
TiO2 selling prices in billing currencies (the non-GAAP measure) during such
period is due to the effect of changes in foreign currency exchange rates. The
above table presents in a tabular format (i) the percentage change in the
Company's average TiO2 selling prices using actual foreign currency exchange
rates prevailing during the respective periods (the GAAP measure), (ii) the
percentage change in the Company's average TiO2 selling prices in billing
currencies (the non-GAAP measure) and (iii) the percentage change due to changes
in foreign currency exchange rates (or the reconciling item between the non-GAAP
measure and the GAAP measure).
The Company's TiO2 sales volumes in the first nine months of 2003 were
slightly lower than the first nine months of 2002. The Company's TiO2 production
volumes in the first nine months of 2003 were 6% higher than the first nine
months of 2002, with operating rates at near full capacity in both the first
nine months of 2003 and 2002.
The increase in average TiO2 selling prices and higher TiO2 production
volumes increased gross margin by $25.1 million and $5.6 million, respectively.
The effect of the decrease in TiO2 sales volumes during the first nine months of
2003 as compared to the same period in 2002 was not material.
The Company's cost of sales increased $44.4 million (13%) in the first nine
months of 2003 compared to the first nine months of 2002. The Company's cost of
sales as a percentage of net sales decreased from 78% in the first nine months
of 2002 to 73% in the first nine months of 2003 primarily due to the higher
average selling prices and higher production volume, partially offset by the
higher operating costs.
The increase in the Company's gross margin, quantified above, is due to the
net effects of the changes in sales and cost of sales during such periods.
The Company's selling, general and administrative expenses increased $10.4
million (20%) in the first nine months of 2003 as compared to the first nine
months of 2002 primarily due to the effects of foreign currency translation,
which increased the Company's expenses in the first nine months of 2003 as
compared to the same period in 2002. The Company's selling, general and
administrative expenses were approximately 12% of sales in the first nine months
of both 2003 and 2002.
As discussed above, the Company's operations and assets are located outside
the United States (primarily in Germany, Belgium and Norway). Overall,
fluctuations in the value of the U.S. dollar relative to other currencies,
primarily the euro, increased the Company's sales in the first nine months of
2003 by a net $69.3 million compared to the same period in 2002, and increased
the Company's income from operations by $5.2 million.
Other operating income (expense) in each of the first nine months of 2003
and 2002 were comprised principally of foreign currency transaction gains and
losses, royalty income and ordinary course of business gains and losses on the
disposal of property and equipment used in the Company's TiO2 operations. See
Note 8 to the Consolidated Financial Statements.
As a net result of the items discussed above, the Company's income from
operations increased 83% from $46.9 million in the first nine months of 2002 to
$85.6 million in the first nine months of 2003.
Outlook
The Company expects that its income from operations in 2003 will be higher
than in 2002 primarily due to higher average TiO2 selling prices and production
volume, partially offset by higher operating costs (particularly energy costs).
The Company's TiO2 production volume in 2003 is expected to be higher than the
Company's 2003 TiO2 sales volume, with finished goods inventories rising
modestly. The Company's expectations as to the future prospects for the Company
and the TiO2 industry are based upon a number of factors beyond the Company's
control, including worldwide growth of gross domestic product, competition in
the market place, unexpected or earlier-than-expected capacity additions by
competitors and technological advances. If actual developments differ from the
Company's expectations, the Company's results of operations could be unfavorably
affected.
Other income (expense) items
The following table sets forth certain information regarding other income
(expense).
Three months ended Nine months ended
September 30, September 30,
--------------------------- ---------------------------
2003 2002 Difference 2003 2002 Difference
------- ------ ------ ------ ------ -------
(In millions)
Trade interest income ........ $ .2 $ .7 $ (.5) $ .5 $ 1.2 $ (.7)
Interest and income from
affiliates .............. -- 3.6 (3.6) -- 22.8 (22.8)
Foreign currency
transaction gain ............ -- -- -- -- 15.8 (15.8)
Interest expense ............. (8.2) (7.6) (.6) (24.3) (9.3) (15.0)
Interest expense to affiliates -- -- -- (.1) (18.7) 18.6
----- ----- ----- ----- ----- -----
$(8.0) $(3.3) $(4.7) $(23.9) $11.8 $(35.7)
===== ===== ===== ===== ===== =====
Interest income was lower in the third quarter and the first nine months of
2003 as compared to the year earlier periods due to lower levels of available
funds invested and lower average yields. The Company expects interest income to
be lower for full-year 2003 than full-year 2002 due to lower average yields and
lower average levels of funds available for investment.
