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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 - For the fiscal year ended December 31, 2003
Commission file number 333-100047
KRONOS INTERNATIONAL, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 22-2949593
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
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Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
None.
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act). Yes No X
No common stock was held by nonaffiliates of the Registrant as of June 30, 2003
(the last business day of the Registrant's most recently-completed second fiscal
quarter).
As of February 27, 2004, 2,968 shares of the Registrant's common stock were
outstanding.
The Registrant is a wholly-owned subsidiary of Kronos Worldwide, Inc. (File No.
1-31763) and meets the conditions set forth in General Instructions I(1) (a) and
(b) and is therefore filing this Form 10-K with the reduced disclosure format.
Documents incorporated by reference
None.
PART I
ITEM 1. BUSINESS
Kronos International, Inc., ("KII") is incorporated in the State of
Delaware, U.S.A., and is registered in the Commercial Register of the Federal
Republic of Germany. KII's principal place of business is in Leverkusen,
Germany.
KII is a wholly-owned subsidiary of Kronos Worldwide, Inc. ("Kronos")
(NYSE: KRO). At December 31, 2003, NL Industries, Inc. (NYSE: NL) held 51% of
the outstanding common stock of Kronos. NL conducts its titanium dioxide
pigments ("TiO2") operations through Kronos, which is the world's fifth largest
producer of TiO2. KII conducts Kronos' European TiO2 operations.
At December 31, 2003, (i) Valhi, Inc (NYSE: VHI) and a wholly-owned
subsidiary of Valhi owned an aggregate of 84% of NL's outstanding common stock,
(ii) Valhi and a wholly-owned subsidiary of Valhi owned an additional 42% of
Kronos' outstanding common stock and (iii) Contran Corporation 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, Kronos and the Company, as well as the
Chairman of the Board of each of Contran, Valhi, Kronos and the Company, may be
deemed to control each of such companies. See Notes 1 and 12 to the Consolidated
Financial 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
Annual Report on Form 10-K relating to matters that are not historical facts,
including, but not limited to, statements found in this Item 1 - "Business,"
Item 3 - "Legal Proceedings," Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Item 7A - "Quantitative and
Qualitative Disclosures About Market Risk," 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 actual future results to
differ materially are the risks and uncertainties discussed in this Annual
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 extent of the dependence of certain of the Company's businesses on
certain market sectors,
o The cyclicality of the Company's businesses,
o Customer inventory levels (such as the extent to which the Company's
customers may, from time to time, accelerate purchases of TiO2 in advance
of anticipated price increases or defer purchases of TiO2 in advance of
anticipated price decreases),
o Changes in raw material and other operating costs (such as energy costs),
o The possibility of labor disruptions,
o General global economic and political conditions (such as changes in the
level of gross domestic product in various regions of the world and the
impact of such changes on demand for TiO2),
o Competitive products and substitute products,
o Customer and competitor strategies,
o The impact of pricing and production decisions,
o Competitive technology positions,
o The introduction of trade barriers,
o Fluctuations in currency exchange rates (such as changes in the exchange
rate between the U.S. dollar and each of the euro 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 The ability of the Company to renew or refinance credit facilities,
o The ultimate outcome of income tax audits, tax settlement initiatives or
other tax matters,
o Environmental matters (such as those requiring emission and discharge
standards for existing and new facilities),
o Government laws and regulations and possible changes therein,
o The ultimate resolution of pending litigation, and
o Possible future litigation.
Should one or more of these risks materialize (or the consequences of such
a development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or expected. The
Company disclaims any intention or obligation to update or revise any
forward-looking statement whether as a result of changes in information, future
events or otherwise.
Industry. Titanium dioxide pigments are chemical products used for
imparting whiteness, brightness and opacity to a wide range of products,
including paints, plastics, paper, fibers, food, ceramics and cosmetics. TiO2 is
considered a "quality-of-life" product with demand affected by gross domestic
product in various regions of the world.
Pricing within the global TiO2 industry over the long term is cyclical, and
changes in industry economic conditions, especially in Western industrialized
nations, can significantly impact the Company's earnings and operating cash
flows. The Company's average TiO2 selling prices were generally decreasing
during all of 2001 and the first quarter of 2002, were generally flat during the
second quarter of 2002, were generally increasing during the third and fourth
quarters of 2002 and the first quarter of 2003, were generally flat during the
second quarter of 2003 and were generally decreasing during the third and fourth
quarters of 2003. Industry-wide demand for TiO2 is estimated to have been flat
or declined slightly throughout 2003. This is believed to have been the result
of lower customer inventory levels resulting from overall declining selling
prices. Volume demand in 2004 is expected to increase moderately over 2003
levels.
The Company is the second largest producer of TiO2 in Europe with an
estimated 18% share of European TiO2 sales volume. The Company is a leading
producer and marketer of TiO2 in Germany, with an estimated 26% share of sales
volume in 2003, and is among the leading marketers of TiO2 in the Benelux and
Scandinavian markets. By sales volume, the Company sells approximately 13% of
its total sales to the North American market through its affiliates, Kronos
(US), Inc. ("KUS") and Kronos Canada, Inc. ("KC"). 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. Significant regions for TiO2 consumption could emerge in Eastern
Europe, the Far East or China as the economies in these regions develop to the
point that quality-of-life products, including TiO2, are in greater demand. The
Company believes that, due to its strong presence in Western Europe, it is well
positioned to participate in growth in consumption of TiO2 in Eastern Europe.
Geographic information is contained in Note 2 to the Consolidated Financial
Statements.
Products and operations. TiO2 is produced in two crystalline forms: rutile
and anatase. Rutile TiO2 is a more tightly bound crystal that has a higher
refractive index than anatase TiO2 and, therefore, provides better opacification
and tinting strength in many applications. Although many end-use applications
can use either form of TiO2, rutile TiO2 is the preferred form for use in
coatings, plastics and ink. Anatase TiO2 has a bluer undertone and is less
abrasive than rutile TiO2, and it is often preferred for use in paper, ceramics,
rubber and man-made fibers.
The Company believes that there are no effective substitutes for TiO2.
However, extenders such as kaolin clays, calcium carbonate and polymeric
opacifiers are used in a number of the Company's markets. Generally, extenders
are used to reduce to some extent the utilization of higher-cost TiO2. The use
of extenders has not significantly changed TiO2 consumption over the past decade
because, to date, extenders generally have failed to match the performance
characteristics of TiO2. As a result, the Company believes that the use of
extenders will not materially alter the growth of the TiO2 business in the
foreseeable future.
The Company currently produces over 40 different TiO2 grades, sold under
the Kronos trademark, which provide a variety of performance properties to meet
customers' specific requirements. The Company's major customers include domestic
and international paint, plastics and paper manufacturers.
The Company has manufacturing facilities located in Germany, Belgium and
Norway. The Company and its distributors and agents sell and provide technical
services for its products to over 4,000 customers. TiO2 is distributed by rail,
truck and ocean carrier in either dry or slurry form. The Company conducts sales
and marketing activities in over 100 countries worldwide. Kronos, the Company
and its predecessors have produced and marketed TiO2 in North America and Europe
for over 80 years. As a result, the Company believes that it has developed
considerable expertise and efficiency in the manufacture, sale, shipment and
service of its products. By volume, approximately 73% of the Company's 2003 TiO2
sales were to Europe, with approximately 13% to North America and the balance to
other markets.
The Company is also engaged in the mining and sale of ilmenite ore (a raw
material used directly as a feedstock by some sulfate-process TiO2 plants)
pursuant to a governmental concession with an unlimited term that allows the
Company to operate an ilmenite mine in Norway. The ore body, owned by the
Norwegian government, has estimated ilmenite reserves that are expected to last
at least 20 years. Approximately 7% of the Company's consolidated net sales in
2001 and 2002 and 6% in 2003 represented ilmenite sales to third-party
customers. The Company is also engaged in the manufacture and sale of iron-based
water treatment chemicals (derived co-products of the pigment production
processes). The Company's water treatment chemicals (marketed under the name
Ecochem) are used as treatment and conditioning agents for industrial effluents
and municipal wastewater, and in the manufacture of iron pigments. Sales of
water treatment chemicals were approximately 5% of the Company's revenues in
each of 2001, 2002 and 2003.
Manufacturing process and raw materials. TiO2 is manufactured by the
Company using both the chloride process and the sulfate process. Approximately
65% of the Company's current production capacity is based on the chloride
process. The chloride process is a continuous process in which chlorine is used
to extract rutile TiO2. In general, the chloride process is also less intensive
than the sulfate process in terms of capital investment, labor and energy.
Because much of the chlorine is recycled and feedstock bearing a higher titanium
content is used, the chloride process produces less waste than the sulfate
process. The sulfate process is a batch chemical process that uses sulfuric acid
to extract TiO2. Sulfate technology normally produces either anatase or rutile
pigment. 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 milling and micronizing.
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 2003, chloride-process production
facilities represented approximately 62% of industry capacity.
The Company produced a Company record 320,000 metric tons of TiO2 in 2003,
compared to 293,000 metric tons produced in 2002 and 269,000 metric tons in
2001. The Company's average production capacity utilization rate in 2003 was
98%, up from 93% in 2002. The rates in 2002 and 2003 were higher than 2001 due
in part to debottlenecking activities. The Company believes its current annual
attainable production capacity is approximately 325,000 metric tons. The Company
expects this production capacity will be increased by approximately 8,000 metric
tons, primarily at its chloride facilities, with moderate capital expenditures,
bringing the Company's capacity to approximately 333,000 metric tons during
2005.
The primary raw materials used in the TiO2 chloride production process are
titanium-containing feedstock, derived from sand ilmenite, natural rutile ore,
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 around the world,
principally in Australia, South Africa, Canada, India and the United States. The
Company purchased approximately 250,000 metric tons of chloride feedstock in
2003, of which the vast majority was slag.
Through KUS the Company purchased slag in 2003 from two subsidiaries of Rio
Tinto plc UK - Richards Bay Iron and Titanium Limited South Africa and Q.I.T.
Fer et Titane Inc. Canada ("Q.I.T,") under long-term supply contracts that
expire at the end of 2007 and 2006 respectively. Natural rutile ore is purchased
primarily from Iluka Resources, Limited (Australia), a company formed through
the merger of Westralian Sands Limited (Australia) and RGC Mineral Sands, Ltd.,
under a long-term supply contract that expires at the end of 2005. The Company
and KUS do not expect to encounter difficulties obtaining long-term extensions
to existing supply contracts prior to the expiration of the contracts. Raw
materials purchased under these contracts and extensions thereof are expected to
meet the Company's chloride feedstock requirements over the next several years.
The primary raw materials used in the TiO2 sulfate production process are
titanium-containing feedstock derived primarily from rock and sand ilmenite 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 around the world. Currently, the
principal active sources are located in Norway, Canada, Australia, India and
South Africa. As one of the few vertically integrated producers of
sulfate-process pigments, the Company operates a rock ilmenite mine in Norway,
which provided all of the Company's feedstock for its European sulfate-process
pigment plants in 2003. The Company produced approximately 860,000 metric tons
of ilmenite in 2003 of which approximately 300,000 metric tons were used
internally, with the remainder sold to third parties.
The Company believes the availability of titanium-containing feedstock for
both the chloride and sulfate processes is adequate for the next several years.
The Company does not expect to experience any interruptions of its raw material
supplies because of its long-term supply contracts. However, political and
economic instability in certain countries from which the Company purchases its
raw material supplies could adversely affect the availability of such feedstock.
Should the Company's vendors not be able to meet their contractual obligations
or should the Company be otherwise unable to obtain necessary raw materials, the
Company may incur higher costs for raw materials or may be required to reduce
production levels, which may have a material adverse effect on the Company's
financial position, results of operations or liquidity.
Competition. The TiO2 industry is highly competitive. The Company competes
primarily on the basis of price, product quality and technical service, and the
availability of high performance pigment grades. Although certain TiO2 grades
are considered specialty pigments, the majority of the Company's grades and
substantially all of the Company's production are considered commodity pigments
with price generally being the most significant competitive factor. During 2003
the Company had an estimated 18% share of European TiO2 sales volume, and
believes that it is the leading seller of TiO2 in Germany and is among the
leading marketers in the Benelux and Scandinavian markets.
The Company's (along with KUS and KC) principal competitors are E.I. du
Pont de Nemours & Co. ("DuPont"); Millennium Chemicals, Inc.; Huntsman;
Kerr-McGee Corporation; and Ishihara Sangyo Kaisha, Ltd. The Company's five
largest competitors have estimated individual shares of TiO2 production capacity
ranging from 24% to 5%, and an estimated aggregate 70% share of worldwide TiO2
production volume.
Capacity additions that are the result of construction of greenfield plants
in the worldwide TiO2 market require significant capital and substantial lead
time, typically three to five years in the Company's experience. As no new
plants are currently under construction, additional greenfield capacity is not
expected in the next three to five years, but industry capacity can be expected
to increase as the Company and its competitors debottleneck existing plants. In
addition to potential capacity additions, certain competitors have either idled
or shut down facilities. Based on the factors described under the caption
"Industry" above, the Company expects that the average annual increase in
industry capacity from announced debottlenecking projects will be less than the
average annual demand growth for TiO2 over the next three to five years.
No assurance can be given that future increases in the TiO2 industry
production capacity and future average annual demand growth rates for TiO2 will
conform to the Company's expectations. If actual developments differ from the
Company's expectations, the Company and the TiO2 industry's performance could be
unfavorably affected.
Research and development. The Company's expenditures for research and
development and certain technical support programs were approximately $5 million
in 2001, $6 million in 2002 and $7 million in 2003. Research and development
activities are conducted principally at the Leverkusen, Germany facility. Such
activities are directed primarily toward improving both the chloride and sulfate
production processes, improving product quality and strengthening the Company's
competitive position by developing new pigment applications.
Patents and trademarks. Patents held for products and production processes
are believed to be important to the Company and to the continuing business
activities of the Company. The Company continually seeks patent protection for
its technical developments, principally in the United States, Canada and Europe,
and from time to time enters into licensing arrangements with third parties.
The Company's major trademarks, including Kronos(TM) and Ecochem(TM), are
protected by registration in Europe, the United States and elsewhere with
respect to those products it manufactures and sells.
Foreign operations. The Company's chemical businesses have operated in the
European markets since the 1920s. The Company's current production capacity is
located in Europe with its net property and equipment aggregating approximately
$368 million at December 31, 2003. The Company's operations include production
facilities in Germany, Belgium and Norway and sales and distribution facilities
in England, France, Denmark and the Netherlands. Approximately $568 million of
the Company's 2003 consolidated sales were to European customers and
approximately $148 million to customers in areas other than Europe, including
approximately $58 million of sales to customers in the U.S. through affiliates.
Foreign operations are subject to, among other things, currency exchange rate
fluctuations and the Company's results of operations have, in the past, been
both favorably and unfavorably affected by fluctuations in currency exchange
rates. Effects of fluctuations in currency exchange rates on the Company's
results of operations are discussed in Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Item 7A.
"Quantitative and Qualitative Disclosures about Market Risk."
Political and economic uncertainties in certain of the countries in which
the Company operates may expose it to risk of loss. The Company does not believe
that there is currently any likelihood of material loss through political or
economic instability, seizure, nationalization or similar event. The Company
cannot predict, however, whether events of this type in the future could have a
material effect on its operations. The Company's manufacturing and mining
operations are also subject to extensive and diverse environmental regulation in
each of the foreign countries in which they operate. See "Regulatory and
Environmental Matters."
Customer base and annual seasonality. The Company believes that neither its
aggregate sales nor those of any of its principal product groups are
concentrated in or materially dependent upon any single customer or small group
of customers. The Company's largest ten TiO2 pigment customers, excluding sales
to Kronos and affiliates, accounted for approximately 20% of net sales in 2003.
Neither the Company's business as a whole nor that of any of its principal
product groups is seasonal to any significant extent. Due in part to the
increase in paint production in the spring to meet the spring and summer
painting season demand, TiO2 sales are generally higher in the first half of the
year than in the second half of the year.
Employees. As of December 31, 2003, the Company employed approximately
1,950 persons. Hourly employees in European production facilities are
represented by a variety of labor unions, with labor agreements having various
expiration dates. The Company believes its labor relations are good.
Regulatory and environmental matters. The Company's operations are governed
by various environmental laws and regulations. Certain of the Company's
businesses are, or have been engaged in the handling, manufacture or use of
substances or compounds that may be considered toxic or hazardous within the
meaning of applicable environmental laws. As with other companies engaged in
similar businesses, certain past and current operations and products of the
Company have the potential to cause environmental or other damage. The Company
has implemented and continues to implement various policies and programs in an
effort to minimize these risks. The policy of the Company is to maintain
compliance with applicable environmental laws and regulations at all its
facilities and to strive to improve its environmental performance. It is
possible that future developments such as stricter requirements in environmental
laws and enforcement policies thereunder, could adversely affect the Company's
production, handling, use, storage, transportation, sale or disposal of such
substances as well as the Company's consolidated financial position, results of
operations or liquidity.
The Company's production facilities operate in an environmental regulatory
framework in which governmental authorities typically are granted broad
discretionary powers that allow them to issue operating permits required for the
plants to operate. The Company believes that all its plants are in substantial
compliance with applicable environmental laws. Neither the Company nor any of
its subsidiaries have been notified of any environmental claim by any applicable
federal, state, provincial or local environmental authority.
While the laws regulating operations of industrial facilities in Europe
vary from country to country, a common regulatory denominator is provided by the
European Union (the "EU"). Germany and Belgium are members of the EU and follow
its initiatives. Norway, although not a member, generally patterns its
environmental regulatory actions after the EU. The Company believes that it has
obtained all required permits and is in substantial compliance with applicable
EU requirements, including EU Directive 92/112/EEC regarding establishment of
procedures for reduction and eventual elimination of pollution caused by waste
from the TiO2 industry.
At the Company's sulfate plant facilities other than Fredrikstad, Norway,
the Company recycles spent acid either through contracts with third parties or
using the Company's own facilities. At its Fredrikstad, Norway plant, the
Company ships its spent acid to a third party location where it is treated and
disposed. The Company has a contract with a third party to treat certain
by-products of its German sulfate-process plants. Either party may terminate the
contract after giving four years advance notice with regard to its Nordenham,
Germany plant. Under certain circumstances, the Company may terminate the
contract after giving six months notice with respect to treatment of by-products
from the Leverkusen, Germany plant.
The Company is also involved in various other environmental, contractual,
product liability and other claims and disputes incidental to its business.
The Company's capital expenditures related to its ongoing environmental
protection and improvement programs in 2003 were approximately $5 million, and
are currently expected to be approximately $5 million in 2004.
Website and other available information. The Company does not maintain a
website on the Internet. However, NL maintains a website on the Internet with
the address of www.nl-ind.com. Copies of this Annual Report on Form 10-K for the
year ended December 31, 2003 and copies of the Company's Quarterly Reports on
Form 10-Q for 2003 and 2004 and any Current Reports on Form 8-K for 2003 and
2004, and any amendments thereto, are or will be available free of charge at
such website as soon as reasonably practical after they are filed with the SEC.
Information contained on NL's website is not part of this report.
The general public may read and copy any materials the Company files with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company is
an electronic filer, and the SEC maintains an Internet website that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC, including the Company. The
Internet address of the SEC's website is www.sec.gov.
ITEM 2. PROPERTIES
The Company currently operates four TiO2 plants (one in Leverkusen,
Germany; one in Nordenham, Germany; one in Langerbrugge, Belgium; and one in
Fredrikstad, Norway). The Company also operates an ilmenite ore mine in Hauge i
Dalane, Norway pursuant to a governmental concession. See Note 13 to the
Consolidated Financial Statements.
The Company's principal German operating subsidiary leases the land under
its Leverkusen TiO2 production facility pursuant to a lease expiring in 2050.
The Leverkusen facility, with about 50% of the Company's current TiO2 production
capacity, is located within an extensive manufacturing complex owned by Bayer
AG. Rent for the Leverkusen facility is periodically established by agreement
with Bayer AG for periods of at least two years at a time. Under a separate
supplies and services agreement expiring in 2011, Bayer provides some raw
materials, including chlorine and certain amounts of sulfuric acid, auxiliary
and operating materials and utilities services necessary to operate the
Leverkusen facility. The lease and the supplies and services agreement have
certain restrictions regarding the Company's ability to transfer ownership or
use of the Leverkusen facility.
The Company owns all of its principal production facilities described
above, except for the land under the Leverkusen and Fredrikstad facilities the
Company also operates an ilmenite ore mine in Norway pursuant to a governmental
concession with an unlimited term to operate the ilmenite mine in Norway.
The Company has under lease various corporate and administrative offices
located in Leverkusen, Germany and Brussels, Belgium and various sales offices
located in France, the Netherlands, Denmark and the United Kingdom.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings. Certain information
called for by this Item is included in Note 13 to the Consolidated Financial
Statements, which information is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to the General Instruction I of Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of KII's common stock is held by Kronos. There is no established public
trading market for KII's common stock. The indenture governing KII's 8.875%
Senior Notes Due 2009 limits the ability of the Company to pay dividends or make
other restricted payments, as defined. The aggregate amount of dividends and
other restricted payments since June 2002 may not exceed 75% of the aggregate
consolidated net income, as defined in the indenture, plus $25 million. KII
currently expects to pay dividends as permitted by the indenture; however
declaration and payment of future dividends and the amount thereof is dependent
upon the Company's results of operations, financial condition, contractual
limitations, cash requirements for its businesses and other factors deemed
relevant by the Company's Board of Directors. See Note 6 to the Consolidated
Financial Statements. At December 31, 2003, $70 million was available for
dividends or other restricted payments, as defined.
In January 2004, the Company paid a $60 million dividend to Kronos. The
declaration and payment of future dividends is discretionary, and the amount, if
any, will be dependent upon the Company's results of operations, financial
condition, contractual restrictions and other factors deemed relevant by the
Company's Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's Consolidated Financial Statements and Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Certain amounts have been reclassified to conform with the current year's
Consolidated Financial Statements.
Years ended December 31,
1999 2000 2001 2002 2003
(In millions, except per share data)
STATEMENTS OF OPERATIONS DATA:
Net sales $ 620.3 $ 620.5 $ 554.6 $ 579.7 $ 715.9
Net income (1) 41.9 80.1 113.7 52.3 81.8
BALANCE SHEET DATA (at year end):
Total assets 580.4 530.1 532.5 611.3 750.5
Long-term debt including current maturities 244.5 196.1 482.9 325.9 356.7
Redeemable preferred stock and profit
participation certificates 489.1 504.9 617.4 - -
Stockholder's equity (deficit) (442.9) (427.7) (777.5) 76.8 111.6
TiO2 OPERATING STATISTICS:
Sales volume* 291 294 265 297 310
Production volume* 272 297 269 293 320
Production rate as a percentage of capacity 90% Full 87% 93% 98%
* Metric tons in thousands
(1) Net income in 1999 includes a $57.7 million income tax benefit related to
(i) a favorable resolution of the Company's previously-reported tax
contingency in Germany ($29.1 million) and (ii) a net reduction in the
Company's deferred income tax asset valuation allowance due to a change in
the estimate of the Company's ability to utilize certain income tax
attributes under the "more-likely-than-not" recognition criteria ($28.6
million).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Critical accounting policies and estimates
The accompanying "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are based upon the Company's consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). The
preparation of these financial statements requires the Company to make estimates
and judgments that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the reported
period. On an on-going basis, the Company evaluates its estimates, including
those related to bad debts, inventory reserves, impairments of investments in
marketable securities and investments accounted for by the equity method, the
recoverability of other long-lived assets (including goodwill and other
intangible assets), pension benefit obligations and the underlying actuarial
assumptions related thereto, the realization of deferred income tax assets and
accruals for, litigation, income tax and other contingencies. The Company bases
its estimates on historical experience and on various other assumptions that it
believes to be reasonable under the circumstances, the results of which form the
basis for making judgments about the reported amounts of assets, liabilities,
revenues and expenses. Actual results may differ from previously-estimated
amounts under different assumptions or conditions.
The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements:
o The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments and
other factors. The Company takes into consideration the current financial
condition of its customers, the age of the outstanding balance and the
current economic environment when assessing the adequacy of the allowance.
If the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. During 2001, 2002 and 2003, the net amount
written off against the allowance for doubtful accounts as a percentage of
the balance of the allowance for doubtful accounts as of the beginning of
the year ranged from 12% to 24%.
o The Company provides reserves for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated net realizable value using assumptions about future demand for
its products and market conditions. If actual market conditions are less
favorable than those projected by management, additional inventory reserves
may be required. The Company also provides reserves for tools and supplies
inventory based generally on both historical and expected future usage
requirements.
o The Company recognizes an impairment charge associated with its long-lived
assets, including property and equipment, whenever it determines that
recovery of such long-lived asset is not probable. Such determination is
made in accordance with the applicable GAAP requirements associated with
the long-lived asset, and is based upon, among other things, estimates of
the amount of future net cash flows to be generated by the long-lived asset
and estimates of the current fair value of the asset. Adverse changes in
such estimates of future net cash flows or estimates of fair value could
result in an inability to recover the carrying value of the long-lived
asset, thereby possibly requiring an impairment charge to be recognized in
the future.
Underapplicable GAAP (SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets), property and equipment is not assessed for
impairment unless certain impairment indicators, as defined, are present.
During 2003, no such impairment indicators, as defined, were present.
o The Company maintains various defined benefit pension plans. The amount
recognized as defined benefit pension expense, and the reported amount of
prepaid and accrued pension costs, are actuarially determined based on
several assumptions, including discount rates, expected rates of returns on
plan assets and expected health care trend rates. Variances from these
actuarially assumed rates will result in increases or decreases, as
applicable, in the recognized pension obligations, pension expense and
funding requirements. These assumptions are more fully described below
under "Assumptions on defined benefit pension plans."
o The Company records a valuation allowance to reduce its deferred income tax
assets to the amount that is believed to be realized under the
"more-likely-than-not" recognition criteria. While the Company has
considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for a valuation allowance, it is
possible that in the future the Company may change its estimate of the
amount of the deferred income tax assets that would "more-likely-than-not"
be realized in the future, resulting in an adjustment to the deferred
income tax asset valuation allowance that would either increase or
decrease, as applicable, reported net income in the period such change in
estimate was made.
o The Company records accruals for legal, income tax and other contingencies
when estimated future expenditures associated with such contingencies
become probable, and the amounts can be reasonably estimated. However, new
information may become available, or circumstances (such as applicable laws
and regulations) may change, thereby resulting in an increase or decrease
in the amount required to be accrued for such matters (and therefore a
decrease or increase in reported net income in the period of such change).
Executive summary
Relative changes in the Company's TiO2 sales and operating income during
the past three years are primarily due to (i) relative changes in TiO2 sales and
production volumes, (ii) relative changes in TiO2 average selling prices and
(iii) relative changes in foreign currency exchange rates. The relatively lower
levels of sales and production volumes in 2001 as compared to 2002 and 2003 are
due in part to the effects of a fire at one of the Company's production
facilities, as discussed below.
Selling prices for TiO2, the Company's principal product, were generally
decreasing during all of 2001 and the first quarter of 2002, were generally flat
during the second quarter of 2002, were generally increasing during the last
half of 2002 and the first quarter of 2003, were generally flat during the
second quarter of 2003 and were generally declining during the third and fourth
quarters of 2003.
Results of operations
Average TiO2 selling prices in billing currencies (which exclude the
effects of foreign currency translation) were generally decreasing during all of
2001 and the first quarter of 2002, were generally flat during the second
quarter of 2002 and were generally increasing during the last half of 2002 and
the first quarter of 2003. Average selling prices for TiO2 were generally flat
during the second quarter of 2003 and were generally decreasing throughout the
remainder of 2003.
Years ended December 31, % Change
2001 2002 2003 2001-02 2002-03
(In millions, except selling price data)
Net sales $ 554.6 $ 579.7 $ 715.9 + 5% +23%
Cost of sales 379.5 454.2 516.9 +20% +14%
------- ------- -------
Gross margin 175.1 125.5 199.0 -28% +59%
Selling, general and administrative
expense (68.3) (72.0) (87.0) + 5% +21%
Insurance recoveries, net 7.2 - -
Currency transaction gains (losses), net (9.1) 12.4 (3.7)
Royalty income 5.4 5.8 6.1
Other operating income (expense), net .6 (.2) -
------- ------- -------
Income from operations $ 110.9 $ 71.5 $ 114.4 -36% +60%
======= ======= =======
TiO2 operating statistics:
Percent change in average selling prices:
Using actual foreign currency
exchange rates -10% +20%
Impact of changes in foreign
currency exchange rates ** -20%
---- ----
In billing currencies -10% **
==== ====
Sales volumes* 265 297 310 +12% + 4%
Production volumes* 269 293 320 + 9% + 9%
Production rate as
percent of capacity 87% 93% 98%
* Thousands of metric tons
** less that 1%
Year ended December 31, 2003 compared to year ended December 31, 2002
The Company's net sales increased $136.2 million (23%) in 2003 compared to
2002 due to higher average selling prices along with higher sales volumes in
2003 and the positive effects of currency exchange rates, specifically the
weaker U.S. dollar as compared to the euro. 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 2003 was consistent with 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 2003 increased 20% compared to 2002. The Company's TiO2 sales
volumes in 2003 set a new record, increasing 4% from the previous record
achieved in 2002, with higher volumes in European and North American markets
more than offsetting a decline in volumes to other regions. By volume,
approximately 75% of the Company's 2002 and 2003 TiO2 sales volumes were
attributable to markets in Europe, with approximately 10% attributable to North
America and the balance to other regions.
