Back to GetFilings.com
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 September 30, 2004 Commission file number 333-100047
KRONOS INTERNATIONAL, INC.
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 22-2949593
- ------------------------------- ---------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes No X
--- ---
Number of shares of the Registrant's common stock outstanding on October 29,
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 September 30, 2004 3
Consolidated Statements of Income -
Three months and nine months ended
September 30, 2003 and 2004 5
Consolidated Statements of Comprehensive Income -
Nine months ended September 30, 2003 and 2004 6
Consolidated Statement of Stockholder's Equity -
Nine months ended September 30, 2004 7
Consolidated Statements of Cash Flows -
Nine months ended September 30, 2003 and 2004 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 4. Controls and Procedures 25
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 26
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, September 30,
2003 2004
------------ -------------
Current assets:
Cash and cash equivalents $ 37,121 $ 76,300
Restricted cash and cash equivalents 1,313 916
Accounts and other receivables 112,797 135,233
Refundable income taxes 35,150 1,244
Receivables from affiliates 1,884 2,560
Inventories 168,131 144,824
Prepaid expenses 3,349 2,514
Deferred income taxes 943 1,526
---------- ----------
Total current assets 360,688 365,117
---------- ----------
Other assets:
Restricted marketable debt securities 2,586 2,556
Deferred financing costs, net 9,761 8,029
Unrecognized net pension obligation 7,812 7,703
Deferred income taxes - 180,036
Other 1,266 1,074
---------- ----------
Total other assets 21,425 199,398
---------- ----------
Property and equipment:
Land 31,106 30,697
Buildings 139,665 137,605
Equipment 644,733 642,803
Mining properties 63,701 62,764
Construction in progress 7,565 15,509
---------- ----------
886,770 889,378
Less accumulated depreciation and amortization 518,383 536,589
---------- ----------
Net property and equipment 368,387 352,789
---------- ----------
$ 750,500 $ 917,304
========== ==========
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDER'S EQUITY December 31, September 30,
2003 2004
------------ -------------
Current liabilities:
Current maturities of long-term debt $ 288 $ 148
Accounts payable and accrued liabilities 103,804 123,089
Payable to affiliate 8,697 4,091
Income taxes 12,007 12,161
Deferred income taxes 3,436 -
---------- ----------
Total current liabilities 128,232 139,489
---------- ----------
Noncurrent liabilities:
Long-term debt 356,451 350,380
Accrued pension costs 53,010 52,142
Deferred income taxes 86,622 24,334
Other 14,098 13,086
---------- ----------
Total noncurrent liabilities 510,181 439,942
---------- ----------
Minority interest 525 528
---------- ----------
Stockholder's equity:
Common stock 297 297
Additional paid-in capital 1,944,185 1,944,185
Retained deficit (1,665,098) (1,439,106)
Accumulated other comprehensive loss:
Currency translation (133,425) (133,634)
Pension liabilities (34,397) (34,397)
---------- ----------
Total stockholder's equity 111,562 337,345
---------- ----------
$ 750,500 $ 917,304
========== ==========
Commitments and contingencies (Notes 7 and 10)
See accompanying notes to consolidated financial statements.
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
Three months ended Nine months ended
September 30, September 30,
-------------------- ---------------------
2003 2004 2003 2004
---- ---- ---- ----
Net sales $ 173,441 $ 203,448 $ 534,516 $ 603,723
Cost of sales 124,183 156,135 389,153 455,058
--------- --------- --------- ---------
Gross margin 49,258 47,313 145,363 148,665
Selling, general and administrative expense 20,811 25,052 63,018 75,779
Other operating income (expense):
Currency transaction gains (losses), net (439) (399) (1,449) 111
Disposition of property and equipment (227) (7) (271) (9)
Royalty income 1,411 1,543 4,786 4,560
Other income 116 140 227 227
--------- --------- --------- ---------
Income from operations 29,308 23,538 85,638 77,775
Other income (expense):
Trade interest income 165 272 503 672
Interest income from affiliates - - 30 7
Interest expense to affiliates (5) (5) (75) (5)
Interest expense (8,213) (8,542) (24,349) (26,021)
--------- --------- --------- ---------
Income before income taxes and minority interest 21,255 15,263 61,747 52,428
Income tax expense (benefit) 7,059 6,104 (3,928) (233,602)
Minority interest in after-tax earnings 18 18 61 38
--------- --------- --------- ---------
Net income $ 14,178 $ 9,141 $ 65,614 $ 285,992
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Nine months ended September 30, 2003 and 2004
(In thousands)
2003 2004
---- ----
Net income $ 65,614 $ 285,992
Other comprehensive income (loss),
net of tax - currency translation adjustment 2,966 (209)
--------- ---------
Comprehensive income $ 68,580 $ 285,783
========= =========
See accompanying notes to consolidated financial statements.
