KRONOS WORLDWIDE INC - Annual Report: 2007 (Form 10-K)
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UNITED
STATES
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SECURITIES
AND EXCHANGE COMMISSION
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Washington,
D.C. 20549
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FORM
10-K
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X
Annual Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934:
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For the fiscal year ended
December 31,
2007
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Commission
file number 1-31763
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KRONOS WORLDWIDE, INC.
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(Exact
name of Registrant as specified in its charter)
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DELAWARE
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76-0294959
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(State
or other jurisdiction of
incorporation
or organization)
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(IRS
Employer Identification No.)
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5430
LBJ Freeway, Suite 1700
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Dallas,
Texas 75240-2697
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(Address
of principal executive offices)
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Registrant's
telephone number, including area
code: (972) 233-1700
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Securities
registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name
of each exchange on
which
registered
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Common
stock
($.01
par value)
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New
York Stock Exchange
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No
securities are registered pursuant to Section 12(g) of the Act.
Indicate
by check mark:
If
the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes No
X
If
the Registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. Yes No
X
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
If
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes
No
X
Whether
the Registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2
of the Act). Large accelerated filer Accelerated
filer X Non-accelerated
filer
Smaller reporting company
Whether
the Registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes No
X
The
aggregate market value of the 2.4 million shares of voting stock held by
nonaffiliates of Kronos Worldwide, Inc. as of June 30, 2007 (the last business
day of the Registrant's most recently-completed second fiscal quarter)
approximated $60 million.
As of February 29, 2008, 48,956,549
shares of the Registrant's common stock were outstanding.
Documents incorporated by
reference
The information required by Part III is
incorporated by reference from the Registrant's definitive proxy statement to be
filed with the Commission pursuant to Regulation 14A not later than 120 days
after the end of the fiscal year covered by this
report.
TABLE
OF CONTENTS
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Part
I
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Page
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Item
1.
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Business
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4
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Item
1A.
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Risk
Factors
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10
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Item
1B.
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Unresolved
Staff comments
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12
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Item
2.
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Properties
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12
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Item
3.
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Legal
Proceedings
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13
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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13
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Part
II
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Item
5.
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Market
for our Common Equity and Related Stockholder
Matters
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14
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Item
6.
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Selected
Financial Data
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16
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
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17
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Item
7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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35
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Item
8.
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Financial
Statements and Supplementary Data
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37
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosures
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37
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Item
9A.
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Controls
and Procedures
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37
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Item
9B.
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Other
Information
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39
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Part
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance*
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39
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Item
11.
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Executive
Compensation*
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39
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters*
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39
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Item
13.
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Certain
Relationships and Related Transactions and Director
Independence*
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39
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Item
14.
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Principal
Accounting Fees and Services*
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39
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Part
IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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39
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Signatures
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* All
or a portion of the information required by this Item is included in this
Form 10-K through incorporation by reference to the Registrant’s Proxy
Statement for our May 15, 2008 Annual Meeting of
Stockholders.
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--
Forward-Looking Information
This report includes forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Any statement in this report that is not a statement of
historical fact may be deemed to be a forward-looking
statement. Because these forward-looking statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by these forward-looking statements. We do not intend to
assume any duty to update or revise any forward-looking statements for new
information, future events or otherwise.
Forward-looking
statements can be identified by the use of words such as "believes," "intends,"
"may," "should," "could," "anticipates," "expected" or comparable terminology,
or by discussions of strategies or trends. Although we believe the
expectations reflected in such forward-looking statements are reasonable, we
cannot give assurances that these expectations will prove to be
correct. Forward-looking statements involve substantial risks and
uncertainties which could significantly impact expected results, and actual
results could differ materially from those described. It is not
possible to identify all of the risks and uncertainties we face that could cause
actual results to differ materially from those described in this
report. But, we have included discussion on the following most
significant risk factors in Item 1A of this document:
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Future
supply and demand for our products
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The
extent of the dependence of certain of our businesses on certain market
sectors
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The
cyclicality of our businesses
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Customer
inventory levels (such as the extent to which our 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)
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Changes
in raw material and other operating costs (such as energy
costs)
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The
possibility of labor disruptions
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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)
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Competitive
products and substitute products
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Customer
and competitor strategies
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Potential
consolidation of our competitors
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The
impact of pricing and production
decisions
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Competitive
technology positions
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The
introduction of trade barriers
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Fluctuations
in currency exchange rates (such as changes in the exchange rate between
the U.S. dollar and each of the euro, the Norwegian kroner and the
Canadian dollar)
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Operating
interruptions (including, but not limited to, labor disputes, leaks,
natural disasters, fires, explosions, unscheduled or unplanned downtime
and transportation interruptions)
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The
timing and amounts of insurance
recoveries
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Our
ability to renew or refinance credit
facilities
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The
ultimate outcome of income tax audits, tax settlement initiatives or other
tax matters
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The
ultimate ability to utilize income tax attributes, the benefits of which
have been recognized under the more-likely-than-not recognition
criteria
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Environmental
matters (such as those requiring compliance with emission and discharge
standards for existing and new
facilities)
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Government
laws and regulations and possible changes
therein
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The
ultimate resolution of pending
litigation
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Possible
future litigation
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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. We disclaim any intention or obligation to update or revise
any forward-looking statements whether as a result of changes in information,
future events or otherwise.
ITEM
1. BUSINESS
General
Kronos
Worldwide, Inc. (NYSE: KRO), a Delaware corporation, is a leading global
producer and marketer of value-added titanium dioxide pigments ("TiO2"). We,
along with our distributors and agents, sell and provide technical services for
our products to over 4,000 customers in approximately 100 countries with the
majority of sales in Europe and North America. We believe that we
have developed considerable expertise and efficiency in the manufacture, sale,
shipment and service of our products in domestic and international
markets.
TiO2 is an
inorganic pigment used to impart whiteness, brightness and opacity for products
such as coatings, plastics, paper, fibers, food, ceramics and
cosmetics. TiO2 is
considered a “quality-of-life” product with demand and growth affected by gross
domestic product and overall economic conditions in our markets in various parts
of the world. TiO2 derives
its value from its whitening properties and hiding power (opacity), which is the
ability to cover or mask other materials effectively and
efficiently. TiO2 is the
largest commercially used whitening pigment because it has a high refractive
rating giving it more hiding power than any other commercially produced white
pigment. In addition, TiO2 has
excellent resistance to interaction with other chemicals, good thermal stability
and resistance to ultraviolet degradation. We ship TiO2 to our
customers in either a powder or slurry form via rail, truck or ocean
carrier. We, including our predecessors, have produced and marketed
TiO2
in North America and Europe for over 80 years.
We
believe that we are the second largest producer of TiO2 in Europe
with an estimated 19% share of European TiO2 sales
volume. Approximately one-half of our 2007 sales volumes was
attributable to markets in Europe. We have an estimated 15% share of
North American TiO2 sales
volume. Per capita utilization of TiO2 in the
United States and Western Europe far exceeds that of other areas in the
world. We expect these markets to continue to be the largest
consumers of TiO2 for the
foreseeable future. It is probable that significant markets for
TiO2
could emerge in Eastern Europe or the Far East as the economies in these regions
develop to the point that quality-of-life products, including TiO2,
experience greater demand. In addition, China has developed into a
significant market and as its economy continues to develop it is probable that
quality-of-life products, including TiO2, will
experience greater demand in that country.
Sales of
TiO2
were about 90% of our net sales in 2007. The remaining 10% of net
sales is made up of other product lines that are complementary to TiO2. These
other products are described as follows:
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We
own and operate an ilmenite mine in Norway pursuant to a governmental
concession with an unlimited term, and we are currently excavating a
second mine located near the first mine. Ilmenite is a raw
material used directly as a feedstock by some sulfate-process TiO2
plants, including all of our European sulfate-process
plants. We also sell ilmenite ore to third-parties, some of
whom are our competitors. The mines have estimated aggregate
reserves that are expected to last for at least another 60
years.
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We
manufacture and sell iron-based chemicals, which are co-products and
processed co-products of the TiO2
pigment production process. These co-product chemicals are
marketed through our Ecochem division, and are used primarily as treatment
and conditioning agents for industrial effluents and municipal wastewater
as well as in the manufacture of iron pigments, cement and agricultural
products.
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We
manufacture and sell titanium oxychloride and titanyl sulfate, which are
side-stream products from the production of TiO2. Titanium
oxychloride is used in specialty applications in the formulation of
pearlescent pigments, production of electroceramic capacitors for cell
phones and other electronic devices. Titanyl sulfate products
are used primarily in pearlescent
pigments.
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At
December 31, 2007, approximately 59% of our common stock was owned by Valhi,
Inc. (NYSE: VHI) and approximately 36% was owned by NL Industries (NYSE:
NL). Valhi also owns 83% of NL Industries’ outstanding common stock.
A subsidiary of Contran Corporation held approximately 93% of Valhi’s
outstanding common stock. Substantially all of Contran Corporation’s
outstanding voting stock is held by trusts established for the benefit of
certain descendants of Harold C. Simmons (of which Mr. Simmons is trustee), or
is held by persons or other entities related to Mr.
Simmons. Consequently, Mr. Simmons may be deemed to control all of
these companies.
Manufacturing
and operation
We
currently produce over 40 different TiO2 grades
under the KronosTM
trademark which provide a variety of performance properties to meet customers’
specific requirements. Our major customers include domestic and
international paint, plastics and paper manufacturers.
Extenders,
such as kaolin clays, calcium carbonate and polymeric opacifiers, are used in a
number of the same end-use markets as white pigments. However, the opacity in
these products is not able to duplicate the performance characteristics of
TiO2,
therefore we believe these products are not effective substitutes for TiO2.
We
produce TiO2
in two crystalline forms: rutile and anatase. Rutile TiO2 is
manufactured using both a chloride production process and a sulfate production
process, whereas anatase TiO2 is only
produced using a sulfate production process. Chloride process rutile
is preferred for the majority of customer applications. From a
technical standpoint, chloride process rutile has a bluer undertone and higher
durability than sulfate process rutile. Although many end-use
applications can use either form, chloride process rutile is the preferred form
for use in coatings and plastics, the two largest end-use
markets. Sulfate process anatase represents a much smaller percentage
of annual global TiO2 production
and is preferred for use in selected paper, ceramics, rubber tires, man-made
fibers, food and cosmetics.