The Company's sales are denominated in various currencies, including the
U.S. dollar, the euro and other major European currencies. The disclosure of the
percentage change in the Company's average TiO2 selling price 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 accounting principles
generally accepted in the United States ("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 20% increase in the Company's average TiO2
selling prices during 2003 as compared to 2002 using actual foreign currency
exchange rates prevailing during the respective periods (the GAAP measure) and
the minimal percentage change in the Company's average TiO2 selling price in
billing currencies (the non-GAAP measure) during such periods is due to the
effect of changes in foreign currency exchange rates. The table above presents
(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 price 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 cost of sales increased $62.7 million (14%) in 2003 compared
to 2002 due to the higher sales volumes. The Company's cost of sales, as a
percentage of net sales, decreased from 78% in 2002 to 72% in 2003 due primarily
to the effects of continued cost reduction efforts combined with the impact of
higher production volumes and higher average selling prices. Operating rates
were near full capacity during most of 2003, setting a new Company production
record.
The Company's gross margins increased $73.5 million (59%) from 2002 to 2003
due to the net effects of the aforementioned changes in sales and cost of sales
during such periods.
As a percentage of net sales, selling general and administrative expenses
remained consistent at 12%, increasing proportionately with the increased sales
and production volume.
Certain of the sales generated by the Company's operations are denominated
in the U.S. dollar, and such operations routinely hold U.S. dollar-denominated
receivables. Primarily as a result of the weakening of the U.S. dollar as
compared to the euro throughout the year, the Company's results in 2003 included
net currency transaction losses of $3.7 million. Due to a more stable dollar in
2002, the Company recognized net currency transaction gains of $12.4 million.
The Company's operations and assets are located outside the United States
(primarily in Germany, Belgium and Norway). The Company's sales 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 generated from its
operations is 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 sales and
operating results are subject to currency exchange rate fluctuations which may
favorably or adversely impact reported earnings and may affect the comparability
of period-to-period operating results. Overall, fluctuations in the value of the
U.S. dollar relative to other currencies, primarily the euro, increased TiO2
sales in 2003 by a net $89 million compared to 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 2003 compared to the same periods of 2002. Overall, currency
exchange rate fluctuations resulted in a net increase in the Company's operating
income in 2003 of approximately $5 million as compared to 2002.
Year ended December 31, 2002 compared to year ended December 31, 2001
The Company's sales increased $25.1 million (5%) in 2002 compared to 2001
due primarily to higher TiO2 sales volumes, offset by lower average TiO2 selling
prices. The Company's TiO2 sales volumes in 2002 were 12% higher compared to
2001 primarily due to higher volumes in European and North American markets. By
volume, approximately 75% of the Company's 2002 TiO2 sales volumes were
attributable to markets in Europe, with 10% attributable to North America and
the balance to other regions. The lower TiO2 sales volumes in 2001 were due in
part to the effect of a fire at the Company's Leverkusen, Germany facility in
March 2001 that disrupted operations. See Note 11 to the Consolidated Financial
Statements. 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 2002
was 10% lower than 2001, with prices lower in all major regions. 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 2002 also decreased 10% compared to 2001.
The Company's cost of sales increased $74.7 million (20%) in 2002 compared
to 2001 due to the higher sales volume, partially offset by lower unit costs,
which resulted primarily from the higher production levels. The effects of lower
TiO2 sales and production volumes in 2001 were partially offset by receipt of
business interruption insurance proceeds subsequent to the fire at the Company's
Leverkusen, Germany facility discussed above. The Company's cost of sales, as a
percentage of net sales, increased from 68% in 2001 to 78% in 2002 primarily due
to the impact on net sales of the lower average selling prices partially offset
by lower unit costs.
The Company's gross margin declined $49.6 million (28%) in 2002 compared to
2001 as the effect of lower average TiO2 selling prices more than offset the
effect of higher TiO2 sales and production volumes. The effect of the higher
sales and production volumes was offset in part by the $27.3 million of business
interruption insurance proceeds received in 2001, as discussed below.
The Company's TiO2 production volume in 2002 was 9% higher than 2001. The
Company's operating rates in 2001 were lower as compared to 2002 primarily due
to lost production resulting from the Leverkusen fire.
The Company's income from operations in 2001 includes $27.3 million of
business interruption insurance proceeds as payment for losses (unallocated
period costs and lost margin) caused by the Leverkusen fire. The effects of the
lower TiO2 sales and production volumes were offset in part by the business
interruption insurance proceeds. Of such $27.3 million of business interruption
insurance proceeds, $20.1 million was recorded as a reduction of cost of sales
to offset unallocated period costs that resulted from lost production, and the
remaining $7.2 million, presenting recovery of lost margin, is included in
income from operations (as shown on the table above). The business interruption
insurance proceeds distorted the income from operations margin percentage in
2001 as there are no sales associated with the $7.2 million of lost margin
recognized. See Note 11 to the Consolidated Financial Statements.
The Company also recognized insurance recoveries of $29.1 million in 2001
for property damage and related cleanup and other extra expenses related to the
Leverkusen fire, resulting in an insurance gain of $17.5 million, as the
insurance recoveries exceeded the carrying value of the property destroyed and
the cleanup and other extra expenses incurred. Such insurance gain is not
reported as a component of income from operations but is included in other
income and expense, as discussed below. The Company does not expect to recognize
any additional insurance recoveries related to the Leverkusen fire. See Note 11
to the Consolidated Financial Statements.
The Company's selling, general and administrative expenses ("SG&A
expenses") increased $3.7 million (5%) in 2002 as compared to 2001 primarily due
to higher selling and distribution expenses associated with the higher sales
volume in 2002 and higher administrative expenses. SG&A expenses were
approximately 12% of sales in both 2001 and 2002.
As discussed above, the Company's operations and assets are located outside
the United States (primarily in Germany, Belgium and Norway) and consequently,
the translated U.S. dollar value of the Company's sales and operating results
are subject to currency exchange rate fluctuations that may favorably or
adversely impact reported earnings and may affect the comparability of
period-to-period operating results. Overall, fluctuations in the value of the
U.S. dollar relative to other currencies, primarily the euro, increased TiO2
sales in 2002 by a net $22 million compared to 2001. 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 2003 compared to the same periods of 2002. Overall, currency
exchange rate fluctuations on the Company's operating income comparisons was not
significant in 2002 as compared to 2001.
Outlook
The Company expects its TiO2 production volumes in 2004 will approximate
its 2003 production volumes, and sales volumes are expected to be slightly
higher in 2004 as compared to 2003. The Company's' average Ti02 selling price,
which declined during the second half of 2003, is expected to continue to
decline during the first quarter of 2004. The Company is hopeful that its
average selling prices will cease to decline sometime during the first half of
2004 and will rise thereafter. Nevertheless, the Company expects its average
TiO2 selling prices, in billing currencies, will be lower in 2004 as compared to
2003. Overall, the Company expects its operating income in 2004 will be lower
than 2003. The Company's expectations as to the future prospects of the Company
and the TiO2 industry are based upon a number of factors beyond its control,
including worldwide growth of gross domestic product, competition in the
marketplace, unexpected or earlier-than-expected capacity additions and
technological advances. If actual developments differ from the Company's
expectations, the Company's results of operations could be unfavorably affected.
Other income (expense)
The following table sets forth certain information regarding other income
and expense items.
Years ended December 31, Change
--------------------------------- -----------------------
2001 2002 2003 2001-02 2002-03
(In millions)
Trade interest income $ 2.1 $ 1.6 $ .7 $ (.5) $ (.9)
Interest income from affiliates 36.2 22.8 - (13.4) (22.8)
Currency transaction gains - 2.7 - 2.7 (2.7)
Insurance recoveries, net 17.5 - - (17.5) -
Interest expense (4.3) (16.7) (32.5) (12.4) (15.8)
Interest expense to affiliates (34.1) (18.7) (.1) 15.4 18.6
------ ------ ------ ------ ------
$ 17.4 $ (8.3) $(31.9) $(25.7) $(23.6)
====== ====== ====== ====== ======
The Company had certain loans to affiliates that were outstanding during
2001 and 2002. The Company transferred such notes receivable from affiliates to
Kronos in July 2002, and accordingly no longer reports interest income on such
loans to affiliates after that date.
Interest income fluctuates in part based upon the amount of funds invested
and yields thereon. Aggregate interest income declined $23.7 million in 2003
compared to 2002 and $13.9 million in 2002 compared with 2001 primarily due to
lower average yields on invested funds and lower average levels of funds
available for investment. The Company expects interest income will be lower in
2004 than 2003 due to lower average funds available for investment and to lower
average yields and lower average levels of funds available for investment.
In June 2002, the Company sold (euro)285 million of its 8.875% Senior
Secured Notes (the "Notes") due 2009. KII used the net proceeds of the Notes
offering to repay certain intercompany indebtedness owed to NL, a portion of
which NL used to redeem at par all of its outstanding 11.75% Senior Secured
Notes due 2003, plus accrued interest. As a result of the refinancing, the
Company recognized a foreign currency transaction gain of $2.7 million in 2002
related to the extinguishment of certain intercompany indebtedness.
The insurance recoveries, net of $17.5 million in 2001 related to insurance
proceeds received from property damage resulting from the Leverkusen fire. The
insurance proceeds received exceeded the carrying value of the property
destroyed and cleanup costs incurred. See Note 11 to the Consolidated Financial
Statements.
Aggregate interest expense in 2003 decreased $2.8 million compared to 2002
primarily due to lower levels of outstanding affiliate indebtedness and
associated currency effects and lower interest rates. As discussed above, the
Company extinguished certain intercompany indebtedness in 2002 and therefore,
interest expense to affiliates decreased significantly in 2003 as compared to
2002. Aggregate interest expense in 2002 decreased $3.0 million compared with
2001 primarily due to lower levels of outstanding indebtedness, partially offset
by higher levels of bank debt. See Note 6 to the Consolidated Financial
Statements. Assuming no significant change in interest rates, interest expense
in 2004 is expected to be higher compared with 2003 due to higher average levels
of outstanding indebtedness, partially offset by lower average interest rates.
Provision for income taxes. The principal reasons for the difference
between the Company's effective income tax rates and the U.S. federal statutory
income tax rates are explained in Note 9 to the Consolidated Financial
Statements. Income tax rates vary by jurisdiction (country and/or state), and
relative changes in the geographic mix of the Company's pre-tax earnings can
result in fluctuations in the effective income tax rate.
During 2003, the Company reduced its deferred income tax asset valuation
allowance by approximately $6.7 million, primarily as a result of utilization of
certain income tax attributes for which the benefit had not previously been
recognized. In addition, the Company recognized a $38.0 million income tax
benefit related to the net refund of certain prior year German income taxes.
During 2002, the Company reduced its deferred income tax asset valuation
allowance by approximately $2.8 million, primarily as a result of utilization of
certain income tax attributes for which the benefit had not previously been
recognized. The provision for income taxes in 2002 also includes a $2.3 million
deferred income tax benefit related to certain changes in the Belgian tax law.
During 2001, the Company reduced its deferred income tax asset valuation
allowance by $23.2 million. This entire reduction related to a change in
estimate of the Company's ability to utilize certain German income tax
attributes following the completion of a restructuring of its German operations,
the benefit of which had not previously been recognized under the
"more-likely-than-not" recognition criteria.
At December 31, 2003, the Company had the equivalent of approximately $438
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. The Company periodically evaluates the "more-likely-than-not"
recognition criteria with respect to such tax loss carryforwards, and it is
possible that in the future the Company may conclude such carryforwards do meet
the recognition criteria, at which time the Company would reverse all or a
portion of such deferred tax valuation allowance.
In January 2004, the German federal government enacted new tax law
amendments that limit the annual utilization of income tax loss carryforward
effective January 1, 2004. The new law may significantly affect the Company's
future income tax expense and cash tax payments.
Related party transactions. The Company is a party to certain transactions
with related parties. See Note 12 to the Consolidated Financial Statements.
Accounting principles newly adopted in 2003. See Note 15 to the
Consolidated Financial Statements.
Accounting principles not yet adopted: See Note 16 to Consolidated
Financial Statements.
Defined benefit pension plans. The Company maintains various defined
benefit pension plans in the Europe. See Note 10 to the Consolidated Financial
Statements.
The Company accounts for its defined benefit pension plans using SFAS No.
87, "Employer's Accounting for Pensions." Under SFAS No. 87, 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. The Company recognized consolidated defined benefit
pension plan expense of $4.6 million in 2001, $5.7 million in 2002 and $5.8
million in 2003. The amount of funding requirements for these defined benefit
pension plans is generally based upon applicable regulations (such as ERISA in
the U.S.), and will generally differ from pension expense recognized under SFAS
No. 87 for financial reporting purposes. Contributions made by the Company to
all of its plans aggregated $7.0 million in 2001, $7.8 million in 2002 and $10.2
million in 2003.
The discount rates the Company utilizes 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, the Company
receives advice about appropriate discount rates from the Company's third-party
actuaries, who may in some cases utilize their own market indices. The discount
rates are adjusted as of each valuation date (September 30th) to reflect
then-current interest rates on such long-term bonds. Such discount rates are
used to determine the actuarial present value of the pension obligations as of
December 31st of that year, and such discount rates are also used to determine
the interest component of defined benefit pension expense for the following
year.
At December 31, 2003, approximately 75% and 20% of the projected benefit
obligation related to Company plans in Germany and Norway, respectively. The
Company uses several different discount rate assumptions in determining its
consolidated defined benefit pension plan obligations and expense because the
Company maintains defined benefit pension plans in several different countries
in Europe and the interest rate environment differs from country to country.
The Company used the following discount rates for its defined benefit
pension plans:
Discount rates used for:
---------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
Obligations at Obligations at Obligations at
December 31, 2001 and expense December 31, 2002 and expense December 31, 2003 and
in 2002 in 2003 expense in 2004
------------------------------- -------------------------------- -----------------------------
Germany 5.8% 5.5% 5.3%
Norway 6.0% 6.0% 5.5%
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 and the actual fair value
of the plan assets as of the beginning of 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, 2003, approximately 70% and 26% of the plan assets related
to plan assets for the Company's plans in Germany and Norway, respectively. The
Company uses several different long-term rates of return on plan asset
assumptions in determining its consolidated defined benefit pension plan expense
because the Company maintains defined benefit pension plans in several different
countries in Europe, 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, the Company considers the long-term asset mix (e.g. equity vs.
fixed income) for the assets for each of its plans and the expected long-term
rates of return for such asset components. In addition, the Company receives
advice about appropriate long-term rates of return from the Company's
third-party actuaries. Such assumed asset mixes are summarized below:
o In Germany, the composition of the Company's plan assets is established to
satisfy the requirements of the German insurance commissioner. The current
plan asset allocation at December 31, 2003 was 25% to equity managers and
75% to fixed income managers.
o In Norway, the Company currently has a plan asset target allocation of 14%
to equity managers and 86% to fixed income managers, with an expected
long-term rate of return for such investments of approximately 8% and 6%,
respectively. The current plan asset allocation at December 31, 2003 was
15% to equity managers and 85% to fixed income managers.
The Company regularly reviews its actual asset allocation for each of its
plans and will periodically rebalance the investments in each plan to more
accurately reflect the targeted allocation when considered appropriate.
The Company's assumed long-term rates of return on plan assets for 2001,
2002 and 2003 were as follows:
2001 2002 2003
Germany 7.3% 6.8% 6.5%
Norway 7.0% 7.0% 6.0%
The Company currently expects to utilize the same long-term rate of return
on plan asset assumptions in 2004 as it used in 2003 for purposes of determining
the 2004 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 the Company's
plans for which the benefit formula is so calculated, the Company generally
bases the assumed expected increase in future compensation levels upon average
long-term inflation rates for the applicable country.
In addition to the actuarial assumptions discussed above, because the
Company maintains its defined benefit pension plans outside the U.S., the amount
of recognized defined benefit pension expense and the amount of prepaid and
accrued pension costs will vary based upon relative changes in foreign currency
exchange rates.
Based on the actuarial assumptions described above and the Company's
current expectation for what actual average foreign currency exchange rates will
be during 2004, the Company expects its defined benefit pension expense will
approximate $10 million in 2004. In comparison, the Company expects to be
required to make approximately $4 million of contributions to such plans during
2004.
As noted above, defined benefit pension expense and the amount recognized
as prepaid and accrued pension costs are based upon the actuarial assumptions
discussed above. The Company believes all of the actuarial assumptions used are
reasonable and appropriate. If the Company had lowered the assumed discount rate
by 25 basis points for all of its plans as of December 31, 2003, the Company's
aggregate projected benefit obligations would have increased by approximately
$7.9 million at that date, and the Company's defined benefit pension expense
would be expected to increase by approximately $1.0 million during 2004.
Similarly, if the Company lowered the assumed long-term rate of return on plan
assets by 25 basis points for all of its plans, the Company's defined benefit
pension expense would be expected to increase by approximately $500,000 during
2004.
Foreign operations
The Company's operations are located in Europe where the functional
currency is not the U.S. dollar. As a result, the reported amount of the
Company's assets and liabilities, and therefore the Company's consolidated net
assets, will fluctuate based upon changes in currency exchange rates. As of
January 1, 2001, the functional currency of the Company's German, Belgian, Dutch
and French operations had been converted to the euro from their respective
national currencies. At December 31, 2003, the Company had substantial net
assets denominated in the euro, Norwegian kroner and United Kingdom pound
sterling.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated cash flows
The Company's consolidated cash flows for each of the past three years are
presented below:
Years ended December 31,
2001 2002 2003
(In millions)
Operating activities $ 76.0 $ 68.2 $ 104.8
Investing activities (28.5) (29.7) (31.7)
Financing activities (52.8) (57.5) (54.9)
------- ------- -------
Net cash provided (used) by operating, investing and financing
activities $ (5.3) $ (19.0) $ 18.2
======= ======= =======
Operating activities. Certain items included in the determination of net
income do not represent current inflows or outflows of cash. For example,
insurance recoveries, net of $17.5 million in 2001, are excluded from the
determination of operating cash flow. These insurance proceeds are shown in the
statement of cash flows under investing activities to partially offset the cash
outflow impact of capital expenditures related to the Leverkusen sulfate plant
reconstruction. Certain other 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 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 the Company's Consolidated Financial Statements.
The TiO2 industry is cyclical and changes in economic conditions within the
industry significantly impact the earnings and operating cash flows of the
Company. Cash flow from operations is considered the primary source of liquidity
for the Company. Changes in TiO2 pricing, production volume and customer demand,
among other things, could significantly affect the liquidity of the Company.
Relative changes in assets and liabilities generally result from the timing
of production, sales, purchases and income tax payments. Such relative changes
can significantly impact the comparability of cash flow from operations from
period to period, as the income statement impact of such items may occur in a
different period from when the underlying cash transaction occurs. For example,
raw materials may be purchased in one period, but the payment for such raw
materials may occur in a subsequent period. Similarly, inventory may be sold in
one period, but the cash collection of the receivable may occur in a subsequent
period.
Cash flows from operating activities increased from $68.2 million in 2002
to $104.8 million in 2003. This $36.6 million increase was due primarily to the
effect of (i) higher net income of $29.5 million, (ii) higher depreciation
expense of $6.5 million, (iii) a lower amount of net cash generated from
relative changes in the Company's inventories, receivables, payables and
accruals and accounts with affiliates of $22.6 million in 2003 as compared to
2002 and (iv) lower cash paid for income taxes of $18.3 million. 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 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.
Cash flows from operating activities decreased from $76.0 million in 2001
to $68.2 million in 2002. This $7.8 million decrease was due primarily to the
net effect of (i) lower net income of $61.4 million, (ii) higher depreciation
expense of $3.0 million, (iii) insurance recoveries, net of $17.5 million in
2001 as compared to nil in 2002 and (iv) a higher amount of net cash generated
from relative changes in the Company's inventories, receivables, payables and
accruals and accounts with affiliates of $33.9 million in 2002 as compared to
2001. Relative changes in accounts receivable are affected by, among other
things, the timing of sales and the collection of the resulting receivable.
Investing cash flows. The Company's capital expenditures were $48.4
million, $27.6 million and $31.5 million in 2001, 2002 and 2003, respectively.
Capital expenditures in 2001 and 2002 included an aggregate of $22.3 million and
$3.1 million, respectively, for the rebuilding of the Company's Leverkusen,
Germany sulfate plant. In 2001 the Company received $23.4 million of insurance
proceeds for property damage resulting from the Leverkusen fire and paid $3.2
million of expenses related to repairs and clean-up costs.
The Company's capital expenditures during the past three years include an
aggregate of approximately $13 million ($4.9 million in 2003) for the Company's
ongoing environmental protection and compliance programs. The Company's
estimated 2004 capital expenditures are $32 million and include approximately $4
million in the area of environmental protection and compliance.
Financing cash flows. In March 2003, the Company's operating subsidiaries
in Germany, Belgium and Norway borrowed (euro)15 million ($16.1 million when
borrowed), in April 2003, repaid NOK 80 million ($11.0 million when repaid) and
in the third quarter of 2003, repaid (euro)30.0 million ($33.9 million when
repaid) under its three-year (euro)80 million secured revolving credit facility
("European Credit Facility"). See Note 6 to the Consolidated Financial
Statements.
In March 2002 the Company repaid $25 million principal amount of affiliate
indebtedness to Kronos. In June 2002 the Company repaid $169 million principal
amount, plus accrued interest of affiliate indebtedness, to Kronos with proceeds
from the June 2002 issuance of the (euro)285 million principal amount of the KII
8.875% Senior Secured Notes ($280 million when issued) (the "Notes"). Further,
in June 2002, the Company repaid (euro)113.8 million ($111.8 million), including
interest, of a euro-denominated note payable to Kronos with proceeds from the
Notes offering.
Also in June 2002, the Company's operating subsidiaries in Germany, Belgium
and Norway borrowed (euro)13 million ($13 million) and NOK 200 million ($26
million) which, along with available cash, was used to repay and terminate KII's
short term notes payable ($53.2 million when repaid). In 2002, the Company
repaid a net euro-equivalent 12.7 million ($12.4 million when repaid) and 1.7
million ($1.6 million when repaid), respectively, of the European Credit
Facility.
Deferred financing costs of $10.0 million for the Notes and the European
Credit Facility are being amortized over the lives of the respective agreements
and are included in other noncurrent assets as of December 31, 2003.
In 2001 the Company repaid (euro)7.6 million ($6.5 million when paid) and
(euro)16.4 million ($14.9 million when paid), respectively, of its
euro-denominated short-term debt with excess cash flow from operations.
Other than operating lease commitments disclosed in Note 13 to the
Consolidated Financial Statements, the Company is not party to any material
off-balance sheet financing arrangements.
Cash dividends paid during 2003 totaled $25.0 million. (No dividends were
paid in 2001 or 2002). In January 2004, the Company paid a $60 million dividend
to Kronos. The declaration and payment of future dividends is discretionary, and
the amount, if any, will be dependent upon the Company's results of operations,
financial condition, contractual restrictions and other factors deemed relevant
by the Company's Board of Directors.
Cash flows related to capital contributions and other transactions with
affiliates aggregated a net cash outflow of $35.6 million in 2001 and a net cash
inflow of $2.9 million in 2002. Such amounts related principally to dividends or
loans KII received from, or capital contributions or loans KII made to
affiliates (such notes receivable from affiliates being reported as reductions
to the Company's stockholder's equity, and therefore considered financing cash
flows). As discussed in Note 1 to the Consolidated Financial Statements, KII
transferred its Canadian operations to Kronos in April 2002, and accordingly KII
no longer reports any such capital transaction cash flows related to such
Canadian operations subsequent to April 2002. Additionally, settlement of the
above-mentioned notes receivable from affiliates was not then currently
contemplated in the foreseeable future. In July 2002, KII transferred such notes
receivable from affiliates to Kronos in one or more non-cash transactions, and
as a result KII no longer reports cash flows related to such notes receivable
from affiliates.
Cash, cash equivalents, restricted cash and restricted marketable debt
securities and borrowing availability. At December 31, 2003, the Company had
current cash and cash equivalents aggregating $37.1 million, had current
restricted cash equivalents of $1.3 million and noncurrent restricted marketable
debt securities of $2.6 million. At December 31, 2003, certain of the Company's
subsidiaries had approximately $100 million available for borrowing, including
approximately $97 million under the European Credit Facility (based on borrowing
availability). At December 31, 2003, the Company had approximately $70 million
available for payment of dividends and other restricted payments as defined in
the Notes indenture. At December 31, 2003, the Company had complied with all
financial covenants governing its debt agreements.
Based upon the Company's expectations for the TiO2 industry and anticipated
demands on the Company's cash resources as discussed herein, the Company expects
to have sufficient liquidity to meet its near-term obligations including
operations, capital expenditures, debt service and current dividend policy. To
the extent that actual developments differ from Company's expectations, the
Company's liquidity could be adversely affected.
Legal proceedings and environmental matters. See Note 13 to the
Consolidated Financial Statements for certain legal proceedings and
environmental matters with respect to the Company.
Foreign operations. As discussed above, the Company's operations are
located outside the United States for which the functional currency is not the
U.S. dollar. As a result, the reported amount of the Company's assets and
liabilities related to its operations, and therefore the Company's consolidated
net assets, will fluctuate based upon changes in currency exchange rates. As of
January 1, 2001, the functional currency of the Company's German, Belgian, Dutch
and French operations have been converted to the euro from their respective
national currencies. At December 31, 2003, the Company had substantial net
assets denominated in the euro, Norwegian kroner and United Kingdom pound
sterling.
Redeemable preferred stock, profit participation certificates and notes
receivable from affiliates. The Company had issued and outstanding Series A and
Series B redeemable preferred stock and profit participation certificates
totaling $694.8 million and $617.4 million at June 30, 2002 and December 31,
2001, respectively, including cumulative and unpaid dividends. The Series A
redeemable preferred stock was issued to Kronos in February 1999 as a result of
a capital contribution to the Company through the reduction of the Company's
affiliate notes payable to NL and Kronos. The Series B redeemable preferred
stock was issued to Kronos in February 1999 as a result of a contribution of
intellectual property by Kronos to the Company. The intellectual property was
contributed to the Company at Kronos' carryover basis of zero due to common
control of the Company and Kronos. The profit participation certificates were
issued to Kronos in December 1999 as part of a recapitalization. The Company had
$753.0 million and $700.8 million of outstanding notes receivable from
affiliates at June 30, 2002 and December 31, 2001, respectively. Settlement of
such notes receivable was not currently contemplated in the then foreseeable
future, and consequently such notes receivable from affiliates were reported in
the Company's consolidated balance sheet as a reduction of the Company's
stockholder's equity in accordance with GAAP. These notes arose between the
Company, NL and Kronos through a series of transactions with affiliates, a
substantial portion of which were noncash in nature. The Company periodically
converted accrued interest receivable from affiliates to notes receivable from
affiliates. See Note 8 to the Consolidated Financial Statements for the effect
of the recapitalization in July 2002 on the Company.
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; issue additional securities; restructure ownership interests; modify
its dividend policy; 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 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. See Note 6 to the Consolidated
Financial Statements.
Summary of debt and other contractual commitments
As more fully described in the notes to the Consolidated Financial
Statements, the Company is a party to various debt, lease and other agreements
which contractually and unconditionally commit the Company to pay certain
amounts in the future. See Notes 6 and 13 to the Consolidated Financial
Statements. The following table summarizes such contractual commitments of the
Company and its consolidated subsidiaries that are unconditional both in terms
of timing and amount by the type and date of payment.
Unconditional payment due date
2009 and
Contractual commitment 2004 2005/2006 2007/2008 after Total
----- ---------- --------- -------- -------
(In millions)
Third-party indebtedness $ .3 $ .3 $ - $ 356.1 $ 356.7
Operating leases 2.9 3.6 2.5 19.9 28.9
Fixed asset acquisitions 5.9 - - - 5.9
Asset retirement obligations and other - - - 5.8 5.8
------- ------- ------- ------- -------
$ 9.1 $ 3.9 $ 2.5 $ 381.8 $ 397.3
======= ======= ======= ======= =======
The above table does not reflect any amounts that the Company might pay to
fund its defined benefit pension 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. Such defined benefit pension plans are
discussed above in greater detail.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General. The Company is exposed to market risk from changes in foreign
currency exchange rates, interest rates and equity security prices. In the past,
the Company has periodically entered into interest rate swaps or other types of
contracts in order to manage a portion of its interest rate market risk.
Otherwise, the Company does not generally enter into forward or option contracts
to manage such market risks, nor does the Company enter into any such contract
or other type of derivative instrument for trading or speculative purposes.
Other than as described below, the Company was not a party to any material
forward or derivative option contract related to foreign exchange rates,
interest rates or equity security prices at December 31, 2002 and 2003. See
Notes 1 and 14 to the Consolidated Financial Statements.