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
Nine months ended September 30, 2004
(In thousands)
Accumulated other
comprehensive loss
Additional --------------------------- Total
Common paid-in Retained Currency Pension stockholders'
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 - - 285,992 - - 285,992
Dividends - - (60,000) - - (60,000)
Other comprehensive loss - - - (209) - (209)
------ ---------- ----------- --------- -------- --------
Balance at September 30, 2004 $ 297 $1,944,185 $(1,439,106) $(133,634) $(34,397) $337,345
====== ========== =========== ========= ======== ========
See accompanying notes to consolidated financial statements.
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2003 and 2004
(In thousands)
2003 2004
---- ----
Cash flows from operating activities:
Net income $ 65,614 $285,992
Depreciation and amortization 24,884 27,936
Noncash interest expense 1,438 1,605
Deferred income taxes 10,948 (244,919)
Minority interest 61 38
Net loss from disposition of property and equipment 271 9
Pension cost, net (2,651) 2,040
Other, net - 641
Change in assets and liabilities:
Accounts and other receivables (14,165) (24,451)
Inventories 10,051 20,784
Prepaid expenses (402) 1,197
Accounts with affiliates (19,248) (5,584)
Accounts payable and accrued liabilities (1,731) 18,268
Income taxes 3,047 33,861
Other, net (839) (799)
-------- --------
Net cash provided by operating activities 77,278 116,618
Cash flows from investing activities:
Capital expenditures (21,111) (18,164)
Change in restricted cash, net (911) 409
Other, net 81 83
-------- --------
Net cash used in investing activities (21,941) (17,672)
-------- --------
Cash flows from financing activities:
Indebtedness:
Borrowings 16,106 99,968
Principal payments (45,868) (100,030)
Distribution to minority interest (14) -
Dividends paid (25,000) (60,000)
-------- --------
Net cash used in financing activities (54,776) (60,062)
-------- --------
Cash and cash equivalents - net change from:
Operating, investing and financing activities 561 38,884
Currency translation 1,204 295
Cash and cash equivalents at beginning of period 15,023 37,121
-------- --------
Cash and cash equivalents at end of period $ 16,788 $ 76,300
======== ========
Supplemental disclosures - cash paid (received) for:
Interest, net of amounts capitalized $ 16,321 $ 16,583
Income taxes, net (17,904) (22,233)
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
September 30, 2004, (i) NL Industries, Inc. (NYSE:NL) held approximately 49% of
Kronos outstanding common stock, (ii) Valhi, Inc. (NYSE:VHI) and a wholly-owned
subsidiary of Valhi held approximately 83% of NL's outstanding common stock,
(iii) Valhi and such wholly-owned subsidiary of Valhi held an additional 45% of
Kronos' outstanding common stock and (iv) 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, 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 September 30, 2004, and the consolidated
statements of income, comprehensive income, stockholder's equity and cash flows
for the interim periods ended September 30, 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 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 11.
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 income related to NL stock options held by employees of the Company
was not significant during the interim periods of 2003 and was approximately
$400,000 and $600,000 in the third quarter and first nine months of 2004,
respectively.