Chloride production
process. Approximately
three-fourths of our current production capacity is based on the chloride
process. The chloride process is a continuous process in which
chlorine is used to extract rutile TiO2. The
chloride process typically has lower manufacturing costs than the sulfate
process due to newer technology, higher yield, less waste, lower energy
requirements and lower labor costs. The chloride process produces
less waste than the sulfate process because much of the chlorine is recycled and
feedstock bearing a higher titanium content is used.
Sulfate production
process. The sulfate process is a batch chemical process that
uses sulfuric acid to extract both rutile and anatase TiO2.
Once an
intermediate TiO2 pigment
has been produced by either the chloride or sulfate process, it is “finished”
into products with specific performance characteristics for particular end-use
applications through proprietary processes involving various chemical surface
treatments and intensive micronizing (milling). Due to environmental
factors and customer considerations, the proportion of TiO2 industry
sales represented by chloride process pigments has increased relative to sulfate
process pigments and, in 2007, chloride process production facilities
represented approximately 60% of industry capacity.
We
produced 512,000 metric tons of TiO2 in 2007,
down slightly from the 516,000 metric tons we produced in 2006. Such
production amounts include our 50% interest in the TiO2
manufacturing joint-venture discussed below. Our average production
capacity utilization rates were near full capacity in 2005, 2006 and
2007. Our production capacity has increased by approximately 30% over
the past ten years due to debottlenecking programs, with only moderate capital
expenditures. We believe our annual attainable production capacity
for 2008 is approximately 532,000 metric tons, with some slight additional
capacity available in 2009 through our continued debottlenecking
efforts.
Raw
Materials
The
primary raw materials used in chloride process TiO2 are
titanium-containing feedstock (natural rutile ore or purchased slag), chlorine
and coke. Chlorine and coke are available from a number of
suppliers. Titanium-containing feedstock suitable for use in the
chloride process is available from a limited but increasing number of suppliers
principally in Australia, South Africa, Canada, India and the United
States. We purchase chloride process grade slag from Rio Tinto Iron
and Titanium under a long-term supply contract that expires at the end of
2011. We purchase natural rutile ore primarily from Iluka Resources,
Limited under a long-term supply contract that expires at the end of
2009. We expect to be successful in obtaining long-term extensions to
these and other existing supply contracts prior to their
expiration. We expect the raw materials purchased under these
contracts to meet our chloride process feedstock requirements over the next
several years.
The
primary raw materials used in sulfate process TiO2 are
titanium-containing feedstock (primarily ilmenite from our Norwegian mine or
purchased slag) and sulfuric acid. Sulfuric acid is available from a
number of suppliers. Titanium-containing feedstock suitable for use
in the sulfate process is available from a limited number of suppliers
principally in Norway, Canada, Australia, India and South Africa. As
one of the few vertically integrated producers of sulfate process TiO2 we own and
operate a rock ilmenite mine in Norway, which provided all of the feedstock for
our European sulfate process TiO2 plants in
2007. We expect ilmenite production from our mine to meet our
European sulfate process feedstock requirements for the foreseeable
future. For our Canadian sulfate process plant, we also purchase
sulfate grade slag primarily from Q.I.T. Fer et Titane Inc. (also a subsidiary
of Rio Tinto Iron and Titanium), under a long-term supply contract that expires
at the end of 2009 and Tinfos Titan and Iron KS under a supply contract that
expires in 2010. We expect the raw materials purchased under these
contracts to meet our sulfate process feedstock requirements over the next few
years.
Many of
our raw material contracts contain fixed quantities we are required to purchase,
although these contracts allow for an upward or downward adjustment in the
quantity purchased. We are not required to purchase feedstock in
excess of amounts that we would reasonably consume in any given
year. The pricing under these agreements is generally negotiated
annually.
The
following table summarizes our raw materials purchased or mined in
2007.
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Production Process/Raw
Material
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Raw
Materials Procured or Mined
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(In
thousands of metric tons)
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Chloride
process plants:
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Purchased
slag or natural rutile ore
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470
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Sulfate
process plants:
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Raw
ilmenite ore mined & used internally
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311
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Purchased
slag
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25
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TiO2
manufacturing joint venture
We hold a 50% interest in a
manufacturing joint venture with Huntsman Holding LLC. The joint
venture owns and operates a chloride process TiO2 facility
located in Lake Charles, Louisiana. We share production from the
plant equally with Huntsman pursuant to separate offtake
agreements.
A
supervisory committee directs the business and affairs of the joint venture,
including production and output decisions. This committee is composed
of four members, two of whom we appoint and two of whom Huntsman
appoints. Two general managers manage the operations of the joint
venture acting under the direction of the supervisory committee. We
appoint one general manager and Huntsman appoints the other.
We are
required to purchase one-half of the TiO2 produced
by the joint venture. The joint venture is not consolidated in our
financial statements because we do not control it. We account for our
interest in the joint venture by the equity method. The joint venture
operates on a break-even basis, and therefore we do not have any equity in
earnings of the joint venture. We share all costs and capital
expenditures of the joint venture equally with Huntsman with the exception of
raw material and packaging costs for the pigment grades produced. Our
share of the net costs is reported as cost of sales as the related TiO2 is
sold. See Notes 6 and 13 to the Consolidated Financial
Statements.
Competition
The
TiO2
industry is highly competitive. Our principal competitors are E.I. du
Pont de Nemours & Co.; Millennium Inorganic Chemicals, Inc. (a subsidiary of
National Titanium Dioxide Company Ltd. (Cristal)); Tronox Incorporated; Huntsman
Corporation; and Ishihara Sangyo Kaisha, Ltd. These competitors have
estimated individual shares of TiO2 production
capacity ranging from 4% (for Ishihara) to 22% (for DuPont), and an estimated
aggregate share of worldwide TiO2 production
volume in excess of 60%. DuPont has about one-half of total North
American TiO2 production
capacity and is our principal North American competitor.
We
compete primarily on the basis of price, product quality, technical service and
the availability of high performance pigment grades. Although certain
TiO2
grades are considered specialty pigments, the majority of our grades and
substantially all of our production are considered commodity pigments with price
generally being the most significant competitive factor. We believe
that we are the leading seller of TiO2 in several
countries, including Germany, with an estimated 12% share of worldwide TiO2 sales
volume in 2007. Overall, we are the world’s fifth-largest producer of
TiO2.
Worldwide
capacity additions in the TiO2 market
resulting from construction of greenfield plants require significant capital
expenditures and substantial lead time (typically three to five years in our
experience). We are not aware of any TiO2 plants
currently under construction. DuPont has announced its intention to
build a TiO2
facility in China, but it is not clear when construction will begin and
it is not likely that any product would be available until 2011, at the
earliest.
We expect
that industry capacity will increase as we and our competitors continue to
debottleneck our existing facilities. We expect the average annual
increase in industry capacity from announced debottlenecking projects to be less
than the average annual demand growth for TiO2 during the
next three to five years. However, we can not assure that future
increases in the TiO2 industry
production capacity and future average annual demand growth rates for TiO2 will
conform to our expectations. If actual developments differ from our
expectations, ours and the TiO2 industry's
performances could be unfavorably affected.
Research
and development
Our
research and development activities are directed primarily on improving the
chloride and sulfate production processes, improving product quality and
strengthening our competitive position by developing new pigment
applications. We primarily conduct research and development
activities at our Leverkusen, Germany facility. Our expenditures for
research and development and certain technical support programs were
approximately $9 million in 2005, $11 million in 2006 and $12 million in
2007.
We
continually seek to improve the quality of our grades and have been successful
at developing new grades for existing and new applications to meet the needs of
customers and increase product life cycle. Since 2002, we have added
14 new grades for plastics, coatings, fibers and paper laminate
applications.
Patents
and trademarks
We
believe that our patents held for products and production processes are
important to us and our continuing business activities. We seek
patent protection for our technical developments, principally in the United
States, Canada and Europe, and from time to time we enter into licensing
arrangements with third parties. Our existing patents generally have
terms of 20 years from the date of filing, and have remaining terms ranging from
2 to 19 years. We seek to protect our intellectual property rights,
including our patent rights, and from time to time are engaged in disputes
relating to the protection and use of intellectual property relating to our
products.
Our
trademarks, including Kronos, are protected by
registration in the United States and elsewhere with respect to those products
we manufacture and sell. We also rely on unpatented proprietary
know-how and continuing technological innovation, and other trade secrets to
develop and maintain our competitive position. Our proprietary
chloride production process is an important part of our technology, and our
business could be harmed if we fail to maintain confidentiality of our trade
secrets used in this technology.
Major
customers
We sell
to a diverse customer base, and no single customer made up more than 10% of our
sales for 2007. Our largest ten customers accounted for approximately
27% of sales in 2007.
Seasonality
Neither
our business as a whole nor that of any of our principal product groups is
seasonal to any significant extent. However, TiO2 sales are
generally higher in the first half of the year. This is due in part
to the increase in paint production in the spring to meet demand during the
spring and summer painting season.
Employees
As of
December 31, 2007, we employed approximately 2,400 persons (excluding employees
of the Louisiana joint venture), with 50 employees in the United States, 410
employees in Canada and 1,940 employees in Europe.
Our
hourly employees in production facilities worldwide, including the TiO2 joint
venture, are represented by a variety of labor unions under labor agreements
with various expiration dates. Our European union employees are
covered by master collective bargaining agreements in the chemicals industry
that are renewed annually. Our Canadian union employees are covered
by a collective bargaining agreement that expires in June 2010.
Regulatory
and environmental matters
Our
operations are governed by various environmental laws and
regulations. Certain of our operations are, or have been, engaged in
the handling, manufacture or use of substances or compounds that may be
considered toxic or hazardous within the meaning of applicable environmental
laws and regulations. As with other companies engaged in similar
businesses, certain of our past and current operations and products have the
potential to cause environmental or other damage. We have implemented
and continue to implement various policies and programs in an effort to minimize
these risks. Our policy is to maintain compliance with applicable
environmental laws and regulations at all of our facilities and to strive to
improve our environmental performance. It is possible that future
developments, such as stricter requirements in environmental laws and
enforcement policies, could adversely affect our production, handling, use,
storage, transportation, sale or disposal of such substances and could adversely
affect our consolidated financial position and results of operations or
liquidity.