Interest rates. The Company is exposed to market risk from changes in
interest rates, primarily related to indebtedness. At December 31, 2003,
substantially all of the Company's aggregate indebtedness was comprised of
fixed-rate instruments (2002 - 92% of fixed-rate instruments and 8% of variable
rate borrowings). 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 the Company's aggregate outstanding indebtedness at December 31, 2003. At
December 31, 2002 and 2003, all outstanding fixed-rate indebtedness was
denominated in euros, and the outstanding variable rate borrowings were
denominated in the euro or the Norwegian kroner. Information shown below for
such foreign currency denominated indebtedness is presented in its U.S. dollar
equivalent at December 31, 2003 using exchange rates of 1.25 U.S. dollars per
euro. Certain Norwegian kroner denominated capital leases totaling $700,000 in
2003 have been excluded from the table below.
Amount
-------------------------
Carrying Fair Interest Maturity
Indebtedness value value rate date
--------- -------- ---------- ----------
(In millions)
Fixed-rate indebtedness:
Euro-denominated
Senior Secured Notes $ 356.1 $ 356.1 8.9% 2009
======= =======
At December 31, 2002, fixed rate indebtedness aggregated $296.9 million
(fair value - $299.9 million) with a weighted-average interest rate of 8.9%; and
variable rate indebtedness at such date aggregated $27.1 million, which
approximates fair value, with a weighted-average interest rate of 6.5%. All of
such fixed rate indebtedness was denominated in euros. Such variable rate
indebtedness was denominated in the euro (58% of the total) or the Norwegian
kroner (42%).
Foreign currency exchange rates. The Company is exposed to market risk
arising from changes in foreign currency exchange rates as a result of
manufacturing and selling its products worldwide. Earnings are primarily
affected by fluctuations in the value of the U.S. dollar relative to the euro,
the Norwegian kroner and the United Kingdom pound sterling.
As described above, at December 31, 2003, the Company had the equivalent of
$356.1 million of outstanding euro-denominated indebtedness (2002 - the
equivalent of $312.5 million of euro-denominated indebtedness and $11.5 million
of Norwegian kroner-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 $35.6 million at December 31, 2003 (2002 - $32.4 million).
At December 31, 2003, the Company had entered into a short-term currency
contract maturing on January 2, 2004 to exchange an aggregate of (euro)40
million into U.S. dollars at an exchange rate of U.S. $1.25 per euro. Such
contract was entered into in conjunction with the January 2004 payment of an
intercompany dividend from one of the Company's European subsidiaries. At
December 31, 2003, the actual exchange rate was U.S. $1.25 per euro. The
estimated fair value of such foreign currency forward contract was not material
at December 31, 2003.
Other. The Company believes there may be a certain amount of incompleteness
in the sensitivity analysis presented above. For example, the hypothetical
effect of changes in exchange rates discussed above ignores the potential effect
on other variables which affect the Company's results of operations and cash
flows, such as demand for the Company's products, sales volumes and selling
prices and operating expenses. Accordingly, the amounts presented above are not
necessarily an accurate reflection of the potential losses the Company 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 the Company of future events,
gains or losses.
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 financial statement users. 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 financial statement users 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 using actual exchange rates
prevailing during the respective periods.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item is contained in a separate section
of this Annual Report. See "Index of Financial Statements and Schedules" (page
F-1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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, 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 and Chief
Financial Officer, have evaluated the Company's disclosure controls and
procedures as of December 31, 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 accounting
principles generally accepted in the United States of America ("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 December 31, 2003 that has
materially affected, or is reasonably likely to materially affect, the Company's
system of internal controls over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted pursuant to the General Instruction I of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Omitted pursuant to the General Instruction I of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Omitted pursuant to the General Instruction I of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to the General Instruction I of Form 10-K.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table shows the aggregate fees LL LLP,
the Company's independent accountants ("PwC"), has billed or is expected to bill
to the Company and its subsidiaries for services rendered for 2002 and 2003. No
fees were billed or expected to be billed by PwC to the Company for services
performed in 2002 and 2003 for financial information systems design and
implementation.
December 31,
2002 2003
(In thousands)
Audit(1) $1,409 $ 633
Audit related(2) 43 26
Tax(3) 36 32
All 4 -
------ ------
other(4)
Total $1,492 $ 691
====== ======
1) Fees for the following services:
a) audits of the Company's consolidated year-end financials statements
for each year;
b) reviews of the unaudited quarterly financial statements appearing in
the Company's Forms 10-Q for each of the first three quarters of each
year;
c) consents and assistance with registration statements filed with the
Commission;
d) normally provided statutory or regulatory filings or engagements for
each year; and
e) the estimated out-of-pocket costs PwC incurred in providing all of
such services for which the Company reimburses PwC.
2) Fees for assurance and related services reasonably related to the audit or
review of the Company's financial statements for each year. These services
include employee benefit plan audits, accounting consultations and attest
services concerning financial accounting and reporting standards and advice
concerning internal controls.
3) Fees for tax compliance, tax advice and tax planning services.
4) Fees for all services not described in the other categories.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d) Financial Statements and Schedules
The Registrant
The consolidated financial statements and schedules of the
Registrant listed on the accompanying Index of Financial
Statements and Schedules (see page F-1) are filed as part of this
Annual Report.
Financial Statements of Guarantors
The consolidated financial statements of Kronos Titan GmbH and
Kronos Denmark ApS listed on the accompanying Index of Financial
Statements and Schedules (see page F-1) are filed as part of this
Annual Report pursuant to Rule 3-16 of Regulation S-X. The
Registrant is not required to provide any other financial
statements pursuant to Rule 3-16 of Regulation S-X.
(b) Reports on Form 8-K
Reports on Form 8-K filed for the quarter ended December 31,
2003.
None.
(c) Exhibits
Included as exhibits are the items listed in the Exhibit Index.
the Company will furnish a copy of any of the exhibits listed
below upon payment of $4.00 per exhibit to cover the costs to the
Company of furnishing the exhibits. Pursuant to Item
601(b)(4)(iii) of Regulation S-K, any instrument defining the
rights of holders of long-term debt issues and other agreements
related to indebtedness which do not exceed 10% of consolidated
total assets as of December 31, 2003 will be furnished to the
Commission upon request.
Item No. Exhibit Index
3.1 Certificate of Incorporation of the Registrant - incorporated by
reference to Exhibit 3.1 to the Registrant's Registration Statement on
Form S-4 (File No. 333-100047).
3.2 Certificate of Amendment to Certificate of Incorporation of the
Registrant, dated March 15, 1989 - incorporated by reference to
Exhibit 3.2 to the Registrant's Registration Statement on Form S-4
(File No. 333-100047).
3.3 Certificate of Amendment to Certificate of Incorporation of the
Registrant, dated January 1, 1999 - incorporated by reference to
Exhibit 3.3 to the Registrant's Registration Statement on Form S-4
(File No. 333-100047).
3.4 Certificate of Amendment to Certificate of Incorporation of the
Registrant, dated February 8, 1999 - incorporated by reference to
Exhibit 3.4 to the Registrant's Registration Statement on Form S-4
(File No. 333-100047).
3.5 Certificate of Amendment to Certificate of Incorporation of the
Registrant, dated December 15, 1999 - incorporated by reference to
Exhibit 3.5 to the Registrant's Registration Statement on Form S-4
(File No. 333-100047).
3.6 Amended and Restated Bylaws of the Registrant - incorporated by
reference to Exhibit 3.6 to the Registrant's Registration Statement on
Form S-4 (File No. 333-100047).
4.1 Indenture governing the 8.875% Senior Secured Notes due 2009, dated as
of June 28, 2002, between the Registrant and The Bank of New York, as
trustee - incorporated by reference to Exhibit 4.1 to the Quarterly
Report on Form 10-Q of NL Industries, Inc. for the quarter ended June
30, 2002.
4.2 Form of certificate of 8.875% Senior Secured Note due 2009 (included
as Exhibit A to Exhibit 4.1) - incorporated by reference to Exhibit
4.2 to the Registrant's Registration Statement on Form S-4 (File No.
333-100047).
4.3 Form of certificate of 8.875% Senior Secured Note due 2009 (included
as Exhibit B to Exhibit 4.1) - incorporated by reference to Exhibit
4.3 to the Registrant's Registration Statement on Form S-4 (File No.
333-100047).
4.4 Purchase Agreement, dated as of June 19, 2002, among the Registrant,
Deutsche Bank AG London, Dresdner Bank AG, London Branch, and
Commerzbank Aktiengesellschaft, London Branch - incorporated by
reference to Exhibit 4.4 to the Quarterly Report on Form 10-Q of NL
Industries, Inc. for the quarter ended June 30, 2002.
4.5 Collateral Agency Agreement, dated as of June 28, 2002, among The Bank
of New York, U.S. Bank, N.A. and the Registrant (filed herewith only
with respect to Sections 2, 5, 6 and 8 thereof) - incorporated by
reference to Exhibit 4.6 to the Quarterly Report on Form 10-Q of NL
Industries, Inc. for the quarter ended June 30, 2002.
4.6 Security Over Shares Agreement (shares of Kronos Limited), dated June
28, 2002, between the Registrant and The Bank of New York, U.S., as
trustee - incorporated by reference to Exhibit 4.7 to the Quarterly
Report on Form 10-Q of NL Industries, Inc. for the quarter ended June
30, 2002.
4.7 Pledge of Shares (shares of Kronos Denmark ApS), dated June 28, 2002,
between the Registrant and U.S. Bank, N.A., as collateral agent -
incorporated by reference to Exhibit 4.8 to the Quarterly Report on
Form 10-Q of NL Industries, Inc. for the quarter ended June 30, 2002.
4.8 Pledge Agreement (pledge of shares of Societe Industrielle du Titane,
S.A.), dated June 28, 2002, between the Registrant and U.S. Bank,
N.A., as collateral agent - incorporated by reference to Exhibit 4.9
to the Quarterly Report on Form 10-Q of NL Industries, Inc. for the
quarter ended June 30, 2002.
4.9 Partnership Interest Pledge Agreement (pledge of fixed capital
contribution in Kronos Titan GmbH & Co. OHG), dated June 28, 2002,
between the Registrant and U.S. Bank, N.A., as collateral agent -
incorporated by reference to Exhibit 4.10 to the Quarterly Report on
Form 10-Q of NL Industries, Inc. for the quarter ended June 30, 2002.
4.10 Recapitalization Agreement, dated as of June 5, 2002, between the
Registrant and Kronos, Inc. - incorporated by reference to Exhibit
4.12 to the Registrant's Registration Statement on Form S-4 (File No.
333-100047).
4.11 Redemption Agreement, dated as of June 6, 2002, between the Registrant
and NL Industries, Inc. - incorporated by reference to Exhibit 4.13 to
the Registrant's Registration Statement on Form S-4 (File No.
333-100047).
4.12 Form of Profit Participation Certificate (English translation from
German language document) - incorporated by reference to Exhibit 4.14
to the Registrant's Registration Statement on Form S-4 (File No.
333-100047).
10.1 (euro)80,000,000 Facility Agreement, dated June 25, 2002, among Kronos
Titan GmbH & Co. OHG, Kronos Europe S.A./N.V., Kronos Titan A/S and
Titania A/S, as borrowers, Kronos Titan GmbH & Co. OHG, Kronos Europe
S.A./N.V. and Kronos Norge AS, as guarantors, Kronos Denmark ApS, as
security provider, Deutsche Bank AG, as mandated lead arranger,
Deutsche Bank Luxembourg S.A., as agent and security agent, and KBC
Bank NV, as fronting bank, and the financial institutions listed in
Schedule 1 thereto, as lenders - incorporated by reference to Exhibit
10.1 to the Quarterly Report on Form 10-Q of NL Industries, Inc. for
the quarter ended June 30, 2002.
10.2 Lease Contract, dated June 21, 1952, between Farbenfabriken Bayer
Aktiengesellschaft and Titangesellschaft mit beschrankter Haftung
(German language version and English translation thereof) -
incorporated by reference to Exhibit 10.14 to the Annual Report on
Form 10-K of NL Industries, Inc. for the year ended December 31, 1985.
10.3 Contract on Supplies and Services, dated as of June 30, 1995, among
Bayer AG, Kronos Titan-GmbH & Co. OHG and the Registrant (English
translation from German language document) - incorporated by reference
to Exhibit 10.1 to Quarterly Report on Form 10-Q of NL Industries,
Inc. for the quarter ended September 30, 1995.
10.4 Master Technology Exchange Agreement, dated as of October 18, 1993,
among Kronos, Inc., Kronos Louisiana, Inc., the Registrant, Tioxide
Group Limited and Tioxide Group Services Limited - incorporated by
reference to Exhibit 10.8 to the Quarterly Report on Form 10-Q of NL
Industries, Inc. for the quarter ended September 30, 1993.
10.5 Services Agreement, dated as of January 1, 1995, amended as of April
1, 2002, among NL Industries, Inc., Kronos (US), Inc. and the
Registrant - incorporated by reference to Exhibit 10.6 to the
Registrant's Registration Statement on Form S-4 (File No. 333-100047).
10.6 Tax Agreement, dated as of May 28, 2002, between Kronos, Inc. and the
Registrant - incorporated by reference to Exhibit 10.7 to the
Registrant's Registration Statement on Form S-4 (File No. 333-100047).
10.7 Form of Kronos Cost Sharing Agreement, effective as of January 1,
2002, among the Registrant, Kronos Europe S.A./N.V., Kronos (US),
Inc., NL Industries, Inc., Kronos Titan GmbH & Co. OHG, Societe
Industrielle du Titane, S.A., Kronos Titan A/S, Titania A/S, Kronos
Limited, Kronos Canada, Inc., Kronos Denmark ApS and Kronos Louisiana
Inc. - incorporated by reference to Exhibit 10.8 to the Registrant's
Registration Statement on Form S-4 (File No. 333-100047).
10.8 Form of Assignment and Assumption Agreement, dated as of January 1,
1999, between Kronos (US), Inc. and the Registrant - incorporated by
reference to Exhibit 10.9 to the Registrant's Registration Statement
on Form S-4 (File No. 333-100047).
10.9 Form of Cross License Agreement, effective as of January 1, 1999,
between Kronos Inc. (formerly known as Kronos (USA), Inc.) and the
Registrant - incorporated by reference to Exhibit 10.10 to the
Registrant's Registration Statement on Form S-4 (File No. 333-100047).
10.10** NL Industries, Inc. 1998 Long-Term Incentive Plan - incorporated by
reference to Appendix A to the Proxy Statement on Schedule 14A of NL
Industries, Inc. for the annual meeting of shareholders held on May 6,
1998.
10.11** Form of Kronos Worldwide, Inc. Long-Term Incentive Plan -
incorporated by reference to Exhibit 10.4 of Kronos Worldwide, Inc.'s
Registration Statement on Form 10 (File No. 001-31763).
10.12** Form of Indemnity Agreement between the Registrant and the officers
and directors of the Registrant - incorporated by reference to Exhibit
10.12 to the Registrant's Registration Statement on Form S-4 (File No.
333-100047).
10.13* Richards Bay Slag Sales Agreement, dated May 1, 1995, between
Richards Bay Iron and Titanium (Proprietary) Limited and Kronos, Inc.
- incorporated by reference to Exhibit 10.17 to the Annual Report on
Form 10-K for NL Industries, Inc. for the year ended December 31,
1995.
10.14* Amendment to Richards Bay Slag Sales Agreement, dated May 1, 1999,
between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit 10.4 to the Annual
Report on Form 10-K for NL Industries, Inc. for the year ended
December 31, 1999.
10.15* Amendment to Richards Bay Slag Sales Agreement, dated June 1, 2001,
between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit 10.5 to the Annual
Report on Form 10-K for NL Industries, Inc. for the year ended
December 31, 2001.
10.16* Amendment to Richards Bay Slag Sales Agreement dated December 20,
2002 between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit 10.7 to the Annual
Report on Form 10-K for NL Industries, Inc. for the year ended
December 31, 2002.
10.17* Amendment to Richards Bay Slag Sales Agreement dated October 31,
2003 between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc - incorporated by reference to Exhibit 10.17 to Kronos
Worldwide, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 2003.
10.18 Agreement between Sachtleben Chemie GmbH and Kronos Titan-GmbH
effective December 30, 1986 - incorporated by reference to Exhibit
10.1 of the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002.
10.19 Supplementary Agreement to the Agreement of December 30, 1986 between
Sachtleben Chemie GmbH and Kronos Titan-GmbH dated May 3, 1996 -
incorporated by reference to Exhibit 10.2 of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2002.
10.20 Second Supplementary Agreement to the Contract dated December 30, 1986
between Sachtleben Chemie GmbH and Kronos Titan-GmbH dated January 8,
2002 - incorporated by reference to Exhibit 10.3 of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2002.
10.21 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).
10.22** Summary of Consulting Arrangement, beginning on August 1, 2003,
between Lawrence A. Wigdor and Kronos Worldwide, Inc. - incorporated
by reference to Exhibit 10.50 to NL Industries, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 2003.
31.1 Certification.
31.2 Certification.
32.1 Certification.
* Portions of the exhibit have been omitted pursuant to a request for
confidential treatment.
** Management contract, compensatory plan or arrangement
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By:/s/ Harold C. Simmons
----------------------------
Harold C. Simmons
March 12, 2004
(Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Dr. Henry Basson /s/ Gregory M. Swalwell
- --------------------------------- -----------------------------------
Dr. Henry Basson , March 12, 2004 Gregory M. Swalwell, March 12, 2004
(Director) (Vice President, Finance;
Principal Financial and
Accounting Officer)
/s/ Andrew Kasprowiak /s/ Volker Roth
- --------------------------------- -----------------------------------
Andrew Kasprowiak, March 12, 2004 Volker Roth, March 12, 2004
(Director) (Director)
/s/ Dr. Ulfert Fiand
- ---------------------------------
Dr. Ulfert Fiand, March 12, 2004
(Director)
KRONOS INTERNATIONAL, INC.
Annual Report on Form 10-K
Items 8, 14(a) and 14(d)
Index of Financial Statements and Schedules
Financial Statements Page
Report of Independent Auditors F-2
Consolidated Balance Sheets - December 31, 2002 and 2003 F-3
Consolidated Statements of Income -
Years ended December 31, 2001, 2002 and 2003 F-5
Consolidated Statements of Comprehensive Income -
Years ended December 31, 2001, 2002 and 2003 F-6
Consolidated Statements of Stockholder's Equity -
Years ended December 31, 2001, 2002 and 2003 F-7
Consolidated Statements of Cash Flows -
Years ended December 31, 2001, 2002 and 2003 F-8
Notes to Consolidated Financial Statements F-11
Financial Statement Schedules
Report of Independent Auditors S-1
Schedule I - Condensed Financial Information of Registrant S-2
Schedule II - Valuation and Qualifying Accounts S-7
Schedules III and IV are omitted because they are not applicable.
Other Financial Statements filed pursuant to Rule 3-16 of Regulation S-X
Financial Statements of Kronos Titan GmbH FA-1
Financial Statements of Kronos Denmark ApS FB-1
REPORT OF INDEPENDENT AUDITORS
To the Stockholder and Board of Directors of Kronos International, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, comprehensive income, stockholder's
equity and cash flows present fairly, in all material respects, the financial
position of Kronos International, Inc. and Subsidiaries as of December 31, 2002
and 2003, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Dallas, Texas
March 5, 2004
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2003
(In thousands, except share data)
ASSETS
2002 2003
Current assets:
Cash and cash equivalents $ 15,023 $ 37,121
Restricted cash 1,226 1,313
Accounts and other receivables 92,493 112,797
Receivable from affiliates 972 1,884
Refundable income taxes 1,718 35,150
Inventories 143,664 168,131
Prepaid expenses 4,040 3,349
Deferred income taxes 695 943
-------- --------
Total current assets 259,831 360,688
-------- --------
Other assets:
Prepaid pension cost 17,572 -
Deferred financing costs, net 9,879 9,761
Restricted marketable debt securities 2,492 2,586
Unrecognized net pension obligation 292 7,812
Other 3,472 1,266
-------- --------
Total other assets 33,707 21,425
-------- --------
Property and equipment:
Land 25,487 31,106
Buildings 115,812 139,665
Equipment 536,835 644,733
Mining properties 65,296 63,701
Construction in progress 7,749 7,565
-------- --------
751,179 886,770
Less accumulated depreciation and amortization 433,416 518,383
-------- --------
Net property and equipment 317,763 368,387
-------- --------
$611,301 $750,500
======== ========
See accompanying notes to consolidated financial statements.
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 2002 and 2003
(In thousands, except share data)
LIABILITIES AND STOCKHOLDER'S EQUITY
2002 2003
Current liabilities:
Current maturities of long-term debt $ 1,298 $ 288
Accounts payable and accrued liabilities 93,563 103,804
Payable to affiliates 21,430 8,697
Income taxes 5,845 12,007
Deferred income taxes 3,219 3,436
---------- ----------
Total current liabilities 125,355 128,232
---------- ----------
Noncurrent liabilities:
Long-term debt 324,608 356,451
Deferred income taxes 49,688 86,622
Accrued pension cost 21,486 53,010
Other 12,933 14,098
---------- ----------
Total noncurrent liabilities 408,715 510,181
---------- ----------
Minority interest 383 525
---------- ----------
Stockholder's equity:
Common stock, $100 par value; 100,000 shares
authorized; 2,968 shares issued 297 297
Additional paid-in capital 1,944,185 1,944,185
Retained deficit (1,721,859) (1,665,098)
Accumulated other comprehensive loss:
Currency translation (139,025) (133,425)
Pension liabilities (6,750) (34,397)
---------- ----------
Total stockholder's equity 76,848 111,562
---------- ----------
$ 611,301 $ 750,500
---------- ----------
Commitments and contingencies (Notes 9 and 13)
See accompanying notes to consolidated financial statements.
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2001, 2002 and 2003
(In thousands)
2001 2002 2003
Net sales $ 554,637 $579,665 $715,906
Cost of sales 379,558 454,154 516,864
--------- -------- --------
Gross margin 175,079 125,511 199,042
Selling, general and administrative expense 68,277 72,008 86,965
Other operating income (expense):
Currency transaction gains (losses), net (9,098) 12,439 (3,721)
Disposition of property and equipment (548) (534) (394)
Insurance recoveries, net 7,222 - -
Royalty income 5,421 5,779 6,122
Other income 1,120 458 489
Other expense (69) (169) (130)
--------- -------- --------
Income from operations 110,850 71,476 114,443
Other income (expense):
Currency transaction gain - 2,718 -
Insurance recoveries, net 17,468 - -
Trade interest income 2,148 1,597 700
Other interest income 5 - -
Interest expense to affiliates (34,145) (18,698) (81)
Interest income from affiliates 36,220 22,754 30
Interest expense (4,305) (16,696) (32,529)
--------- -------- --------
Income before income taxes and minority interest 128,241 63,151 82,563
Provision for income taxes 14,497 10,805 730
Minority interest 16 55 72
--------- -------- --------
Net income 113,728 52,291 81,761
Dividends and accretion applicable to redeemable preferred stock
and profit participation certificates (112,466) (78,600) -
--------- -------- --------
Net income (loss) available to
common stock $ 1,262 $(26,309) $ 81,761
========= ======== =========
See accompanying notes to consolidated financial statements.
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2001, 2002 and 2003
(In thousands)
2001 2002 2003
Net income $113,728 $ 52,291 $ 81,761
-------- ---------- ---------
Other comprehensive (loss) income, net of tax:
Minimum pension liabilities adjustment (3,969) (2,781) (27,647)
Currency translation adjustment (3,153) 30,733 5,600
-------- ---------- ---------
Total other comprehensive income (loss) (7,122) 27,952 (22,047)
-------- ---------- ---------
Comprehensive income $106,606 $ 80,243 $ 59,714
======== ========== =========
See accompanying notes to consolidated financial statements.
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Years ended December 31, 2001, 2002 and 2003
(In thousands)
Common stockholder's equity (deficit)
-------------------------------------------------------------------------------------
Redeemable Accumulated other
preferred comprehensive Total
stock and Notes income (loss) common
profit Additional receivable ------------------------ stockholder's
participation Common paid-in Retained from Currency Pension equity
certificates stock capital earnings affiliates translation liabilities (deficit)
Balance at December 31, 2000 $ 504,943 $ 320 $1,966,464 $(1,884,071) $(343,777) $(166,605) $ - $ (427,669)
Net income - - - 113,728 - - - 113,728
Other comprehensive loss, net of tax - - - - - (3,153) (3,969) (7,122)
Preferred dividends and accretion 112,466 - (112,466) - - - - (112,466)
Change in notes receivable
from affiliates - - - - (357,066) - - (357,066)
Capital contribution - - 16,937 - - - - 16,937
Common dividends declared - - - (3,807) - - - (3,807)
---------- ----- ---------- ----------- --------- --------- -------- -----------
Balance at December 31, 2001 617,409 320 1,870,935 (1,774,150) (700,843) (169,758) (3,969) (777,465)
Net income - - - 52,291 - - - 52,291
Other comprehensive income (loss),
net of tax - - - - - 30,733 (2,781) 27,952
Change in notes receivable
from affiliates - - - - 156,661 - - 156,661
Preferred dividends and accretion 78,600 - (78,600) - - - - (78,600)
Capital contribution - - 217,000 - (217,000) - - -
Recapitalization (696,009) (23) (65,150) - 761,182 - - 696,009
---------- ----- ---------- ----------- --------- --------- -------- -----------
Balance at December 31, 2002 - 297 1,944,185 (1,721,859) - (139,025) (6,750) 76,848
Net income - - - 81,761 - - - 81,761
Other comprehensive income (loss),
net of tax - - - - 5,600 (27,647) (22,047)
Cash dividends - - - (25,000) - - - (25,000)
---------- ----- ---------- ----------- --------- --------- -------- -----------
Balance at December 31, 2003 $ - $ 297 $1,944,185 $(1,665,098) $ - $(133,425) $(34,397) $ 111,562
========== ===== ========== =========== ========= ========= ======== ==========
See accompanying notes to consolidated financial statements.
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001, 2002 and 2003
(In thousands)
2001 2002 2003
Cash flows from operating activities:
Net income $ 113,728 $ 52,291 $ 81,761
Depreciation and amortization 24,119 27,144 33,634
Noncash currency transaction (gain) loss 9,355 (13,121) -
Noncash interest expense to affiliates - 5,521 -
Noncash interest income from affiliates (25,044) (21,849) -
Noncash interest expense - 860 1,944
Deferred income taxes (6,565) 5,514 38,690
Minority interest 16 55 72
Net loss from disposition of property and equipment 548 534 394
Pension cost, net (2,342) (2,118) (3,805)
Insurance recoveries, net (17,468) - -
Change in assets and liabilities:
Accounts and other receivables (1,797) 10,726 1,104
Inventories (7,617) (1,907) 232
Prepaid expenses (1,546) 903 1,345
Accounts payable and accrued liabilities 4,088 (5,784) 5,745
Income taxes 386 (2,114) (37,231)
Accounts with affiliates (13,332) 12,189 (14,424)
Other noncurrent assets 366 162 (3,779)
Other noncurrent liabilities (932) (788) (894)
--------- --------- ---------
Net cash provided by operating activities 75,963 68,218 104,788
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (48,417) (27,632) (31,518)
Property damaged by fire:
Insurance proceeds 23,361 - -
Other, net (3,205) - -
Change in restricted cash equivalents and restricted
marketable debt securities, net (577) (2,891) (554)
Proceeds from disposition of property and equipment 364 864 383
--------- --------- ---------
Net cash used by investing activities (28,474) (29,659) (31,689)
========= ========= =========
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2001, 2002 and 2003
(In thousands)
2001 2002 2003
Cash flows from financing activities:
Indebtedness:
Borrowings $ 1,437 $335,768 $ 16,106
Principal payments (22,428) (84,814) (46,006)
Deferred financing fees - (9,963) -
Repayments on loans from affiliates - (301,432) -
Capital contribution 3,815 - -
Other capital transactions with affiliates, net (35,631) 2,925 -
Dividends paid - - (25,000)
Distributions to minority interests (5) (11) (14)
--------- -------- ---------
Net cash used by financing activities (52,812) (57,527) (54,914)
--------- -------- ---------
Cash and cash equivalents - net change from:
Operating, investing and financing activities (5,323) (18,968) 18,185
Currency translation (1,065) 3,648 3,913
--------- -------- ---------
(6,388) (15,320) 22,098
Balance at beginning of year 36,731 30,343 15,023
--------- -------- ---------
Balance at end of year $ 30,343 $ 15,023 $ 37,121
========= ======== =========
Supplemental disclosures - cash paid (received) for:
Interest $ 38,607 $ 34,061 $ 28,147
Income taxes 20,690 6,748 (11,480)
See accompanying notes to consolidated financial statements.
KORNOS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies:
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") (NYSE:KRO). At December 31, 2003, NL Industries, Inc. (NYSE: NL) held
51% of the outstanding common stock of Kronos. NL conducts its titanium dioxide
pigments ("TiO2") operations through Kronos. KII conducts Kronos' European TiO2
operations. At December 31, 2003, Valhi, Inc. and a wholly-owned subsidiary of
Valhi, held approximately 84% of NL's outstanding common stock, and Contran
Corporation and its subsidiaries held approximately 90% of Valhi's outstanding
common stock. At December 31, 2003, Valhi and a wholly-owned subsidiary of Valhi
held an additional approximate 42% of Kronos' 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 of Valhi, Contran, NL, Kronos and the Company may be deemed to control
each of such companies.
