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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2004 Commission file number 333-100047
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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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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes_X_ No___
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes___ No_X_
Number of shares of the Registrant's common stock outstanding on April 30, 2004:
2,968.
The Registrant is a wholly owned subsidiary of Kronos Worldwide, Inc. (File No.
1-31763) and meets the conditions set forth in General Instructions H(1)(a) and
H(1)(b) of Form 10-Q for reduced disclosure format.
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
December 31, 2003 and March 31, 2004 3
Consolidated Statements of Income -
Three months ended March 31, 2003 and 2004 5
Consolidated Statements of Comprehensive Income -
Three months ended March 31, 2003 and 2004 6
Consolidated Statement of Stockholder's Equity -
Three months ended March 31, 2004 7
Consolidated Statements of Cash Flows -
Three months ended March 31, 2003 and 2004 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 4. Controls and Procedures 20
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, March 31,
2003 2004
------------ -----------
Current assets:
Cash and cash equivalents $ 37,121 $ 39,153
Restricted cash and cash equivalents 1,313 845
Accounts and other receivables 112,797 127,422
Refundable income taxes 35,150 13,899
Receivable from affiliates 1,884 3,149
Inventories 168,131 154,205
Prepaid expenses 3,349 3,514
Deferred income taxes 943 1,367
---------- ----------
Total current assets 360,688 343,554
---------- ----------
Other assets:
Restricted marketable debt securities 2,586 2,459
Deferred financing costs, net 9,761 8,959
Unrecognized net pension obligation 7,812 7,812
Other 1,266 1,257
---------- ----------
Total other assets 21,425 20,487
---------- ----------
Property and equipment:
Land 31,106 30,235
Buildings 139,665 135,672
Equipment 644,733 630,544
Mining properties 63,701 61,160
Construction in progress 7,565 6,506
---------- ----------
886,770 864,117
Less accumulated depreciation and amortization 518,383 511,807
---------- ----------
Net property and equipment 368,387 352,310
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$ 750,500 $ 716,351
========== ==========
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDER'S EQUITY December 31, March 31,
2003 2004
------------ -----------
Current liabilities:
Current maturities of long-term debt $ 288 $ 279
Accounts payable and accrued liabilities 103,804 108,100
Payable to affiliates 8,697 352
Income taxes 12,007 12,667
Deferred income taxes 3,436 1,407
---------- ----------
Total current liabilities 128,232 122,805
---------- ----------
Noncurrent liabilities:
Long-term debt 356,451 377,531
Accrued pension costs 53,010 53,172
Deferred income taxes 86,622 83,622
Other 14,098 13,679
---------- ----------
Total noncurrent liabilities 510,181 528,004
---------- ----------
Minority interest 525 517
---------- ----------
Stockholder's equity:
Common stock 297 297
Additional paid-in capital 1,944,185 1,944,185
Retained deficit (1,665,098) (1,711,918)
Accumulated other comprehensive loss:
Currency translation (133,425) (133,142)
Pension liabilities (34,397) (34,397)
---------- ----------
Total stockholder's equity 111,562 65,025
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$ 750,500 $ 716,351
========== ==========
Commitments and contingencies (Notes 7 and 9)
See accompanying notes to consolidated financial statements.
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three months ended March 31, 2003 and 2004
(In thousands)
2003 2004
---------- ----------
Net sales $ 178,197 $ 192,173
Cost of sales 130,770 142,623
--------- ----------
Gross margin 47,427 49,550
Selling, general and administrative expense 20,495 25,411
Other operating income (expense):
Currency transaction gains (losses), net 94 446
Disposition of property and equipment (61) (23)
Royalty income 1,748 1,364
Other income 101 17
--------- ----------
Income from operations 28,814 25,943
Other income (expense):
Trade interest income 150 198
Interest income from affiliates - 5
Interest expense to affiliates (64) -
Interest expense (7,910) (9,047)
--------- ----------
Income before income taxes and minority interest 20,990 17,099
Provision for income taxes 6,212 3,911
Minority interest in after-tax earnings 24 8
--------- ----------
Net income $ 14,754 $ 13,180
========= ==========
See accompanying notes to consolidated financial statements.