Our U.S.
manufacturing operations are governed by federal environmental and worker health
and safety laws and regulations. These primarily consist of the
Resource Conservation and Recovery Act (“RCRA”), the Occupational Safety and
Health Act, the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act,
the Toxic Substances Control Act and the Comprehensive Environmental Response,
Compensation and Liability Act, as amended by the Superfund Amendments and
Reauthorization Act (“CERCLA”), as well as the state counterparts of these
statutes. We believe the TiO2 plant
owned by the joint venture and a TiO2 slurry
facility owned by us in Lake Charles, Louisiana are in substantial compliance
with applicable requirements of these laws or compliance orders issued
thereunder. These are our only U.S. manufacturing
facilities.
While the
laws regulating operations of industrial facilities in Europe vary from country
to country, a common regulatory framework is provided by the European Union
(“EU”). Germany and Belgium are members of the EU and follow its
initiatives. Norway is not a member but generally patterns its
environmental regulatory actions after the EU. We believe we have
obtained all required permits and are in substantial compliance with applicable
environmental requirements for our European and Canadian
facilities.
At our
sulfate plant facilities in Germany, we recycle weak sulfuric acid either
through contracts with third parties or at our own facilities. In
addition, at our German locations we have a contract with a third party to treat
certain sulfate-process effluents. At our Norwegian plant, we ship
spent acid to a third party location where it is treated and
disposed. These contracts may be terminated by either party after
giving three or four years advance notice, depending on the
contract.
From time
to time, our facilities may be subject to environmental regulatory enforcement
under U.S. and non-U.S. statutes. Typically we establish compliance
programs to resolve these matters. Occasionally, we may pay
penalties. To date such penalties have not involved amounts having a
material adverse effect on our consolidated financial position, results of
operations or liquidity. We believe that all of our facilities are in
substantial compliance with applicable environmental laws.
Capital
expenditures in 2007 related to ongoing environmental compliance, protection and
improvement programs were $5.6 million, and are currently expected to be
approximately $7 million in 2008.
Website
and other available information
Our
fiscal year ends December 31. Our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments
to those reports are available on our website at www.kronostio2.com. These
reports are available on the website, without charge, as soon as is reasonably
practicable after we file or furnish them electronically with the Securities and
Exchange Commission (“SEC”). Additional information regarding us,
including our Audit Committee charter, Code of Business Conduct and Ethics and
our Corporate Governance Guidelines, can also be found at this
website. Information contained on our website is not part of this
report. We will also provide free copies of such documents upon
written request. Such requests should be directed to the Corporate
Secretary at our address on the cover page of this Form 10-K.
The
public may read and copy any materials we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The
public may obtain information about the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. We are an electronic filer, and
the SEC maintains an internet website that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC at www.sec.gov.
ITEM
1A. RISK FACTORS
Below are certain risk factors
associated with our business. In addition to the potential effect of
these risk factors discussed below, any risk factor which could result in
reduced earnings or operating losses, or reduced liquidity, could in turn
adversely affect our ability to service our liabilities or pay dividends on our
common stock or adversely affect the quoted market prices for our
securities.
Approximately
90% of our revenues are attributable to sales of TiO2. Pricing
within the global TiO2 industry
over the long term is cyclical, and changes in economic conditions, especially
in Western industrialized nations, can significantly impact our earnings and
operating cash flows. This may result in reduced earnings or
operating losses.
Historically,
the markets for many of our products have experienced alternating periods of
increasing and decreasing demand. Relative changes in the selling
prices for our products are one of the main factors that affects the level of
our profitability. In periods of increasing demand, our selling
prices and profit margins generally will tend to increase, while in periods of
decreasing demand our selling prices and profit margins generally tend to
decrease. Future growth in demand for TiO2 may not be
sufficient to alleviate any future conditions of excess industry capacity, and
such conditions may not be sustained or may be further aggravated by anticipated
or unanticipated capacity additions or other events.
The
demand for TiO2 during a
given year is also subject to annual seasonal fluctuations. TiO2 sales are
generally higher in the first half of the year. This is due in part
to the increase in paint production in the spring to meet demand during the
spring and summer painting season. See Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” for
further discussion on production and price changes.
We sell several of our products in
mature and highly competitive industries and face price pressures in the markets
in which we operate, which may result in reduced earnings or operating
losses.
The
global markets in which we operate our business are highly
competitive. Competition is based on a number of factors, such as
price, product quality and service. Some of our competitors may be
able to drive down prices for our products because their costs are lower than
our costs. In addition, some of our competitors' financial,
technological and other resources may be greater than our resources, and such
competitors may be better able to withstand changes in market
conditions. Our competitors may be able to respond more quickly than
we can to new or emerging technologies and changes in customer
requirements. Further, consolidation of our competitors or customers
may result in reduced demand for our products or make it more difficult for us
to compete with our competitors. New competitors could emerge by
modifying their existing production facilities so they could manufacture
products that compete with our products. The occurrence of any of
these events could result in reduced earnings or operating losses.
Higher
costs or limited availability of our raw materials may reduce our earnings and
decrease our liquidity.
The
number of sources for and availability of, certain raw materials is specific to
the particular geographical region in which a facility is
located. For example, titanium-containing feedstocks suitable for use
in our TiO2 facilities
are available from a limited number of suppliers around the
world. Political and economic instability in the countries from which
we purchase our raw material supplies could adversely affect their
availability. If our worldwide vendors were unable to meet their
contractual obligations and we were unable to obtain necessary raw materials, we
could incur higher costs for raw materials or may be required to reduce
production levels. We may not always be able to increase our selling
prices to offset the impact of any higher costs or reduced production levels,
which could reduce our earnings and decrease our liquidity.
Our
leverage may impair our financial condition or limit our ability to operate our
businesses.
We
currently have a significant amount of debt. As of December 31, 2007,
our total consolidated debt was approximately $606 million, substantially all of
which relates to Senior Secured Notes of our wholly-owned subsidiary, Kronos
International, Inc. Our level of debt could have important
consequences to our stockholders and creditors, including:
|
·
|
making
it more difficult for us to satisfy our obligations with respect to our
liabilities;
|
|
·
|
increasing
our vulnerability to adverse general economic and industry
conditions;
|
|
·
|
requiring
that a portion of our cash flows from operations be used for the payment
of interest on our debt, which reduces our ability to use our cash flow to
fund working capital, capital expenditures, dividends on our common stock,
acquisitions or general corporate
requirements;
|
|
·
|
limiting
our ability to obtain additional financing to fund future working capital,
capital expenditures, acquisitions or general corporate
requirements;
|
|
·
|
limiting
our flexibility in planning for, or reacting to, changes in our business
and the industry in which we operate;
and
|
|
·
|
placing
us at a competitive disadvantage relative to other less leveraged
competitors.
|
In addition to our indebtedness, we are
party to various lease and other agreements pursuant to which, along with our
indebtedness, we are committed to pay approximately $315 million in
2008. Our ability to make payments on and refinance our debt, and to
fund planned capital expenditures, depends on our future ability to generate
cash flow. To some extent, this is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond our control. In addition, our ability to borrow funds under
our subsidiaries’ credit facilities in the future will, in some instances,
depend in part on these subsidiaries’ ability to maintain specified financial
ratios and satisfy certain financial covenants contained in the applicable
credit agreement.
Our
business may not generate cash flows from operating activities sufficient to
enable us to pay our debts when they become due and to fund our other liquidity
needs. As a result, we may need to refinance all or a portion of our
debt before maturity. We may not be able to refinance any of our debt
in a timely manner on favorable terms, if at all. Any inability to
generate sufficient cash flows or to refinance our debt on favorable terms could
have a material adverse effect on our financial condition.
|
ITEM
1B.
|
UNRESOLVED
STAFF COMMENTS.
|
|
|
None.
|
|
ITEM
2.
|
PROPERTIES
|
We
currently operate six TiO2
facilities, two slurry facilities and an ilmenite mine at the following
locations:
|
Location
|
Description
|
|
Leverkusen,
Germany
|
TiO2
production, Chloride and sulfate process
|
|
Nordenham,
Germany
|
TiO2
production, Sulfate process
|
|
Langerbrugge,
Belgium
|
TiO2
production, Chloride process
|
|
Fredrikstad,
Norway
|
TiO2
production, Sulfate process
|
|
Varennes,
Quebec, Canada
|
TiO2
production, Chloride and sulfate process, slurry
facility
|
|
Lake
Charles, Louisiana (1)
|
TiO2
production, Chloride process
|
|
Lake
Charles, Louisiana
|
Slurry
facility
|
|
Hauge
i Dalane, Norway (2)
|
Ilmenite
mine
|
(1) We
operate this facility in a 50% owned joint venture with Huntsman Holdings, LLC.
(see Note 6 to the Consolidated Financial Statements).
(2) We
are currently excavating a second mine located near our current mine in
Norway.
Our
co-products are produced at our German, Norwegian and Belgian facilities, and
our titanium chemicals are produced at our Canadian and Belgian
facilities.
We own
all of our principal production facilities described above, except for the land
under the Fredrikstad, Norway and Leverkusen, Germany facilities. The
Norwegian plant is located on public land and is leased until 2013, with an
option to extend the lease for an additional 50 years. Our principal
German operating subsidiary leases the land under our Leverkusen plant pursuant
to a lease with Bayer AG that expires in 2050. We own the Leverkusen
facility, which represents about one-third of our current TiO2 production
capacity and is located within an extensive manufacturing
complex. Rent for the land lease associated with the Leverkusen
facility is periodically established by agreement with Bayer AG for periods of
at least two years at a time. Bayer AG provides some raw materials,
including chlorine, auxiliary and operating materials, utilities and services
necessary to operate the Leverkusen facility under separate supplies and
services agreements.
Our
corporate headquarters is located in Dallas, Texas. We have under
lease various corporate and administrative offices located in the U.S. and
various sales offices located in the U.S., France, the Netherlands and the
U.K. The roads leading to our facilities are generally maintained by
the applicable local government and are adequate for our purposes.