Interest income from affiliates decreased $3.6 million and $22.8 million,
respectively, from the third quarter and first nine months of 2002 due to the
redemption and extinguishments of all notes receivable from affiliates in July
2002. As a result of the redemption and extinguishments of affiliate notes
receivable, the Company does not expect a material amount of interest income
from affiliates in 2003.
Foreign currency transaction gains in the first nine months of 2002 related
primarily to the Company's dollar-denominated, 11.75% Second-tier Senior Mirror
Note payable to Kronos, which was repaid in June 2002 using a portion of the
proceeds from the Senior Secured Notes offering. As a result of the repayment of
this loan from affiliate, the Company does not expect any nonoperating foreign
currency transaction gains or losses in 2003.
Interest expense to third parties in the third quarter and first nine
months of 2003 increased $.6 million and $15.0 million, respectively, from the
third quarter and first nine months of 2002 primarily due to higher levels of
outstanding debt and associated currency effects. Interest expense to affiliates
decreased $18.6 million from the first nine months of 2002 due to the repayment
of loans from affiliates in June 2002 using proceeds from the Company's
(euro)285 million Senior Secured Notes offering (the "Notes"). The Company
expects its aggregate interest expense for full-year 2003 to be higher than
full-year 2002 due to higher levels of outstanding indebtedness, offset in part
by the effect of lower average rates on outstanding borrowings. As a result of
the repayment of the loans from affiliates in June 2002, the Company does not
expect a material amount of interest expense to affiliates in 2003.
Provision for income taxes
See Note 9 to the Consolidated Financial Statements.
Recently adopted accounting principle
As described in Note 1 to the Consolidated Financial Statements, the
Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligations,"
effective January 1, 2003.
Accounting principle not yet adopted
See Note 11 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows from operating, investing and
financing activities for the nine months ended September 30, 2003 and 2002 are
presented below.
Nine months ended
September 30,
------------------
2003 2002
------- ------
(In millions)
Net cash provided (used) by:
Operating activities ...................................................... $77.3 $50.1
Investing activities ...................................................... (21.9) (15.9)
Financing activities ...................................................... (54.8) (55.6)
----- -----
Net cash provided (used) by operating, investing and financing activities $ .6 $(21.4)
===== =====
Operating activities
The TiO2 industry is cyclical and changes in economic conditions within the
industry significantly affect the earnings and operating cash flows of the
Company. Cash flows from operations is the primary source of liquidity for the
Company. Changes in TiO2 pricing, production volume and customer demand, among
other things, could significantly affect the liquidity of the Company. Relative
changes in assets and liabilities generally result from the timing of
production, sales, purchases and income tax payments. Such relative changes can
significantly impact the comparability of cash flow from operations from period
to period, as the statement of income impact of such items may occur in a
different period from when the underlying cash transaction occurs. For example,
raw materials may be purchased in one period, but the payment for such raw
materials may occur in a subsequent period. Similarly, inventory may be sold in
one period, but the cash collection of the receivable may occur in a subsequent
period.
Cash flows from operating activities increased from $50.1 million in the
first nine months of 2002 to $77.3 million in the first nine months of 2003.
This $27.2 million increase was due primarily to the net effect of (i) higher
net income of $16.8 million, (ii) higher depreciation expense of $4.9 million,
(iii) $13.1 million of lower noncash currency transaction gains, $21.8 million
lower noncash interest income from affiliates and $5.5 million lower noncash
interest expense to affiliates in the first nine months of 2003, (iv) $4.5
million higher deferred income tax expense in 2003 and (v) $35.4 million of
higher net cash used to fund changes in the Company' inventories, receivables,
payables and accounts with affiliates in the first nine months of 2003. Relative
changes in accounts receivable are affected by, among other things, the timing
of sales and the collection of the resulting receivable. Relative changes in
inventories and accounts payable and accrued liabilities and accounts with
affiliates are affected by, among other things, the timing of raw material
purchases and the payment for such purchases and the relative difference between
production volume and sales volume.
Investing activities
The Company's capital expenditures were $21.1 million and $15.3 million in
the first nine months of 2003 and 2002, respectively. Capital expenditures in
the first nine months of 2002 included approximately $2.6 million related to
reconstruction of the Company's Leverkusen, Germany sulfate plant damaged in the
March 2001 fire.
Financing activities
In June 2002, the Company's operating subsidiaries in Germany, Belgium and
Norway entered into a new three-year (euro)80 million secured revolving credit
facility ("European Credit Facility") and borrowed (euro)13 million ($13 million
when borrowed) and NOK 200 million ($26 million when borrowed) which, along with
available cash, was used to repay and terminate the Company's short term notes
payable ($53.2 million when repaid). In the third quarter of 2002, the Company
repaid a net euro-equivalent 12.7 million ($12.4 million when repaid) of the
European Credit Facility. See Note 6 to the Consolidated Financial Statements.