The following table presents what the Company's consolidated net income
would have been in the 2003 and 2004 periods presented 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 Nine months ended
September 30, September 30,
-------------------- ---------------------
2003 2004 2003 2004
---- ---- ---- ----
(In millions)
Net income as reported $14.2 $ 9.1 $65.6 $286.0
Adjustments, net of applicable income
tax effects, of stock-based employee
compensation determined under:
APBO No. 25 (.1) .3 (.1) .4
SFAS No. 123 - - (.1) -
----- ----- ----- ------
Pro forma net income $14.1 $ 9.4 $65.4 $286.4
===== ===== ===== ======
Note 2 - Accounts and other receivables:
December 31, September 30,
2003 2004
------------ -------------
(In thousands)
Trade receivables $ 106,304 $ 128,432
Recoverable VAT and other receivables 8,715 8,941
Allowance for doubtful accounts (2,222) (2,140)
---------- ----------
$ 112,797 $ 135,233
========== ==========
Note 3 - Inventories:
December 31, September 30,
2003 2004
------------ -------------
(In thousands)
Raw materials $ 30,261 $ 25,252
Work in process 15,623 12,664
Finished products 92,009 77,617
Supplies 30,238 29,291
---------- ----------
$ 168,131 $ 144,824
========== ==========
Note 4 - Accounts payable and accrued liabilities:
December 31, September 30,
2003 2004
------------ -------------
(In thousands)
Accounts payable $ 50,626 $ 47,610
Employee benefits 23,592 26,462
Other 29,586 49,017
---------- ----------
$ 103,804 $ 123,089
========== ==========
Note 5 - Long-term debt:
December 31, September 30,
2003 2004
------------ -------------
(In thousands)
8.875% Senior Secured Notes $ 356,136 $ 350,180
Other 603 348
---------- ----------
356,739 350,528
Less current maturities 288 148
---------- ----------
$ 356,451 $ 350,380
========== ==========
During the first quarter of 2004, certain of KII's operating subsidiaries
borrowed a net Euro 26 million ($32 million when borrowed) under the European
revolving credit facility at an interest rate of 3.8%. Such amounts were repaid
in the second quarter of 2004. In October 2004, one of KII's operating
subsidiaries borrowed Euro 10 million ($12 million when borrowed) under the
European revolving credit facility at an interest rate of 3.83%.
Note 6 - Other noncurrent liabilities:
December 31, September 30,
2003 2004
------------ -------------
(In thousands)
Employee benefits $ 4,849 $ 4,611
Insurance 1,222 966
Other 8,027 7,509
---------- ----------
$ 14,098 $ 13,086
========== ==========
Note 7 - Provision (benefit) for income taxes:
Nine months ended
September 30,
-----------------------
2003 2004
---- ----
(In millions)
Expected tax expense $ 21.6 $ 18.3
Change in deferred income tax valuation
allowance, net (.7) (254.3)
Refund of prior year German income taxes (24.6) (3.3)
Non-U.S. tax rates .2 .1
Nondeductible expenses 1.8 2.1
Other, net (2.2) 3.5
------ -------
$ (3.9) $(233.6)
====== =======
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 ($7 million at September 30,
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
September 30, 2004) relating to the years 1998 to 2000. The Company has
objected 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 a significant amount of net operating
loss carryforwards for German corporate and trade tax purposes, all of which
have no expiration date. These net operating loss carryforwards were generated
by the Company principally during the 1990s when the Company had a significantly
higher level of outstanding indebtedness than is currently outstanding. For
financial reporting purposes, however, the benefit of such net operating loss
carryforwards had not previously been recognized because the Company did not
believe they met the "more-likely-than-not" recognition criteria, and
accordingly the Company had a deferred income tax asset valuation allowance
offsetting the benefit of such net operating loss carryforwards and the
Company's other tax attributes in Germany. The Company had generated taxable
income in Germany for both German corporate and trade tax purposes since 2000,
and starting with the quarter ended December 31, 2002 and for each quarter
thereafter, the Company had cumulative taxable income in Germany for the most
recent twelve quarters. However, offsetting this positive evidence was the fact
that prior to the end of 2003, the Company believed there was significant
uncertainty regarding its ability to utilize such net operating loss
carryforwards under German tax law and, principally because of the uncertainty
caused by this negative evidence, the Company had concluded the benefit of the
net operating loss carryforwards did not meet the "more-likely-than-not"
criteria. By the end of 2003, and primarily as a result of a favorable German
court ruling in 2003 and the procedures the Company had completed during 2003
with respect to the filing of certain amended German tax returns (as discussed
below), the Company had concluded that the significant uncertainty regarding its
ability to utilize such net operating loss carryforwards under German tax law
had been eliminated. However, at the end of 2003, the Company believed at that
time that it would generate a taxable loss in Germany during 2004. Such
expectation was based primarily upon then current levels of prices for TiO2, and
the fact that the Company was experiencing a downward trend in its TiO2 selling
prices and the Company did not have any positive evidence to indicate that the
downward trend would improve. If the price trend continued downward throughout
all of 2004 (which was a possibility given Kronos' prior experience), the
Company would likely have a taxable loss in Germany for 2004. If the downward
trend in prices had abated, ceased, or reversed at some point during 2004, then
the Company would likely have taxable income in Germany during 2004.