Management's estimates. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America ("GAAP") requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amount of revenues and expenses during the reporting period. Actual
results may differ from previously-estimated amounts under different assumptions
or conditions.
Principles of consolidation. The consolidated financial statements include
the accounts of KII and its wholly-owned and majority-owned subsidiaries
(collectively, the "Company"). All material intercompany accounts and balances
have been eliminated.
Translation of foreign currencies. Assets and liabilities of subsidiaries
whose functional currency is other than the U.S. dollar are translated at
year-end rates of exchange and revenues and expenses are translated at average
exchange rates prevailing during the year. Resulting translation adjustments are
accumulated in stockholder's equity as part of accumulated other comprehensive
income (loss), net of related deferred income taxes and minority interest.
Currency transaction gains and losses are recognized in income currently.
Net sales. Sales are recorded when products are shipped and title and other
risks and rewards of ownership have passed to the customer, or when services are
performed. Shipping terms of products shipped are generally FOB shipping point,
although in some instances shipping terms are FOB destination point (for which
sales are not recognized until the product is received by the customer). Amounts
charged to customers for shipping and handling are included in net sales. Sales
are stated net of price, early payment and distributor discounts and volume
rebates.
Inventories and cost of sales. Inventories are stated at the lower of cost
(principally average cost) or market, net of allowance for slow-moving
inventories. Amounts are removed from inventories at average cost. Cost of sales
includes costs for materials, packing and finishing, utilities, salary and
benefits, maintenance and depreciation.
Cash and cash equivalents. Cash equivalents include bank deposits with
original maturities of three months or less.
Restricted marketable debt securities. Restricted marketable debt
securities are primarily invested in corporate debt securities and include
amounts restricted in accordance with applicable Norwegian law regarding certain
requirements of the Company's Norwegian defined benefit pension plans ($2.5
million and $2.6 million at December 31, 2002 and 2003, respectively). The
restricted marketable debt securities are generally classified as either a
current or noncurrent asset depending upon the maturity date of each such debt
security and are carried at market which approximates cost.
Accounts receivable. The Company provides an allowance for doubtful
accounts for known and estimated potential losses arising from sales to
customers based on a periodic review of these accounts.
Property and equipment and depreciation. Property and equipment are stated
at cost. The Company has a governmental concession with an unlimited term to
operate an ilmenite mine in Norway. Mining properties consist of buildings and
equipment used in the Company's Norwegian ilmenite mining operations. The
Company does not own the ilmenite reserves associated with the mine.
Depreciation of property and equipment for financial reporting purposes
(including mining properties) is computed principally by the straight-line
method over the estimated useful lives of ten to 40 years for buildings and
three to 20 years for equipment. Accelerated depreciation methods are used for
income tax purposes, as permitted. Upon sale or retirement of an asset, the
related cost and accumulated depreciation are removed from the accounts and any
gain or loss is recognized in income currently.
The Company performs planned major maintenance activities during the year.
Repair and maintenance costs estimated to be incurred in connection with planned
major maintenance activities are accrued in advance and are included in cost of
sales. Accrued repair and maintenance costs, included in other current
liabilities, was $3.3 million and $4.5 million at December 31, 2002 and 2003,
respectively.
Interest costs related to major long-term capital projects and renewals are
capitalized as a component of construction costs. Interest costs capitalized
were not significant in 2001, 2002 or 2003.
When events or changes in circumstances indicate that assets may be
impaired, an evaluation is performed to determine if an impairment exists. Such
events or changes in circumstances include, among other things, (i) significant
current and prior periods or current and projected periods with operating
losses, (ii) a significant decrease in the market value of an asset or (iii) a
significant change in the extent or manner in which an asset is used. All
relevant factors are considered. The test for impairment is performed by
comparing the estimated future undiscounted cash flows (exclusive of interest
expense) associated with the asset to the asset's net carrying value to
determine if a write-down to market value or discounted cash flow value is
required. Effective January 1, 2002, the Company commenced assessing impairment
of other long-lived assets (such as property and equipment and mining
properties) in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets."
Long-term debt. Amortization of deferred financing costs, included in
interest expense, is computed by the interest method over the term of the
applicable issue.
Derivatives and hedging activities. Derivatives are recognized as either
assets or liabilities and measured at fair value in accordance with SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended.
The accounting for changes in fair value of derivatives depends upon the
intended use of the derivative, and such changes are recognized either in net
income or other comprehensive income. As permitted by the transition
requirements of SFAS No. 133, the Company has exempted from the scope of SFAS
No. 133 all host contracts containing embedded derivatives that were issued or
acquired prior to January 1, 1999.
Income taxes. Prior to December 2003, KII, Kronos and its qualifying
subsidiaries were members of NL's consolidated U.S. federal income tax group
(the "NL Tax Group"). As a member of the NL Tax Group, the Company was a party
to a tax sharing agreement (the "NL Tax Agreement"). Effective January 1, 2001,
the NL Tax Group, including KII, was included in the consolidated U.S. federal
tax return of Contran (the "Contran Tax Group"). As a member of the Contran Tax
Group, NL is a party to a separate tax sharing agreement (the "Contran Tax
Agreement"). The Contran Tax Agreement provides that NL and its qualifying
subsidiaries, including KII, compute provisions for U.S. income taxes on a
separate-company basis using the tax elections made by Contran. Pursuant to the
NL Tax Sharing Agreement and using the tax elections made by Contran, KII made
payments to or received payments from NL in amounts it would have paid to or
received from the U.S. Internal Revenue Service had it not been a member of NL's
consolidated tax group but instead was a separate taxpayer. Refunds are limited
to amounts previously paid under the NL Tax Sharing Agreement. See Note 9.
Effective December 2003, following NL's distribution of 48.8% of the
outstanding shares of Kronos common stock to NL stockholders, KII, Kronos and
its qualifying subsidiaries ceased being members of the NL Tax Group, but KII,
Kronos and its qualifying subsidiaries remained as members of the Contran Tax
Group. Kronos entered into a new tax sharing agreement with Valhi and Contran,
which contains similar terms to the NL Tax Agreement.
Deferred income tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the income tax and
financial reporting carrying amounts of assets and liabilities, including
investments in the Company's subsidiaries and affiliates who are not members of
the Contran Tax Group and including undistributed earnings of foreign
subsidiaries which are not deemed to be permanently reinvested. The Company
periodically evaluates its deferred tax assets in the various taxing
jurisdictions in which it operates and adjusts any related valuation allowance
based on the estimate of the amount of such deferred tax assets that the Company
believes does not meet the "more-likely-than-not" recognition criteria. Earnings
of foreign subsidiaries deemed to be permanently reinvested aggregated $133.2
million at December 31, 2002 and $190.2 million at December 31, 2003.
Stock options. The Company has not issued any stock options. However,
certain employees of the Company have been granted options by NL to purchase NL
common stock. The Company has elected the disclosure alternative prescribed by
SFAS No. 123, "Accounting for Stock-Based Compensation," as amended, and to
account for its stock-based employee compensation related to stock options 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 and 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. Aggregate compensation expense related to
NL stock options held by employees of the Company was nil in 2001, $400,000 in
2002 and $300,000 in 2003.
The following table presents what the Company's consolidated net income,
and related per share amounts, would have been in 2001, 2002 and 2003 if the
Company had applied the fair value-based recognition provisions of SFAS No. 123,
for all awards granted subsequent to January 1, 1995.
Years ended December 31,
2001 2002 2003
(In millions)
Net income (loss) as reported $ 1.3 $(26.3) $ 81.8
Adjustments, net of applicable income
tax effects and minority interest:
Stock-based employee compensation expense
determined under APBO No. 25 - .3 .1
Stock-based employee compensation expense
determined under SFAS No. 123 (.3) (.3) (.1)
------ ------- -------
Pro forma net income (loss) $ 1.0 $(26.3) $ 81.8
====== ====== =======
Selling, general and administrative expenses; shipping and handling costs.
Selling, general and administrative expenses include costs related to marketing,
sales, distribution, shipping and handling, research and development, legal and
administrative functions such as accounting, treasury and finance, and includes
costs for salaries and benefits, travel and entertainment, promotional materials
and professional fees. Shipping and handling costs are included in selling,
general and administrative expense and were $33 million in each of 2001 and
2002, and $43 million in 2003. Advertising costs are expensed as incurred and
were $1 million in each of 2001, 2002 and 2003. Research, development and
certain sales technical support costs are expensed as incurred and approximated
$5 million in 2001, $6 million in 2002 and $7 million in 2003.
Other. Accounting and funding policies for retirement plans are described
in Note 10.
Note 2 - Geographic information:
The Company's operations are associated with the production and sale of
TiO2. Titanium dioxide pigments are used to impart whiteness, brightness and
opacity to a wide variety of products, including paints, plastics, paper, fibers
and ceramics. All of the Company's net assets are located in Europe.
For geographic information, net sales are attributed to the place of
manufacture (point of origin) and the location of the customer (point of
destination); property and equipment are attributed to their physical location.
Years ended December 31,
---------------------------------------------
2001 2002 2003
(In thousands)
Geographic areas
Net sales - point of origin:
Germany $ 398,470 $ 404,299 $ 510,105
Belgium 126,782 123,760 150,728
Norway 102,843 111,811 131,457
Other 82,320 89,560 110,358
Eliminations (155,778) (149,765) (186,742)
---------- ---------- ----------
$ 554,637 $ 579,665 $ 715,906
========== ========== ==========
Years ended December 31,
---------------------------------------------
2001 2002 2003
(In thousands)
Net sales - point of destination:
Europe $ 424,888 $ 456,299 $ 567,630
United States 32,052 39,104 58,293
Latin America 16,039 12,808 12,258
Asia 42,686 39,832 42,974
Other 38,972 31,622 34,751
---------- ---------- ----------
$ 554,637 $ 579,665 $ 715,906
========== ========== ==========
December 31,
-----------------------------
2002 2003
---- ----
(In thousands)
Identifiable assets -
net property and equipment:
Germany $213,170 $252,411
Belgium 54,625 64,895
Norway 49,737 50,811
Other 231 270
-------- --------
$317,763 $368,387
======== ========
Note 3 - Accounts and other receivables:
December 31,
-----------------------------
2002 2003
---- ----
(In thousands)
Trade receivables $ 83,929 $106,246
Insurance claims 312 58
Recoverable VAT and other receivables 10,159 8,715
Allowance for doubtful accounts (1,907) (2,222)
-------- --------
$ 92,493 $112,797
======== ========
Note 4 - Inventories
December 31,
-----------------------------
2002 2003
---- ----
(In thousands)
Raw materials $ 36,960 $ 30,261
Work in process 14,009 15,623
Finished products 67,469 92,009
Supplies 25,226 30,238
-------- --------
$143,664 $168,131
======== ========
Note 5 - Accounts payable and accrued liabilities:
December 31,
-----------------------------
2002 2003
---- ----
(In thousands)
Accounts payable $ 49,630 $ 50,626
Employee benefits 20,131 23,592
Other 23,802 29,586
-------- --------
$ 93,563 $103,804
======== ========
Note 6 - Long-term debt:
December 31,
-----------------------------
2002 2003
---- ----
(In thousands)
Long-term debt:
8.875% Senior Secured Notes $296,942 $356,136
Bank credit facility 27,077 -
Other 1,887 603
-------- --------
325,906 356,739
Less current maturities 1,298 288
-------- --------
$324,608 $356,451
======== ========
In June 2002, KII issued euro 285 million principal amount ($280 million
when issued) of its 8.875% Senior Secured Notes (the "Notes") due 2009. The
Notes are collateralized by first priority liens on 65% of the common stock or
other ownership interests of certain of KII's first-tier operating subsidiaries.
In addition, the indenture contains customary cross-default provisions with
respect to other debt and obligations of KII or its subsidiaries. The Notes are
issued pursuant to an indenture which contains a number of covenants and
restrictions which, among other things, restricts the ability of KII and its
subsidiaries to incur debt, incur liens, pay dividends or merge or consolidate
with, or sell or transfer all or substantially all of their assets to, another
entity. The Notes are redeemable, at KII's option, on or after December 30, 2005
at redemption prices ranging from 104.437% of the principal amount, declining to
100% on or after December 30, 2008. In addition, on or before June 30, 2005, KII
may redeem up to 35% of the Notes with the net proceeds of a qualified public
equity offering at 108.875% of the principal amount. In the event of a change of
control of KII, as defined, KII would be required to make an offer to purchase
its Notes at 101% of the principal amount. KII would also be required to make an
offer to purchase a specified portion of its Notes at par value in the event KII
generates a certain amount of net proceeds from the sale of assets outside the
ordinary course of business, and such net proceeds are not otherwise used for
specified purposes within a specified time period. At December 31, 2003, KII was
in compliance with all the covenants, and the quoted market price of the Notes
was approximately (euro)1,000 per (euro)1,000 principal amount (2002 -
(euro)1,010 per (euro)1,000 principal amount). The Notes require cash interest
payments on June 30 and December 30. KII completed an exchange offer in November
2002 to exchange the Notes for registered publicly traded notes that have
substantially identical terms as the Notes.
Also in June 2002, KII's operating subsidiaries in Germany, Belgium and
Norway (collectively, the "Borrowers") entered into a (euro)80 million secured
revolving bank credit facility that matures in June 2005 ("European Credit
Facility"). Borrowings under this facility were used in part to repay and
terminate Kronos' short-term non-U.S. bank credit agreements. Borrowings may be
denominated in euros, Norwegian kroners or U.S. dollars, and bear interest at
the applicable interbank market rate plus 1.75%. The facility also provides for
the issuance of letters of credit up to (euro)5 million. The European Credit
Facility is collateralized by the accounts receivable and inventories of the
borrowers, plus a limited pledge of all of the other assets of the Belgian
borrower. The European Credit Facility contains certain restrictive covenants
which, among other things, restricts the ability of the borrowers to incur debt,
incur liens, pay dividends or merge or consolidate with, or sell or transfer all
or substantially all of their assets to, another entity. In addition, the
European Credit Facility contains customary cross-default provisions with
respect to other debt and obligations of Borrowers, KII and its other
subsidiaries. At December 31, 2003, no amounts were outstanding under the
European Credit Facility, and the equivalent of $97.5 million was available for
additional borrowing by the subsidiaries.
Under the cross-default provisions of the Notes, the Notes may be
accelerated prior to their stated maturity if KII or any of KII's subsidiaries
default under any other indebtedness in excess of $20 million due to a failure
to pay such other indebtedness at its due date (including any due date that
arises prior to the stated maturity as a result of a default under such other
indebtedness). Under the cross-default provisions of the European Credit
Facility, any outstanding borrowings under the European Credit Facility may be
accelerated prior to their stated maturity if the Borrowers or KII default under
any other indebtedness in excess of (euro)5 million due to a failure to pay such
other indebtedness at its due date (including any due date that arises prior to
the stated maturity as a result of a default under such other indebtedness). In
the event the cross-default provisions of either the Notes or the European
Credit Facility become applicable, and such indebtedness is accelerated, the
Company would be required to repay such indebtedness prior to their stated
maturity.
Deferred financing costs of $10.0 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 December 31, 2003.
Unused lines of credit available for borrowing under the Company's non-U.S.
credit facilities approximated $99.9 million at December 31, 2003 (including
approximately $97.5 million under the European Credit Facility).
In January and February 2004, certain of KII's operating subsidiaries
borrowed (euro)40 million ($50 million when borrowed) under the European Credit
Facility at an interest rate of 3.825%.
Aggregate maturities of long-term debt at December 31, 2003 are shown in
the table below.
Years ending December 31, Amount
---------------
(In thousands)
2004 $ 288
2005 153
2006 145
2007 18
2008 -
2009 and thereafter 356,135
--------
$356,739
========
Note 7 - Other noncurrent liabilities:
December 31,
-----------------------------
2002 2003
---- ----
(In thousands)
Insurance claims and expenses $ 889 $ 1,222
Employee benefits 4,025 4,849
Other 8,019 8,027
------- -------
$12,933 $14,098
======= =======
Note 8 - Common stock and notes receivable from affiliates:
NL common stock options held by employees of the Company. At December 31,
2003, employees of the Company held options to purchase approximately 124,000
shares of NL common stock, of which 60,000 were granted in 2001 and are
exercisable at various dates through 2011 at an exercise price of $11.49 per
share. The remaining exercisable options are exercisable at various dates
through 2010 at an exercise price ranging from $2.66 to $9.34 per share.
The pro forma information required by SFAS No. 123 is based on an
estimation of the fair value of options issued subsequent to January 1, 1995.
See Note 1. The fair value of options granted during 2001 (none were granted
during 2002 or 2003) was $7.52 per share. The fair value of employee stock
options was calculated using the Black-Scholes stock option valuation model with
the following weighted average assumptions for grants in 2001: stock price
volatility of 46%; risk-free rate of return of 5%; dividend yield of 4.0%; and
an expected term of 9 years. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over the options'
vesting periods.
Common stock dividends. KII paid $25.0 million in cash dividends to Kronos
during 2003. On January 2, 2004, KII paid a cash dividend of $60.0 million to
Kronos, as approved by the Company's Board of Directors.
Preferred stock. In July 2002, KII and Kronos agreed to a recapitalization
of the Company as contemplated in the (euro)285 million Notes offering. See Note
6. In connection with the recapitalization agreement, KII converted the Series A
(738 shares) and Series B (647 shares) redeemable preferred stock (including
liquidation and redemption preferences and accrued and unpaid dividends) held by
Kronos totaling $411.7 million into 1,385 shares of KII, $100 par value, common
stock. As a result of the conversion, the Series A and B redeemable preferred
stock certificates were canceled. Further, KII redeemed its profit participation
certificates held by Kronos totaling $284.3 million in exchange for various
notes receivable from NL. As a result of the redemption, the profit
participation certificates were canceled. Finally, KII redeemed 1,613 shares of
KII common stock held by Kronos in exchange for its remaining notes receivable
from NL and Kronos totaling $479.4 million. As a result of the recapitalization
in July 2002, KII's common stockholder's equity increased a net $696.0 million.
Notes receivable from affiliates - contra equity. The Company periodically
converted interest receivable from affiliates to notes receivable from
affiliates. For the years ended 2001, 2002 and 2003, the interest transferred to
notes receivable from affiliates totaled $25.0 million, $12.6 million and nil,
respectively.
Cash flows related to such loans made to affiliates included in contra
equity were reflected in "Other capital transactions with affiliates, net" in
the accompanying Consolidated Statements of Cash Flows.
Note 9 - Income taxes:
Years ended December 31,
2001 2002 2003
(In millions)
Pre-tax income (loss):
Germany $ 88.3 $ 46.8 $ 45.8
Non-U.S. 39.9 16.4 36.8
------ ------ ------
$128.2 $ 63.2 $ 82.6
====== ====== ======
Expected tax expense (benefit), at U.S.
federal statutory income tax rate of 35% $ 44.9 $ 22.1 $ 28.9
Non-U.S. tax rates (8.4) (5.2) (.9)
Refund of prior year German income taxes - - (38.0)
Nontaxable income (3.2) - -
Nondeductible expenses .1 2.8 2.7
Change in deferred income tax valuation allowance, net
(23.2) (2.8) (6.7)
Currency transaction gains and losses for which no income taxes are
provided 3.2 (4.6) -
Change in Belgian income tax law - (2.3) -
NL tax contingency reserve adjustment, net (1.7) .1 13.4
Other, net 2.8 .7 1.3
------ ------ ------
$ 14.5 $ 10.8 $ .7
====== ====== ======
Components of income tax expense (benefit):
Currently payable (refundable):
Germany $ 10.3 $ (1.2) $(56.9)
Other non - U.S. 10.8 6.5 18.9
------ ------ ------
21.1 5.3 (38.0)
------ ------ ------
Deferred income taxes (benefit):
Germany (6.2) 7.9 44.4
Other non - U.S. (.4) (2.4) (5.7)
------ ------ ------
(6.6) 5.5 38.7
------ ------ ------
$ 14.5 $ 10.8 $ .7
====== ====== ======
Comprehensive provision for
income taxes (benefit) allocable to:
Net income $ 14.5 $ 10.8 $ .7
Other comprehensive income -
pension liabilities (1.1) (.7) (9.5)
------ ------ ------
$ 13.4 $ 10.1 $ (8.8)
====== ====== ======
The components of the net deferred tax liability at December 31, 2002 and
2003, and changes in the deferred income tax valuation allowance during the past
three years, are summarized in the following tables.
December 31,
2002 2003
--------------------- -----------------------
Assets Liabilities Assets Liabilities
(In millions)
Tax effect of temporary differences
related to:
Inventories $ .7 $ (3.3) $ .9 $ (3.4)
Property and equipment 43.9 (17.2) 46.0 (21.6)
Accrued (prepaid) pension cost .2 (24.8) 11.3 (33.5)
Other accrued liabilities and deductible differences 1.8 - 3.8 -
Other taxable differences - (32.2) - (67.2)
Tax loss and tax credit carryforwards 134.3 - 137.3 -
Valuation allowance (153.7) - (162.7) -
------- -------- ------ -------
Adjusted gross deferred tax assets
(liabilities) 27.2 (77.5) 36.6 (125.7)
Netting of items by tax jurisdiction (24.6) 24.6 (35.7) 35.7
------- -------- ------ -------
2.6 (52.9) .9 (90.0)
Less net current deferred tax
asset (liability) .7 (3.2) .9 (3.4)
------- -------- ------ -------
Net noncurrent deferred tax asset
(liability) $ 1.9 $ (49.7) $ - $ (86.6)
======= ======== ====== =======
Years ended December 31,
2001 2002 2003
(In millions)
Increase (decrease) in valuation allowance:
Recognition of certain deductible tax
attributes for which the benefit had not
previously been recognized under the
"more-likely-than-not" recognition criteria $(23.2) $(2.8) $ (6.7)
Foreign currency translation (7.5) 21.6 28.2
Offset to the change in gross deferred
income tax assets due principally to
redeterminations of certain tax attributes
and implementation of certain tax
planning strategies (3.2) 13.2 (12.5)
------ ----- ------
$(33.9) $32.0 $ 9.0
====== ===== ======
A reduction in the Belgian income tax rate from 40% to 34% was enacted in
December 2002 and became effective in January 2003. This reduction in the
Belgian income tax rate resulted in a $2.3 million decrease in the Company's
income tax expense in 2002 because the Company had previously recognized a net
deferred income tax liability with respect to Belgian temporary differences.
In 2001, the Company completed a restructuring of its German subsidiaries,
and as a result the Company recognized a $17.6 million net income tax benefit.
This benefit is comprised of a $23.2 million decrease in the Company's deferred
income tax asset valuation allowance due to a change in estimate of the
Company's ability to utilize certain German income tax attributes that did not
previously meet the "more-likely-than-not" recognition criteria, offset by $5.6
million of incremental U.S. taxes on undistributed earnings of certain foreign
subsidiaries.
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. KII and the Company's
German operating subsidiary were required to file amended tax returns with the
German tax authorities in order to receive its refunds for such years, and all
of such amended returns were filed during 2003. Such amended returns reflected
an aggregate refund of taxes and related interest to the Company's German
operating subsidiary of (euro)103.2 million ($123.0 million), and an aggregate
additional liability of taxes and related interest to KII of (euro)91.9 million
($109.6 million). Assessments and refunds will be processed by year as the
respective returns are reviewed by the tax authorities. Certain interest
components may also be refunded separately. The German tax authorities have
reviewed and accepted the amended return with respect to the 1990 tax year. In
February 2004, the Company's German operating subsidiary received interest of
(euro)16.8 million ($19.2 million). The Company believes it will receive the net
refunds of taxes and related interest for the remaining years during 2004. In
addition to the refunds for the 1990 to 1997 periods, the court ruling also
resulted in a refund of 1999 income taxes and interest, and the Company received
(euro)21.5 million ($24.6 million) in 2003. The Company has recognized the
aggregate (euro)32.8 million ($38 million) benefit of such net refunds in its
2003 results of operations.
Certain of the Company's non-U.S. tax returns are being examined and tax
authorities have or may propose tax deficiencies, including non-income related
items and interest. For example:
o The Company has received a preliminary tax assessment related to 1993 from
the Belgian tax authorities proposing tax deficiencies, including interest,
of approximately (euro)6 million ($8 million at December 31, 2003). The
Company has filed a protest to this assessment and believes that a
significant portion of the assessment is without merit. The Belgian tax
authorities have filed a lien on the fixed assets of the Company's Belgian
TiO2 operations in connection with this assessment. In April 2003, the
Company received a notification from the Belgian tax authorities of their
intent to assess a tax deficiency related to 1999 that, including interest,
is expected to be approximately (euro)13 million ($16 million). The Company
believes the proposed assessment is substantially without merit, and the
Company has filed a written response. In December 2003, the Belgian tax
authorities agreed to a settlement of certain tax assessments separate from
the assessments noted previously, for the years 1991 to 1997. Including
interest, the proposed (euro)10.1 million tax deficiency ($12.6 million at
December 31, 2003) was settled for (euro)5.0 million ($6.3 million).
o The Norwegian tax authorities have notified the Company of their intent to
assess tax deficiencies of approximately kroner 12 million ($2 million at
December 31, 2003) relating to the years 1998 to 2000. The Company has
filed a written protest to this proposed assessment.
No assurance can be given that these tax matters will be resolved in the
Company's favor in view of the inherent uncertainties involved in settlement
initiatives, court and tax proceedings. The Company believes that it has
provided adequate accruals for additional taxes and related interest expense
which may ultimately result from all such examinations and believes that the
ultimate disposition of such examinations should not have a material adverse
effect on its consolidated financial position, results of operations or
liquidity.
At December 31, 2003, the Company had the equivalent of $438 million of
German income tax loss carryforwards with no expiration date. The Company has
provided a deferred tax valuation allowance of $153.7 million at December 31,
2002 and $162.7 million at December 31, 2003, principally related to Germany,
partially offsetting deferred tax assets which the Company believes do not meet
the "more-likely-than-not" recognition criteria.
In January 2004, the German federal government enacted new tax law
amendments that limit the annual utilization of income tax loss carryforward
effective January 1, 2004. The new law may significantly affect the Company's
future income tax expense and cash tax payments.
Note 10 - Employee benefit plans:
Defined benefit plans. The Company maintains various defined benefit
pension plans. Non-U.S. employees are covered by plans in their respective
countries and a majority of U.S. employees are eligible to participate in a
contributory savings plan. Variances from actuarially assumed rates will result
in increases or decreases in accumulated pension obligations, pension expense
and funding requirements in future periods. At December 31, 2003, the Company
currently expects to contribute the equivalent of approximately $4 million to
all of its defined benefit pension plans during 2004.
The funded status of the Company's defined benefit pension plans, the
components of net periodic defined benefit pension cost related to the Company's
consolidated business segments and charged to continuing operations and the
rates used in determining the actuarial present value of benefit obligations are
presented in the tables below. The Company uses a September 30th measurement
date for their defined benefit pension plans.
Years ended December 31,
2002 2003
(In thousands)
Change in projected benefit obligations ("PBO"):
Benefit obligations at beginning of the year $ 180,586 $ 213,183
Service cost 3,395 4,060
Interest cost 10,965 12,378
Participant contributions 1,016 1,295
Plan amendments - 3,200
Actuarial (gains) losses (7,118) 17,337
Change in foreign exchange rates 36,054 36,547
Benefits paid (11,715) (15,796)
--------- ---------
Benefit obligations at end of the year $ 213,183 $ 272,204
========= =========
Change in plan assets:
Fair value of plan assets at beginning of the year $ 137,158 $ 160,860
Actual return on plan assets (717) (12,559)
Employer contributions 7,768 10,240
Participant contributions 1,016 1,295
Change in foreign exchange rates 27,350 23,262
Benefits paid (11,715) (15,796)
--------- ---------
Fair value of plan assets at end of year $ 160,860 $ 167,302
========= =========
Funded status at end of the year:
Plan assets less than PBO $ (52,323) $(104,902)
Unrecognized actuarial losses 45,809 98,368
Unrecognized prior service cost 3,221 6,678
Unrecognized net transition obligations 1,638 1,228
--------- ---------
$ (1,655) $ 1,372
========= =========
Amounts recognized in the balance sheet:
Prepaid pension costs $ 17,572 $ -
Unrecognized net pension obligations 292 7,812
Accrued pension costs:
Current (6,568) (7,877)
Noncurrent (21,486) (53,010)
Accumulated other comprehensive income 8,535 54,447
--------- ---------
$ (1,655) $ 1,372
========= =========
Years ended December 31,
-------------------------------------
2001 2002 2003
(In thousands)
Net periodic pension cost:
Service cost benefits $ 3,087 $ 3,395 $ 4,060
Interest cost on PBO 10,268 10,965 12,378
Expected return on plan assets (9,676) (10,294) (12,264)
Amortization of prior service cost 201 223 255
Amortization of net transition obligations 320 332 527
Recognized actuarial losses 415 1,029 827
-------- -------- --------
$ 4,615 $ 5,650 $ 5,783
======== ======== ========
The weighted-average rate assumptions used in determining the actuarial
present value of benefit obligations as of December 31, 2002 and 2003 are
presented in the table below. Such weighted-average rates were determined using
the projected benefit obligations at each date.