Information
on our properties is incorporated by reference to Item 1: Business,
Manufacturing and Operations above. See Note 14 to our Consolidated
Financial Statements for information on our leases.
ITEM 3.
LEGAL PROCEEDINGS
We are
involved in various environmental, contractual, intellectual property, product
liability and other claims and disputes incidental to our
business. Information called for by this Item is incorporated by
reference to Note 14 to our Consolidated Financial Statements.
ITEM 4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of
security holders during the quarter ended December 31, 2007.
PART
II
|
ITEM 5.
|
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
|
Our
common stock is listed and traded on the New York Stock Exchange (symbol:
KRO). As of February 29, 2008, there were approximately 3,450 holders
of record of common stock. The following table sets forth the high
and low closing per share sales price for common stock for the periods indicated
according to Bloomberg, and dividends paid during such periods. On
February 29, 2008 the closing price of common stock according to the NYSE
Composite Tape was $18.50.
|
High
|
Low
|
Cash
dividends
paid
|
||||||||||
|
Year
ended December 31, 2006
|
||||||||||||
|
First
Quarter
|
$ | 32.40 | 28.41 | $ | .25 | |||||||
|
Second
Quarter
|
31.95 | 27.60 | .25 | |||||||||
|
Third
Quarter
|
30.70 | 27.52 | .25 | |||||||||
|
Fourth
Quarter
|
40.53 | 28.20 | .25 | |||||||||
|
Year
ended December 31, 2007
|
||||||||||||
|
First
Quarter
|
37.08 | 30.67 | .25 | |||||||||
|
Second
Quarter
|
37.07 | 25.25 | .25 | |||||||||
|
Third
Quarter
|
28.97 | 18.35 | .25 | |||||||||
|
Fourth
Quarter
|
21.79 | 15.50 | .25 | |||||||||
|
January
1, 2008 through February
29,
2008
|
22.56 | 15.74 | - | |||||||||
We paid
four quarterly cash dividends of $.25 per share in 2006 and 2007. On
February 14, 2008, our Board of Directors declared a regular quarterly dividend
of $.25 per share to stockholders of record as of March 11, 2008 to be paid on
March 25, 2008. The declaration and payment of future dividends, and
the amount thereof, is discretionary, and will be dependent upon the Company’s
results of operations, financial condition, contractual restrictions and other
factors deemed relevant by the Company’s Board of Directors. The
amount and timing of past dividends is not necessarily indicative of the amount
and timing of any future dividends which might be paid.
Performance
graph
Set forth
below is a line graph comparing, for the period December 8, 2003 (the first day
our common stock was publicly traded) through December 31, 2007, the cumulative
total stockholder return on our common stock against the cumulative total return
of (a) the S&P Composite 500 Stock Index and (b) the S&P 500 Diversified
Chemicals Index. The graph shows the value at December 31 of each
year, assuming an original investment of $100 in each and reinvestment of cash
dividends and other distributions to stockholders.
The
information contained in the performance graph shall not be deemed “soliciting
material” or “filed” with the SEC, or subject to the liabilities of Section 18
of the Securities Exchange Act, except to the extent we specifically request
that the material be treated as soliciting material or specifically incorporate
this performance graph by reference into a document filed under the Securities
Act or the Securities Exchange Act.
Equity
compensation plan information
We have
an equity compensation plan, which was approved by our stockholders, which
provides for the discretionary grant to our employees and directors of, among
other things, options to purchase our common stock and stock
awards. As of December 31, 2007, there were no options outstanding to
purchase shares of our common stock, and approximately 136,500 shares were
available for future grant or issuance. We do not have any equity
compensation plans that were not approved by our stockholders. See
Note 12 to our Consolidated Financial Statements.
|
ITEM
6.
|
SELECTED
FINANCIAL DATA
|
The
following selected financial data should be read in conjunction with our
Consolidated Financial Statements and Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
|
Years ended December 31,
|
||||||||||||||||||||
|
2003
|
2004
|
2005
|
2006 (3)
|
2007
|
||||||||||||||||
|
(In
millions, except per share data and TiO2
operating statistics)
|
||||||||||||||||||||
|
STATEMENTS
OF OPERATIONS DATA:
|
||||||||||||||||||||
|
Net
sales
|
$ | 1,008.2 | $ | 1,128.6 | $ | 1,196.7 | $ | 1,279.4 | $ | 1,310.3 | ||||||||||
|
Gross
margin
|
270.3 | 261.2 | 327.5 | 310.5 | 251.4 | |||||||||||||||
|
Income
from operations
|
133.9 | 113.8 | 176.0 | 143.2 | 84.9 | |||||||||||||||
|
Net
income (loss)
|
88.5 | 314.1 | 71.5 | 82.0 | (66.7 | ) | ||||||||||||||
|
Net
income (loss) per share
|
1.81 | 6.42 | 1.46 | 1.67 | (1.36 | ) | ||||||||||||||
|
Cash
dividends per share (1)
|
.14 | 1.00 | 1.00 | 1.00 | 1.00 | |||||||||||||||
|
BALANCE
SHEET DATA (at year end):
|
||||||||||||||||||||
|
Total
assets
|
$ | 1,121.9 | $ | 1,353.3 | $ | 1,298.9 | $ | 1,421.5 | $ | 1,455.0 | ||||||||||
|
Notes
payable and long-term debt including current maturities
|
556.7 | 533.2 | 465.3 | 536.2 | 606.2 | |||||||||||||||
|
Common
stockholders’ equity
|
162.2 | 473.1 | 412.5 | 448.4 | 411.0 | |||||||||||||||
|
STATEMENTS
OF CASH FLOW DATA:
|
||||||||||||||||||||
|
Net
cash provided (used) by:
|
||||||||||||||||||||
|
Operating
activities
|
$ | 107.7 | $ | 151.0 | $ | 97.8 | $ | 71.9 | $ | 90.0 | ||||||||||
|
Investing
activities
|
(35.4 | ) | (39.8 | ) | (39.7 | ) | (50.9 | ) | (47.4 | ) | ||||||||||
|
Financing
activities
|
(61.8 | ) | (108.8 | ) | (44.8 | ) | (35.0 | ) | (39.8 | ) | ||||||||||
|
TiO2 OPERATING
STATISTICS:
|
||||||||||||||||||||
|
Sales
volume(2)
|
462 | 500 | 478 | 511 | 519 | |||||||||||||||
|
Production
volume(2)
|
476 | 484 | 492 | 516 | 512 | |||||||||||||||
|
Production
capacity at beginning of year(2)
|
470 | 480 | 495 | 516 | 525 | |||||||||||||||
|
Production
rate as a percentage of capacity
|
Full
|
Full
|
99 | % |
Full
|
98 | % | |||||||||||||
|
__________________________________
|
||||||||||||||||||||
|
(1)
|
Excludes
our December 2003 dividend to NL in the form of a $200 million long-term
note payable.
|
|
(2)
|
Metric
tons in thousands
|
|
(3)
|
We adopted Statement of
Financial Accounting Standards No. 158 effective December 31,
2006. See Note 10 and 17 to our Consolidated Financial
Statements.
|
|
ITEM 7.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
RESULTS
OF OPERATIONS
Business
overview
We are a leading global producer and
marketer of value-added TiO2. TiO2 is used
for a variety of manufacturing applications, including plastics, paints, paper
and other industrial products. For 2007, approximately one-half of
our sales volumes were into European markets. We believe that we are
the second largest producer of TiO2 in Europe
with an estimated 19% share of European TiO2 sales
volumes. In addition, we estimate that we have a 15% share of North
American TiO2 sales
volumes. Our production facilities are located throughout Europe and
North America.
We
consider TiO2 to be a
“quality of life” product, with demand affected by gross domestic product and
overall economic conditions in our markets located in various regions of the
world. Over the long-term, we expect demand for TiO2 to grow by
2% to 3% per year. This is consistent with our expectations for the
long-term growth in gross domestic product. However, demand for
TiO2
in any interim or annual period may not change in the same proportion as the
change in GDP even if we and our competitors maintain consistent shares of the
worldwide market. This is due in part to relative changes in the
TiO2
inventory levels of our customers. We believe that our customers’
inventory levels are partly influenced by their expectation for future changes
in the market TiO2 selling
prices.
The
factors having the most impact on our reported income from operations
are:
|
·
|
TiO2
selling prices,
|
|
·
|
Foreign
currency exchange rates (particularly the exchange rate for the U.S.
dollar relative to the euro and the Canadian
dollar),
|
|
·
|
TiO2
sales and production volumes, and
|
|
·
|
Manufacturing
costs, particularly maintenance and energy-related
expenses.
|
Our key
performance indicators are our TiO2 average
selling prices, and our level of TiO2 sales and
production volumes.
In
addition, our effective income tax rate in 2005, 2006 and 2007 has been impacted
by certain favorable and unfavorable developments.
Executive
Summary
We reported a net loss of $66.7
million, or $1.36 per diluted share for 2007, compared to net income of $82.0
million, or $1.67 per diluted share for 2006. Our diluted earnings
per share declined from 2006 to 2007 due primarily to the net effect of (i)
lower income from operations in 2007, (ii) the unfavorable effect of certain
provisions for income taxes recognized in 2007, (iii) the favorable effect of
certain income tax benefits recognized in 2006 and (iv) a charge in 2006 from
the redemption of our 8.875% Senior Secured Notes.
We reported net income of $82.0
million, or $1.67 per diluted share, in 2006 compared to $71.5 million, or $1.46
per diluted share, in 2005. Our diluted earnings per share increased
from 2005 to 2006 due primarily to the net effect of (i) the favorable
effect of certain net income tax benefits recognized in 2006, (ii) lower income
from operations in 2006, (iii) a gain from the sale of our passive interest in a
Norwegian smelting operation in 2005 and (iv) a charge in 2006 from the
redemption of our 8.875% Senior Secured Notes.
Net
income for 2007 includes (i) a non-cash charge of $90.8 million ($1.85 per
diluted share) relating to a decrease in our net deferred income tax asset in
Germany resulting from the reduction in their income tax rates, (ii) a non-cash
charge of $8.7 million ($.18 per diluted share) related to the adjustment of
certain German income tax attributes and (iii) a $2.0 million income tax benefit
($.04 per diluted share) resulting from a net reduction in our reserve for
uncertain tax positions.