Accordingly, the Company continued to conclude at the end of 2003 that the
benefit of the German net operating loss carryforwards did not meet the
"more-likely-than-not" criteria and that it would not be appropriate to reverse
the deferred income tax asset valuation allowance, given the likelihood that the
Company would generate a taxable loss in Germany during 2004. The expectation
for a taxable loss in Germany continued through the end of the first quarter of
2004. By the end of the second quarter of 2004, however, the Company's TiO2
selling prices had started to increase, and the Company believes its selling
prices will continue to increase during the second half of 2004 after the
Company and its major competitors announced an additional round of price
increases. The fact that the Company's selling prices started to increase during
the second quarter of 2004, combined with the fact that the Company and its
competitors had announced additional price increases (which based on past
experience indicated to the Company that some portion of the additional price
increases would be realized in the marketplace), provided additional positive
evidence that was not present at December 31, 2003. Consequently, the Company's
revised projections now reflect taxable income for Germany in 2004 as well as
2005. Accordingly, based on all available evidence, including the fact that (i)
the Company had generated positive taxable income in Germany since 2000, and
starting with the quarter ended December 31, 2002 and for each quarter
thereafter, the Company had cumulative taxable income in Germany for the most
recent twelve quarters, (ii) the Company was now projecting positive taxable
income in Germany for 2004 and 2005 and (iii) the German net operating loss
carryforwards have no expiration date, the Company concluded that the benefit of
the net operating loss carryforwards and other German tax attributes met the
"more-likely-than-not" recognition criteria, and the Company reversed the
deferred income tax asset valuation allowance related to Germany. Given the
magnitude of the German net operating loss carryforwards and the fact that
current provisions of German law limit the annual utilization of net operating
loss carryforwards to 60% of taxable income after the first euro 1 million of
taxable income, the Company believes it will take several years to fully utilize
the benefit of such operating loss carryforwards. However, given the number of
years for which the Company has now generated positive taxable income in
Germany, combined with the fact that the net operating loss carryforwards were
generated during a time when the Company had a significantly higher level of
outstanding indebtedness than it currently has outstanding, and the fact that
the net operating loss carryforwards have no expiration date, the Company
concluded it was appropriate to reverse all of the valuation allowance related
to the net operating loss carryforwards. Accordingly, in the first six months of
2004, the Company recognized a $254.3 million income tax benefit related to the
reversal of such deferred income tax asset valuation allowance attributable to
the Company's income tax attributes in Germany (principally the net operating
loss carryforwards). Of such $254.3 million, $8.7 million relates primarily to
the utilization of the German net operating loss carryforwards during the first
six months of 2004, the benefit of which had previously not met the
"more-likely-than-not" recognition criteria, and $245.6 million relates to the
German deferred income tax asset valuation allowance attributable to the
remaining German net operating loss carryforwards and other tax attributes as of
June 30, 2004, the benefit of which the Company has concluded now meet the
"more-likely-than-not" recognition criteria. At September 30, 2004, the net
operating loss carryforwards for German corporate and trade tax purposes
aggregated the equivalent of $602 million and $244 million, respectively, all of
which have no expiration date.
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 net refund
of taxes and related interest to the Company's German operating subsidiary of
Euro 26.9 million ($32.1 million), and the Company recognized the benefit for
these net refunds in its 2003 results of operations. During the first six months
of 2004, the Company recognized a benefit of Euro 2.5 million ($3.3 million)
related to additional net interest, which has accrued on the outstanding refund
amounts. 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 through 1994 tax years.
Through September 2004, KII's German operating subsidiary received net refunds
of Euro 27.2 million ($33.6 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, and the Company recognized the benefit of this refund
in the second quarter of 2003.