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended March 31, 2003 and 2004
(In thousands)
2003 2004
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Net income $ 14,754 $ 13,180
Other comprehensive income (loss), net of tax - currency translation
adjustment (2,027) 283
--------- ----------
Comprehensive income $ 12,727 $ 13,463
========= ==========
See accompanying notes to consolidated financial statements.
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
Three months ended March 31, 2004
(In thousands)
Accumulated other
comprehensive loss
Additional ----------------------------- Total
Common paid-in Retained Currency Pension stockholder's
stock capital deficit translation liabilities equity
-------- ---------- ------------ ----------- ----------- -------------
Balance at December 31, 2003 $ 297 $1,944,185 $(1,665,098) $(133,425) $(34,397) $111,562
Net income - - 13,180 - - 13,180
Dividends - - (60,000) - - (60,000)
Other comprehensive income - - - 283 - 283
------ ---------- ----------- --------- -------- --------
Balance at March 31, 2004 $ 297 $1,944,185 $(1,711,918) $(133,142) $(34,397) $ 65,025
====== ========== =========== ========= ======== ========
See accompanying notes to consolidated financial statements.
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2003 and 2004
(In thousands)
2003 2004
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Cash flows from operating activities:
Net income $ 14,754 $ 13,180
Depreciation and amortization 8,120 9,488
Noncash interest expense 464 536
Deferred income taxes 3,488 (210)
Minority interest 24 8
Net loss from disposition of property and equipment 61 23
Pension cost, net (1,319) 1,528
Other, net - 200
Change in assets and liabilities:
Accounts and other receivables (17,809) (18,206)
Inventories 11,066 9,317
Prepaid expenses 1,365 (162)
Accounts with affiliates (26,153) (9,269)
Accounts payable and accrued liabilities (5,461) 6,210
Income taxes 904 21,991
Other, net 779 (727)
--------- --------
Net cash provided by (used in) operating activities (9,717) 33,907
--------- --------
Cash flows from investing activities:
Capital expenditures (5,613) (3,984)
Change in restricted cash, net (779) 556
Other, net 42 30
--------- --------
Net cash used in investing activities (6,350) (3,398)
--------- --------
Cash flows from financing activities:
Indebtedness:
Borrowings 16,106 99,968
Principal payments (342) (67,468)
Dividends paid - (60,000)
--------- --------
Net cash provided by (used in) financing activities 15,764 (27,500)
--------- --------
Cash and cash equivalents - net change from:
Operating, investing and financing activities (303) 3,009
Currency translation 168 (977)
Cash and cash equivalents at beginning of period 15,023 37,121
--------- --------
Cash and cash equivalents at end of period $ 14,888 $ 39,153
========= ========
Supplemental disclosures:
Cash paid (received) for:
Interest, net of amounts capitalized $ 702 $ 960
Income taxes, net 1,820 (17,823)
See accompanying notes to consolidated financial statements.
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
Kronos International, Inc. ("KII") is incorporated in the state of
Delaware, U.S.A., with its seat of management in Leverkusen, Germany. KII is a
wholly-owned subsidiary of Kronos Worldwide, Inc. ("Kronos") (NYSE:KRO). At
March 31, 2004, NL Industries, Inc. (NYSE: NL) held 50.5% of the outstanding
common stock of Kronos. NL conducts its titanium dioxide pigments ("TiO2")
operations through Kronos. KII conducts Kronos' European TiO2 operations. At
March 31, 2004, Valhi, Inc. and a wholly-owned subsidiary of Valhi, held
approximately 83% of NL's outstanding common stock, and Contran Corporation and
its subsidiaries held approximately 90% of Valhi's outstanding common stock. At
March 31, 2004, Valhi and a wholly-owned subsidiary of Valhi held an additional
43.3% 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, or is held by Mr. Simmons or persons or other entities related to
Mr. Simmons. Mr. Simmons, the Chairman of the Board of Valhi, Contran, NL,
Kronos and the Company may be deemed to control each of such companies.
The consolidated balance sheet of KII at December 31, 2003 has been
condensed from the Company's audited consolidated financial statements at that
date. The consolidated balance sheet at March 31, 2004, and the consolidated
statements of income, comprehensive income, stockholder's equity and cash flows
for the interim periods ended March 31, 2003 and 2004, have been prepared by the
Company, without audit, in accordance with accounting principles generally
accepted in the United States of America ("GAAP"). In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the consolidated financial position, results of operations and
cash flows have been made.