Net
income for 2006 includes (i) a charge related to the prepayment of our 8.875%
Senior Secured Notes of $14.5 million, net of tax benefit, ($.30 per diluted
share) and (ii) a net income tax benefit of $34.9 million ($.71 per diluted
share related to the net effect of the withdrawal of certain income tax
assessments previously made by the Belgian and Norwegian tax authorities, the
resolution of certain income tax issues related to our German and Belgian
operations and the enactment of a reduction in the Canadian federal income tax
rate.
Net
income for 2005 includes (i) the aggregate favorable effects of certain non-U.S.
income tax audits of Kronos, principally in Belgium and Canada, of $11.5 million
($.23 per diluted share), (ii) a securities transaction gain of $3.5 million,
net of tax, ($.07 per diluted share) and (iii) the unfavorable effect with
respect to the loss of certain income tax attributes in Germany of $17.5 million
($.36 per diluted share).
We
currently expect income from operations will be lower in 2008 compared to 2007,
as the favorable effect of anticipated modest improvements in sales volume,
production volume and average TiO2 selling
prices are expected to be more than offset by higher production costs,
particularly raw material and energy costs as well as higher freight costs and
unfavorable currency effects. However, we currently expect to report
net income in 2008 as compared to reporting a net loss in 2007, as the
unfavorable effect of lower income from operations in 2008 is expected to be
more than offset by the unfavorable effect of the reduction in German income
taxes rates in 2007.
Critical
accounting policies and estimates
The
accompanying "Management's Discussion and Analysis of Financial Condition and
Results of Operations" is based upon our Consolidated Financial Statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP"). The preparation of
these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amount of revenues and expenses during the reported
period. On an on-going basis, we evaluate our estimates, including
those related to, the recoverability of long-lived assets, pension and other
postretirement benefit obligations and the underlying actuarial assumptions
related thereto, the realization of deferred income tax assets and accruals for
litigation, income tax and other contingencies. We base our estimates
on historical experience and on various other assumptions which we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the reported amounts of assets, liabilities, revenues and
expenses. Actual results may differ significantly from
previously-estimated amounts under different assumptions or
conditions.
The
following critical accounting policies affect our more significant judgments and
estimates used in the preparation of our Consolidated Financial
Statements:
|
·
|
Long-lived
assets. We recognize an impairment charge associated
with our long-lived assets, including property and equipment, whenever we
determine that recovery of such long-lived asset is not
probable. Such determination is made in accordance with the
applicable GAAP requirements associated with the long-lived asset, and is
based upon, among other things, estimates of the amount of future net cash
flows to be generated by the long-lived asset and estimates of the current
fair value of the asset. Significant judgment is required in
estimating such cash flows. Adverse changes in such estimates
of future net cash flows or estimates of fair value could result in an
inability to recover the carrying value of the long-lived asset, thereby
possibly requiring an impairment charge to be recognized in the
future. We do not assess our property and equipment for
impairment unless certain impairment indicators, as defined, are
present.
|
|
·
|
Pension and OPEB
Plans. We maintain various defined benefit pension plans
and postretirement benefits other than pensions (“OPEB”). The
amounts recognized as defined benefit pension and OPEB expenses, and the
reported amounts of pension asset and accrued pension and OPEB costs, are
actuarially determined based on several assumptions, including discount
rates, expected rates of returns on plan assets and expected health care
trend rates. Variances from these actuarially assumed rates
will result in increases or decreases, as applicable, in the recognized
pension and OPEB obligations, pension and OPEB expenses and funding
requirements. These assumptions are more fully described below
under “Defined Benefit Pension Plans” and “OPEB
Plans.”
|
|
·
|
Income
taxes. Deferred taxes are recognized for future tax
effects of temporary differences between financial and income tax
reporting in accordance with the recognition criteria of SFAS No. 109,
Accounting for Income
Taxes. We record a valuation allowance to reduce our
deferred income tax assets to the amount that is believed to be realized
under the more-likely-than-not recognition criteria. While we
have considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for a valuation allowance, it is
possible that in the future we may change our estimate of the amount of
the deferred income tax assets that would more-likely-than-not be realized
in the future, resulting in an adjustment to the deferred income tax asset
valuation allowance that would either increase or decrease, as applicable,
reported net income in the period such change in estimate was
made. For example, we have substantial net operating loss
carryforwards in Germany (the equivalent of $780 million for German
corporate purposes and $215 million for German trade tax purposes at
December 31, 2007). Prior to the complete utilization of such
carryforwards, it is possible that we might conclude the benefit of such
carryforwards would no longer meet the more-likely-than-not recognition
criteria, at which point we would be required to recognize a valuation
allowance against some or all of the then-remaining tax benefit associated
with the carryforwards.
|
We record
a reserve for uncertain tax positions in accordance with Financial Accounting
Standards Board Interpretation No. 48, Accounting for Uncertain Tax
Positions, for tax positions where we believe it is more-likely-than-not
our position will not prevail with the applicable tax authorities. It
is possible that in the future we may change our assessment regarding the
probability that our tax positions will prevail that would require an adjustment
to the amount of our reserve for uncertain tax positions that could either
increase or decrease, as applicable, reported net income in the period the
change in assessment was made.
In
addition, we make an evaluation at the end of each reporting period as to
whether or not some or all of the undistributed earnings of our foreign
subsidiaries are permanently reinvested (as that term is defined in
GAAP). While we may have concluded in the past that some of such
undistributed earnings are permanently reinvested, facts and circumstances can
change in the future, and it is possible that a change in facts and
circumstances, such as a change in the expectation regarding the capital needs
of our foreign subsidiaries, could result in a conclusion that some or all of
such undistributed earnings are no longer permanently reinvested. In
such an event, we would be required to recognize a deferred income tax liability
in an amount equal to the estimated incremental U.S. income tax and withholding
tax liability that would be generated if all of such previously-considered
permanently reinvested undistributed earnings were distributed to the
U.S.
|
·
|
Contingencies. We
record accruals for legal, and other contingencies when estimated future
expenditures associated with such contingencies and commitments become
probable and the amounts can be reasonably estimated. However,
new information may become available or circumstances (such as applicable
laws and regulations) may change, thereby resulting in an increase or
decrease in the amount required to be accrued for such matters (and
therefore a decrease or increase in reported net income in the period of
such change).
|
Income
from operations is impacted by certain of these significant judgments and
estimates, such as allowance for doubtful accounts, reserves for obsolete or
unmarketable inventories, impairment of equity method investments, goodwill and
other long-lived assets, defined benefit pension plans and loss
accruals. In addition, net income (loss) is impacted by the
significant judgments and estimates for deferred income tax asset valuation
allowances and loss accruals.
Comparison
of 2007 to 2006 Results of Operations
|
Year
ended
December 31,
|
||||||||||||||||
|
2006
|
2007
|
|||||||||||||||
|
(Dollars
in millions)
|
||||||||||||||||
|
Net
sales
|
$ | 1,279.4 | 100 | % | $ | 1,310.3 | 100 | % | ||||||||
|
Cost
of sales
|
968.9 | 76 | % | 1,058.9 | 81 | % | ||||||||||
|
Gross
margin
|
310.5 | 24 | % | 251.4 | 19 | % | ||||||||||
|
Other
operating income and expenses, net
|
167.3 | 13 | % | 166.5 | 13 | % | ||||||||||
|
Income
from operations
|
$ | 143.2 | 11 | % | $ | 84.9 | 6 | % | ||||||||
|
Percent
|
||||||||||||||||
|
Change
|
||||||||||||||||
|
Ti02
operating statistics:
|
||||||||||||||||
|
Sales
volumes*
|
511 | 519 | 1 | % | ||||||||||||
|
Production
volumes*
|
516 | 512 | (1 | )% | ||||||||||||
|
Percent
change in net sales:
|
||||||||||||||||
|
TiO2
product pricing
|
(4 | )% | ||||||||||||||
|
TiO2
sales volumes
|
1 | % | ||||||||||||||
|
TiO2
product mix
|
- | |||||||||||||||
|
Changes
in currency exchange rates
|
5 | % | ||||||||||||||
|
Total
|
2 | % | ||||||||||||||
*
Thousands of metric tons
Net sales – Net sales
increased 2% or $30.9 million for 2007 compared to 2006, primarily due to
favorable foreign currency exchange rates and a 1% increase in sales volumes
offset somewhat by a 4% decrease in average TiO2 selling
prices. We estimate the favorable effect of changes in currency
exchange rates increased our net sales for 2007 by approximately $65 million, or
5%, compared to the same period in 2006.
Our 1%
increase in sales volumes in 2007 is primarily due to higher sales volumes in
European and export markets, which were somewhat offset by lower sales volumes
in North America. Our TiO2 sales volumes in 2007 were a new record for
us.
Cost of sales - Cost of sales
increased 9% or $90 million for 2007, compared to 2006, due to higher sales
volumes, lower production volumes, and the effects of changes in currency
exchange rates. The cost of sales as a percentage of net sales
increased to 81% in the year ended December 31, 2007, compared to 76% in the
same period of 2006 primarily due to the net effects of lower average selling
prices, lower utility costs, higher other manufacturing costs (including
maintenance) and slightly lower production volumes. TiO2 production
volumes decreased 1% for 2007 compared to the same period in 2006, which
unfavorably impacted our income from operations comparisons. Our
operating rates were near full capacity in both periods.
Income from operations –
Income from operations in 2007 declined by 41% to $84.9 million compared
to 2006; the income from operations as a percentage of net sales decreased to 6%
in 2007 from 11% for 2006. The decline in income from operations is
driven by the decline in gross margin, which decreased to 19% in 2007 compared
to 24% in 2006. While our sales volumes were higher in 2007, our
gross margin decreased primarily because of lower average TiO2 selling
prices, lower production volumes and higher manufacturing costs, which more than
offset the impact of higher sales volumes. Changes in currency rates
have also negatively affected our gross margin. We estimate the
negative effect of changes in foreign currency exchange rates decreased income
from operations by approximately $4 million when comparing 2007 to
2006.