Note 8 - Employee benefit plans:
The components of net periodic defined benefit pension cost are presented
in the table below.
Three months ended Nine months ended
September 30, September 30,
-------------------- ---------------------
2003 2004 2003 2004
---- ---- ---- ----
(In thousands)
Service cost benefits $ 1,008 $ 1,431 $ 3,007 $ 3,877
Interest cost on projected benefit obligations 3,084 3,462 9,166 10,472
Expected return on plan assets (3,024) (3,054) (9,712) (9,235)
Amortization of prior service cost 62 114 190 343
Amortization of net transition obligations 134 89 391 271
Recognized actuarial losses 201 572 617 1,726
--------- --------- --------- ---------
$ 1,465 $ 2,614 $ 3,659 $ 7,454
========= ========= ========= =========
Note 9 - Accounts with affiliates:
December 31, September 30,
2003 2004
------------ -------------
(In thousands)
Current receivables from affiliates:
Kronos Canada, Inc. $ 1,847 $ 2,543
Kronos (US), Inc. ("KUS") 30 -
Other 7 17
---------- ----------
$ 1,884 $ 2,560
========== ==========
Current payable to affiliate - KUS $ 8,697 $ 4,091
========== ==========
Note 10 - Commitments and contingencies:
The Company is from time to time involved in various 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 of these 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 11 - 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 which had not already been consolidated under prior
applicable GAAP, 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 third quarter and first nine months of 2003 and 2004 are primarily
due to (i) relative changes in average TiO2 selling prices, (ii) relative
changes in TiO2 sales volumes and (iii) relative changes in foreign currency
exchange rates. Selling prices were generally: increasing during the first
quarter of 2003, flat during the second quarter of 2003, decreasing during the
second half of 2003 and the first half of 2004 and increasing during the third
quarter of 2004.
The Company reported net income of $9.1 million in the third quarter of
2004 compared to net income of $14.2 million in the third quarter of 2003. For
the first nine months of 2004, the Company reported net income of $286.0 million
compared to net income of $65.6 million in the first nine months of 2003. The
increase in the Company's reported net income from the first nine months of 2003
to the same period in 2004 is due primarily to the net effects of (i)
significantly higher tax benefit generated from the reversal of the Company's
German deferred income tax asset valuation allowance, (ii) lower gross margins,
(iii) higher selling, general and administrative expense and (iv) higher
currency transaction gains. Overall, the Company believes its net income in 2004
will be higher than in 2003 as the impact of the reversal of the Company's
deferred income tax asset valuation allowance is expected to more than offset
the effect of expected lower gross margins.
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 The introduction of trade barriers,
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 The ultimate ability to utilize income tax attributes, the benefit of which
has been recognized under the "more-likely-than-not" recognition criteria,
o Environmental matters (such as those requiring emission and discharge
standards for existing and new facilities),
o Government laws and regulations and possible changes therein,
o The ultimate resolution of pending litigation and
o Possible future litigation.
Should one or more of these risks materialize (or the consequences of such
a development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecast 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.