The results of operations for the interim periods are not necessarily
indicative of the operating results for a full year or of future operations.
Certain information normally included in financial statements prepared in
accordance with GAAP has been condensed or omitted, and certain prior year
amounts have been reclassified to conform to the current year presentation. The
accompanying consolidated financial statements should be read in conjunction
with the Company's Annual Report on Form 10-K for the year ended December 31,
2003 (the "2003 Annual Report").
The Company has not issued any stock options to purchase KII common stock.
However, certain employees of the Company have been granted options by NL to
purchase NL common stock. As disclosed in the 2003 Annual Report, the Company
accounts for stock-based employee compensation in accordance with Accounting
Principles Board Opinion ("APBO") No. 25, "Accounting for Stock Issued to
Employees," and its various interpretations. Under APBO No. 25, no compensation
cost is generally recognized for fixed stock options in which the exercise price
is greater than or equal to the market price on the grant date. Prior to 2003,
the Company commenced accounting for its stock options using the variable
accounting method of APBO No. 25, which requires the intrinsic value of all
unexercised stock options (including stock options with an exercise price at
least equal to the market price on the date of grant) to be accrued as an
expense, with subsequent increases (decreases) in the Company's market price
resulting in recognition of additional compensation expense (income). Aggregate
compensation expense (income) related to NL stock options held by employees of
the Company was ($200,000) in the first quarter of 2003 and approximately
$200,000 in the first quarter of 2004.
The following table presents what the Company's consolidated net income
would have been in the first quarter of 2003 and 2004 if the Company and its
subsidiaries and affiliates had each elected to account for their respective
stock-based employee compensation related to stock options in accordance with
the fair value-based recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," for all awards granted subsequent to January 1, 1995.
Three months
ended March 31,
-------------------------
2003 2004
---- ----
(In millions)
Net income as reported $14.8 $13.2
Adjustments, net of applicable income
tax effects and minority interest:
Stock-based employee compensation expense
(income) determined under APBO No. 25 (.2) .1
Stock-based employee compensation expense
determined under SFAS No. 123 - -
----- -----
Pro forma net income $14.6 $13.3
===== =====
The Company has complied with the consolidation requirements of FASB
Interpretation ("FIN") No. 46R, "Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51," as amended, as of March 31, 2004. See Note 10.
Note 2 - Accounts and other receivables:
December 31, March 31,
2003 2004
------------ ----------
(In thousands)
Trade receivables $106,304 $121,235
Recoverable VAT and other receivables 8,715 8,343
Allowance for doubtful accounts (2,222) (2,156)
-------- --------
$112,797 $127,422
======== ========
Note 3 - Inventories:
December 31, March 31,
2003 2004
------------ ----------
(In thousands)
Raw materials $ 30,261 $ 22,360
Work in process 15,623 14,472
Finished products 92,009 88,377
Supplies 30,238 28,996
-------- --------
$168,131 $154,205
======== ========
Note 4 - Accounts payable and accrued liabilities:
December 31, March 31,
2003 2004
------------ ----------
(In thousands)
Accounts payable $ 50,626 $ 45,262
Employee benefits 23,592 24,007
Other 29,586 38,831
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$103,804 $108,100
======== ========
Note 5 - Long-term debt:
December 31, March 31,
2003 2004
------------ ----------
(In thousands)
8.875% Senior Secured Notes $356,136 $345,848
Revolving credit facility - 31,551
Other 603 411
-------- --------
356,739 377,810
ess current maturities 288 279
-------- --------
$356,451 $377,531
======== ========
During the first quarter of 2004, certain of KII's operating subsidiaries
borrowed a net euro 26 million ($32 million when borrowed) under the revolving
credit facility at an interest rate of 3.8%.