In March 2003 the Company borrowed (euro)15 million ($16.1 million when
borrowed), in April 2003 the Company repaid NOK 80 million ($11.0 million when
repaid) and in the third quarter of 2003 the Company repaid (euro)30.0 million
($33.9 million when repaid) under the European Credit Facility.
In June 2003 the Company paid a $25.0 million dividend to Kronos. No
dividends were paid in the first or third quarters of 2003.
In March 2002 the Company repaid $25 million in principal amount of
affiliate indebtedness to Kronos. In June 2002 the Company issued (euro)285
million ($280 million when issued) principal amount of Notes due 2009. In June
2002 the Company repaid $169 million principal amount, plus accrued interest of
affiliate indebtedness to Kronos and (euro)113.8 million ($111.8 million),
including interest, of the euro-denominated note payable to Kronos with proceeds
from the offering of the Notes.
Deferred financing costs of $9.3 million for the Notes and the European
Credit Facility are being amortized over the life of the respective agreements
and are included in other noncurrent assets as of September 30, 2003.
Cash flows related to capital contributions and other transactions with
affiliates aggregated a net cash inflow of $2.9 million for the first nine
months of 2002. Such amounts relate principally to cash flows related to
dividends or loans KII received from, or capital contributions or loans KII made
to affiliates (such notes receivable from affiliates having previously been
reported as a reduction of the Company's stockholder's equity, and therefore
considered financing cash flows). As discussed in Note 1 of the Consolidated
Financial Statements, KII transferred its Canadian operations to Kronos in April
2002, and accordingly KII no longer reports such capital transaction cash flows
related to such Canadian operations subsequent to April 2002.
Cash, cash equivalents, restricted cash and noncurrent restricted
marketable debt securities and borrowing availability
At September 30, 2003, the Company had cash and cash equivalents
aggregating $16.8 million, current restricted cash equivalents of $836,000 and
noncurrent restricted marketable debt securities of $2.0 million. Based upon
expectations for the TiO2 industry and anticipated demands on cash resources as
discussed herein, the Company expects to have sufficient liquidity to meet
near-term obligations including operations, capital expenditures and debt
service. To the extent that actual developments differ from expectations,
liquidity could be adversely affected.
Certain of the Company's subsidiaries had approximately $89 million
available for borrowing at September 30, 2003 under the European Credit
Facility. At September 30, 2003, the Company had approximately $60 million
available for payments of dividends and other restricted payments as defined in
the Notes indenture. At September 30, 2003, the Company had complied with all
financial covenants governing its debt agreements.
Income tax contingencies
See Note 9 to the Consolidated Financial Statements.
Commitments and contingencies
See Note 10 to the Consolidated Financial Statements.
Non-GAAP financial measures
In an effort to provide investors with additional information regarding the
Company's results as determined by GAAP, the Company has disclosed certain
non-GAAP information which the Company believes provides useful information to
investors.
As discussed above, the Company discloses percentage changes in its average
TiO2 prices in billing currencies, which excludes the effects of foreign
currency translation. Such disclosure of the percentage change in the Company's
average TiO2 selling price in billing currencies is considered a "non-GAAP"
financial measure under regulations of the SEC. The disclosure of the percentage
change in the Company's average TiO2 selling prices using actual foreign
currency exchange rates prevailing during the respective periods is considered
the most directly comparable GAAP measure. The Company discloses percentage
changes in its average TiO2 prices in billing currencies because the Company
believes such disclosure provides useful information to investors to allow them
to analyze such changes without the impact of changes in foreign currency
exchange rates, thereby facilitating period-to-period comparisons of the
relative changes in average selling prices in the actual various billing
currencies. Generally, when the U.S. dollar either strengthens or weakens
against other currencies, the percentage change in average selling prices in
billing currencies will be higher or lower, respectively, than such percentage
changes would be using actual exchange rates prevailing during the respective
periods.
Other
The Company periodically evaluates its liquidity requirements, alternative
uses of capital, capital needs and availability of resources in view of, among
other things, its dividend policy, its debt service and capital expenditure
requirements and estimated future operating cash flows. As a result of this
process, the Company in the past has sought, and in the future may seek, to
reduce, refinance, repurchase or restructure indebtedness; raise additional
capital; repurchase shares of its common stock; modify its dividend policy;
restructure ownership interests; sell interests in subsidiaries or other assets;
or take a combination of such steps or other steps to manage its liquidity and
capital resources. In the normal course of its business, the Company may review
opportunities for the acquisition, divestiture, joint venture or other business
combinations in the chemicals or other industries, as well as the acquisition of
interests in, and loans to, related companies. In the event of any acquisition
or joint venture transaction, the Company may consider using available cash,
issuing equity securities or increasing its indebtedness to the extent permitted
by the agreements governing the Company's existing debt.