Net sales and income from operations
Three months ended Nine months ended
September 30, September 30,
---------------------------------- ----------------------------------
2003 2004 % Change 2003 2004 % Change
---- ---- -------- ---- ---- --------
(In millions, except percentages and volumes)
Net sales $ 173.4 $ 203.4 +17% $ 534.5 $ 603.7 +13%
Cost of sales 124.1 156.1 +26% 389.1 455.0 +17%
-------- -------- -------- --------
Gross margin 49.3 47.3 -4% 145.4 148.7 +2%
Selling, general and administrative
expense (20.8) (25.0) (63.0) (75.8)
Currency transaction gains (losses),
net (.4) (.4) (1.5) .1
Disposition of property and equipment (.3) - (.3) -
Royalty income 1.4 1.5 4.8 4.6
Other income .1 .1 .2 .2
-------- -------- -------- --------
Income from operations $ 29.3 $ 23.5 -20% $ 85.6 $ 77.8 -9%
======== ======== ======== ========
TiO2 data:
Percent change in average TiO2
selling prices:
Using actual foreign currency
exchange rates +2% +3%
Impact of changes in foreign
currency exchange rates -5% -8%
---- ----
In billing currencies -3% -5%
==== ====
Sales volumes* 74 85 +15% 232 256 +10%
Production volumes* 80 84 +5% 238 246 +3%
________________________________
* Thousands of metric tons
The Company's sales increased $30.0 million (17%) in the third quarter of
2004 compared to the third quarter of 2003 and increased $69.2 million (13%) in
the first nine months of 2004 compared to the same period in 2003, as the
favorable effect of fluctuations in foreign currency exchange rates, which
increased sales by approximately $11 million and $43 million, respectively, (as
more fully discussed below) and increased sales volumes 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 third quarter
and first nine months of 2004 were 3% and 5% lower, respectively, than the
comparable periods in 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 third
quarter and first nine months 2004 were 2% and 3% higher, respectively, compared
to the third quarter and first nine months of 2003. The Company's TiO2 sales
volumes in the third quarter and first nine months of 2004 increased 15% and
10%, respectively, compared to the same periods of 2003, primarily due to higher
volumes in European markets. The Company's TiO2 sales volumes in the first nine
months of 2004 were a new record for the Company.
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 GAAP ("GAAP measure").
The Company discloses percentage changes in its average TiO2 selling 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 TiO2 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 TiO2 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 2% increase
and 3% increase in the Company's average TiO2 selling prices during the third
quarter and first nine months of 2004, as compared to the same periods in 2003
using actual foreign currency exchange rates prevailing during the respective
periods (the GAAP measure) and the 3% decrease and 5% decrease in the Company's
average TiO2 selling prices in billing currencies (the non-GAAP measure) during
the third quarter and first nine months of 2004, 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 $32.0 million (26%) in the third
quarter of 2004 compared to the third quarter of 2003, and increased $65.9
million (17%) in the year-to-date period largely due to the increased sales and
production volumes and 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 72% and 73% in the third quarter and first nine months
of 2003, respectively, to 77% and 75% in the third quarter and first nine months
of 2004, respectively. The Company's TiO2 production volumes in the third
quarter of 2004 increased 5% compared to the third quarter of 2003, and
increased 3% in the first nine months of 2004, with operating rates near full
capacity in those periods. The Company's TiO2 production volumes in the first
nine months of 2004 were also a new Company record.
The Company's gross margins for the third quarter of 2004 decreased $2.0
million (4%) from the third quarter of 2003 as the effect of selling price
decreases and higher maintenance costs offset increased sales volumes. However,
gross margins increased $3.3 million (2%) from the first nine months of 2003 as
compared to the first nine months of 2004. Such increase was due to increased
sales volumes and the favorable effect on gross margin resulting from relative
changes in foreign currency exchange rates offset by the unfavorable effect of
lower average TiO2 selling prices.
Selling, general and administrative expenses increased $4.2 million (20%)
and $12.8 million (20%), respectively, in the third quarter and first nine
months of 2004 as compared to the corresponding periods in 2003. These increases
are largely attributable to the higher sales volumes as well as 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 non-U.S. 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 third quarter of 2004 by a net amount of approximately $11 million
compared to the same period in 2003 and increased TiO2 sales in the first nine
months of 2004 by approximately $43 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 third quarter and
first nine months of 2004 compared to the first nine months of 2003. Overall,
currency exchange rate fluctuations resulted in net increases in the Company's
income from operations of approximately $9 million in the first nine months of
2004 as compared to the same period in 2003. Currency exchange rate fluctuations
did not have a material effect on the Company's income from operations in the
third quarter of 2004 as compared to the third quarter of 2003.
Outlook
Reflecting the impact of partial implementation of prior price increase
announcements, the Company's average TiO2 selling prices in the third quarter of
2004 were 2% higher as compared to the second quarter of 2004. In June 2004, the
Company announced additional price increases of Euro 120 per metric ton in
Europe, which is targeted to be implemented later in 2004. In September 2004,
the Company announced additional price increases of Euro 110 per metric ton
which is in addition to the previously mentioned increases which are targeted to
be implemented in January 2005. The Company is also targeting to achieve price
increases in export markets in the fourth quarter of the year. The extent to
which all of such price increases will be realized will depend on, among other
things, economic factors.