Note 6 - Other noncurrent liabilities:
December 31, March 31,
2003 2004
------------ ----------
(In thousands)
Employee benefits $ 4,849 $ 4,663
Insurance 1,222 1,506
Other 8,027 7,510
-------- --------
$ 14,098 $ 13,679
======== ========
Note 7 - Provision for income taxes:
Three months
ended March 31,
-------------------------
2003 2004
---- ----
(In millions)
Expected tax expense $ 7.3 $ 5.9
Non-U.S. tax rates - (.1)
Change in deferred income tax valuation
allowance, net (.7) (3.0)
Other, net (.4) 1.1
----- -----
$ 6.2 $ 3.9
===== =====
In the first quarter of 2003, the Company was notified by the German
Federal Fiscal Court (the "Court") that the Court had ruled in KII's favor
concerning a claim for refund suit in which KII sought refunds of prior taxes
paid during the periods 1990 through 1997. KII and its German operating
subsidiary were required to file amended tax returns with the German tax
authorities to receive 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. Through April 2004, KII's German
operating subsidiary received net refunds of euro 16.3 million ($20.3 million
when received). KII believes it will receive the net refunds 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 for
which the Company received euro 21.5 million ($24.6 million) in 2003. KII
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 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 related
interest, of approximately euro 6 million ($8 million at March 31, 2004).
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.
o The Norwegian tax authorities have notified the Company of their intent to
assess tax deficiencies of approximately kroner 12 million ($2 million at
March 31, 2004) 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 8 - Employee benefit plans:
The components of net periodic defined benefit pension cost are presented
in the table below.
Three months
ended March 31,
-------------------------
2003 2004
---- ----
(In thousands)
Service cost benefits $ 983 $1,288
Interest cost on projected benefit obligations 2,988 3,539
Expected return on plan assets (3,582) (3,122)
Amortization of prior service cost 64 116
Amortization of net transition obligations 126 91
Recognized actuarial losses 209 578
------ ------
$ 788 $2,490
------ ------
Note 9 - Commitments and contingencies:
In May 2004, the court ruled and, among other things, imposed a fine of
euro 200,000 against the Company with an aggregate amount of less than euro
40,000 against various employees of the Company, in the previously-reported
matter concerning fatalities at the Company's Belgian facility. The Company and
the individuals plan to appeal the ruling.
In addition to the litigation described above, the Company is also involved
in various other environmental, contractual, product liability, patent (or
intellectual property), employment and other claims and disputes incidental to
its present and former businesses. In certain cases, the Company has insurance
coverage for such items. 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.
Note 10 - Accounting principle newly adopted in 2004:
The Company complied with the consolidation requirements of FIN No. 46R,
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,"
as amended, as of March 31, 2004. The Company does not have any involvement with
any variable interest entity (as that term is defined in FIN No. 46R) covered by
the scope of FIN No. 46R, and therefore the impact to the Company of adopting
the consolidation requirements of FIN No. 46R was not material.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
Executive summary
Relative changes in the Company's TiO2 sales and income from operations
during the first three months of 2003 and 2004 are primarily due to (i) relative
changes in TiO2 average selling prices and (ii) relative changes in foreign
currency exchange rates. Selling prices were generally increasing during 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 and the
first quarter of 2004.
Forward-looking information
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts
are forward-looking statements that represent management's beliefs and
assumptions based on currently available information. Forward-looking statements
can be identified by the use of words such as "believes," "intends," "may,"
"should," "could," "anticipates," "expects" 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
Quarterly Report and those described from time to time in the Company's other
filings with the Securities and Exchange Commission ("SEC") including, but not
limited to, the following:
o Future supply and demand for the Company's products,
o The cyclicality of the Company's 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 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 new information, future events
or otherwise.
Three months ended
March 31,
------------------------- %
2003 2004 Change
---- ---- ------
(In millions, except
percentages and volumes)
Net sales $178.2 $192.2 +8%
Cost of sales 130.8 142.6 +9%
------ ------
Gross margin 47.4 49.6 +5%
Selling, general and administrative expense (20.5) (25.4) +24%
Currency transaction gains (losses), net .1 .4
Royalty income 1.7 1.3
Other .1 -
------ ------
Income from operations $ 28.8 $ 25.9 -10%
====== ======
TiO2 data:
Percent change in average selling prices:
Using actual foreign currency exchange rates +7%
Impact of changes in foreign currency exchange rates -11%
-----
In billing currencies -4%
=====
Sales volumes* 80 81
Production volumes* 79 79
________________________________
* Thousands of metric tons
The Company's sales increased $14.0 million (8%) in the first quarter of
2004 compared to the first quarter of 2003 as the favorable effect of
fluctuations in foreign currency exchange rates, which increased sales by
approximately $20 million (as more fully discussed below), more than offset the
impact of lower average TiO2 selling prices. Excluding the effect of
fluctuations in the value of the U.S. dollar relative to other currencies, the
Company's average TiO2 selling prices in billing currencies in the first quarter
of 2004 were 4% lower than the first quarter of 2003. When translated from
billing currencies into U.S. dollars using actual foreign currency exchange
rates prevailing during the respective periods, the Company's average TiO2
selling prices in the first quarter of 2004 were 7% higher compared to the first
quarter of 2003. The Company's TiO2 sales volumes in the first quarter of 2004
were slightly higher than its TiO2 sales volumes in the first quarter of 2003.