December 31,
------------------------
2002 2003
Discount rate 5.8% 5.4%
Increase in future compensation levels 2.6% 2.8%
The weighted-average rate assumptions used in determining the net periodic
pension cost for 2001, 2002 and 2003 are presented in the table below. The
weighted-average discount rate and the weighted-average increase in future
compensation levels were determined using the projected benefit obligations as
of the beginning of each year, and the weighted-average long-term return on plan
assets was determined using the fair value of plan assets as of the beginning of
each year.
December 31,
----------------------------------------
2001 2002 2003
Discount rate 6.2% 6.0% 5.8%
Increase in future compensation levels 3.0% 2.8% 2.6%
Long-term return on plan assets 7.5% 7.3% 6.9%
Selected information related to the Company's defined benefit pension plans
that have accumulated benefit obligations in excess of fair value of plan assets
is presented below. At December 31, 2002 and 2003, 100% of the projected benefit
obligations of such plans relate to non-U.S. plans.
December 31,
----------------------
2002 2003
(In thousands)
Projected benefit obligation $163,122 $272,204
Accumulated benefit obligation 143,530 230,893
Fair value of plan assets 113,536 167,302
Note 11 - Leverkusen fire and insurance claim:
In March 2001, the Company suffered a fire at its Leverkusen, Germany TiO2
facility. Production at the facility's chloride-process plant returned to full
capacity on April 8, 2001. The facility's sulfate-process plant became
approximately 50% operational in September 2001, and became fully operational in
late October 2001. The damages to property and the business interruption losses
caused by the fire were covered by insurance, but the effect on the financial
results of the Company on a quarter-to-quarter basis was impacted by the timing
and amount of insurance recoveries. The Company's operating income in 2001
includes $27.3 million of business interruption insurance recoveries related to
the Leverkusen fire. Of such business interruption proceeds amount, $20.1
million was recorded as a reduction of cost of sales to offset unallocated
period costs that resulted from lost production; and the remaining $7.2 million,
representing recovery of lost margin, was recorded as other income. The Company
also recognized insurance recoveries of $29.1 million in 2001 for property
damage and related cleanup and other extra costs, resulting in an insurance gain
of $17.5 million as such recoveries exceeded the carrying value of the property
destroyed and the cleanup and other extra expenses incurred.
Note 12 - Related party transactions:
The Company may be deemed to be controlled by Harold C. Simmons. See Note
1. Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (a) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account, and
sales, leases and exchanges of assets, including securities issued by both
related and unrelated parties and (b) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations,
securities repurchases, and purchases and sales (and other acquisitions and
dispositions) of subsidiaries, divisions or other business units, which
transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a
publicly-held minority equity interest in another related party. While no
transactions of the type described above are planned or proposed with respect to
the Company other than as set forth in these financial statements, the Company
continuously considers, reviews and evaluates, and understands that Contran and
related entities consider, review and evaluate such transactions. Depending upon
the business, tax and other objectives then relevant, it is possible that the
Company might be a party to one or more such transactions in the future.
It is the policy of the Company to engage in transactions with related
parties on terms, in the opinion of the Company, no less favorable to the
Company than could be obtained from unrelated parties.
The Company is a party to a cost sharing agreement with Kronos whereby
Kronos provides certain management, financial, insurance and administrative
services to the Company on a fee basis. The Company's expense was $.2 million in
2001, $1.1 million in 2002 and $1.2 million in 2003.
Sales of TiO2 to Kronos (US), Inc. ("KUS"), an affiliate, were $32.0
million in 2001, $38.5 million in 2002 and $57.8 million in 2003. Sales of TiO2
to Kronos Canada, Inc. ("KC") were $7.2 million in 2001, $7.7 million in 2002
and $10.9 million in 2003.
KUS purchases the rutile and slag feedstock used as a raw material in all
of the Company's chloride process TiO2 facilities. The Company purchases such
feedstock from KUS for use in its facilities for an amount equal to the amount
paid by KUS to the third-party supplier plus a 2.5% administrative fee. Such
feedstock purchases were $91.5 million in 2001, $102.5 million in 2002 and $93.3
million in 2003.
Purchases of TiO2 from KUS were $1.2 million in 2001, $2.6 million in 2002
and $100,000 in 2003. Purchases of TiO2 from KC were $100,000 in 2001 and
$500,000 in each of 2002 and 2003.
Royalty income received from KC for use of certain of the Company's
intellectual property was $5.4 million in 2001, $5.8 million in 2002 and $6.1
million in 2003.
The Company is party to master global NL insurance coverage policies with
regard to property, business interruption, excess liability and other coverages.
The costs associated with these policies aggregated $7.1 million, $7.0 million
and $5.2 million in 2001, 2002 and 2003, respectively.
Contran and certain of its subsidiaries and affiliates, including the
Company, purchase certain of their insurance policies as a group, with the costs
of the jointly-owned policies being apportioned among the participating
companies. With respect to certain of such policies, it is possible that
unusually large losses incurred by one or more insureds during a given policy
period could leave the other participating companies without adequate coverage
under that policy for the balance of the policy period. As a result, Contran and
certain of its subsidiaries and its affiliates, including the Company, have
entered into a loss sharing agreement under which any uninsured loss is shared
by those entities who have submitted claims under the relevant policy. The
Company believes the benefits in the form of reduced premiums and broader
coverage associated with the group coverage for such policies justifies the risk
associated with the potential for uninsured loss.
Net amounts between the Company and KUS were generally related to product
sales and raw material purchases. Net amounts between the Company and KC were
generally related to product sales and royalties. See Note 8 for discussion of
notes receivable from affiliates.
Current receivables from and payables to affiliates are summarized in the
table below.
December 31,
---------------------
2002 2003
(In thousands)
Current receivables from affiliates:
NL $ 98 $ -
KC 815 1,877
Other 59 7
------- -------
$ 972 $ 1,884
======= =======
Current payables to affiliates:
KUS $21,430 $ 8,697
======= =======
Interest income on all loans to related parties was $36.2 million in 2001,
$22.8 million in 2002 and less than $50,000 in 2003. Interest expense on all
loans from related parties was $34.1 million in 2001, $18.7 million in 2002 and
less than $100,000 in 2003.
In July 2002, all outstanding Series A shares and Series B shares (with
aggregate values of $219.0 million and $192.7 million, respectively, at the time
of conversion) were converted into 1,385 shares of KII, $100 par value, common
stock. As a result of the conversion, the Series A and B shares were canceled.
See Note 8.
Profit Participation Certificates ("PPCs") - PPCs with DM100 par value:
5,500,000 shares authorized, issued and outstanding are designated nonvoting
cumulative preferred PPCs and yielded an annual dividend of 4% per share based
on earnings of the Company and before any common stock dividends to Kronos.
Kronos waived its right to dividend distributions for all periods presented and
through December 2002. The PPCs were issued to Kronos ($284.3 million) in
December 1999 as part of a recapitalization of the Company. In July 2002 all
outstanding PPCs (with an aggregate value of $284.3 million at the time of
redemption) were redeemed in exchange for various notes receivable from NL. As a
result of the redemption, the PPCs were canceled.
Note 13 - Commitments and contingencies:
Environmental matters. The Company's operations are governed by various
environmental laws and regulations. Certain of the Company's businesses are, or
have been engaged in the handling, manufacture or use of substances or compounds
that may be considered toxic or hazardous within the meaning of applicable
environmental laws. As with other companies engaged in similar businesses,
certain past and current operations and products of the Company have the
potential to cause environmental or other damage. The Company has implemented
and continues to implement various policies and programs in an effort to
minimize these risks. The Company's policy is to comply with environmental laws
and regulations at all its facilities and to strive to improve its environmental
performance in association with applicable industry initiatives. The Company
believes that its operations are in substantial compliance with applicable
requirements of environmental laws. From time to time, the Company may be
subject to environmental regulatory enforcement under various statutes,
resolution of which typically involves the establishment of compliance programs.
It is possible that future developments, such as stricter requirements of
environmental laws and enforcement policies thereunder, could adversely affect
the Company's production, handling, use, storage, transportation, sale or
disposal of such substances.
The Company's production facilities operate within an environmental
regulatory framework in which governmental authorities typically are granted
broad discretionary powers that allow them to issue operating permits under
which the plants must operate. The Company believes all its plants are in
substantial compliance with applicable environmental laws. With respect to the
Company's plants, neither the Company nor any of its subsidiaries have been
notified of any environmental claim by any applicable foreign authority or any
provincial or local authority.
While the laws regulating operations of industrial facilities in Europe
vary from country to country, a common regulatory denominator is provided by the
European Union (the "EU"). Germany and Belgium are members of the EU and follow
its initiatives. Norway, although not a member, generally patterns its
environmental regulatory actions after the EU. The Company believes that it has
obtained all required permits and is in substantial compliance with applicable
EU requirements, including EU Directive 92/112/EEC regarding establishment of
procedures for reduction and eventual elimination of pollution caused by waste
from the TiO2 industry.
Litigation matters. The Company's Belgian subsidiary and various Belgian
employees are the subject of civil and criminal proceedings related to an
accident that resulted in two fatalities in such facility in 2000. At a hearing
held in January 2004, the government requested the court to impose fines on the
Company's subsidiary and certain of its employees in an amount equal to
approximately (euro)367,500 ($460,000). The Company's subsidiary has undertaken
the defense of and liability for any fines and costs incurred by its employees
arising out of these proceedings. The court's decision is anticipated in April
2004.
The Company is also involved in various other environmental, contractual,
product liability and other claims and disputes incidental to its business.
The Company currently believes the disposition of all claims and disputes,
individually or in the aggregate, should not have a material adverse effect on
its consolidated financial condition, results of operations or liquidity.
Concentrations of credit risk. Sales of TiO2 accounted for more than 90% of
net sales from continuing operations during each of the past three years. The
remaining sales result from the mining and sale of ilmenite ore (a raw material
used in the sulfate pigment production process), and the manufacture and sale of
iron-based water treatment chemicals (derived from co-products of the TiO2
production processes). TiO2 is generally sold to the paint, plastics and paper
industries. Such markets are generally considered "quality-of-life" markets
whose demand for TiO2 is influenced by the relative economic well-being of the
various geographic regions. TiO2 is sold to over 4,000 customers, with the top
ten customers approximating 23%, 21% and 20%, respectively of net sales in 2001,
2002 and 2003. Approximately 73% of the Company's TiO2 sales by volume were to
Europe in each of the past three years and approximately 13% of sales by volume
were attributable to North America in 2001, 2002 and 2003.
Capital expenditures. At December 31, 2003 the estimated cost to complete
capital projects in process approximated $5.9 million.
Long-term contracts. KUS has long-term supply contracts that provide for
certain affiliates' chloride-process TiO2 feedstock requirements through 2007.
The agreements require KUS to purchase certain minimum quantities of feedstock
with average minimum annual purchase commitments aggregating approximately $165
million. The agreements require that the Company and certain of its affiliates
purchase chloride feedstock underlying these long-term supply contracts from
KUS.
Operating leases. The Company's principal German operating subsidiary
leases the land under its Leverkusen TiO2 production facility pursuant to a
lease expiring in 2050. The Leverkusen facility, with approximately one-half of
the Company's current TiO2 production capacity, is located within the lessor's
extensive manufacturing complex. Rent for the Leverkusen facility is
periodically established by agreement with the lessor for periods of at least
two years at a time. Under a separate supplies and services agreement expiring
in 2011, the lessor provides some raw materials, auxiliary and operating
materials and utilities services necessary to operate the Leverkusen facility.
Both the lease and the supplies and services agreements restrict the Company's
ability to transfer ownership or use of the Leverkusen facility.
The Company also leases various other manufacturing facilities and
equipment. Some of the leases contain purchase and/or various term renewal
options at fair market and fair rental values, respectively. In most cases the
Company expects that, in the normal course of business, such leases will be
renewed or replaced by other leases. Net rent expense approximated $6 million in
2001, $7 million in 2002 and $9 million in 2003. At December 31, 2003, future
minimum payments under noncancellable operating leases having an initial or
remaining term of more than one year were as follows:
Years ending December 31, Amount
(In thousands)
2004 $ 2,950
2005 2,168
2006 1,389
2007 1,285
2008 1,184
2009 and thereafter 19,881
-------
$28,857
=======
Approximately $19 million of the $29 million aggregate future minimum
rental commitments at December 31, 2003 relates to the Company's Leverkusen
facility lease discussed above. The minimum commitment amounts for such lease
included in the table above for each year through the 2050 expiration of the
lease are based upon the current annual rental rate as of December 31, 2003.
Note 14 - Financial instruments:
Summarized below is the estimated fair value and related net carrying value
of the Company's financial instruments.
December 31, December 31,
2002 2003
--------------------------- -------------------------
Carrying Fair Carrying Fair
amount value amount value
------------- ------------- -------------------------
(In millions)
Cash, cash equivalents, and current and noncurrent restricted
marketable debt securities $ 17.5 $ 17.5 $ 39.7 $ 39.7
Long-term debt:
Fixed rate with market quotes -
8.875% Senior Secured Notes $ 296.9 $ 299.9 $ 356.1 $ 356.1
Variable rate debt 29.0 29.0 .6 .6
Fair value of the Company's noncurrent restricted marketable debt
securities and 8.875% Senior Secured Notes are based upon quoted market prices
at each balance sheet date.
At December 31, 2003, the Company had entered into a short-term currency
forward contract maturing January 2, 2004 to exchange an aggregate of euro 40
million for an equivalent amount of U.S. dollars at an exchange rate of U.S.
$1.25 per euro. Such contract was entered into in conjunction with the January
2004 payment of an intercompany dividend from one of the Company's European
subsidiaries. At December 31, 2003, the actual exchange rate was U.S. $1.25 per
euro. The estimated fair value of such foreign currency contract was not
material at December 31, 2003. The Company held no other significant derivative
financial instruments at December 31, 2002 or 2003. See Note 1.
Note 15 - Accounting principles newly adopted in 2003:
Asset retirement obligations. The Company adopted SFAS No. 143, Accounting
for Asset Retirement Obligations, on 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 would be accreted to its present
value, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs 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 are measured using information, assumptions and interest rates all
as of January 1, 2003. The amount recognized as the asset retirement cost is
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, is 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, if any, between the amounts
to be recognized as described above and any associated amounts recognized in the
Company's balance sheet as of December 31, 2002 is recognized as a cumulative
effect of a change in accounting principles as of the date of adoption. The
effect of adopting SFAS No. 143 as of January 1, 2003 was not material, as
summarized in the table below, 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 carrying value of previously-accrued closure and
post-closure activities .3
Asset retirement obligation recognized (.6)
----
Net impact $ -
====
The increase in the asset retirement obligations from January 1, 2003
($600,000) to December 31, 2003 ($800,000) is due to accretion expense and the
effects of currency translation. Accretion expense, which is reported as a
component of cost of goods sold in the accompanying Consolidated Statement of
Operations, approximated $100,000 for the year ended December 31, 2003. If the
Company had adopted SFAS No. 143 as of January 1, 2001, the asset retirement
obligations would have been approximately $500,000 at December 31, 2001.
Estimates of the ultimate cost to be incurred to settle the Company's
obligations require a number of assumptions, are inherently difficult to develop
and the ultimate outcome may differ from current estimates. As additional
information becomes available, cost estimates will be adjusted as necessary. It
is possible that technological, regulatory or enforcement developments, the
results of studies or other factors could necessitate the recording of
additional liabilities.
Costs associated with exit or disposal activities. The Company adopted SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal Activities, on
January 1, 2003 for exit or disposal activities initiated on or after that date.
Under SFAS No. 146, costs associated with exit activities, as defined, that are
covered by the scope of SFAS No. 146 will be recognized and measured initially
at fair value, generally in the period in which the liability is incurred. Costs
covered by the scope of SFAS No. 146 include termination benefits provided to
employees, costs to consolidate facilities or relocate employees, and costs to
terminate contracts (other than a capital lease). Under prior GAAP, a liability
for such an exit cost is recognized at the date an exit plan is adopted, which
may or may not be the date at which the liability has been incurred. The effect
of adopting SFAS No. 146 as of January 1, 2003 was not material as the Company
was not involved in any exit or disposal activities covered by the scope of the
new standard as of such date.
Note 16 - Accounting principles not yet adopted:
The Company is required to comply with the consolidation requirements of
FASB Interpretation ("FIN") No. 46R, "Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51," as amended at March 31, 2004. While
the Company currently does not believe it has any involvement with any variable
interest entity (as that term is defined in FIN No. 46R) covered by the scope of
FIN No. 46R, the interpretation is complex and therefore the impact of adopting
the consolidation requirements of FIN No. 46R has not yet been definitively
determined.
REPORT OF INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULES
To the Stockholder and Board of Directors of Kronos International, Inc.:
Our audits of the consolidated financial statements referred to in our
report dated March 5, 2004, appearing on page F-2 of the 2003 Annual Report on
Form 10-K of Kronos International, Inc., also included an audit of the financial
statement schedules listed in the index on page F-1 of this Form 10-K. In our
opinion, these financial statement schedules present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
March 5, 2004
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Balance Sheets
December 31, 2002 and 2003
(In thousands)
2002 2003
----- -----
Current assets:
Cash and cash equivalents $ 2,445 $ 548
Accounts and notes receivable 6,349 7,553
Receivable from subsidiaries 31,840 5,605
Other 194 21
---------- ----------
Total current assets 40,828 13,727
---------- ----------
Other assets:
Notes receivable from subsidiary 74,799 89,710
Investment in subsidiaries 249,644 563,171
Deferred income taxes 1,875 -
Other 8,956 9,190
Property and equipment, net 4,929 6,454
---------- ----------
Total other assets 340,203 668,525
---------- ----------
$ 381,031 $ 682,252
========== ==========
Current liabilities:
Payable to affiliates $ 164 $ 32,218
Accounts payable and accrued liabilities 5,362 5,305
Income taxes - 95,293
Deferred income taxes 900 -
---------- ----------
Total current liabilities 6,426 132,816
---------- ----------
Noncurrent liabilities:
Long-term debt 296,942 356,136
Deferred income taxes - 80,741
Other 815 997
---------- ----------
Total noncurrent liabilities 297,757 437,874
---------- ----------
Stockholder's equity 76,848 111,562
---------- ----------
$ 381,031 $ 682,252
========== ==========
Contingencies (Note 3)
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Condensed Statements of Income
Years ended December 31, 2001, 2002 and 2003
(In thousands)
2001 2002 2003
----- ----- -----
Revenues and other income:
Net sales $ 26,179 $ 28,326 $ 35,601
Equity in income from continuing operations of subsidiaries 114,170 34,308 293,623
Interest income from affiliates 43,901 28,405 50
Royalty income 13,603 14,370 16,568
Currency translation gains (losses), net (9,084) 14,656 (599)
Other income, net 1,838 753 (38)
-------- --------- --------
190,607 120,818 345,205
-------- --------- --------
Costs and expenses:
Cost of sales 12,454 13,903 18,306
General and administrative 18,891 16,814 21,209
Interest 1,063 13,948 29,847
Interest expense to affiliates 42,245 20,530 -
-------- --------- --------
74,653 65,195 69,362
-------- --------- --------
Income before income taxes 115,954 55,623 275,843
Provision for income taxes 2,226 3,332 194,082
-------- --------- --------
Net income 113,728 52,291 81,761
Dividends and accretion applicable to redeemable preferred
stock and profit participation certificates (112,466) (78,600) -
-------- --------- --------
Net income (loss) available to common stock $ 1,262 $ (26,309) $ 81,761
======== ========= ========
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Condensed Statements of Cash Flows
Years ended December 31, 2001, 2002 and 2003
(In thousands)
2001 2002 2003
----- ----- -----
Cash flows from operating activities:
Net income $ 113,728 $ 52,291 $ 81,761
Distributions from subsidiaries 44,990 26,249 402
Noncash currency transaction (gain) loss 9,355 (13,121) -
Noncash interest income (25,044) (21,849) -
Noncash interest expense - 6,174 1,472
Deferred income taxes (449) 5,037 238,814
Equity in earnings of subsidiaries (114,170) (34,308) (293,623)
Other, net 292 451 (3,570)
28,702 20,924 25,256
--------- --------- ---------
Net change in assets and liabilities 25,510 1,220 115
--------- --------- ---------
Net cash provided by operating activities
54,212 22,144 25,371
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (883) (1,730) (2,406)
Collection of loans to affiliates 21,406 12,090 -
Investments in subsidiaries (27,237) - -
Other, net - 13 9
--------- --------- ---------
Net cash provided (used) by investing activities (6,714) 10,373 (2,397)
--------- --------- ---------
Cash flows from financing activities:
Indebtedness:
Borrowings - 280,041 -
Principal payments (21,397) (26,697) -
Deferred financing fees - (8,600) -
Repayments of loans from affiliates - (301,432) -
Capital contribution 3,807 - -
Dividends paid - - (25,000)
Other capital transactions with affiliates, net (35,631) 2,925 -
--------- --------- ---------
Net cash used by financing activities (53,221) (53,763) (25,000)
--------- --------- ---------
Net change during the year from operating investing and
financing activities (5,723) (21,246) (2,026)
Currency translation (421) 2,013 129
Balance at beginning of year 27,822 21,678 2,445
--------- --------- ---------
Balance at end of year $ 21,678 $ 2,445 $ 548
========= ========= =========
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Notes to Condensed Financial Information
Note 1 - Basis of presentation:
The Consolidated Financial Statements of Kronos International, Inc. and the
related Notes to Consolidated Financial Statements are incorporated herein by
reference.
Note 2 - Investment in and advances to subsidiaries:
December 31,
---------------------
2002 2003
----- -----
(In thousands)
Current:
Receivable from:
Kronos Titan GmbH ("TG") $ 27,914 $ -
Kronos Titan A/S 1,525 1,567
Kronos Europe S.A./N.V 1,052 1,641
KC 91 1,354
Kronos Denmark ApS ("KDK") 514 635
Titania A/S ("TIA") 360 360
Other 384 48
-------- --------
$ 31,840 $ 5,605
======== ========
Payable to:
TG - 31,974
KUS 130 48
Kronos Chemie GmbH ("KCH") - 150
Other 34 46
-------- --------
$ 164 $ 32,218
======== ========
Noncurrent:
Notes receivable from TG $ 74,799 $ 89,710
======== ========
December 31,
-----------------------
2002 2003
----- ------
(In thousands)
Investment in:
TG $150,575 $440,844
KDK 81,579 109,010
Other 17,490 13,317
-------- --------
$249,644 $563,171
======== ========
Years ended December 31,
--------------------------------------
2001 2002 2003
----- ----- ------
(In thousands)
Equity in income from continuing operations of subsidiaries:
TG $ 85,807 $ 22,430 $270,541
KDK 18,439 11,344 26,892
Other 9,924 534 (3,810)
-------- --------- --------
$114,170 $ 34,308 $293,623
======== ========= ========
Note 3 - Long-term debt:
The Company's $194 million of 11.75% Senior Secured Notes at December 31,
2001 were redeemed at par value in 2002.
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
Balance at charged to Balance
beginning costs and Net Currency at end
Description of year expenses deductions translation Other of year
- --------------------------------- ----------- ----------- ----------- ------------ ------- ---------
Year ended December 31, 2001:
Allowance for doubtful accounts $ 1,662 $ 255 $ (195) $ (96) $ - $ 1,626
======= ======= ======= ======= ======= =======
Year ended December 31, 2002:
Allowance for doubtful accounts $ 1,626 $ 381 $ (397) $ 297 $ - $ 1,907
======= ======= ======= ======= ======= =======
Year ended December 31, 2003:
Allowance for doubtful accounts $ 1,907 $ 233 $ (281) $ 363 $ - $ 2,222
======= ======= ======= ======= ======= =======
Note - Certain information has been omitted from this Schedule because it is
disclosed in the notes to the Consolidated Financial Statements.
KRONOS TITAN GMBH AND SUBSIDIARY
Index of Consolidated Financial Statements
Financial Statements Pages
Report of Independent Auditors FA-2
Consolidated Balance Sheets - December 31, 2002 and 2003 FA-3
Consolidated Statements of Income - Years ended
December 31, 2001, 2002 and 2003 FA-5
Consolidated Statements of Comprehensive Income - Years ended
December 31, 2001, 2002 and 2003 FA-6
Consolidated Statements of Partners' Capital/Owners'
Equity - Years ended December 31, 2001, 2002 and 2003 FA-7
Consolidated Statements of Cash Flows - Years ended
December 31, 2001, 2002 and 2003 FA-8
Notes to Consolidated Financial Statements FA-10
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Owner of Kronos Titan GmbH:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, comprehensive income, owners' equity
and cash flows present fairly, in all material respects, the financial position
of Kronos Titan GmbH and Subsidiary at December 31, 2002 and 2003, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers GmbH
Wirtschaftsprufungsgesellschaft
March 5, 2004
/s/Thomas Husemeyer /s/ Hans-Peter Kreibich
(Wirtschaftsprufer) (Wirtschaftsprufer)
KRONOS TITAN GMBH AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2003
(In thousands)
ASSETS 2002 2003
----- ------
Current assets:
Cash and cash equivalents $ 7,825 $ 30,859
Accounts and notes receivable 53,318 66,565
Receivable from affiliates 18,823 82,166
Refundable income taxes 215 128,956
Inventories 85,542 100,133
Prepaid expenses 3,004 2,389
-------- --------
Total current assets 168,727 411,068
-------- --------
Other assets:
Unrecognized net pension obligations 292 3,636
Deferred income taxes - 19,832
Other 1,590 1,211
-------- --------
Total other assets 1,882 24,679
-------- --------
Property and equipment:
Land 11,103 13,539
Buildings 83,012 101,819
Machinery and equipment 363,321 422,838
Construction in progress 6,714 6,624
-------- --------
464,150 564,820
Less accumulated depreciation and depletion 259,913 323,313
-------- --------
Net property and equipment 204,237 241,507
-------- --------
$374,846 $677,254
======== ========
See accompanying notes to consolidated financial statements.
KRONOS TITAN GMBH AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 2002 and 2003
(In thousands)
LIABILITIES AND PARTNERS' CAPITAL/OWNERS' EQUITY 2002 2003
------ ------
Current liabilities:
Accounts payable and accrued liabilities $ 52,688 $ 61,252
Payable to affiliates 44,082 21,685
Deferred income taxes 765 1,407
-------- ---------
Total current liabilities 97,535 84,344
-------- ---------
Noncurrent liabilities:
Note payable to Kronos International, Inc. 74,799 89,710
Deferred income taxes 19,994 -
Accrued pension cost 20,709 50,826
Other 11,234 11,530
-------- ---------
Total noncurrent liabilities 126,736 152,066
-------- ---------
Partners' capital / owners' equity:
Partners' capital 118,589 -
Subscribed capital - 12,496
Paid in capital - 376,634
Accumulated other comprehensive income (loss):
Currency translation 37,850 75,524
Pension liabilities (5,864) (23,810)
-------- ---------
Total partners' capital / owners' equity 150,575 440,844
-------- ---------
$374,846 $ 677,254
======== =========
Commitments and contingencies (Notes 6, 10 and 14)
See accompanying notes to consolidated financial statements.
KRONOS TITAN GMBH AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2001, 2002 and 2003
(In thousands)
2001 2002 2003
------- ------- -------
Net sales $ 379,360 $ 384,361 $487,337
Cost of sales 280,084 323,306 379,187
--------- --------- --------
Gross margin 99,276 61,055 108,150
Selling, general and administrative expense 31,166 34,633 42,925
Other operating income (expense):
Currency transaction gains (losses), net 631 93 (3,519)
Disposition of property and equipment (512) (300) (390)
Insurance recoveries, net 7,222 - -
--------- --------- --------
Income from operations 75,451 26,215 61,316
Other income (expense):
Insurance recoveries, net 17,468 - -
Trade interest income 376 518 447
Interest and other expense to affiliates (8,856) (4,493) (361)
Interest and other income from affiliates 2,135 3,694 3,918
Interest expense (22) (198) (449)
--------- --------- --------
Income before income taxes 86,552 25,736 64,871
Income tax provision (benefit) 745 3,306 (205,670)
--------- --------- --------
Net income $ 85,807 $ 22,430 $270,541
========= ========= ========
See accompanying notes to consolidated financial statements.
KRONOS TITAN GMBH AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2001, 2002 and 2003
(In thousands)
2001 2002 2003
------- ------- -------
Net income $85,807 $22,430 $270,541
------- ------- --------
Other comprehensive income (loss), net of tax:
Minimum pension liabilities adjustment (2,949) (2,915) (17,946)
Currency translation adjustment (2,079) 22,892 37,674
------- ------- --------
Total other comprehensive income (loss) (5,028) 19,977 19,728
------- ------- --------
Comprehensive income $80,779 $42,407 $290,269
======= ======= ========
See accompanying notes to consolidated financial statements.