The Company expects its TiO2 sales and production volumes in calendar 2004
will be higher than in 2003. The Company expects its average TiO2 selling
prices, in billing currencies, will be lower in calendar 2004 as compared to
2003 and 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 Nine months ended
September 30, September 30,
---------------------------------- ----------------------------------
2003 2004 Difference 2003 2004 Difference
---- ---- ---------- ---- ---- ----------
(In millions)
Interest expense to affiliates $ - $ - $ - $ (.1) $ - $ .1
Trade interest income .2 .3 .1 .5 .7 .2
Interest expense (8.2) (8.5) (.3) (24.3) (26.0) (1.7)
------- ------- ------- ------- ------- -------
$ (8.0) $ (8.2) $ (.2) $ (23.9) $ (25.3) $ (1.4)
======= ======= ======= ======= ======= =======
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
third quarter and first nine months of 2004 was $8.5 million and $26.0 million,
respectively, an increase of $300,000 and $1.7 million, respectively, from the
third quarter and first nine months 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 by
approximately $500,000 in the third quarter of 2004 and $2.2 million in the
first nine months of 2004 as compared to the third quarter and first nine months
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.
As stated in Note 5 to the Consolidated Financial Statements, one of the
Company's operating subsidiaries borrowed Euro 10 million in October 2004 under
the European revolving credit facility at an interest rate of 3.83%
Provision (benefit) 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.
At September 30, 2004, the Company had the equivalent of $602 million and
$244 million, respectively, of net operating loss carryforwards for German
corporate and trade tax purposes, all of which have no expiration date. As more
fully described in Note 7 to the Consolidated Financial Statements, the Company
had previously provided a deferred income tax asset valuation allowance against
substantially all of these tax loss carryforwards and other deductible temporary
differences in Germany because the Company did not believe they met the
"more-likely-than-not" recognition criteria. During the first six months of
2004, the Company reduced its deferred income tax asset valuation allowance by
approximately $8.7 million, primarily as a result of utilization of these German
net operating loss carryforwards, the benefit of which had not previously been
recognized. At June 30, 2004, after considering all available evidence, the
Company concluded that these German tax loss carryforwards and other deductible
temporary differences met the "more-likely-than-not" recognition criteria.
Accordingly, as of June 30, 2004, the Company reversed the remaining $245.6
million valuation allowance related to such items. Because the benefit of such
net operating loss carryforwards and other deductible temporary differences in
Germany has now been recognized, the Company's future effective income tax rate
will be higher than what it would have otherwise been, although its future cash
income tax rate would not be affected.
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 to 60% of taxable income after the first Euro 1
million of taxable income. The new law will have a significant effect on the
Company's cash tax payments in Germany going forward, the extent of which will
be dependent on the level of income earned in Germany.
Recently adopted accounting principle
See Note 11 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 nine months ended September 30, 2003 and 2004 are
presented below:
Nine months ended
September 30,
-----------------------
2003 2004
---- ----
(In millions)
Net cash provided (used) by:
Operating activities $ 77.3 $116.6
Investing activities (21.9) (17.7)
Financing activities (54.8) (60.0)
------ ------
Net cash provided by operating,
investing and financing activities $ .6 $ 38.9
====== ======
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.
Trends in cash flows from operating activities (excluding the impact of
significant asset dispositions and relative changes in assets and liabilities)
are generally similar to trends in the Company's earnings. However, certain
items included in the determination of net income are non-cash, and therefore
such items have no impact on cash flows from operating activities. Non-cash
items included in the determination of net income include depreciation and
amortization expense, deferred income taxes and non-cash interest expense.
Non-cash interest expense consists of amortization of deferred financing costs.
Certain other items included in the determination of net income may have an
impact on cash flows from operating activities, but the impact of such items on
cash flows from operating activities will differ from their impact on net
income. For example, the amount of periodic defined benefit pension plan expense
depends upon a number of factors, including certain actuarial assumptions, and
changes in such actuarial assumptions will result in a change in the reported
expense. The amount of such periodic expense generally differs from the outflows
of cash required to be currently paid for such benefits.