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 prices in billing
currencies (which excludes the effects of fluctuations in the value of the U.S.
dollar relative to other currencies) is considered a "non-GAAP" financial
measure under regulations of the SEC. The disclosure of the percentage change in
the Company's average TiO2 selling prices using actual foreign currency exchange
rates prevailing during the respective periods is considered the most directly
comparable financial measure presented in accordance with 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 7% increase in the Company's average TiO2
selling prices during the first quarter 2004 as compared to the same period in
2003 using actual foreign currency exchange rates prevailing during the
respective periods (the GAAP measure) and the 4% decrease 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 above table presents in a tabular format (i) the percentage change in the
Company's average TiO2 selling prices using actual foreign currency exchange
rates prevailing during the respective periods (the GAAP measure), (ii) the
percentage change in the Company's average TiO2 selling prices in billing
currencies (the non-GAAP measure) and (iii) the percentage change due to changes
in foreign currency exchange rates (or the reconciling item between the non-GAAP
measure and the GAAP measure).
The Company's cost of sales increased $11.8 million (9%) in the first
quarter of 2004 compared to the first quarter of 2003 largely due to the effects
of translating foreign currencies (primarily the euro) into U.S. dollars. As a
result of the lower average TiO2 selling prices in billing currencies the
Company's cost of sales, as a percentage of net sales, increased from 73% in the
first quarter of 2003 to 74% in the first quarter of 2004. The Company's TiO2
production volumes in the first quarter of 2004 were consistent with its TiO2
production volumes in the first quarter of 2003, with operating rates near full
capacity in both periods.
The Company's gross margins for the first quarter of 2004 increased $2.2
million (5%) from the first quarter of 2003 due to the effects of the
aforementioned increases in sales.
Selling, general and administrative expenses increased $4.9 million (24%)
in the first quarter of 2004 as compared to the corresponding period in 2003.
This increase is largely attributable to the impact of translating foreign
currencies (primarily the euro) into U.S. dollars.
The Company's operations and assets are located outside the United States
(particularly in Germany, Belgium and Norway). A significant amount of the
Company's sales generated from its operations are denominated in currencies
other than the U.S. dollar, primarily the euro and other major European
currencies. Certain raw materials, primarily titanium-containing feedstocks, are
purchased in U.S. dollars, while labor and other production costs are
denominated primarily in local currencies. Consequently, the translated U.S.
dollar value of the Company's foreign sales and operating results are subject to
currency exchange rate fluctuations which may favorably or adversely impact
reported earnings and may affect the comparability of period-to-period operating
results. Overall, fluctuations in the value of the U.S. dollar relative to other
currencies, primarily the euro, increased TiO2 sales in the first quarter of
2004 approximately $20 million compared to the same period in 2003. Fluctuations
in the value of the U.S. dollar relative to other currencies similarly impacted
the Company's foreign currency-denominated operating expenses. The Company's
operating costs that are not denominated in the U.S. dollar, when translated
into U.S. dollars, were higher in the first quarter of 2004 compared to the
first quarter of 2003. Overall, the net impact of currency exchange rate
fluctuations on the Company's operating income comparisons was not significant
in the first quarter of 2004 as compared to the same period in 2003.
Outlook
The Company expects its TiO2 sales and production volumes to be higher for
the full year 2004 as compared to 2003. The Company's average Ti02 selling
price, which declined during the second half of 2003 and the first quarter of
2004, is expected to cease to decline sometime during the second quarter of 2004
and should rise thereafter. Nevertheless, the Company expects its average TiO2
selling prices, in billing currencies, to be lower in 2004 as compared to 2003.