KRONOS TITAN GMBH AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL / OWNERS' EQUITY
Years ended December 31, 2001, 2002 and 2003
(In thousands)
Accumulated other
comprehensive
Owners' Equity income (loss)
Partners' --------------------------- -------------------------
capital Subscribed Paid in Currency Pension
(deficit) capital capital translation liabilities Total
---------- ----------- --------- -------------- ------------- -----------
Balance at December 31, 2000 $ 17,489 $ - $ - $17,037 $ - $ 34,526
Net income 85,807 - - - - 85,807
Other comprehensive loss, - - - (2,079) (2,949) (5,028)
net of tax
Cash distribution (11,097) - - - - (11,097)
Cash contribution 16,666 - - - - 16,666
-------- --------- -------- -------- -------- --------
Balance at December 31, 2001 108,865 - - 14,958 (2,949) 120,874
Net income 22,430 - - - - 22,430
Other comprehensive income - - - 22,892 (2,915) 19,977
(loss), net of tax
Cash distribution (12,706) - - - - (12,706)
-------- --------- -------- -------- -------- --------
Balance at December 31, 2002 118,589 - - 37,850 (5,864) 150,575
Net income 270,541 - - - - 270,541
Other comprehensive income - - - 37,674 (17,946) 19,728
(loss), net of tax
Partnership conversion (389,130) 12,496 376,634 - - -
-------- --------- -------- -------- -------- --------
Balance at December 31, 2003 $ - $ 12,496 $376,634 $ 75,524 $(23,810) $440,844
======== ========= ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
KRONOS TITAN GMBH AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001, 2002 and 2003
(In thousands)
2001 2002 2003
------- ------- -------
Cash flows from operating activities:
Net income $ 85,807 $ 22,430 $ 270,541
Depreciation, depletion and amortization 14,056 16,387 20,452
Noncash interest expense - 57 140
Deferred income taxes (6,273) 2,875 (39,770)
Net loss from disposition of property and equipment 512 300 390
Pension, net (2,846) (2,745) (5,021)
Insurance recoveries, net (17,468) - -
Change in assets and liabilities:
Accounts and notes receivable (7,147) (27,322) 1,827
Inventories (4,730) (2,678) 1,830
Prepaid expenses (1,382) 25 1,107
Accounts payable and accrued liabilities 8,239 (4,652) 3,554
Income taxes 162 (1,164) (130,136)
Accounts with affiliates (22,752) 25,616 (85,431)
Accrued environmental costs - 259 (905)
Other noncurrent assets 190 (222) 481
Other noncurrent liabilities (827) (1,018) (555)
--------- --------- ---------
Net cash provided by operating activities 45,541 28,148 38,504
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (35,298) (15,818) (18,715)
Loans to affiliates:
Loans (16,677) - -
Collections - 18,097 -
Property damage by fire:
Insurance proceeds 23,361 - -
Other, net (3,205) - -
Proceeds from disposition of property and equipment 262 3 4
--------- --------- ---------
Net cash provided (used) by investing activities (31,557) 2,282 (18,711)
--------- --------- ---------
KRONOS TITAN GMBH AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
December 31, 2001, 2002 and 2003
(In thousands)
2001 2002 2003
------- ------- -------
Cash flows from financing activities:
Repayment of loans from affiliates $ (21,406) $ (12,090) $ -
Cash contributions 16,666 - -
Cash distributions (11,097) (12,706) -
Deferred financing fees - (410) -
--------- --------- ---------
Net cash used by financing activities (15,837) (25,206) -
--------- --------- ---------
Cash and cash equivalents:
Net change during the year from:
Operating, investing and financing
activities (1,853) 5,224 19,793
Currency translation (286) 924 3,241
Balance at beginning of period 3,816 1,677 7,825
--------- --------- ---------
Balance at end of period $ 1,677 $ 7,825 $ 30,859
========= ========= =========
Supplemental disclosures:
Cash paid (received) for:
Interest $ 8,689 $ 4,463 $ 674
Income taxes 6,855 938 (166)
KRONOS TITAN GMBH AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
Effective December 31, 2003, Kronos Titan GmbH & Co. OHG was converted from
a partnership into a limited liability company under German law, and was renamed
Kronos Titan GmbH ("TG"). The conversion had no material affect on TG's
consolidated financial statements, other than with respect to deferred income
taxes. See Note 10. TG is majority owned (99.95%) by Kronos International, Inc.
("KII"). KII is a wholly owned subsidiary of Kronos Worldwide, Inc. ("Kronos"),
a majority owned subsidiary of NL Industries, Inc. ("NL"). NL Industries Chemie
GmbH, another wholly owned subsidiary of NL, holds the remaining 0.05% ownership
interest in TG. NL conducts its titanium dioxide pigments ("TiO2") operations
through Kronos. At December 31, 2003, Valhi, Inc. ("Valhi") and a wholly-owned
subsidiary of Valhi held approximately 84% of NL's outstanding common stock. At
December 31, 2003, 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 the sole trustee. Mr. Simmons, the Chairman of the Board of each of Contran,
Valhi and NL, may be deemed to control each of such companies and TG.
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"), with the U.S. dollar as the reporting currency. TG also
prepares financial statements on other bases, as required in Germany.
As part of the restructuring of KII's German operations, KII implemented
certain restructuring transactions in 1999 and 2001. In June 1999, two
predecessors of TG, which had operated in corporate form in Germany, were each
converted into partnerships. In October 2001, through various legal
transactions, those two entities merged to form TG. There was no impact on TG's
consolidated financial statements as a result of this 2001 merger since both
companies were under common control.
TG is not a registrant with the U.S. Securities and Exchange Commission
("SEC") and is not subject to the SEC's periodic reporting requirements, except
as may be required by Rule 3-16 of Regulation S-X.
Note 2 - Summary of significant accounting policies:
Principles of consolidation and management's estimates. The accompanying
consolidated financial statements include the accounts of TG and its wholly
owned subsidiary (collectively, the "Company"). All material intercompany
accounts and balances have been eliminated. Certain prior-year amounts have been
reclassified to conform to the current year presentation. The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amount of revenues and expenses
during the reporting period. Actual results may differ from previously estimated
amounts under different assumptions or conditions. The Company has no
involvement with any variable interest entity covered by the scope of FASB
Interpretation ("FIN") No. 46R, "Consolidation of Variable Interest Entities."
Translation of foreign currencies. The functional currency of the Company
is the euro. Assets and liabilities of the Company are translated to U.S.
dollars at year-end rates of exchange and revenues and expenses are translated
at weighted average exchange rates prevailing during the year. Resulting
translation adjustments are included in other comprehensive income (loss), net
of related income taxes, if applicable. Currency transaction gains and losses
are recognized in income currently.
Cash equivalents. Cash equivalents include bank deposits with original
maturities of three months or less.
Inventories and cost of sales. Inventories are stated at the lower of cost
(principally average cost) or market, net of allowance for obsolete or
slow-moving inventories. Amounts are removed from inventories at average cost.
Cost of sales includes costs for materials, packaging and finishing, utilities,
salary and benefits, maintenance and depreciation.
Property, equipment, depreciation and depletion. Property and equipment are
stated at cost. Interest costs related to major, long-term capital projects are
capitalized as a component of construction costs. Expenditures for maintenance,
repairs and minor renewals are expensed; expenditures for major improvements are
capitalized. The Company performs planned major maintenance activities
throughout the year. Repair and maintenance costs estimated to be incurred in
connection with planned major maintenance activities are accrued in advance and
are included in cost of goods sold. At December 31, 2003, accrued repair and
maintenance costs, included in other current liabilities, was $3.3 million (2002
- - $3.2 million).
Depreciation is computed principally by the straight-line method over the
estimated useful lives of ten to forty years for buildings and three to twenty
years for machinery and equipment.
When events or changes in circumstances indicate that assets may be
impaired, an evaluation is performed to determine if an impairment exists. Such
events or changes in circumstances include, among other things, (i) significant
current and prior periods or current and projected periods with operating
losses, (ii) a significant decrease in the market value of an asset or (iii) a
significant change in the extent or manner in which an asset is used. All
relevant factors are considered. The test for impairment is performed by
comparing the estimated future undiscounted cash flows (exclusive of interest
expense) associated with the asset to the asset's net carrying value to
determine if a write-down to market value or discounted cash flow value is
required. Effective January 1, 2002, the Company commenced accounting for the
impairment of other long-lived assets (such as property and equipment) in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 144.
Deferred financing costs. Deferred financing costs are amortized over the
term of the applicable issue by the interest method.
Employee benefit plans. Accounting and funding policies for retirement
plans are described in Note 8.
The Company has not issued any stock options. However, certain employees of
the Company have been granted options by NL to purchase NL common stock. The
Company has elected the disclosure alternative prescribed by SFAS No. 123,
"Accounting for Stock-Based Compensation," as amended, and to account for its
stock-based employee compensation related to stock options 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 and 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. Aggregate compensation expense related to
NL stock options held by employees of the Company was nil in 2001, $25,000 in
2002 and $12,000 in 2003.
The following table illustrates the effect on net income if the Company had
applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation.
Years ended December 31,
--------------------------------------------
2001 2002 2003
------ ------ ------
(In thousands)
Net income - as reported $85,807 $22,430 $270,541
Adjustments, net of applicable income
tax effects:
Stock-based employee compensation
expense determined under APBO No. 25 - 21 10
Stock-based employee compensation
expense determined under SFAS No. 123 (25) (21) (9)
------- ------- --------
Pro forma net income $85,782 $22,430 $270,542
======= ======= ========
Environmental remediation costs. Environmental remediation costs are
accrued when estimated future expenditures are probable and reasonably
estimable. The estimated future expenditures are generally not discounted to
present value. Recoveries of remediation costs from other parties, if any, are
reported as receivables when their receipt is deemed probable. At December 31,
2002 and 2003, no receivables for recoveries have been recognized.
Net sales. Sales are recorded when products are shipped and title and other
risks and rewards of ownership have passed to the customer. Shipping terms of
products shipped are generally FOB shipping point. Amounts charged to customers
for shipping and handling are included in net sales. Sales are stated net of
price, early payment and distributor discounts and volume rebates.
Accounts receivable. The Company provides an allowance for doubtful
accounts for known and estimated potential losses arising from sales to
customers based on a periodic review of the accounts.
Selling, general and administrative expenses; shipping and handling costs.
Selling, general and administrative expenses include costs related to marketing,
sales, distribution, shipping and handling, research and development, legal and
administrative functions, such as accounting, treasury and finance, and includes
costs for salary and benefits, travel and entertainment, promotional materials
and professional fees. Shipping and handling costs are included in selling,
general and administrative expense and were $14.3 million in 2001, $15.1 million
in 2002 and $19.8 million in 2003.
Income taxes. As a partnership under German law, TG is not subject to
corporate income taxes, but remains subject to trade income taxes. Deferred
trade income tax assets and liabilities are recognized for the expected future
tax consequences of temporary differences between the trade income tax and
financial reporting carrying amounts of assets and liabilities. The Company
periodically evaluates its deferred trade income tax assets and adjusts any
related valuation allowance. The Company's valuation allowance is equal to the
amount of deferred trade income tax assets which the Company believes does not
meet the "more-likely-than-not" recognition criteria. Effective December 31,
2003, the Company was converted from a partnership to a limited liability
company. See Note 10. Subsequent to that date, the Company will be subject to
the German corporation tax, with a statutory rate of 25%, in addition to
solidarity-surcharge of 5.5% of corporate income tax and trade income taxes.
Derivatives and hedging activities. Derivative instruments are recognized
as either assets or liabilities and measured at fair value in accordance with
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended. The accounting for changes in fair value of derivatives is dependent
upon the intended use of the derivative, and such changes are recognized either
in net income or other comprehensive income. As permitted by the transition
requirements of SFAS No. 133, as amended, the Company exempted from the scope of
SFAS No. 133 all host contracts containing embedded derivatives which were
issued or acquired prior to January 1, 1999. See Note 15.
Note 3 - Accounts and notes receivable:
December 31,
------------------------
2002 2003
------ ------
(In thousands)
Trade receivables $47,152 $ 62,225
Insurance claims receivable 147 9
Recoverable VAT and other receivables 7,008 5,800
Allowance for doubtful accounts (989) (1,469)
------- --------
$53,318 $ 66,565
======= ========
Note 4 - Inventories:
December 31,
------------------------
2002 2003
------ ------
(In thousands)
Raw materials $ 20,426 $ 13,424
Work in process 11,489 14,169
Finished products 41,471 57,267
Supplies 12,156 15,273
-------- --------
$ 85,542 $100,133
======== ========
Note 5 - Accounts payable and accrued liabilities:
December 31,
------------------------
2002 2003
------ ------
(In thousands)
Accounts payable $28,118 $29,886
------- -------
Accrued liabilities:
Employee benefits 10,152 13,180
Waste acid recovery 6,296 8,187
Other 8,122 9,999
------- -------
24,570 31,366
------- -------
$52,688 $61,252
======= =======
Note 6 - Long-term debt:
In June 2002 the Company and KII's operating subsidiaries in Belgium and
Norway (Kronos Europe S.A./N.V.-"KEU", Kronos Titan A/S - "TAS" and Titania A/S
- - "TIA"), referred to as the "Borrowers", entered into a three-year (euro)80
million secured revolving credit facility ("Credit Facility"). The Credit
Facility is available in multiple currencies, including U.S. dollars, euros and
Norwegian kroner. Borrowings bear interest at the applicable interbank market
rate plus 1.75%. As of December 31, 2003, no amounts were outstanding under the
Credit Facility. At December 31, 2003, (euro)77.5 million ($97.5 million) was
available for borrowing by the Borrowers.
The Credit Facility is collateralized by accounts receivable and inventory
of the Borrowers, plus a limited pledge of certain other assets of the Belgian
operating subsidiary. The Credit Facility contains, among others, various
restrictive covenants, including restrictions on incurring liens, asset sales,
additional financial indebtedness, mergers, investments and acquisitions,
transactions with affiliates and dividends. The Company and KEU are
unconditionally jointly and severally liable for any and all outstanding
borrowings under the Credit Facility. The parent company of TAS and TIA, Kronos
Norge A/S, is jointly and severally liable for any and all outstanding
borrowings under the Credit Facility to the extent permitted by Norwegian law.
The Borrowers have a (euro)5 million sub-limit for issuing letters of credit
with (euro)2.5 million letters of credit issued at December 31, 2003. The
Borrowers were in compliance with all the covenants as of December 31, 2003.
Deferred financing costs of $1.4 million for the Credit Facility ($.4
million paid by the Company, with the remaining $1.0 million paid by KII's
Belgian and Norwegian operating subsidiaries) are being amortized over the life
of the Credit Facility and are included in other noncurrent assets as of
December 31, 2003.
In January 2004, the Company borrowed (euro)40 million ($50 million, when
borrowed) under the Credit Facility at an interest rate of 3.86% and used the
proceeds to fund a $60 million dividend to KII. In February 2004, the Company
repaid the (euro)40 million borrowing from proceeds collected from KEU and TAS
in settlement of outstanding intercompany balances. KEU and TAS utilized funds
borrowed under the Credit Facility, (euro)26 million ($32 million when borrowed)
borrowed by KEU and (euro)14 million ($18 million when borrowed) borrowed by
TAS, to settle the outstanding intercompany balances.
In June 2002, KII issued (euro)285 million principal amount of 8.875%
Senior Secured Notes (the "Notes") due 2009. The Notes are collateralized by
first priority liens on 65% of the common stock or other equity interests of
certain of KII's first-tier subsidiaries, including the Company. The Notes are
issued pursuant to an indenture which contains a number of covenants and
restrictions which, among other things, restricts the ability of KII and its
subsidiaries, including the Company, to incur debt, incur liens, or merge or
consolidate with, or sell or transfer all or substantially all of their assets
to, another entity.
Note 7 - Other noncurrent liabilities:
December 31,
------------------------
2002 2003
------ ------
(In thousands)
Employee benefits $ 3,286 $ 3,962
Insurance claims expense 813 1,112
Other 7,135 6,456
------- -------
$11,234 $11,530
======= =======
Note 8 - Employee benefit plans:
Company-sponsored pension plans. The Company maintains a defined benefit
pension plan and certain other benefits covering substantially all employees.
Certain actuarial assumptions used in measuring the defined benefit pension
assets, liabilities and expenses are presented below. The Company uses a
September 30th measurement date for their defined benefit pension plans.
The weighted-average rate assumptions used in determining the actuarial
present value of benefit obligations as of December 31, 2002 and 2003 are
presented in the table below. Such weighted-average rates were determined using
the projected benefit obligations at each date.
December 31,
-------------------
Rate 2002 2003
------ ------ ------
Discount rate 5.5% 5.3%
Increase in future compensation levels 2.5% 2.8%
The weighted-average rate assumptions used in determining the net periodic
pension cost for 2001, 2002 and 2003 are presented in the table below. The
weighted-average discount rate and the weighted-average increase in future
compensation levels were determined using the projected benefit obligations at
the beginning of each year, and the weighted-average long-term return on plan
assets was determined using the fair value of plan assets at the beginning of
each year.
Years ended December 31,
-------------------------------
2001 2002 2003
----- ----- -----
Rate
------
Discount rate 5.8% 5.5% 5.3%
Increase in future compensation levels 2.8% 2.5% 2.8%
Long-term return on plan assets 7.3% 6.8% 6.5%
Plan assets are comprised primarily of investments in corporate equity and
debt securities, short-term investments, mutual funds and group annuity
contracts.
SFAS No. 87, "Employers' Accounting for Pension Costs" requires that an
additional pension liability be recognized when the unfunded accumulated pension
benefit obligation exceeds the unfunded accrued pension liability. The
accumulated benefit obligation of the Company's defined benefit pension plan was
$177.3 million at December 31, 2003 (2002 - $141.4 million). Variances from
actuarially assumed rates will change the actuarial valuation of accrued pension
liabilities, pension expense and funding requirements in future periods.
The components of the net periodic defined benefit pension cost are set
forth below.
Years ended December 31,
--------------------------------------
2001 2002 2003
------- ------- -------
(In thousands)
Net periodic pension cost:
Service cost benefits $ 1,924 $ 2,120 $ 2,621
Interest cost on projected benefit
obligation ("PBO") 7,877 8,353 9,354
Expected return on plan assets (7,396) (8,210) (8,831)
Amortization of net transition obligation 201 210 251
Recognized actuarial losses - 329 20
------- ------- -------
$ 2,606 $ 2,802 $ 3,415
======= ======= =======
The funded status of the Company's defined benefit pension plan is set
forth below.
December 31,
--------------------------
2002 2003
----- ------
(In thousands)
Change in PBO:
Beginning of year $ 139,472 $ 160,871
Service cost 2,120 2,621
Interest 8,353 9,354
Participant contributions 904 1,156
Plan amendments - 3,200
Actuarial losses (gains) (5,885) 6,398
Benefits paid (9,115) (10,947)
Change in currency exchange rates 25,022 32,787
--------- ---------
End of year $ 160,871 $ 205,440
--------- ---------
Change in fair value of plan assets:
Beginning of year $ 98,704 $ 112,674
Actual return on plan assets (1,274) (15,643)
Employer contributions 5,547 8,919
Participant contributions 904 1,156
Benefits paid (9,115) (10,947)
Change in currency exchange rates 17,908 20,116
--------- ---------
End of year $ 112,674 $ 116,275
--------- ---------
Funded status at year end:
Plan assets less than PBO $ (48,197) $ (89,165)
Unrecognized actuarial loss 28,522 68,627
Unrecognized prior service cost - 3,566
Unrecognized net transition obligation 292 70
--------- ---------
$ (19,383) $ (16,902)
========= =========
Amounts recognized in the balance sheet:
Accrued pension cost:
Current $ (6,189) $ (7,878)
Noncurrent (20,709) (50,826)
Unrecognized net pension obligations 292 3,636
Accumulated other comprehensive loss 7,223 38,166
--------- ---------
$ (19,383) $ (16,902)
========= =========
At December 31, 2003, the Company currently expects to contribute the
equivalent of approximately $2.6 million to its defined benefit pension plan
during 2004.
Note 9 - Other items:
Advertising costs are expensed as incurred and were $.3 million in each of
2001, 2002 and 2003.
Interest capitalized in connection with long-term capital projects was nil
in each of 2001, 2002 and 2003.
Note 10 - Income taxes:
The components of (i) the difference between the provision for income taxes
attributable to pretax income and the amounts that would be expected using the
German statutory corporation tax rate of 25%, (ii) the provision for income
taxes and (iii) the comprehensive tax provision are presented below.
Years ended December 31,
--------------------------------------
2001 2002 2003
------- ------- -------
(In thousands)
Pretax income $ 86,552 $ 25,736 $ 64,871
======== ======== =========
Expected tax expense $ 21,638 $ 6,434 $ 16,218
Trade income tax 12,825 2,561 11,365
German tax refund - - (123,033)
Organschaft adjustment - - (94,079)
Change in valuation allowance:
Increase (decrease) in certain deductible
temporary differences that the Company
believes do not meet the "more-likely-
than-not" recognition criteria (1,808) - -
Recognition of certain deductible tax
attributes which previously did not meet
the "more-likely-than-not" recognition
criteria (11,535) - -
No corporation tax provision due to partnership structure (21,638) (6,434) (16,218)
Other, net 1,263 745 77
-------- -------- ---------
Income tax expense (benefit) $ 745 $ 3,306 $(205,670)
======== ======== =========
Provision for income taxes:
Current income tax expense (benefit) $ 7,018 $ 431 (165,900)
Deferred income tax expense (benefit) (6,273) 2,875 (39,770)
-------- -------- ---------
$ 745 $ 3,306 $(205,670)
======== ======== =========
Comprehensive provision (benefit) for income
taxes allocable to:
Pretax income $ 745 $ 3,306 $(205,670)
Other comprehensive loss - pension
liabilities (627) (732) (5,331)
-------- -------- ---------
$ 118 $ 2,574 $(211,001)
======== ======== =========
The components of the net deferred tax liability are summarized below.
December 31,
-------------------------------------------------------
2002 2003
------------------------- -------------------------
Assets Liabilities Assets Liabilities
-------- ------------- -------- -------------
Tax effect of temporary differences
relating to:
Inventories $ - $ (765) $ - $ (1,407)
Property and equipment 680 (22,829) 38,400 -
Accrued (prepaid) pension cost - (6,189) 6,690 (22,716)
Other taxable differences - (1,840) - (2,880)
Tax loss and tax credit carryforwards 10,184 - 338 -
------- -------- ------- ---------
Gross deferred tax assets (liabilities) 10,864 (31,623) 45,428 (27,003)
Reclassification, principally netting by tax jurisdiction (10,864) 10,864 (25,596) 25,596
------- -------- ------- ---------
Net total deferred tax liabilities - (20,759) 19,832 (1,407)
Net current deferred tax liabilities - (765) - (1,407)
------- -------- ------- ---------
Net noncurrent deferred tax liabilities $ - $(19,994) $19,832 $ -
======= ======== ======= =========
Changes in the Company's deferred income tax valuation allowance are
summarized below.
Year ended
December 31, 2001
-------------------
Balance at beginning of year $14,018
Increase (decrease) in certain deductible tax attributes which the Company believes do not
meet the "more-likely-than-not" recognition criteria (1,808)
Recognition of certain deductible tax attributes which previously did not meet the
"more-likely-than-not" recognition criteria (11,535)
Foreign currency translation (675)
--------
Balance at end of year $ -
========
Certain of the Company's tax returns are being examined and the German tax
authorities may propose tax deficiencies, including penalties and interest.
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.
During 2001, 2002 and 2003, the Company's legal form was as a partnership.
As a partnership, the Company is not subject to corporation tax, although the
Company is subject to trade income tax. Effective December 31, 2003, the Company
was converted to a limited liability company and will also be subject to the
German corporation tax in years following 2003. As a result of the conversion of
the Company from a partnership, the Company recognized net deferred income tax
assets of approximately $52 million related to the expected future tax
consequences of temporary differences between the corporate income tax and
financial reporting carrying amounts of its assets and liabilities.
During 2001, the Company recognized a $11.5 million trade income tax
benefit attributable to a decrease in the valuation allowance due to a change in
estimate of the Company's ability to utilize certain German trade income tax
attributes that did not previously meet the "more-likely-than-not" recognition
criteria.
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 was required
to file amended tax returns with the German tax authorities in order to receive
its refunds for such years, and all of such amended returns were filed during
2003. Such amended returns reflected an aggregate refund of taxes and related
interest to the Company of (euro)103.2 million ($123.0 million). The German tax
authorities have reviewed and accepted the amended return with respect to the
1990 tax year, and in February 2004 the Company received interest of (euro)16.8
million ($19.2 million). The Company believes it will receive the refunds of
taxes and related interest for the remaining years during 2004. The Company has
recognized the aggregate (euro)103.2 million ($123.0 million) benefit of such
refunds in its 2003 results of operations, comprised of (euro)63.1 million of
tax and (euro)40.1 million of interest. KII will be required to pay additional
income taxes to the German tax authorities in connection with the 1990 to 1997
amended returns. As a result of the court ruling that allowed Organschaft (tax
consolidation) tax treatment, certain intercompany tax balances between the
Company and KII were adjusted to reflect the corrected intercompany tax balance
and such adjustment resulted in the Company recognizing a (euro)36.2 million
($43.1 million) non-cash income tax benefit in 2003.
Pursuant to the Company's conversion to a limited liability company
effective December 31, 2003, the Company will be included in KII's Organschaft
effective January 1, 2004.
Note 11 - Leverkusen fire and insurance claim:
A fire on March 20, 2001 damaged a section of the Company's Leverkusen,
Germany 35,000 metric ton sulfate-process TiO2 plant ("Sulfate Plant") and, as a
result, production of TiO2 at the Leverkusen facility was halted. The fire did
not enter the Company's adjacent 125,000 metric ton chloride-process TiO2 plant
("Chloride Plant"), but did damage certain support equipment necessary to
operate that plant. The damage to the support equipment resulted in a temporary
shutdown of the Chloride Plant.
On April 8, 2001, repairs to the damaged support equipment were
substantially completed and full production resumed at the Chloride Plant. The
Sulfate Plant became approximately 50% operational in September 2001 and became
fully operational in late October 2001. The damages to property and the business
interruption losses caused by the fire were covered by insurance as noted below,
but the effect on the financial results of the Company on a quarter-to-quarter
basis was impacted by the timing and amount of insurance recoveries.
The Company reached an agreement and settled its insurance claim involving
the Leverkusen fire for $56.4 million during the fourth quarter of 2001 ($46.9
million received as of December 31, 2001, with the remaining $9.5 million
received in January 2002), of which $27.3 million related to business
interruption and $29.1 million related to property damage, clean-up costs and
other extra expenses. The Company recognized a $17.5 million pre-tax gain in
2001 related to the property damage recovery after deducting $11.6 million of
clean-up costs and other extra expenses incurred and the carrying value of
assets destroyed in the fire. The gain was excluded from the determination of
operating income. The $27.3 million of business interruption proceeds recognized
in 2001 were allocated between other income, excluding corporate, which reflects
recovery of lost margin ($7.2 million) and as a reduction of cost of sales to
offset unallocated period costs ($20.1 million).
Note 12 - Related party transactions:
The Company may be deemed to be controlled by Harold C. Simmons.
Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (a) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, tax
sharing agreements, joint ventures, partnerships, loans, options, advances of
funds on open account, and sales, leases and exchanges of assets, including
securities issued by both related and unrelated parties and (b) common
investment and acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases, and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties and
have included transactions which resulted in the acquisition by one related
party of a publicly held minority equity interest in another related party.
While no transactions of the type described above are planned or proposed with
respect to the Company other than as set forth in these financial statements,
the Company from time to time considers, reviews and evaluates such transactions
and understands that Contran, Valhi, NL, Kronos, KII and related entities
consider, review and evaluate, such transactions. Depending upon the business,
tax and other objectives then relevant, and restrictions under the KII
indenture, the Credit Facility and other agreements, it is possible that the
Company might be a party to one or more such transactions in the future.
The Company is a party to a cost sharing agreement with Kronos, KII and
KEU, whereby Kronos, KII and KEU provide certain management, financial,
insurance and administrative services to the Company on a fee basis. The
Company's expense was approximately $3.6 million in 2001, $5.7 million in 2002
and $7.1 million in 2003.
The Company charges affiliates for certain management, financial and
administrative services costs, which totaled approximately $5.3 million, $3.4
million and $4.3 million in 2001, 2002 and 2003, respectively. These charges to
affiliates were reflected primarily as a reduction of selling, general and
administrative expense.
The Company is also party to master global insurance coverage policies with
NL with regard to property, business interruption, excess liability, and other
coverages. Tall Pines, Valmont Insurance Company and EWI RE, Inc. provide for or
broker certain insurance policies for Contran and certain of its subsidiaries
and affiliates, including NL and the Company. Valmont is a wholly-owned
subsidiary of Valhi, and EWI is a wholly-owned subsidiary of NL. Consistent with
insurance industry practices, Tall Pines, Valmont and EWI receive commissions
from the insurance and reinsurance underwriters for the policies that they
provide or broker. In the Company's opinion, the amounts that the Company paid
for these insurance policies and the allocation among NL and its affiliates of
relative insurance premiums are reasonable and similar to those they could have
obtained through unrelated insurance companies and/or brokers. The costs
associated with these policies aggregated $6.0 million, $5.6 million and $4.1
million in 2001, 2002 and 2003, respectively.