As a
percentage of net sales, selling, general and administrative expenses were
relatively consistent at approximately 12% for both 2006 and 2007.
Other non-operating income
and expense, net – In 2006, we issued our euro 400 million
principal amount of 6.5% Senior Secured Notes, and used the proceeds to redeem
our euro 375 million principal amount of 8.875% Senior Secured
Notes. As a result of our prepayment of the 8.875% Senior Secured
Notes, we recognized a $22.3 million pre-tax interest charge ($14.5 million net
of income tax benefit) in 2006 for the prepayment of the notes, representing (1)
the call premium on the notes, (2) the write-off of deferred financing costs and
(3) write off of the existing unamortized premium on the notes. See
Note 8 to our Consolidated Financial Statements.
Interest
expense decreased $3.8 million from $43.2 million for 2006 to $39.4 million for
2007 due to the issuance of the 6.5% Senior Secured Notes during 2006, which was
partially offset by unfavorable changes in currency exchange rates in 2007
compared to 2006. The interest expense we recognize will vary with
fluctuations in the euro exchange rate.
Provision (benefit) for income taxes
– Our provision for income taxes was $114.7 million in 2007 compared to a
benefit of $.7 million for 2006. See Note 9 to our Consolidated Financial
Statements for a tabular reconciliation of our statutory income tax expense to
our actual tax expense. Some of the more significant items impacting
this reconciliation are summarized below.
Our
income tax expense for 2007 includes:
|
·
|
a
non-cash charge of $90.8 million relating to a decrease in our net
deferred income tax asset in Germany resulting from the reduction in its
income tax rates;
|
|
·
|
a
non-cash charge of $8.7 million related to the adjustment of certain
German income tax attributes; and
|
|
·
|
a
non-cash income tax benefit of $2.0 million resulting from a net reduction
in our reserve for uncertain tax
positions.
|
Our
income tax benefit in 2006 includes:
|
·
|
an
income tax benefit of $21.7 million resulting from a favorable resolution
of certain income tax audits in Germany that resulted in an increase in
the amount of our German trade tax net operating loss
carryforward;
|
|
·
|
an
income tax benefit of $10.7 million resulting from the reduction in our
income tax contingency reserves related to favorable developments with
income tax audits in Belgium, Norway and
Germany;
|
|
·
|
an
income tax benefit of $1.4 million related to the favorable resolution of
certain income tax audit issues in Germany and Belgium;
and
|
|
·
|
a
$1.1 million benefit resulting from the enactment of a reduction in
Canadian income tax rates.
|
Comparison
of 2006 to 2005 Results of Operations
|
Years ended December 31,
|
||||||||||||||||
|
2005
|
2006
|
|||||||||||||||
|
(Dollars
in millions)
|
||||||||||||||||
|
Net
sales
|
$ | 1,196.7 | 100 | % | $ | 1,279.4 |
100
|
% | ||||||||
|
Cost
of sales
|
869.2 | 73 | % | 968.9 | 76 |
%
|
||||||||||
|
Gross
margin
|
327.5 | 27 | % | 310.5 | 24 | % | ||||||||||
|
Other
operating income and expenses, net
|
151.5 | 13 | % | 167.3 | 13 | % | ||||||||||
|
Income
from operations
|
$ | 176.0 | 14 | % | $ | 143.2 | 11 | % | ||||||||
|
Percent
|
||||||||||||||||
|
Change
|
||||||||||||||||
|
Ti02
operating statistics:
|
||||||||||||||||
|
Sales
volumes*
|
478 | 511 | 7 | % | ||||||||||||
|
Production
volumes*
|
492 | 516 | 5 | % | ||||||||||||
|
Percent
change in net sales:
|
||||||||||||||||
|
TiO2
product pricing
|
- | |||||||||||||||
|
TiO2
sales volumes
|
7 | % | ||||||||||||||
|
TiO2
product mix
|
- | |||||||||||||||
|
Changes
in currency exchange rates
|
- | |||||||||||||||
|
Total
|
7 | % | ||||||||||||||
*
Thousands of metric tons
Net Sales – Net sales
increased 7% or $82.7 million for 2006 compared to the year ended 2005 primarily
due to a 7% increase in TiO2 sales
volumes. We estimate the favorable effect of changes in currency
exchange rates increased our net sales by approximately $2 million, or less than
1%, compared to the same period in 2005.
Our sales
volumes for 2006 were a new record for us. The 7% increase in sales
volumes in 2006 is primarily due to higher sales volumes in the United States,
Europe and in export markets, which were somewhat offset by lower sales volumes
in Canada. Our sales volumes in Canada have been negatively impacted
by decreased demand for TiO2 used in
paper products.
Cost of Sales – Cost of sales
increased $99.7 million or 11% for 2006 compared to 2005 primarily due to the
impact of increased sales volumes, a 15% increase in utility costs (primarily
energy costs), a 4% increase in raw material costs and currency fluctuations
(primarily the Canadian dollar). The cost of sales as a percentage of
net sales increased to 76% for 2006 compared to 73% for 2005 primarily due to
increases in raw material and other operating costs (including energy
costs).
The
negative impact of the increase in other operating costs and raw materials was
somewhat offset by the 5% increase in production volumes. Our
TiO2
production volumes in 2006 were also a new record for us for the fifth
consecutive year. Our operating rates were at full capacity in 2006
and near full capacity in 2005. The higher production volumes for
2006 were aided by enhancing our processes and our continuing
debottlenecking.
Income from operations –
Income from operations for 2006 declined by 19% to $143.2 million
compared to 2005. As a percentage of net sales, income from
operations declined to 11% for 2006 from 14% in 2005. The decline in
income from operations is driven by the decline in gross margin, which fell to
24% in 2006 compared to 27% in 2005. While our sales volumes were
higher in 2006, our gross margin decreased as we were not able to achieve
pricing levels to offset the negative impact of our increased operating costs
(primarily energy costs and raw materials). Changes in currency rates
have also negatively affected our gross margin. We estimate the
negative effect of changes in foreign currency exchange rates decreased income
from operations by approximately $20 million.
As a
percentage of net sales, selling, general and administrative expenses were
relatively consistent at 12% for 2006 and 13% for 2005.
Other non-operating income and
expense, net – In 2005 we recognized a gain on the sale of our
passive interest in a Norwegian smelting operation, which had a nominal carrying
value for financial reporting purposes, for aggregate consideration of
approximately $5.4 million consisting of cash of $3.5 million and inventory with
a value of $1.9 million. See Note 15 to our Consolidated Financial
Statements.
In 2006,
we recognized a $22.3 million pre-tax interest charge resulting from the
redemption of our 8.875% Senior Secured Notes. Interest expense
decreased $1.5 million from $44.7 million for 2005 to $43.2 million for 2006 due
to such redemption, which was partially offset by unfavorable changes in
currency exchange rates in 2006 compared to 2005. The interest
expense we recognize will vary with fluctuations in the euro exchange
rate.
Provision (benefit) for income
taxes – Our
benefit for income taxes was $.7 million for 2006 compared to a provision for
income taxes of $67.4 million for 2005. See Note 9 to our
Consolidated Financial Statements for a tabular reconciliation of our statutory
income tax expense to our actual tax expense. Some of the more
significant items impacting this reconciliation are summarized
below.
Our
income tax benefit in 2006 includes:
|
·
|
an
income tax benefit of $21.7 million resulting from a favorable resolution
of certain income tax audits in Germany that resulted in an increase in
the amount of our German trade tax net operating loss
carryforward;
|
|
·
|
an
income tax benefit of $10.7 million resulting from the reduction in our
income tax contingency reserves related to favorable developments with
income tax audits in Belgium, Norway and
Germany;
|
|
·
|
an
income tax benefit of $1.4 million related to the favorable resolution of
certain income tax audit issues in Germany and Belgium;
and
|
|
·
|
a
$1.1 million benefit resulting from the enactment of a reduction in
Canadian income tax rates.
|
Our
income tax expense for 2005 includes;
|
·
|
an
income tax benefit of $11.5 million for the aggregate effect of favorable
developments with respect to income tax audits in Belgium and Canada;
and
|
|
·
|
a
charge of $17.5 million for the unfavorable effect related to the loss of
certain of our German income tax
attributes.
|
Effects
of Foreign Currency Exchange Rates
We
have substantial
operations and assets located outside the United States (primarily in Germany,
Belgium, Norway and Canada). The majority of our foreign operations’
sales are denominated in foreign currencies, principally the euro, other major
European currencies and the Canadian dollar. A portion of our sales
generated from our foreign operations are denominated in the U.S.
dollar. Certain raw materials used worldwide, primarily
titanium-containing feedstocks, are purchased in U.S. dollars, while labor and
other production costs are purchased primarily in local
currencies. Consequently, the translated U.S. dollar value of our
foreign sales and operating results are subject to currency exchange rate
fluctuations which may favorably or unfavorably impact reported earnings and may
affect the comparability of period-to-period operating
results. Overall, fluctuations in foreign currency exchange rates had
the following effects on our sales and income from operations for the periods
indicated.
|
Year
ended
December
31, 2006
vs. 2005
|
Year
ended
December
31, 2007
vs. 2006
|
|||||||
|
Increase
(decrease)
(In
millions)
|
||||||||
|
Impact
on:
|
||||||||
|
Net
sales
|
$ | 2 | $ | 65 | ||||
|
Income
from operations
|
(20 | ) | (4 | ) | ||||
Other
On
September 22, 2005, the chloride-process TiO2 facility
operated by our 50%-owned joint venture, Louisiana Pigment Company (“LPC”),
temporarily halted production due to Hurricane Rita. Although storm
damage to core processing facilities was not extensive, a variety of factors,
including loss of utilities, limited access and availability of employees and
raw materials, prevented the resumption of partial operations until October 9,
2005 and full operations until late 2005. The majority of LPC’s
property damage and unabsorbed fixed costs for periods in which normal
production levels were not achieved were covered by insurance, and insurance
covered our lost profits (subject to applicable deductibles) resulting from our
share of the loss of production at LPC. Both we and LPC filed claims
with our insurers. We recognized a gain of $1.8 million related to
our business interruption claim in the fourth quarter of 2006, which is included
in other operating income on our Consolidated Statement of Income.