Overall, the Company expects its gross margin in 2004 to 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)
Three months ended
March 31,
------------------------
2003 2004 Difference
---- ---- -----------
(In millions)
Interest expense to affiliates $ (.1) $ - $ .1
Trade interest income .2 .2 -
Interest expense (7.9) (9.0) (1.1)
------ ------ ------
$ (7.8) $ (8.8) $ (1.0)
====== ====== ======
The Company has a significant amount of outstanding indebtedness
denominated in the euro, including its euro 285 million Senior Secured Notes.
Accordingly, the reported amount of interest expense will vary depending on
relative changes in foreign currency exchange rates. Interest expense in the
first quarter of 2004 was $9.0 million, an increase of $1.1 million from the
first quarter of 2003. The increase was due primarily to relative changes in
foreign currency exchange rates, which increased the U.S. dollar equivalent of
interest expense on the Company's Senior Secured Notes in the first quarter of
2004 as compared to the first quarter of 2003. Assuming no significant change in
interest rates or foreign currency exchange rates, interest expense for the
full-year 2004 is expected to be slightly higher than amounts for the same
periods in 2003.
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 7 to the Consolidated Financial Statements.
During the first quarter of 2004, the Company reduced its deferred income
tax asset valuation allowance by approximately $3 million primarily as a result
of utilization of certain income tax attributes for which the benefit had not
previously been recognized.
At March 31, 2004, the Company had the equivalent of $606 million of German
income tax loss carryforwards with no expiration date. However, the Company has
provided a deferred income tax asset valuation allowance against substantially
all of this loss carryforward because the Company does not currently believe it
meets 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 asset valuation
allowance.
In January 2004, the German federal government enacted new tax law
amendments that limit the annual utilization of income tax loss carryforwards
effective January 1, 2004. While the new law did not significantly affect the
Company's income tax expense and cash tax payments in the first quarter of 2004,
it could have a significant effect in the future depending on the level of
income earned in Germany.
Recently adopted accounting principle
See Note 10 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES:
Consolidated cash flows
The Company's consolidated cash flows from operating, investing and
financing activities for the three months ended March 31, 2003 and 2004 are
presented below:
Three months
ended March 31,
-------------------------
2003 2004
---- ----
(In millions)
Net cash provided (used) by:
Operating activities $ (9.7) $ 33.9
Investing activities (6.4) (3.4)
Financing activities 15.8 (27.5)
------ ------
Net cash provided (used) by operating, investing and financing activities $ (.3) $ 3.0
====== ======
Operating activities
The TiO2 industry is cyclical and changes in economic conditions within the
industry significantly impact the earnings and operating cash flows of the
Company. Cash flow from operations is considered the primary source of liquidity
for the Company. Changes in TiO2 pricing, production volume and customer demand,
among other things, could significantly affect the liquidity of the Company.
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 for operating activities increased from $9.7 million used in the
first quarter of 2003 to $33.9 million of cash provided by operating activities
in the first quarter of 2004. This $43.6 million increase was due primarily to
the net effects of (i) lower net income of $1.6 million, (ii) higher
depreciation expense of $1.4 million, (iii) lower deferred income taxes of $3.7
million, (iv) a lower amount of net cash used in relative changes in the
Company's inventories, receivables, payables and accruals and accounts with
affiliates of $26.4 million in the first quarter of 2004 as compared to the
first quarter of 2003 and (v) lower cash paid for income taxes of $19.6 million.
Relative changes in accounts receivable are affected by, among other things, the
timing of sales and the collection of the resulting receivables. Relative
changes in inventories and accounts payable and accrued liabilities are affected
by, among other things, the timing of raw material purchases and the payment for
such purchases and the relative difference between production volume and sales
volume.
Investing and financing activities
The Company's capital expenditures were $5.6 million and $4.0 million in
the first three months of 2003 and 2004, respectively.
In the first quarter of 2004 the Company's operating subsidiaries in
Germany, Belgium and Norway borrowed a net euro 26 million ($32 million when
borrowed) under the European revolving credit facility at an interest rate of
3.8%.
In the first quarter of 2004, the Company paid a cash dividend of $60
million to Kronos.