Contran and certain of its subsidiaries and affiliates, including the
Company, purchase certain of their insurance policies as a group, with the costs
of the jointly-owned policies being apportioned among the participating
companies. With respect to certain of such policies, it is possible that
unusually large losses incurred by one or more insureds during a given policy
period could leave the other participating companies without adequate coverage
under that policy for the balance of the policy period. As a result, Contran and
certain of its subsidiaries and its affiliates, including NL, have entered into
a loss sharing agreement under which any uninsured loss is shared by those
entities who have submitted claims under the relevant policy. The Company
believes the benefits in the form of reduced premiums and broader coverage
associated with the group coverage for such policies justifies the risk
associated with the potential for uninsured loss.
The Company purchases from and sells to its affiliates a significant amount
of TiO2. Intercompany sales to (purchases from) affiliates of TiO2 are
summarized in the following table.
Years ended December 31,
--------------------------------------
2001 2002 2003
------ ------ ------
(In thousands)
Sales to:
Kronos (US), Inc. ("KUS") $ 19,821 $ 24,511 $ 37,550
Societe Industrielle du Titane, S.A. ("SIT") 26,202 23,681 32,969
KEU 22,345 19,141 22,417
Kronos Limited ("KUK") 14,887 16,864 22,151
Kronos Canada, Inc. ("KC") 4,638 4,494 5,026
Other affiliates 9,274 10,564 29,200
-------- -------- --------
$ 97,167 $ 99,255 $149,313
======== ======== ========
Purchases from:
KEU $ 34,346 $ 26,868 $ 33,061
TAS 8,497 3,209 5,722
KC 85 - -
-------- -------- --------
$ 42,928 $ 30,077 $ 38,783
======== ======== ========
KUS purchases the rutile and slag feedstock used as a raw material in the
Company's chloride process TiO2 facility. The Company purchases such feedstock
from KUS for use in its facility for an amount equal to the amount paid by KUS
to the third-party supplier plus a 2.5% administrative fee. Such feedstock
purchases were $59.5 million in 2001, $64.3 million in 2002 and $56.2 million in
2003.
The Company sells water treatment chemicals (derived from co-products of
the TiO2 production processes) to KII. Such water treatment chemical sales were
$7.1 million in 2001, $8.4 million in 2002 and $12.8 million in 2003.
The Company was party to a long-term ilmenite supply contract with TIA, an
affiliate, that provided for the Company's sulfate feedstock requirements
through December 31, 2001. Subsequent to December 31, 2001, the Company purchase
ilmenite from TIA on a year-to-year basis. Such feedstock purchases were $7.3
million in 2001, $13.4 million in 2002 and $15.5 million in 2003.
At January 1, 2001, the Company was party to an accounts receivable
factoring agreement with KII pursuant to which the Company factored its export
accounts receivable without recourse to KII for a fee of 0.85%. KII, upon
non-recourse transfer from the Company, assumed all risk pertaining to the
factored receivables, including, but not limited to, exchange control risks,
risks pertaining to the bankruptcy of a customer and risks related to late
payments.
Effective June 2002, this factoring agreement was terminated, and certain
European affiliates of the Company commenced factoring their export accounts
receivables to the Company on similar terms. Export receivables sold to KII
during 2001 and 2002 aggregated $151 million and $59 million, respectively, and
export receivables purchased by the Company during 2002 and 2003 aggregated $60
million and $108 million, respectively.
Net amounts currently receivable from (payable to) affiliates are
summarized in the following table.
December 31,
--------------------------
2002 2003
------ ------
(In thousands)
Receivable from:
KUK $ 91 $ 886
TAS 5,932 15,533
SIT 987 -
KEU 8,934 32,342
Kronos B.V. 1,546 -
KII - 31,974
Other affiliates 1,333 1,431
-------- --------
$ 18,823 $ 82,166
======== ========
Payable to:
KII $ 27,914 $ -
KUS 13,857 5,856
TIA 2,311 6,631
Kronos B.V. - 8,609
SIT - 589
-------- --------
$ 44,082 $ 21,685
======== ========
Such amounts receivable from affiliates were generally related to product
sales (including water treatment chemical sales to KII) and services rendered.
Amounts payable to affiliates, net were related primarily to raw material
purchases, accounts receivable factoring and services received.
The noncurrent euro-denominated note payable to KII was established prior
to 2001 during a recapitalization of the Company. The note payable ((euro)71.8
million, or $74.8 million and $89.7 million, at December 31, 2002 and 2003,
respectively) bore interest through 2002 at EURIBOR plus 1% (4.30% at December
31, 2002) and is due in 2008.
Interest expense to affiliates related to the note payable to KII was $7.2
million in 2001, $3.7 million in 2002 and nil in 2003. Interest income from
affiliates related to a note receivable from KEU, repaid in June 2002, was $.5
million in 2001 and $.6 million in 2002. Included in other affiliate income and
other affiliate expense was other affiliate interest income/expense, factoring
fees and service fees.
Note 13 - NL common stock options held by employees of the Company:
At December 31, 2003, employees of the Company held options to purchase
approximately 18,000 shares of NL common stock, of which 8,000 were granted in
2000 and are exercisable at various dates through 2010 at an exercise price of
$5.63 per share, and 10,000 were granted in 2001 and are exercisable at various
dates through 2011 at an exercise price of $11.49 per share.
The pro forma information required by SFAS No. 123 is based on an
estimation of the fair value of options issued subsequent to January 1, 1995.
See Note 2. The fair value of options granted during 2001 (none were granted
during 2002 or 2003) was $7.52 per share. The fair value of employee stock
options was calculated using the Black-Scholes stock option valuation model with
the following weighted average assumptions for grants in 2001: stock price
volatility of 46%; risk-free rate of return of 5%; dividend yield of 4.0%; and
an expected term of 9 years. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over the options'
vesting period.
Note 14 - Commitments and contingencies:
Leases. The Company leases, pursuant to operating leases, various
manufacturing and office space and transportation equipment. Most of the leases
contain purchase and/or various term renewal options at fair market and fair
rental values, respectively. In most cases management expects that, in the
normal course of business, leases will be renewed or replaced by other leases.
The Company leases the land under its Leverkusen TiO2 production facility
pursuant to a lease expiring in 2050. The Leverkusen facility, with
approximately two-thirds of the Company's current TiO2 production capacity, is
located within the lessor's extensive manufacturing complex. Rent for the
Leverkusen facility is periodically established by agreement with the lessor for
periods of at least two years at a time. Under a separate supplies and services
agreement expiring 2011, the lessor provides some raw materials, including
chlorine and certain amounts of sulfuric acid, auxiliary and operating materials
and utilities services necessary to operate the Leverkusen facility with a
minimum annual cost of approximately $10.9 million. Both the lease and the
supplies and services agreements restrict the Company's ability to transfer
ownership or use of the Leverkusen facility.
Net rent expense aggregated $4 million in each of 2001 and 2002 and $5
million in 2003. At December 31, 2003, minimum rental commitments under the
terms of noncancellable operating leases were as follows:
Amount
---------------------
(in thousands)
Years ending December 31,
2004 $ 2,023
2005 1,517
2006 1,046
2007 968
2008 923
2009 and thereafter 19,824
-------
$26,301
=======
Capital expenditures. At December 31, 2003 the estimated cost to
complete capital projects in process approximated $3.7 million.
Purchase commitments. KUS has long-term supply contracts that provide for
certain affiliates' chloride feedstock requirements through 2007. The Company
purchases chloride feedstock underlying these long-term supply contracts from
KUS. The agreements require KUS to purchase certain minimum quantities of
feedstock with average minimum annual purchase commitments aggregating
approximately $165 million.
Environmental, product liability and litigation matters. The Company's
operations are governed by various environmental laws and regulations. Certain
of the Company's businesses are and have been engaged in the handling,
manufacture or use of substances or compounds that may be considered toxic or
hazardous within the meaning of applicable environmental laws. As with other
companies engaged in similar businesses, certain past and current operations and
products of the Company have the potential to cause environmental or other
damage. The Company has implemented and continues to implement various policies
and programs in an effort to minimize these risks. The policy of the Company is
to maintain compliance with applicable environmental laws and regulations at all
of its facilities and to strive to improve its environmental performance. It is
possible that future developments, such as stricter requirements of
environmental laws and enforcement policies thereunder, could adversely affect
the Company's production, handling, use, storage, transportation, sale or
disposal of such substances as well as the Company's consolidated financial
position, results of operations or liquidity.
The Company's production facilities operate in an environmental regulatory
framework in which governmental authorities typically are granted broad
discretionary powers that allow them to issue operating permits required for the
plants to operate. The Company believes all of its plants are in substantial
compliance with applicable environmental laws. Neither the Company nor its
subsidiary have been notified of any environmental claims by any applicable
federal or local environmental authority.
Germany is a member of the European Union (the "EU") and follows its
initiatives. The Company believes that it has all required permits and is in
substantial compliance with applicable EU requirements, including EU Directive
92/112/EEC regarding establishment of procedures for reduction and eventual
elimination of pollution caused by waste from the TiO2 industry.
The Company has a contract with a third party to treat spent acid from its
sulfate-process plants. With regard to the Company's Nordenham, Germany plant,
either party may terminate the contract after giving four years advance notice.
Under certain circumstances, the Company may terminate the contract after giving
six months notice, with respect to treatment of by-products from the Leverkusen,
Germany plant. The estimated minimum annual cost under the agreement is
approximately (euro)13 million ($15 million).
The Company is also involved in various other environmental, contractual,
product liability and other claims and disputes incidental to its business.
The Company currently believes the disposition of all claims and disputes,
individually or in the aggregate, should not have a material adverse effect on
the Company's consolidated financial condition, results of operations or
liquidity.
Concentrations of credit risk. Sales of TiO2 accounted for approximately
98% of net sales during each of 2001, 2002 and 2003. The remaining sales result
from the manufacture and sale of iron-based water treatment chemicals (derived
from co-products of the TiO2 production processes). TiO2 is generally sold to
the paint, plastics and paper, as well as fibers, rubber, ceramics, inks and
cosmetics markets. Such markets are generally considered "quality-of-life"
markets whose demand for TiO2 is influenced by the relative economic well-being
of the various geographic regions. TiO2 is sold to over 1,000 customers, with
the top ten external customers approximating 18% of net sales in 2001 and 20% of
net sales in each of 2002 and 2003. Approximately 75% of the Company's TiO2
sales by volume were to Europe in each of 2001 and 2002 decreasing to 68% in
2003. Approximately 6% in 2001, 8% in 2002 and 12% in 2003 of sales by volume
were to North America.
Note 15 - Financial instruments:
Summarized below is the estimated fair value and related net carrying value
of the Company's financial instruments.
December 31,
-----------------------------------------------------------
2002 2003
----------------------- --------------------------
Carrying Fair Carrying Fair
amount value amount value
--------- --------- --------- --------
(In millions)
Cash and cash equivalents $ 7.8 $ 7.8 $30.9 $30.9
Note payable to KII 74.8 74.8 89.7 89.7
The Company periodically uses currency forward contracts to manage foreign
exchange rate risk associated with anticipated transactions denominated in a
currency other than the euro. The Company has not entered into these contracts
for trading or speculative purposes in the past, nor does the Company currently
anticipate entering into such contracts for trading or speculative purposes in
the future. To manage such exchange rate risk, at December 31, 2003 the Company
held a contract maturing on January 2, 2004 to exchange an aggregate of (euro)40
million for an equivalent amount of U.S. dollars at an exchange rate of $1.2496
U.S. dollars per euro. At December 31, 2003, the actual exchange rate was equal
to the contract rate. The contract was closed on January 2, 2004 at an
immaterial loss.
The Company periodically uses interest rate swaps, currency swaps and other
types of contracts to manage interest rate and foreign exchange risk with
respect to financial assets or liabilities. The Company has not entered into
these contracts for trading or speculative purposes in the past, nor does it
currently anticipate doing so in the future. The Company was not a party to any
such contracts during 2001, 2002 and 2003.
Other than as described above, the Company was not a party to any material
derivative financial instruments during 2001, 2002 or 2003. There was no impact
on the Company's financial statements from adopting SFAS No. 133.
Note 16 - Quarterly financial data (unaudited):
Quarters ended
--------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- --------
(In thousands)
Year ended December 31, 2002:
Net sales $ 96,699 $ 96,083 $101,362 $ 90,217
Cost of sales 81,778 84,133 81,000 76,395
Income from operations 7,005 4,817 12,049 2,862
Income before income taxes 5,995 4,516 12,434 2,791
Net income 7,192 2,577 10,039 2,622
Year ended December 31, 2003:
Net sales $120,327 $124,550 $120,461 $121,999
Cost of sales 94,557 98,905 91,944 93,781
Income from operations 15,271 13,807 18,162 14,076
Income before income taxes 15,872 14,319 19,117 15,563
Net income 13,590 11,890 15,715 229,346
KRONOS DENMARK APS AND SUBSIDIARIES
Index of Consolidated Financial Statements
------------------------------------------
Financial Statements Pages
- -------------------- -----
Report of Independent Auditors FB-2
Consolidated Balance Sheets - December 31, 2002 and 2003 FB-3
Consolidated Statements of Income - Years ended
December 31, 2001, 2002 and 2003 FB-5
Consolidated Statements of Comprehensive Income - Years ended
December 31, 2001, 2002 and 2003 FB-6
Consolidated Statements of Stockholder's Equity - Years ended
December 31, 2001, 2002 and 2003 FB-7
Consolidated Statements of Cash Flows - Years ended
December 31, 2001, 2002 and 2003 FB-8
Notes to Consolidated Financial Statements FB-10
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholder of Kronos Denmark ApS:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, stockholder's equity
and cash flows present fairly, in all material respects, the financial position
of Kronos Denmark ApS and Subsidiaries at December 31, 2002 and 2003, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Dallas, Texas
March 5, 2004
KRONOS DENMARK APS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2003
(In thousands, except share data)
ASSETS 2002 2003
----- -----
Current assets:
Cash and cash equivalents $ 2,913 $ 4,681
Restricted cash 1,226 1,313
Accounts and notes receivable 14,075 15,605
Receivable from affiliates 2,327 1,987
Refundable income taxes 1,310 587
Inventories 56,232 66,156
Prepaid expenses 916 834
Deferred income taxes 16 26
-------- --------
Total current assets 79,015 91,189
-------- --------
Other assets:
Prepaid pension cost 17,572 -
Other 3,362 7,387
-------- --------
Total other assets 20,934 7,387
-------- --------
Property and equipment:
Land 14,385 17,568
Buildings 32,151 37,025
Machinery and equipment 145,354 168,549
Mining properties 65,296 63,700
Construction in progress 595 237
-------- --------
257,781 287,079
Less accumulated depreciation and amortization 153,376 171,338
-------- --------
Net property and equipment 104,405 115,741
-------- --------
$204,354 $214,317
======== ========
See accompanying notes to consolidated financial statements.
KRONOS DENMARK APS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 2002 and 2003
(In thousands, except share data)
LIABILITIES AND STOCKHOLDER'S EQUITY 2002 2003
Current liabilities:
Current maturities of long-term debt $ 1,298 $ 288
Accounts payable and accrued liabilities 31,500 31,536
Payable to affiliates 25,393 39,661
Income taxes 4,842 5,411
Deferred income taxes 1,498 2,030
--------- ---------
Total current liabilities 64,531 78,926
--------- ---------
Noncurrent liabilities:
Long-term debt 27,666 315
Deferred income taxes 29,694 23,320
Accrued pension costs - 1,191
Other 884 1,555
--------- ---------
Total noncurrent liabilities 58,244 26,381
--------- ---------
Stockholder's equity:
Common stock - 100 Danish kroner par value;
10,000 shares authorized; 10,000 shares issued 136 136
Additional paid-in capital 216,996 216,996
Accumulated deficit (120,351) (93,459)
Accumulated other comprehensive loss:
Currency translation adjustment (15,202) (4,204)
Minimum pension liability - (10,459)
--------- ---------
Total stockholder's equity 81,579 109,010
--------- ---------
$ 204,354 $ 214,317
========= =========
Commitments and contingencies (Notes 7, 11 and 14)
KRONOS DENMARK APS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2001, 2002 and 2003
(In thousands)
2001 2002 2003
----- ----- ------
Net sales $ 233,932 $ 243,412 $ 292,611
Cost of sales 185,299 206,690 234,881
--------- --------- ---------
Gross margin 48,633 36,722 57,730
Selling, general and administrative expense 15,617 17,406 19,596
Other operating income (expense):
Currency transaction gains (losses), net (191) 399 355
Disposition of property and equipment 12 (239) 37
Other, net 420 176 350
--------- --------- ---------
Income from operations 33,257 19,652 38,876
Other income (expense):
Trade interest income 249 231 163
Interest and other expense to affiliates (3,250) (2,938) (2,608)
Interest and other income from affiliates 813 325 198
Interest expense (2,256) (2,548) (2,309)
--------- --------- ---------
Income before income taxes 28,813 14,722 34,320
Provision for income taxes 10,374 3,378 7,428
--------- --------- ---------
Net income $ 18,439 $ 11,344 $ 26,892
========= ========= =========
KRONOS DENMARK APS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2001, 2003 and 2003
(In thousands)
2001 2002 2003
----- ----- -----
Net income $18,439 $11,344 $26,892
------- ------- -------
Other comprehensive income (loss), net of tax:
Currency translation adjustment (3,402) 17,081 10,998
Minimum pension liability - - (10,459)
------- ------- -------
Total other comprehensive income (loss) (3,402) 17,081 539
------- ------- -------
Comprehensive income $15,037 $28,425 $27,431
======= ======= =======
KRONOS DENMARK APS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Years ended December 31, 2001, 2002 and 2003
(In thousands)
Accumulated other
comprehensive income (loss)
----------------------------
Additional Currency Minimum
Common paid-in Accumulated translation pension
stock capital deficit adjustment liability Total
-------- ----------- ----------- ------------ ---------- ---------
Balance at December 31, 2000 $ 136 $ 206,425 $(103,367) $ (28,881) - $ 74,313
Net income - - 18,439 - - 18,439
Other comprehensive loss,
net of tax - - - (3,402) - (3,402)
Capital contribution - 10,571 - - - 10,571
Common dividends declared - - (33,407) - - (33,407)
------- --------- --------- --------- ---------- ----------
Balance at December 31, 2001 136 216,996 (118,335) (32,283) - 66,514
Net income - - 11,344 - - 11,344
Other comprehensive income,
net of tax - - - 17,081 - 17,081
Common dividends declared - - (13,360) - - (13,360)
------- --------- --------- --------- ---------- ----------
Balance at December 31, 2002 136 216,996 (120,351) (15,202) - 81,579
Net income - - 26,892 - - 26,892
Other comprehensive income (loss)
net of tax, - - - 10,998 (10,459) 539
------- --------- --------- --------- ---------- ----------
Balance at December 31, 2003 $ 136 $ 216,996 $ (93,459) $ (4,204) $ (10,459) $ 109,010
======= ========= ========= ========= ========== ==========
KRONOS DENMARK APS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001, 2002 and 2003
(In thousands)
2001 2002 2003
----- ----- ------
Cash flows from operating activities:
Net income $ 18,439 $ 11,344 $ 26,892
Depreciation and amortization 8,774 9,408 11,446
Noncash interest expense - 150 332
Deferred income taxes (125) (2,011) (5,405)
Net loss (gain) from disposition of property and equipment (12) 239 (37)
Pension, net 1,073 1,132 2,278
Change in assets and liabilities:
Accounts and notes receivable (2,280) (1,307) 437
Inventories (1,619) 1,377 (2,250)
Prepaid expenses (156) 909 143
Accounts payable and accrued liabilities (4,321) 5,098 4,107
Income taxes (1,817) (1,542) (2,902)
Accounts with affiliates 2,903 19,152 10,403
Other noncurrent assets 153 263 (4,181)
Other noncurrent liabilities (65) (73) 547
-------- -------- ---------
Net cash provided by operating activities 20,947 44,139 41,810
-------- -------- ---------
Cash flows from investing activities:
Capital expenditures (11,799) (10,329) (10,274)
Change in restricted cash equivalents and restricted (554)
marketable debt securities, net (577) (2,891)
Proceeds from disposition of property and equipment 59 823 350
-------- -------- ---------
Net cash used by investing activities (12,317) (12,397) (10,478)
======== ======== =========
See accompanying notes to consolidated financial statements.
KRONOS DENMARK APS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2001, 2002 and 2003
(In thousands)
2001 2002 2003
----- ----- ------
Cash flows from financing activities:
Indebtedness:
Borrowings $ 1,437 $ 55,727 $ 16,106
Principal payments (1,031) (58,117) (46,006)
Deferred financing fees - (953) -
Loans from affiliates:
Loans 16,677 - -
Repayments - (18,097) -
Capital contribution 10,571 - -
Dividends paid (33,407) (13,360) -
--------- --------- ---------
Net cash used by financing activities (5,753) (34,800) (29,900)
--------- --------- ---------
Cash and cash equivalents:
Net change during the year from:
Operating, investing and financing 1,432
activities 2,877 (3,058)
Currency translation (75) 541 336
Balance at beginning of period 2,628 5,430 2,913
--------- --------- ---------
Balance at end of period $ 5,430 $ 2,913 $ 4,681
========= ========= =========
Supplemental disclosures:
Cash paid for:
Interest $ 5,459 $ 5,461 $ 4,638
Income taxes 12,316 6,931 11,525
See accompanying notes to consolidated financial statements.
KRONOS DENMARK APS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
Kronos Denmark ApS ("KDK") was incorporated in Denmark in October 1999 and
is a wholly-owned subsidiary of Kronos International, Inc. ("KII"). KII is a
wholly-owned subsidiary of Kronos Worldwide, Inc., a majority-owned subsidiary
of NL Industries, Inc.. NL is primarily a holding company and Kronos conducts
its titanium dioxide pigments ("TiO2") operations. At December 31, 2003, Valhi,
Inc. and a wholly-owned subsidiary of Valhi, 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 the sole trustee. Mr. Simmons, the Chairman of
the Board of each of Contran, Valhi, NL and the Company may be deemed to control
each of such companies and KDK.
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") with the U.S. dollar as the reporting currency. KDK and its
subsidiaries also prepare financial statements on other bases, as required in
countries in which such entities are resident.
KDK's current operations are conducted primarily through its Belgian and
Norwegian subsidiaries with a TiO2 plant in Belgium and a TiO2 plant and
ilmenite ore mining operation in Norway. KDK also operates TiO2 sales and
distribution facilities in Denmark and the Netherlands.
KDK is not a registrant with the U.S. Securities and Exchange Commission
("SEC") and is not subject to the SEC's periodic reporting requirements, except
as may be required by Rule 3-16 of Regulation S-X.
Note 2 - Summary of significant accounting policies:
Management's estimates. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America ("GAAP") requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amount of revenues and expenses during the reporting period. Actual
results may differ from previously-estimated amounts under different assumptions
or conditions.
Principles of consolidation. The consolidated financial statements include
the accounts of KDK and its wholly-owned subsidiaries (collectively, the
"Company"). All material intercompany accounts and balances have been
eliminated. Certain prior-year amounts have been reclassified to conform to the
current year presentation. The Company has no involvement with any variable
interest entity covered by the scope of FASB Interpretation ("FIN") No. 46R,
"Consolidation of Variable Interest Entities."
Translation of foreign currencies. The functional currencies of the Company
include the Danish kroner, the euro and the Norwegian kroner. Assets and
liabilities of subsidiaries whose functional currency is other than the U.S.
dollar are translated at year-end rates of exchange and revenues and expenses
are translated at average exchange rates prevailing during the year. Resulting
translation adjustments are accumulated in stockholder's equity as part of
accumulated other comprehensive income (loss), net of related deferred income
taxes. Currency transaction gains and losses are recognized in income currently.
Net sales. Sales are recorded when products are shipped and title and other
risks and rewards of ownership have passed to the customer, or when services are
performed. Shipping terms of products shipped are generally FOB shipping point;
although in some instances shipping terms are FOB destination point (for which
sales are not recognized until the product is received by the customer). Amounts
charged to customers for shipping and handling are included in net sales. Sales
are stated net of price, early payment and distributor discounts and volume
rebates.
Inventories and cost of sales. Inventories are stated at the lower of cost
(principally average cost) or market, net of allowance for obsolete or
slow-moving inventories. Amounts are removed from inventories at average cost.
Cost of sales includes costs for materials, packaging and finishing, utilities,
salary and benefits, maintenance and depreciation.
Cash and cash equivalents. Cash equivalents include bank deposits with
original maturities of three months or less.
Restricted marketable debt securities. Restricted marketable debt
securities are primarily invested in corporate debt securities and include
amounts restricted in accordance with applicable Norwegian law regarding certain
requirements of the Company's Norwegian defined benefit pension plans ($2.5
million and $2.6 million at December 31, 2002 and 2003, respectively). The
restricted marketable debt securities are generally classified as either a
current or noncurrent asset depending upon the maturity date of each such debt
security and are carried at market, which approximates cost.
Accounts receivable. The Company provides an allowance for doubtful
accounts for known and estimated potential losses arising from sales to
customers based on a periodic review of these accounts.
Property and equipment and depreciation. Property and equipment are stated
at cost. The Company has a governmental concession with an unlimited term to
operate an ilmenite mine in Norway. Mining properties consist of buildings and
equipment used in the Company's Norwegian ilmenite mining operations. The
Company does not own the ilmenite reserves associated with the mine.
Depreciation of property and equipment for financial reporting purposes
(including mining properties) is computed principally by the straight-line
method over the estimated useful lives of ten to 40 years for buildings and
three to 20 years for equipment. Accelerated depreciation methods are used for
income tax purposes, as permitted. Upon sale or retirement of an asset, the
related cost and accumulated depreciation are removed from the accounts and any
gain or loss is recognized in income currently.
The Company performs planned major maintenance activities during the year.
Repair and maintenance costs estimated to be incurred in connection with planned
major maintenance activities are accrued in advance and are included in cost of
sales. Accrued repair and maintenance costs, included in other current
liabilities (see Note 6), was $100,000 and $1.1 million at December 31, 2002 and
2003, respectively.
Interest costs related to major long-term capital projects and renewals are
capitalized as a component of construction costs. Interest costs capitalized
were not significant in 2001, 2002 or 2003.
When events or changes in circumstances indicate that assets may be
impaired, an evaluation is performed to determine if an impairment exists. Such
events or changes in circumstances include, among other things, (i) significant
current and prior periods or current and projected periods with operating
losses, (ii) a significant decrease in the market value of an asset or (iii) a
significant change in the extent or manner in which an asset is used. All
relevant factors are considered. The test for impairment is performed by
comparing the estimated future undiscounted cash flows (exclusive of interest
expense) associated with the asset to the asset's net carrying value to
determine if a write-down to market value or discounted cash flow value is
required. Effective January 1, 2002, the Company commenced assessing impairment
of other long-lived assets (such as property and equipment and mining
properties) in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets."
Long-term debt. Amortization of deferred financing costs, included in
interest expense, is computed by the interest method over the term of the
applicable issue.
Derivatives and hedging activities. Derivative instruments are recognized
as either assets or liabilities and measured at fair value in accordance with
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended. The accounting for changes in fair value of derivatives is dependent
upon the intended use of the derivative, and such changes are recognized either
in net income or other comprehensive income. As permitted by the transition
requirements of SFAS No. 133, as amended, the Company exempted from the scope of
SFAS No. 133 all host contracts containing embedded derivatives which were
issued or acquired prior to January 1, 1999.
Income taxes. Deferred income tax assets and liabilities are recognized for
the expected future tax consequences of temporary differences between the income
tax and financial reporting carrying amounts of assets and liabilities,
including investments in the Company's subsidiaries and affiliates who are not
members of the Contran Tax Group and undistributed earnings of foreign
subsidiaries which are not deemed to be permanently reinvested. The Company
periodically evaluates its deferred tax assets in the various taxing
jurisdictions in which it operates and adjusts any related valuation allowance
based on the estimate of the amount of such deferred tax assets that the Company
believes does not meet the "more-likely-than-not" recognition criteria. Earnings
of foreign subsidiaries deemed to be permanently reinvested aggregated $251.8
million at December 31, 2002 and $278.6 million at December 31, 2003.
Employee benefit plans. Accounting and funding policies for retirement
plans are described in Note 8.
The Company has not issued any stock options. However, certain employees of
the Company have been granted options by NL to purchase NL common stock. The
Company has elected the disclosure alternative prescribed by SFAS No. 123,
"Accounting for Stock-Based Compensation," as amended, and to account for its
stock-based employee compensation related to stock options 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 and 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. Compensation cost recognized by the Company
in accordance with APBO No. 25 and the amount charged to the Company by NL for
stock option exercises was nil in 2001, $126,000 in 2002 and $117,000 in 2003.
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock-based employee compensation.
Years ended December 31,
----------------------------------------
2001 2002 2003
---- ---- ----
(In thousands except per share amounts)
Net income - as reported $18,439 $11,344 $26,892
Adjustments, net of applicable income tax
effects:
Stock-based employee compensation expense determined
under APBO No. 25 - 75 77
Stock-based employee compensation
expense determined under SFAS No. 123 (60) (79) (38)
------- ------- -------
Pro forma net income $18,379 $11,340 $26,931
======= ======= =======
Selling, general and administrative expenses; shipping and handling costs.