Outlook
We
currently expect income from operations will be lower in 2008 compared to 2007,
as the favorable effects of anticipated modest improvements in sales volume,
production volume and average TiO2 selling
prices are expected to be more than offset by higher productions costs,
particularly raw material and energy costs as well as higher freight costs and
unfavorable currency effects. Our expectations as to the future of
the TiO2 industry
are based upon a number of factors beyond our control, including worldwide
growth of gross domestic product, competition in the marketplace, unexpected or
earlier than expected capacity additions and technological
advances. If actual developments differ from our expectations, our
results of operations could be unfavorably affected.
Despite
our expectation of lower income from operations in 2008, we currently expect to
report net income in 2008 as compared to reporting a net loss in 2007, as the
unfavorable effect of lower income from operations in 2008 is expected to be
more than offset by the unfavorable effect of the reduction in German income
taxes rates in 2007.
Our
efforts to debottleneck our production facilities to meet long-term demand
continue to prove successful. Such debottlenecking efforts included,
among other things, the addition of finishing capacity in the German chloride
process facility and equipment upgrades and enhancements in several locations to
allow for reduced downtime for maintenance activities. Our production
capacity has increased by approximately 30% over the past ten years due to
debottlenecking programs, with only moderate capital expenditures. We
believe that our annual attainable production capacity for 2008 is approximately
532,000 metric tons, with some slight additional capacity expected to be
available in 2009 through our continued debottlenecking efforts.
LIQUIDITY
AND CAPITAL RESOURCES
Consolidated
cash flows
Operating
activities
Trends in
cash flows as a result of our operating activities (excluding the impact of
significant asset dispositions and relative changes in assets and liabilities)
are generally similar to trends in our earnings.
Cash flows from operating activities
provided $90.0 million in 2007 compared to $71.9 million in
2006. This $18.1 million increase was due primarily to the net
effects of the following items:
|
·
|
lower
income from operations in 2007 of $58.3
million;
|
|
·
|
higher
net cash provided by relative changes in our inventories, receivables,
payables and accruals of $31.4 million in 2007 as compared to 2006, due
primarily to relative changes in our inventory levels, as discussed
below;
|
|
·
|
payment
of the $20.9 million call premium in 2006 as a result of the prepayment of
our 8.875% Senior Secured Notes, which is required to be included in cash
flows from operating activities;
|
|
·
|
lower
cash paid for income taxes in 2007 of $20.8 million, in part due to the
net payment of $19.2 million in 2006 associated with the settlement of
prior year income tax audits;
|
|
·
|
higher
net contributions to our TiO2
joint venture in 2007 of $7.2 million due to related changes in their cash
flow;
|
|
·
|
higher
cash paid for interest in 2007 of $4.5 million, primarily as a result of
the effects of foreign currency exchange rates on the semiannual interest
payments on our 6.5% Senior Secured Notes;
and
|
|
·
|
higher
depreciation expense of $4.6 million in 2007, primarily as a result of the
effects of foreign currency exchange
rates.
|
Cash
flows from operating activities decreased to $71.9 million in 2006 from $97.8
million in 2005. This $25.9 million decrease was due primarily to the
net effect of the following items:
|
·
|
lower
income from operations in 2006 of $32.8
million;
|
|
·
|
lower
net cash used from relative changes in our inventories, receivables,
payables and accruals of $27.7 million in 2006 as compared to 2005, due
primarily to relative changes in our inventory levels, as discussed
below;
|
|
·
|
payment
of the $20.9 million call premium in 2006 as a result of the prepayment of
our 8.875% Senior Secured Notes;
|
|
·
|
higher
cash paid for income taxes in 2006 of $14.3 million, in part due to the
net payment of $19.2 million in 2006 associated with the settlement of
prior year income tax audits; and
|
|
·
|
lower
cash paid for interest in 2006 of $7.4 million, primarily as a result of
the May 2006 redemption of our 8.875% Senior Secured Notes (on which we
paid interest semiannually in June and December) and the April 2006
issuance of our 6.5% Senior Secured Notes (on which we pay interest
semiannually in April and October).
|
Changes
in working capital are affected by accounts receivable and inventory
changes. Our average days sales outstanding (“DSO”) increased from 61
days at December 31, 2006 to 63 days at December 31, 2007 due to the timing of
collection on higher accounts receivable balances at the end of
2007. For comparative purposes, our average DSO increased from 55
days at December 31, 2005 to 61 days at December 31, 2006 due to the timing of
collections. Our average days sales in inventory (“DSI”) decreased
from 68 days at December 31, 2006 to 59 days at December 31, 2007, as our sales
volumes increased in 2007 and our sales volumes exceeded our TiO2 production
volumes during the year ended 2007. For comparative purposes, our
average DSI increased to 68 days at December 31, 2006 from 59 days at December
31, 2005.
Investing
activities
Our
capital expenditures were $43.4 million in 2005, $50.9 million in 2006 and $47.3
million in 2007. Capital expenditures are primarily for improvements
and upgrades to existing facilities. Our capital expenditures during the past
three years include an aggregate of approximately $14 million ($5.6 million in
2007) for our ongoing environmental protection and compliance
programs.
Other
cash flows from investing activities include $3.5 million we received in 2005
from the sale of our passive interest in a Norwegian smelting
operation.
Financing
activities
During
2007, we:
|
·
|
made
net borrowings of $9 million under our U.S. credit
facility.
|
During
2006, we:
|
·
|
issued
euro 400 million principal amount of 6.5% Senior Secured Notes at 99.306%
of par ($498.5 million when
issued);
|
|
·
|
redeemed
our euro 375 million principal amount of 8.875% Senior Secured Notes
($470.5 million when redeemed) using the proceeds from the issuance of the
6.5% Notes;
|
|
·
|
made
net payments of $5.1 million under our U.S. credit facility;
and
|
|
·
|
borrowed
and repaid $4.4 million under our Canadian credit
facility.
|
During
2005, we:
|
·
|
repaid
euro 10 million ($12.9 million when repaid) under our European revolving
credit facility;
|
|
·
|
made
net borrowings of $11.5 million under our U.S. credit facility;
and
|
|
·
|
entered
into additional capital leases for certain mining equipment in Norway for
the equivalent of approximately $4.4
million.
|
During
each of 2005, 2006 and 2007, we paid a quarterly dividend to our stockholders of
$.25 per share for an aggregate dividend $49.0 million in each
year. On February 14, 2008, our Board of Directors declared a regular
quarterly dividend of $.25 per share to stockholders of record as of
March 11, 2008 to be paid on March 25, 2008. The
declaration and payment of future dividends are discretionary, and the amount,
if any, will be dependent upon our results of operations, financial condition,
contractual restrictions and other factors deemed relevant by our Board of
Directors.
Outstanding
debt obligations and borrowing availability
At
December 31, 2007, our consolidated debt was comprised of:
|
·
|
euro
400 million principal amount of our 6.5% Senior Secured Notes ($585.5
million at December 31, 2007) due in
2013;
|
|
·
|
$15.4
million under our U.S. revolving credit facility, which matures in
September 2008; and
|
|
·
|
approximately
$5.3 million of other indebtedness.
|
Certain
of our credit agreements contain provisions which could result in the
acceleration of indebtedness prior to their stated maturity for reasons other
than defaults for failure to comply with applicable covenants. For
example, certain credit agreements allow the lender to accelerate the maturity
of the indebtedness upon a change of control (as defined in the agreement) 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. We are in compliance
with all of our debt covenants at December 31, 2007. See Note 8 to
our Consolidated Financial Statements.
Our
assets consist primarily of investments in operating subsidiaries, and our
ability to service our obligations, including the Senior Secured Notes, depends
in large part upon the distribution of earnings of our subsidiaries, whether in
the form of dividends, advances or payments on account of intercompany
obligations or otherwise. None of our subsidiaries have guaranteed
the Senior Secured Notes, although our subsidiary Kronos International, Inc. has
pledged 65% of the common stock or other ownership interests of certain of its
first-tier operating subsidiaries as collateral of the Senior Secured
Notes. At December 31, 2007, our subsidiary, Kronos International,
Inc., had approximately $78 million available for payment of dividends and other
restricted payments as defined in the indenture for the Senior Secured
Notes.
Liquidity
Our
primary source of liquidity on an ongoing basis is cash flows from operating
activities which is generally used to (i) fund working capital expenditures,
(ii) repay any short-term indebtedness incurred for working capital purposes and
(iii) provide for the payment of dividends. From time-to-time we will
incur indebtedness, generally to (i) fund short-term working capital needs, (ii)
refinance existing indebtedness or (iii) fund major capital expenditures or the
acquisition of other assets outside the ordinary course of
business. We will also from time-to-time sell assets outside the
ordinary course of business, and use the proceeds to (i) repay existing
indebtedness, (ii) make investments in marketable and other securities, (iii)
fund major capital expenditures or the acquisition of other assets outside the
ordinary course of business or (iv) pay dividends.
Pricing
within the TiO2 industry
is cyclical, and changes in industry economic conditions significantly impact
earnings and operating cash flows. Changes in TiO2 pricing,
production volumes and customer demand, among other things, could significantly
affect our liquidity.
We
routinely evaluate our liquidity requirements, alternative uses of capital,
capital needs and availability of resources in view of, among other things, our
dividend policy, our debt service and capital expenditure requirements and
estimated future operating cash flows. As a result of this process,
we have in the past and may in the future seek to reduce, refinance, repurchase
or restructure indebtedness, raise additional capital, repurchase shares of our
common stock, modify our dividend policy, restructure ownership interests, sell
interests in our subsidiaries or other assets, or take a combination of these
steps or other steps to manage our liquidity and capital
resources. Such activities have in the past and may in the future
involve related companies. In the normal course of our business, we
may investigate, evaluate, discuss and engage in acquisition, joint venture,
strategic relationship and other business combination opportunities in the
TiO2
industry. In the event of any future acquisition or joint
venture opportunity, we may consider using then-available liquidity, issuing our
equity securities or incurring additional indebtedness.