Cash, cash equivalents, restricted cash and restricted marketable debt
securities and borrowing availability
At March 31, 2004, the Company and its subsidiaries had (i) current cash
and cash equivalents aggregating $39.2 million, (ii) current restricted cash
equivalents of $800,000 and (iii) noncurrent restricted marketable debt
securities of $2.5 million. At March 31, 2004, certain of the Company's
subsidiaries had approximately $65 million available for borrowing (including
approximately $63 million under its revolving credit facility). At March 31,
2004, the Company had approximately $12 million available for payment of
dividends and other restricted payments as defined in the Senior Secured Notes
indenture.
Litigation matters
See Note 9 to the Consolidated Financial Statements and Part II, Item 1,
"Legal Proceedings."
Income tax contingencies
See Note 7 to the Consolidated Financial Statements for certain income tax
examinations currently underway with respect to certain of the Company's income
tax returns in various non-U.S. jurisdictions.
Other matters
The Company periodically evaluates its liquidity requirements, alternative
uses of capital, its dividend policy, capital needs and availability of
resources in view of, among other things, its dividend policy, debt service and
capital expenditure requirements and estimated future operating cash flows. As a
result of this process, the Company has in the past and may in the future seek
to reduce, refinance, repurchase or restructure indebtedness, raise additional
capital, issue additional securities, modify its dividend policy, restructure
ownership interests, sell interests in subsidiaries or other assets, or take a
combination of such steps or other steps to manage its liquidity and capital
resources. In the normal course of its business, the Company may review
opportunities for the acquisition, divestiture, joint venture or other business
combinations in the chemicals industry or other industries, as well as the
acquisition of interests in related entities. In the event of any such
transaction, the Company may consider using its available cash, issuing its
equity securities or increasing its indebtedness to the extent permitted by the
agreements governing the Company's existing debt.
Non-GAAP financial measures
In an effort to provide investors with additional information regarding the
Company's results of operations as determined by GAAP, the Company has disclosed
certain non-GAAP information which the Company believes provides useful
information to investors.
o The Company discloses percentage changes in its average TiO2 selling prices
in billing currencies, which excludes the effects of foreign currency
translation. The Company believes disclosure of such percentage changes
allows investors to analyze such changes without the impact of changes in
foreign currency exchange rates, thereby facilitating period-to-period
comparisons of the relative changes in average 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.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures. The
term "disclosure controls and procedures," as defined by regulations of the SEC,
means controls and other procedures that are designed to ensure that information
required to be disclosed in the reports that the Company files or submits to the
SEC under the Securities Exchange Act of 1934, as amended (the "Act"), is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
to the SEC under the Act is accumulated and communicated to the Company's
management, including its principal executive officer and its principal
financial officer, as appropriate to allow timely decisions to be made regarding
required disclosure. Each of Harold C. Simmons, the Company's Chief Executive
Officer, and Gregory M. Swalwell, the Company's Vice President, Finance, have
evaluated the Company's disclosure controls and procedures as of March 31, 2004.
Based upon their evaluation, these executive officers have concluded that the
Company's disclosure controls and procedures are effective as of the date of
such evaluation.
The Company also maintains a system of internal controls over financial
reporting. The term "internal control over financial reporting," as defined by
regulations of the SEC, means a process designed by, or under the supervision
of, the Company's principal executive and principal financial officers, or
persons performing similar functions, and effected by the Company's board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with GAAP, and includes
those policies and procedures that:
o Pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the
assets of the Company,
o Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP, and
that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company,
and
o Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the Company's consolidated financial
statements.
There has been no change to the Company's system of internal controls over
financial reporting during the quarter ended March 31, 2004 that has materially
affected, or is reasonably likely to materially affect, the Company's system of
internal controls over financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to the 2003 Annual Report and Note 9 to the Consolidated
Financial Statements for descriptions of certain legal proceedings.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The Company has retained a signed original of any exhibit listed below
that contains signatures, and the Company will provide any such
exhibit to the SEC or its staff upon request.
31.1 - Certification
31.2 - Certification
32.1 - Certification
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended March 31, 2004.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KRONOS INTERNATIONAL, INC.
-----------------------------
(Registrant)
Date May 10, 2004 By /s/ Gregory M. Swalwell
----------------------------
Gregory M. Swalwell
Vice President, Finance
(Principal Financial Officer)
Date May 10, 2004 By /s/ James W. Brown
----------------------------
James W. Brown
Vice President and Controller
(Principal Accounting Officer)