Special note regarding forward-looking statements
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts
are forward-looking statements that represent management's beliefs and
assumptions based on currently available information. Forward-looking statements
can be identified by the use of words such as "believes," "intends," "may,"
"should," "could," "anticipates," "expected" or comparable terminology, or by
discussions of strategies or trends. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
cannot give any assurances that these expectations will prove to be correct.
Such statements by their nature involve substantial risks and uncertainties that
could significantly impact expected results, and actual future results could
differ materially from those described in such forward-looking statements. While
it is not possible to identify all factors, the Company continues to face many
risks and uncertainties. Among the factors that could cause future results to
differ materially from those described herein are the risks and uncertainties
discussed in this Quarterly Report and those described from time to time in the
Company's other filings with the SEC including, but not limited to, the
following:
o Future supply and demand for the Company's products,
o The cyclicality of the Company's TiO2 business,
o Customer inventory levels (such as the extent to which the Company's
customers may, from time to time, accelerate purchases of TiO2 in advance
of anticipated price increases or defer purchases of TiO2 in advance of
anticipated price decreases),
o Changes in raw material and other operating costs (such as energy costs),
o The possibility of labor disruptions,
o General global economic and political conditions (such as changes in the
level of gross domestic product in various regions of the world and the
impact of such changes on demand for, among other things, TiO2),
o Competitive products and substitute products,
o Customer and competitor strategies,
o The impact of pricing and production decisions,
o Competitive technology positions,
o Fluctuations in currency exchange rates (such as changes in the exchange
rate between the U.S. dollar and each of the euro and the Norwegian
kroner),
o Operating interruptions (including, but not limited to, labor disputes,
leaks, fires, explosions, unscheduled or unplanned downtime and
transportation interruptions),
o Recoveries from insurance claims and the timing thereof,
o The ability of the Company to renew or refinance credit facilities,
o The ultimate outcome of income tax audits or other tax matters, and
o Possible future litigation.
Should one or more of these risks materialize (or the consequences of such
a development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or expected. The
Company disclaims any intention or obligation to update or revise any
forward-looking statement whether as a result of new information, future events
or otherwise.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures. The
term "disclosure controls and procedures," as defined by regulations of the SEC,
means controls and other procedures that are designed to ensure that information
required to be disclosed in the reports that the Company files or submits to the
SEC under the Securities Exchange Act of 1934, as amended (the "Act"), is
recorded, processed, summarized and reported, within the time periods specified
in the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
to the SEC under the Act is accumulated and communicated to the Company's
management, including its principal executive officer and its principal
financial officer, or persons performing similar functions, as appropriate to
allow timely decisions to be made regarding required disclosure. Each of Harold
C. Simmons, the Company's Chief Executive Officer, and Gregory M. Swalwell, the
Company's Vice President, Finance, have evaluated the Company's disclosure
controls and procedures as of September 30, 2003. Based upon their evaluation,
these executive officers have concluded that the Company's disclosure controls
and procedures are effective as of the date of such evaluation.
The Company also maintains a system of internal controls over financial
reporting. The term "internal control over financial reporting," as defined by
regulations of the SEC, means a process designed by, or under the supervision
of, the Company's principal executive and principal financial officers, or
persons performing similar functions, and effected by the Company's board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with GAAP, and includes
those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the assets of the
Company,
o Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP, and
that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company,
and
o Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the Company's consolidated financial
statements.
There has been no change to the Company's system of internal controls over
financial reporting during the quarter ended September 30, 2003 that has
materially affected, or is reasonably likely to materially affect, the Company's
system of internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Note 10 to the Consolidated Financial Statements, and
to the 2002 Annual Report and the Company's Quarterly Reports on Form 10-Q for
the quarters ended March 31, 2003 and June 30, 2003 for descriptions of certain
previously reported legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Company has retained a signed original of any exhibit listed
below that contains signatures, and the Company will provide any
such exhibit to the SEC or its staff upon request.
10.1 - Amendment dated August 11, 2003 to the Contract on
Supplies and Services among Bayer AG, Kronos Titan-GmbH & Co. OHG
and Kronos International (English translation of German language
document) - incorporated by reference to Exhibit 10.32 to the
Kronos Worldwide, Inc. Registration Statement on Form 10 (File
No. 001-31763).
31.1 - Certification.
31.2 - Certification.
32.1 - Certification.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended September 30, 2003:
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KRONOS INTERNATIONAL, INC.
(Registrant)
Date: November 14, 2003 By /s/ Gregory M. Swalwell
-------------------------------
Gregory M. Swalwell
Vice President, Finance
(Principal Accounting Officer and
Principal Financial Officer)