Selling, general and administrative expenses include costs related to marketing,
sales, distribution, shipping and handling, research and development, legal and
administrative functions, such as accounting, treasury and finance, and includes
costs for salaries and benefits, travel and entertainment, promotional materials
and professional fees. Shipping and handling costs are included in selling,
general and administrative expense and were $8.5 million in 2001, $9.2 million
in 2002 and $11.2 million in 2003.
Note 3 - Accounts and notes receivable:
December 31,
------------------------
2002 2003
---- ----
(In thousands)
Trade receivables $11,598 $13,117
Recoverable VAT and other receivables 2,721 2,510
Allowance for doubtful accounts (244) (22)
------- -------
$14,075 $15,605
======= =======
Note 4 - Inventories:
December 31,
------------------------
2002 2003
---- ----
(In thousands)
Raw materials $16,527 $16,793
Work in process 2,520 1,454
Finished products 24,115 32,943
Supplies 13,070 14,966
------- -------
$56,232 $66,156
======= =======
Note 5 - Other noncurrent assets:
December 31,
------------------------
2002 2003
---- ----
(In thousands)
Unrecognized net pension obligations $ - $ 4,176
Restricted marketable debt securities 2,492 2,586
Deferred financing costs, net 795 542
Other 75 83
------- -------
$ 3,362 $ 7,387
======= =======
Note 6 - Accounts payable and accrued liabilities:
December 31,
------------------------
2002 2003
---- ----
(In thousands)
Accounts payable $17,547 $16,609
------- -------
Accrued liabilities:
Employee benefits 8,174 8,786
Other 5,779 6,141
------- -------
13,953 14,927
------- -------
$31,500 $31,536
======= =======
Note 7 - Notes payable and long-term debt:
December 31,
------------------------
2002 2003
---- ----
(In thousands)
Long-term debt:
Revolving credit facility $27,077 $ -
Other 1,887 603
------- -------
28,964 603
Less current maturities 1,298 288
------- -------
$27,666 $ 315
======= =======
In June 2002 the Company's operating subsidiaries in Belgium ("KEU") Norway
("TAS" and "TIA") and KII's operating subsidiary in Germany ("TG"), referred to
as the "Borrowers" entered into a three-year (euro)80 million secured revolving
credit facility ("Credit Facility"). The Credit Facility is available in
multiple currencies, including U.S. dollars, euros and Norwegian kroner.
Borrowings bear interest at the applicable interbank market rate plus 1.75%. All
amounts outstanding under the Credit Facility at December 31, 2002 were repaid
in 2003 and as of December 31, 2003, no amounts were outstanding under the
Credit Facility. At December 31, 2003, (euro)77.5 million ($97.5 million) was
available for borrowing by the Borrowers.
The Credit Facility is collateralized by accounts receivable and inventory
of the Borrowers, plus a limited pledge of certain other assets of the Company.
The Credit Facility contains, among others, various restrictive covenants,
including restrictions on incurring liens, asset sales, additional financial
indebtedness, mergers, investments and acquisitions, transactions with
affiliates and dividends. KEU and TG are unconditionally jointly and severally
liable for any and all outstanding borrowings under the Credit Facility. The
parent company of TAS and TIA, Kronos Norge A/S, is jointly and severally liable
for any and all outstanding borrowings under the Credit Facility to the extent
permitted by Norwegian law. The Company has a (euro)5 million sub-limit for
issuing letters of credit with (euro)2.0 million ($2.5 million) letters of
credit issued at December 31, 2003. The Borrowers were in compliance with all
the covenants as of December 31, 2003.
Deferred financing costs of $1.4 million for the Credit Facility ($1.0
million paid by the Company, with the remaining $.4 million paid by the German
operating subsidiary) are being amortized over the life of the Credit Facility
and are included in other noncurrent assets as of December 31, 2003.
Unused lines of credit available for borrowing under the Company's non-U.S.
credit facilities approximated $99.0 million at December 31, 2003, including
$97.5 million under the Credit Facility.
In February 2004, KEU and TAS utilized funds borrowed under the Credit
Facility, (euro)26 million ($32 million when borrowed) borrowed by KEU and
(euro)14 million ($18 million when borrowed) borrowed by TAS, to settle
outstanding intercompany balances with TG. See Note 12. The interest rate at the
time of borrowing was 3.825%.
In June 2002, KII issued (euro)285 million principal amount of 8.875%
Senior Secured Notes (the "Notes") due 2009. The Notes are collateralized by
first priority liens on 65% of the common stock or other equity interests of
certain of KII's first-tier subsidiaries, including the Company. The Notes are
issued pursuant to an indenture which contains a number of covenants and
restrictions which, among other things, restricts the ability of KII and its
subsidiaries, including the Company, to incur debt, incur liens or merge or
consolidate with, or sell or transfer all or substantially all of their assets
to, another entity.
The aggregate maturities of long-term debt at December 31, 2003 are shown
in the table below.
Amount
(In thousands)
Years ending December 31,
- --------------------------
2004 $ 288
2005 153
2006 144
2007 18
2008 -
-------
$ 603
=======
Note 8 - Employee benefit plans:
The Company maintains various defined benefit pension plans. Personnel are
covered by plans in their respective countries. Variances from actuarially
assumed rates will result in increases or decreases in accumulated pension
obligations, pension expense and funding requirements in future periods. In 2002
the Company amended its defined benefit pension plans for KEU, TAS and TIA to
exclude the admission of new employees to the plans. New employees at these
locations are eligible to participate in Company-sponsored defined contribution
plans. The Company's expense related to the Company-sponsored defined
contribution plans was not material in 2002 or 2003. At December 31, 2003, the
Company currently expects to contribute the equivalent of approximately $1.3
million to its defined benefit pension plans during 2004.
Certain actuarial assumptions used in measuring the defined benefit pension
assets, liabilities and expenses are presented below. The Company uses a
September 30th measurement date for their defined benefit pension plans.
The weighted-average rate assumptions used in determining the actuarial
present value of benefit obligations as of December 31, 2002 and 2003 are
presented in the table below. Such weighted-average rates were determined using
the projected benefit obligations at each date.
December 31,
---------------------
2002 2003
---- ----
Discount rate 5.9% 5.5%
Increase in future compensation levels 3.0% 3.0%
The weighted-average rate assumptions used in determining the net periodic
pension cost for 2001, 2002 and 2003 are presented in the table below. The
weighted-average discount rate and the weighted-average increase in future
compensation levels were determined using the projected benefit obligations as
of the beginning of each year, and the weighted-average long-term return on plan
assets was determined using the fair value of plan assets as of the beginning of
each year.
Years ended December 31,
-------------------------------
2001 2002 2003
---- ---- ----
Discount rate 6.0% 6.0% 5.9%
Increase in future compensation levels 3.0% 3.0% 3.0%
Long-term return on plan assets 7.0% 6.9% 7.0%
Plan assets are comprised primarily of investments in corporate equity and
debt securities, short-term investments, mutual funds and group annuity
contracts.
The components of the net periodic defined benefit pension cost are set
forth below.
Years ended December 31,
--------------------------------------
2001 2002 2003
----- ----- -----
(In thousands)
Net periodic pension cost:
Service cost benefits $ 1,154 $ 1,264 $ 1,430
Interest cost on projected benefit
obligation ("PBO") 2,293 2,508 2,907
Expected return on plan assets (2,613) (2,660) (3,335)
Amortization of prior service cost 201 223 255
Amortization of net transition obligation 137 140 296
Recognized actuarial losses 400 668 732
------- ------- --------
$ 1,572 $ 2,143 $ 2,285
======= ======= ========
The funded status of the Company's defined benefit pension plans is set
forth below.
December 31,
------------------------
2002 2003
----- -----
(In thousands)
Change in PBO:
Beginning of year $ 39,317 $ 50,061
Service cost 1,264 1,430
Interest 2,508 2,907
Participant contributions 112 135
Actuarial gains (losses) (1,371) 10,745
Benefits paid (2,495) (4,736)
Change in currency exchange rates 10,726 3,619
-------- --------
End of year $ 50,061 $ 64,161
-------- --------
Change in fair value of plan assets:
Beginning of year $ 37,819 $ 47,324
Actual return on plan assets 759 2,943
Employer contributions 1,011 1,223
Participant contributions 112 135
Benefits paid (2,495) (4,736)
Change in currency exchange rates 10,118 2,651
-------- --------
End of year $ 47,324 $ 49,540
-------- --------
Funded status at year end:
Plan assets less than PBO $ (2,737) $(14,621)
Unrecognized actuarial loss 15,663 27,815
Unrecognized prior service cost 3,221 3,112
Unrecognized net transition obligation 1,425 1,223
-------- --------
$ 17,572 $ 17,529
-------- --------
Amounts recognized in the balance sheet:
Prepaid pension cost $ 17,572 $ -
Accrued pension cost, noncurrent - (1,174)
Unrecognized net pension obligations - 4,176
Accumulated other comprehensive loss - 14,527
-------- --------
$ 17,572 $ 17,529
======== ========
SFAS No. 87, "Employers' Accounting for Pension Costs" requires that an
additional pension liability be recognized when the unfunded accumulated pension
benefit obligation exceeds the unfunded accrued pension liability. Variances
from actuarially assumed rates will change the actuarial valuation of accrued
pension liabilities, pension expense and funding requirements in future periods.
The accumulated benefit obligation of the Company's defined benefit pension
plans was $51.1 million at December 31, 2003 (2002 - $43.7 million).
Note 9 - Other items:
Advertising costs are expensed as incurred and were approximately $100,000
in each of 2001, 2002 and 2003.
Research, development and certain sales technical support costs are
expensed as incurred and approximated $300,000 in each of 2001, 2002 and 2003.
Interest capitalized in connection with long-term capital projects was nil
in each of 2001, 2002 and 2003.
Note 10 - Income taxes:
The components of (i) income from continuing operations before income taxes
("pretax income"), (ii) the difference between the provision for income taxes
attributable to pretax income and the amounts that would be expected using the
Danish statutory income tax rate of 30% in 2001, 2002 and 2003, (iii) the
provision for income taxes and (iv) the comprehensive tax provision are
presented below.
Years ended December 31,
------------------------------------------
2001 2002 2003
------ ------ ------
(In thousands)
Pretax income (loss):
Denmark $ (71) $ 207 $ 170
Non-Denmark 28,884 14,515 34,150
------- ------- -------
$28,813 $14,722 $34,320
======= ======= =======
Expected tax expense $ 8,644 $ 4,417 $10,296
Non-Denmark tax rates 1,170 650 428
Valuation allowance - 658 -
Tax contingency reserve adjustment 540 - (5,100)
Tax on partnership income - - 1,245
Rate change adjustment of deferred taxes - (2,332) -
Other, net 20 (15) 559
------- ------- -------
Income tax expense $10,374 $ 3,378 $ 7,428
======= ======= =======
Provision for income taxes:
Current income tax expense:
Denmark $ - $ 48 $ 63
Non-Denmark 10,499 5,341 12,770
------- ------- -------
10,499 5,389 12,833
------- ------- -------
Deferred income tax expense (benefit):
Denmark 540 (1) (5,104)
Non-Denmark (665) (2,010) (301)
------- ------- -------
(125) (2,011) (5,405)
------- ------- -------
$10,374 $ 3,378 $ 7,428
Comprehensive provision for income taxes
allocable to:
Pretax income $10,374 $ 3,378 $ 7,428
Other comprehensive loss - pension liabilities - - (4,068)
------- ------- -------
$10,374 $ 3,378 $ 3,360
======= ======= =======
The components of the net deferred tax liability are summarized below.
December 31,
------------------------------------------------------
2002 2003
----------------------- ------------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
(In thousands)
Tax effect of temporary differences relating to:
Inventories $ 16 $ (1,581) $ 26 $ (2,035)
Property and equipment 105 (17,146) 143 (18,856)
Accrued (prepaid) pension cost - (5,040) 4,068 (4,970)
Accrued liabilities and other deductible differences 771 - 834 -
Other taxable differences - (7,643) - (3,851)
Valuation allowance (658) - (683) -
------- --------- ------ --------
Gross deferred tax assets (liabilities) 234 (31,410) 4,388 (29,712)
Reclassification, principally netting by tax 218
jurisdiction (218) (4,362) 4,362
------- --------- ------ --------
Net total deferred tax assets (liabilities) 16 (31,192) 26 (25,350)
Net current deferred tax assets (liabilities) 16 (1,498) 26 (2,030)
------- --------- ------ --------
Net noncurrent deferred tax liabilities $ - $ (29,694) $ - $(23,320)
======= ========= ====== ========
Changes in the Company's deferred income tax valuation allowance are
summarized below:
December 31,
-----------------------
2002 2003
(In thousands)
Balance at beginning of year $ - $ 658
Increase in certain deductible temporary differences which the Company
believes do not meet the "more-likely-than-not" recognition criteria 658 -
Foreign currency translation - 25
------- -------
Balance at end of year $ 658 $ 683
======= =======
A reduction in the Belgian income tax rate from 40% to 34% was enacted in
December 2002 and became effective in January 2003. This reduction in the
Belgian income tax rate resulted in a $2.3 million decrease in the Company's
income tax expense in 2002 because the Company had previously recognized a net
deferred income tax liability with respect to Belgian temporary differences.
Certain of the Company's U.S. and non-U.S. tax returns are being examined
and tax authorities have or may propose tax deficiencies, including penalties
and interest. For example:
o The Company has received a preliminary tax assessment related to 1993 from
the Belgian tax authorities proposing tax deficiencies, including interest,
of approximately (euro)6 million ($8 million at December 31, 2003). The
Company has filed a protest to this assessment and believes that a
significant portion of the assessment is without merit. The Belgian tax
authorities have filed a lien on the fixed assets of the Company's Belgian
TiO2 operations in connection with this assessment. In April 2003, the
Company received a notification from the Belgian tax authorities of their
intent to assess a tax deficiency related to 1999 that, including interest,
is expected to be approximately (euro)13 million ($16 million). The Company
believes the proposed assessment is substantially without merit, and the
Company has filed a written response. In December 2003, the Belgian tax
authorities agreed to a settlement of certain tax assessments separate from
the assessments noted previously, for the years 1991 to 1997. Including
interest, the proposed (euro)10.1 million tax deficiency ($12.6 million at
December 31, 2003) was settled for (euro)5.0 million ($6.3 million).
o The Norwegian tax authorities have notified the Company of their intent to
assess tax deficiencies of approximately kroner 12 million ($2 million at
December 31, 2003) relating to the years 1998 to 2000. The Company has
filed a written protest to this proposed assessment.
No assurance can be given that these tax matters will be resolved in the
Company's favor in view of the inherent uncertainties involved in settlement
initiatives, court and tax proceedings. The Company believes that it has
provided adequate accruals for additional taxes and related interest expense
which may ultimately result from all such examinations and believes that the
ultimate disposition of such examinations should not have a material adverse
effect on its consolidated financial position, results of operations or
liquidity.
Note 11 - Related party transactions:
The Company may be deemed to be controlled by Harold C. Simmons.
Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (a) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, tax
sharing agreements, joint ventures, partnerships, loans, options, advances of
funds on open account, and sales, leases and exchanges of assets, including
securities issued by both related and unrelated parties and (b) common
investment and acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases, and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties and
have included transactions which resulted in the acquisition by one related
party of a publicly held minority equity interest in another related party.
While no transactions of the type described above are planned or proposed with
respect to the Company other than as set forth in these financial statements,
the Company from time to time considers, reviews and evaluates such transactions
and understands that Contran, Valhi, NL, Kronos, KII and related entities
consider, review and evaluate such transactions. Depending upon the business,
tax and other objectives then relevant, it is possible that the Company might be
a party to one or more such transactions in the future.
The Company is a party to a cost sharing agreement with Kronos and KII
whereby Kronos and KII provide certain management, financial, insurance and
administrative services to the Company on a fee basis. The Company's expense was
approximately $1.4 million in 2001, and $1.9 million in each of 2002 and 2003.
The Company is also party to master global insurance coverage policies with
Kronos with regard to property, business interruption, excess liability, and
other coverages. Tall Pines, Valmont Insurance Company and EWI RE, Inc. provide
for or broker certain insurance policies for Contran and certain of its
subsidiaries and affiliates, including Kronos and the Company. Valmont and
Tremont are wholly-owned subsidiaries of Valhi, and EWI is a wholly-owned
subsidiary of NL. Consistent with insurance industry practices, Tall Pines,
Valmont and EWI receive commissions from the insurance and reinsurance
underwriters for the policies that they provide or broker. In the Company's
opinion, the amounts that the Company paid for these insurance policies and the
allocation among Kronos and its affiliates of relative insurance premiums are
reasonable and similar to those they could have obtained through unrelated
insurance companies and/or brokers. The costs associated with these policies
aggregated $1.1 million, $1.3 million and $900,000 in each of 2001, 2002 and
2003, respectively.
Contran and certain of its subsidiaries and affiliates, including the
Company, purchase certain of their insurance policies as a group, with the costs
of the jointly-owned policies being apportioned among the participating
companies. With respect to certain of such policies, it is possible that
unusually large losses incurred by one or more insureds during a given policy
period could leave the other participating companies without adequate coverage
under that policy for the balance of the policy period. As a result, Contran and
certain of its subsidiaries and its affiliates, including NL, have entered into
a loss sharing agreement under which any uninsured loss is shared by those
entities who have submitted claims under the relevant policy. The Company
believes the benefits in the form of reduced premiums and broader coverage
associated with the group coverage for such policies justifies the risk
associated with the potential for uninsured loss.
Intercompany sales to (purchases from) affiliates of TiO2 are summarized in
the following table.
Years ended December 31,
-----------------------------------------
2001 2002 2003
------ ------ ------
(In thousands)
Sales to:
TG $ 42,843 $ 30,077 $ 38,783
Kronos Limited ("KUK") 14,962 17,148 18,856
Kronos (US), Inc. ("KUS") 10,883 13,189 18,792
Societe Industrielle du Titane, S.A. ("SIT") 7,158 8,924 8,138
Kronos Canada, Inc. ("KC") 2,587 3,231 5,881
-------- -------- --------
$ 78,433 $ 72,569 $ 90,450
======== ======== ========
Purchases from:
TG $ 31,619 $ 29,706 $ 38,785
KUS 1,177 2,553 101
KC - 170 223
-------- -------- --------
$ 32,796 $ 32,429 $ 39,109
======== ======== ========
Sales of ilmenite to TG were $7.3 million in 2001, $13.4 million in 2002
and $15.5 million in 2003.
KUS purchases the rutile and slag feedstock used as a raw material in all
of the Company's chloride process TiO2 facilities. The Company purchases such
feedstock from KUS for use in its facilities for an amount equal to the amount
paid by KUS to the third-party supplier plus a 2.5% administrative fee. Such
feedstock purchases were $31.6 million in 2001, $32.9 million in 2002 and $39.5
million in 2003.
Interest expense to affiliates related to a note payable to TG was $500,000
in 2001, $300,000 in 2002 and nil in 2003. Such note was repaid in full in 2002
and the underlying agreement was cancelled. Included in other affiliate income
and other affiliate expense was other affiliate interest income/expense,
factoring fees and service fees.
Royalties paid to KII for use of certain of KII's intellectual property
totaled $8.2 million in 2001, $8.6 million in 2002 and $10.4 million in 2003,
and was included as a component of cost of sales.
During 2001, 2002 and 2003, the Company was party to an accounts receivable
factoring agreement (the "Factoring Agreement") with one or more of its
affiliates whereby the Company factored its export accounts receivable without
recourse for a fee of 0.85% for the Company's export receivables related to
Kronos Europe S.A./N.V. ("KEU") and 1.2% for export receivables related to its
Norwegian operating subsidiaries, Kronos Titan A/S ("TAS") and Titania A/S
("TIA"). Upon non-recourse transfer from the Company, the affiliate assumed all
risk pertaining to the factored receivables, including, but not limited to,
exchange control risks, risks pertaining to the bankruptcy of a customer and
risks related to late payments. Export receivables sold by the Company pursuant
to the Factoring Agreement during 2001, 2002 and 2003 aggregated $82.9 million,
$92.0 million and $101.4 million, respectively.
Net amounts currently receivable from (payable to) affiliates are
summarized in the following table.
December 31,
------------------------
2002 2003
------ ------
(In thousands)
Receivable from:
SIT 684 501
KUK 1,348 1,085
KC 295 401
-------- --------
$ 2,327 $ 1,987
======== ========
Payable to:
KII $ 3,450 $ 4,203
KUS 7,437 2,770
TG 14,489 32,635
Other affiliates 17 53
-------- --------
$ 25,393 $ 39,661
======== ========
Net amounts between the Company, KUS, TG, SIT, KUK and KC were generally
related to product purchases and sales. Net amounts with TG also include
accounts receivable factoring fees.
Note 12 - NL common stock options held by employees of the Company:
At December 31, 2003, employees of the Company held options to purchase
approximately 39,000 shares of NL common stock, of which 16,000 are exercisable
at various dates through 2010 at an exercise price ranging from $2.66 to $5.63
per share and 23,000 are exercisable at various dates through 2011 at an
exercise price ranging from $9.34 to $11.49 per share.
The pro forma information required by SFAS No. 123 is based on an
estimation of the fair value of options issued subsequent to January 1, 1995.
See Note 2. The fair value of options granted during 2001 (none were granted
during 2002 or 2003) was $7.52 per share. The fair value of employee stock
options was calculated using the Black-Scholes stock option valuation model with
the following weighted average assumptions for grants in 2001: stock price
volatility of 46%; risk-free rate of return of 5%; dividend yield of 4.0%; and
an expected term of 9 years. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over the options'
vesting period.
Note 13 - Commitments and contingencies:
Leases. The Company leases, pursuant to operating leases, various
manufacturing and office space and transportation equipment. Most of the leases
contain purchase and/or various term renewal options at fair market and fair
rental values, respectively. In most cases management expects that, in the
normal course of business, leases will be renewed or replaced by other leases.
Net rent expense aggregated $1 million in 2001, $2 million in 2002 and $3
million in 2003. At December 31, 2003, minimum rental commitments under the
terms of noncancellable operating leases were as follows:
Equipment
-------------
(in thousands)
Years ending December 31,
- -------------------------
2004 $ 500
2005 316
2006 234
2007 218
2008 212
2009 and thereafter 54
------
$1,534
======
Purchase commitments. KUS has long-term supply contracts that provide for
certain affiliates' chloride feedstock requirements through 2007. The Company
and certain of its affiliates purchase chloride feedstock underlying these
long-term supply contracts from KUS. The agreements require KUS to purchase
certain minimum quantities of feedstock with average minimum annual purchase
commitments aggregating approximately $165 million.
Environmental, product liability and litigation matters. The Company's
operations are governed by various environmental laws and regulations. Certain
of the Company's businesses are, or have been engaged in the handling,
manufacture or use of substances or compounds that may be considered toxic or
hazardous within the meaning of applicable environmental laws. As with other
companies engaged in similar businesses, certain past and current operations and
products of the Company have the potential to cause environmental or other
damage. The Company has implemented and continues to implement various policies
and programs in an effort to minimize these risks. The Company's policy is to
comply with environmental laws and regulations at all its facilities and to
strive to improve its environmental performance in association with applicable
industry initiatives. The Company believes that its operations are in
substantial compliance with applicable requirements of environmental laws. From
time to time, the Company may be subject to environmental regulatory enforcement
under various statutes, resolution of which typically involves the establishment
of compliance programs. It is possible that future developments, such as
stricter requirements of environmental laws and enforcement policies thereunder,
could adversely affect the Company's production, handling, use, storage,
transportation, sale or disposal of such substances.
The Company's production facilities operate within an environmental
regulatory framework in which governmental authorities typically are granted
broad discretionary powers that allow them to issue operating permits under
which the plants must operate. The Company believes all its plants are in
substantial compliance with applicable environmental laws. With respect to the
Company's plants, neither the Company nor any of its subsidiaries have been
notified of any environmental claim by any applicable foreign authority or any
provincial or local authority.
While the laws regulating operations of industrial facilities in Europe
vary from country to country, a common regulatory denominator is provided by the
European Union (the "EU"). Belgium ia a member of the EU and follows its
initiatives. Norway, although not a member, generally patterns its environmental
regulatory actions after the EU. The Company believes that it has obtained all
required permits and is in substantial compliance with applicable EU
requirements, including EU Directive 92/112/EEC regarding establishment of
procedures for reduction and eventual elimination of pollution caused by waste
from the TiO2 industry.
The Company's Belgian subsidiary and various Belgian employees are the
subject of civil and criminal proceedings related to an accident that resulted
in two fatalities in such facility in 2000. At a hearing held in January 2004,
the government requested the court to impose fines on the Company's subsidiary
and certain of its employees in an amount equal to approximately (euro)367,500
($460,000). The Company's subsidiary has undertaken the defense of and liability
for any fines and costs incurred by its employees arising out of these
proceedings. The court's decision is anticipated in April 2004.
The Company is also involved in various other environmental, contractual,
product liability and other claims and disputes incidental to its business.
The Company currently believes the disposition of all claims and disputes,
individually or in the aggregate, should not have a material adverse effect on
its consolidated financial condition, results of operations or liquidity.
Concentrations of credit risk. Sales of TiO2 accounted for approximately
80%, 77% and 79% of net sales during 2001, 2002 and 2003, respectively. The
remaining sales result from the mining and sale of ilmenite ore (a raw material
used in the sulfate pigment production process). TiO2 is generally sold to the
paint, plastics and paper, as well as fibers, rubber, ceramics, inks and
cosmetics markets. Such markets are generally considered "quality-of-life"
markets whose demand for TiO2 is influenced by the relative economic well-being
of the various geographic regions. TiO2 is sold to over 1,000 customers, with
the top ten external customers approximating 30% of net sales in 2001, 28% of
net sales in 2002 and 26% of net sales in 2003. Approximately 80% of the
Company's TiO2 sales by volume were to Europe in each of 2001, 2002 and 2003.
Approximately 10% of sales by volume were to North America in each of 2001, 2002
and 2003.
Note 14 - Financial instruments:
Summarized below is the estimated fair value and related net carrying value
of the Company's financial instruments.
December 31,
---------------------------------------------------------
2002 2003
-------------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- ------- --------- -------
(In millions)
Cash, cash equivalents, restricted cash
equivalents and noncurrent restricted
marketable debt securities $ 5.4 $ 5.4 $ 8.6 $ 8.6
Notes payable and long-term debt -
variable rate debt $ 29.0 $ 29.0 $ .6 $ .6
The Company held no derivative financial instruments during 2001, 2002 or
2003.
Note 15 - Accounting principles newly adopted in 2003:
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 would be 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 would be accreted to its present value, and the
capitalized cost would be 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 will recognize (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 are measured using information, assumptions
and interest rates all as of January 1, 2003. The amount recognized as the asset
retirement cost is 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, is 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, if any,
between the amounts to be recognized as described above and any associated
amounts recognized in the Company's balance sheet as of December 31, 2003 would
be recognized as a cumulative effect of a change in accounting principle as of
the date of adoption. The effect of adopting SFAS No. 143 as of January 1, 2003
as summarized in the table below is not expected to have a material effect on
the Company's consolidated financial position, results of operations or
liquidity:
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 $ -
====
The increase in the asset retirement obligations from January 1, 2003
($600,000) to December 31, 2003 ($800,000) is due to accretion expense and the
effects of currency translation. Accretion expense, which is reported as a
component of cost of goods sold in the accompanying statement of operations,
approximated $100,000 for the year ended December 31, 2003. If the Company had
adopted SFAS No. 143 as of January 1, 2001, the asset retirement obligations
would have been approximately $500,000 at December 31, 2001.
Estimates of the ultimate cost to be incurred to settle the Company's asset
retirement obligations require a number of assumptions, are inherently difficult
to develop and the ultimate outcome may differ from current estimates. As
additional information becomes available, cost estimates will be adjusted as
necessary. It is possible that technological, regulatory or enforcement
developments, the results of studies or other factors could necessitate the
recording of additional liabilities.
Costs associated with exit or disposal activities. The Company adopted SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," on
January 1, 2003 for exit or disposal activities initiated on or after that date.
Under SFAS No. 146, costs associated with exit activities, as defined, that are
covered by the scope of SFAS No. 146 will be recognized and measured initially
at fair value, generally in the period in which the liability is incurred. Costs
covered by the scope of SFAS No. 146 include termination benefits provided to
employees, costs to consolidate facilities or relocate employees, and costs to
terminate contracts (other than a capital lease). Under prior GAAP, a liability
for such an exit cost is recognized at the date an exit plan is adopted, which
may or may not be the date at which the liability has been incurred. The effect
of adopting SFAS No. 146 as of January 1, 2003 was not material as the Company
was not involved in any exit or disposal activities covered by the scope of the
new standard as of such date.
Note 16 - Accounting principles not yet adopted:
The Company is required to comply with the consolidation requirements of
FASB Interpretation ("FIN") No. 46R, "Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51," as amended at March 31, 2004. While
the Company currently does not believe it has any involvement with any variable
interest entity (as that term is defined in FIN No. 46R) covered by the scope of
FIN No. 46R, the interpretation is complex and therefore the impact of adopting
the consolidation requirements of FIN No. 46R has not yet been definitively
determined.