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 $77.3 million provided
in the first nine months of 2003 to $116.6 million of cash provided by operating
activities in the first nine months of 2004. This $39.3 million increase was due
primarily to the net effects of (i) higher net income of $220.4 million, (ii)
higher depreciation and amortization expense of $3.1 million, (iii) lower
deferred income taxes of $255.9 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 $34.1 million in the first nine months
of 2004 as compared to the first nine months of 2003 and (v) higher cash
received for income taxes of $4.3 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 volumes and sales volumes.
Investing and financing activities
The Company's capital expenditures were $21.1 million and $18.2 million in
the first nine 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%. Such amounts were repaid in the second quarter of 2004. In October 2004,
one of the Company's operating subsidiaries borrowed Euro 10 million under the
European revolving credit facility. See Note 5 to the Consolidated Financial
Statements.
In the first nine months of 2004, the Company paid a cash dividend of $60
million to Kronos. In October 2004, the Company loaned $80 million to Kronos.
Cash, cash equivalents, restricted cash and restricted marketable debt
securities and borrowing availability
At September 30, 2004, the Company and its subsidiaries had (i) current
cash and cash equivalents aggregating $76.3 million, (ii) current restricted
cash equivalents of $900,000 and (iii) noncurrent restricted marketable debt
securities of $2.6 million. At September 30, 2004, certain of the Company's
subsidiaries had approximately $97.2 million available for borrowing (including
approximately $94.8 million under its revolving credit facility). At September
30, 2004, the Company had approximately $220 million available for payment of
dividends and other restricted payments as defined in the Senior Secured Notes
indenture.
Provisions contained in certain of the Company's credit agreements could
result in the acceleration of the applicable indebtedness prior to its stated
maturity for reasons other than defaults from failing to comply with typical
financial covenants. For example, certain credit agreements allow the lender to
accelerate the maturity of the indebtedness upon a change of control (as
defined) of the borrower. In addition, certain credit agreements could result in
the acceleration of all or a portion of the indebtedness following a sale of
assets outside the ordinary course of business. Other than operating leases
discussed in the 2003 Annual Report, neither the Company nor any of its
subsidiaries or affiliates are party to any off-balance sheet financing
arrangements.
Pricing within the TiO2 industry is cyclical, and changes in industry
economic conditions significantly impact the Company's earnings and operating
cash flows. Cash flows from operations is considered the primary source of
liquidity for the Company. Changes in TiO2 pricing, production volumes and
customer demand, among other things, could significantly affect the liquidity of
the Company.
Litigation matters
See Note 10 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 acquisitions, divestitures, joint ventures 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 TiO2 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 TiO2 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 and
Chief Financial Officer, have evaluated the Company's disclosure controls and
procedures as of September 30, 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 September 30, 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, Note 10 to the Consolidated
Financial Statements and the Company's Quarterly Reports on Form 10-Q for the
quarters ended March 31, 2004 and June 30, 2004 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. Such requests should be
directed to the attention of the Company's corporate secretary at the
Company's corporate offices located at 5430 LBJ Freeway, Suite 1700,
Dallas, Texas 75240.
10.1 - First Amendment Agreement, dated September 3, 2004, Relating to
a Facility Agreement dated June 25, 2002 among Kronos Titan GmbH,
Kronos Europe S.A./N.V., Kronos Titan AS and Titania A/S, as
borrowers, Kronos Titan GmbH, Kronos Europe S.A./N.V. and Kronos
Norge AS, as guarantors, Kronos Denmark ApS, as security
provider, with Deutsche Bank Luxembourg S.A., acting as agent -
incorporated by reference to Exhibit 10.8 to the Registration
Statement on Form S-1 of Kronos Worldwide, Inc. (File No.
333-119639).
31.1 - Certification
31.2 - Certification
32.1 - Certification
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended September 30, 2004.
September 8, 2004 - Reported Item 1.01 and Item 2.03.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KRONOS INTERNATIONAL, INC.
---------------------------------------
(Registrant)
Date November 8, 2004 By /s/ Gregory M. Swalwell
----------------- ----------------------------------
Gregory M. Swalwell
Vice President, Finance and Chief
Financial Officer
(Principal Financial Officer)
Date November 8, 2004 By /s/ James W. Brown
----------------- ----------------------------------
James W. Brown
Vice President and Controller
(Principal Accounting Officer)