At
December 31, 2007, we had credit available under all of our existing credit
facilities of approximately $152 million, consisting principally of $118 million
under our European credit facility, $11 million under our Canadian credit
facility and $23 million under our U.S. credit facility. Based upon
our expectation for the TiO2 industry
and anticipated demands on cash resources, we expect to have sufficient
liquidity to meet our future obligations including operations, capital
expenditures, debt service and current dividend policy. If actual
developments differ from our expectations, our liquidity could be adversely
affected.
Capital
expenditures
We intend
to spend approximately $64 million for major improvements and upgrades to our
existing facilities during 2008, including approximately $7 million in the area
of environmental protection and compliance.
Off-balance
sheet financing
Other
than operating lease commitments disclosed in Note 14 to our Consolidated
Financial Statements, we are not party to any material off-balance sheet
financing arrangements.
Cash,
cash equivalents, restricted cash and restricted marketable debt
securities
At
December 31, 2007, we had current cash and cash equivalents aggregating $72.2
million ($68.8 million held by our non-U.S. subsidiaries). At
December 31, 2007, our U.S. and non-U.S. subsidiaries had current restricted
cash equivalents of $1.8 million and noncurrent restricted marketable debt
securities of $3.2 million.
Related
party transactions
We are
party to certain transactions with related parties. See Note 13 to
our Consolidated Financial Statements. It is our policy to engage in
transactions with related parties on terms, in our opinion, no less favorable to
us than could be obtained from unrelated parties.
Commitments
and contingencies
See
Notes 9 and 14 to our Consolidated Financial Statements for a description of
certain income tax examinations currently underway and certain legal
proceedings.
Recent
accounting pronouncements
See
Note 17 to our Consolidated Financial Statements.
Debt
and Other Contractual Commitments
As more
fully described in the Notes to the Consolidated Financial Statements, we are a
party to various debt, lease and other agreements which contractually and
unconditionally commit us to pay certain amounts in the future. See
Notes 8, 13 and 14 to our Consolidated Financial Statements. Our
obligation for the purchase of TiO2 feedstock
is more fully described in Note 14 to our Consolidated Financial Statements and
above in “Business – raw materials.” The following table summarizes
such contractual commitments of ours and our consolidated subsidiaries as of
December 31, 2007 by the type and date of payment.
|
Payment due date
|
||||||||||||||||||||
|
Contractual commitment
|
2008
|
2009/2010 | 2011/2012 |
2013
and
after
|
Total
|
|||||||||||||||
|
(In
millions)
|
||||||||||||||||||||
|
Indebtedness(1)
|
$ | 16.2 | $ | 2.1 | $ | 2.3 | $ | 585.6 | $ | 606.2 | ||||||||||
|
Interest
payments on indebtedness
|
39.4 | 77.0 | 76.7 | 12.8 | 205.9 | |||||||||||||||
|
Operating
leases
|
9.5 | 11.9 | 6.1 | 21.6 | 49.1 | |||||||||||||||
|
Fixed
asset acquisitions
|
32.0 | - | - | - | 32.0 | |||||||||||||||
|
Long-term
supply contracts for the purchase of TiO2 feedstock
|
208.0 | 404.0 | 100.0 | - | 712.0 | |||||||||||||||
|
Estimated
tax obligations
|
9.6 | - | - | - | 9.6 | |||||||||||||||
| $ | 314.7 | $ | 495.0 | $ | 185.1 | $ | 620.0 | $ | 1,614.8 | |||||||||||
_____________________________
|
|
(1)
Primarily relates to Kronos International, Inc. Senior Secured
Notes. See Item 7A, “Quantitative and Qualitative Disclosures
about Market Risk” and Note 8 to our Consolidated Financial
Statements.
|
The
timing and amount shown for our commitments related to indebtedness (principal
and interest), operating leases, fixed asset acquisitions, long-term supply
contracts and other are based upon the contractual payment amount and the
contractual payment date for such commitments. With respect to the
revolving credit facility, the amount shown for indebtedness is based upon the
actual amount outstanding at December 31, 2007, and the amount shown for
interest for any outstanding variable-rate indebtedness is based upon the
December 31, 2007 interest rate and assumes that such variable-rate indebtedness
remains outstanding until the maturity of the facility. The amount
shown for estimated tax obligations is the consolidated amount of income taxes
payable at December 31, 2007, which is assumed to be paid during
2008. A significant portion of the amount shown for indebtedness
relates to our 6.5% Senior Secured Notes ($585.5 million at December 31,
2007). Such indebtedness is denominated in euro. See Item
7A – “Quantitative and Qualitative Disclosures About Market Risk” and Note 8 to
the Consolidated Financial Statements.
Our
contracts for the purchase of TiO2 feedstock
contain fixed quantities that we are required to purchase, although certain of
these contracts allow for an upward or downward adjustment in the quantity
purchased, generally no more than 10%, based on our feedstock
requirements. The pricing under these agreements is generally based
on a fixed price with price escalation clauses primarily based on consumer price
indices, as defined in the respective contracts. The timing and
amount shown for our commitments related to the long-term supply contracts for
TiO2
feedstock are based upon our current estimate of the quantity of material that
will be purchased in each time period shown, and the payment that would be due
based upon such estimated purchased quantity and an estimate of the effect of
the price escalation clause. The actual amount of material purchased,
and the actual amount that would be payable by us, may vary from such estimated
amounts.
The above
table does not reflect any amounts that we might pay to fund our defined benefit
pension plans and OPEB plans, as the timing and amount of any such future
fundings are unknown and dependent on, among other things, the future
performance of defined benefit pension plan assets, interest rate assumptions
and actual future retiree medical costs. Such defined benefit pension
plans and OPEB plans are discussed below in greater detail. The table
also does not reflect any amounts that we might pay related to our asset
retirement obligations as the terms and amounts of such future fundings are
unknown. See Notes 10 and 17 to our Consolidated Financial
Statements.
The above
table does not reflect any amounts that we might pay to settle any of our
uncertain tax positions, as the timing and amount of any such future settlements
are unknown and dependent on, among other things, the timing of tax
audits. See Notes 9 and 17 to our Consolidated Financial
Statements.
The above
table also does not reflect any amounts we might pay to acquire TiO2 from our
TiO2
manufacturing joint venture, as the timing and amount of such purchases are
unknown and dependent on, among other things, the amount of TiO2 produced
by the joint venture in the future and the joint venture’s future cost of
producing such TiO2. However,
the table does include amounts related to our share of the joint venture’s ore
requirements necessary to produce TiO2 for
us. See Item 1, “Business” and Note 6 to our Consolidated Financial
Statements.
Defined
benefit pension plans
We
maintain various defined benefit pension plans in the U.S., Europe and
Canada. See Note 10 to our Consolidated Financial
Statements.
We
account for our defined benefit pension plans using SFAS No. 87, Employer’s Accounting for Pensions,
as amended. Under SFAS No. 87, defined benefit pension plan
expense and prepaid and accrued pension costs are each recognized based on
certain actuarial assumptions, principally the assumed discount rate, the
assumed long-term rate of return on plan assets and the assumed increase in
future compensation levels.
In
September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans. SFAS No. 158 requires
the recognition of an asset or liability for the over or under funded status of
each of our individual defined benefit pension plans on our Consolidated Balance
Sheets. This standard does not change the existing recognition and
measurement requirements that determine the amount of periodic benefit cost we
recognize in net income. We adopted the asset and liability
recognition and disclosure requirements of this standard effective December 31,
2006 on a prospective basis, in which we recognized through accumulated other
comprehensive income all of our prior unrecognized gains and losses and prior
service costs or credits, net of tax, as of December 31, 2006.
We
recognized consolidated defined benefit pension plan expense of $14.1 million in
2005, $20.4 million in 2006, and $22.4 million in 2007. The amount of
funding requirements for these defined benefit pension plans is generally based
upon applicable regulations (such as ERISA in the U.S.), and will generally
differ from pension expense recognized under SFAS No. 87 for financial reporting
purposes. We made contributions to all of our plans which aggregated
$18.6 million in 2005, $26.8 million in 2006, and $27.1 million in
2007.
The
discount rates we use for determining defined benefit pension expense and the
related pension obligations are based on current interest rates earned on
long-term bonds that receive one of the two highest ratings given by recognized
rating agencies in the applicable country where the defined benefit pension
benefits are being paid. In addition, we receive advice about
appropriate discount rates from our third-party actuaries, who may in some cases
use their own market indices. The discount rates are adjusted as of
each measurement date to reflect then-current interest rates on such long-term
bonds. Such discount rates are used to determine the actuarial
present value of the pension obligations as of the measurement date, and such
discount rates are also used to determine the interest component of defined
benefit pension expense for the following year. Prior to December 31,
2007, we used a September 30 measurement date. Effective December 31,
2007, we now use a December 31 measurement date, concurrent with our adoption of
the measurement date requirements of SFAS No. 158 effective December 31,
2007. See Note 17 to our Consolidated Financial
Statements.
At
December 31, 2007, approximately 62%, 18%, 13% and 3% of the projected benefit
obligations related to our plans in Germany, Canada, Norway and the U.S.,
respectively. We use several different discount rate assumptions in
determining our consolidated defined benefit pension plan obligation and
expense. This is because we maintain defined benefit pension plans in
several different countries in North America and Europe and the interest rate
environment differs from country to country.
We used
the following discount rates for our defined benefit pension plans:
|
Discount
rates used for:
|
|||||
|
Obligations
at
December
31, 2005 and expense in 2006
|
Obligations
at
December
31, 2006 and expense in 2007
|
Obligations
at
December
31, 2007 and expense in 2008
|
|||
|
Germany
|
4.0%
|
4.5%
|
5.5%
|
||
|
Canada
|
5.0%
|
5.0%
|
5.3%
|
||
|
Norway
|
4.5%
|
4.8%
|
5.5%
|
||
|
U.S.
|
5.5%
|
5.8%
|
6.1%
|
||
The
assumed long-term rate of return on plan assets represents the estimated average
rate of earnings expected to be earned on the funds invested or to be invested
from the plans’ assets provided to fund the benefit payments inherent in the
projected benefit obligations. Defined benefit pension expense each
year is based upon the assumed long-term rate of return on plan assets for each
plan and the actual fair value of the plan assets as of the beginning of the
year. Differences between the expected return on plan assets for a
given year and the actual return are deferred and amortized over future periods
based either upon the expected average remaining service life of the active plan
participants (for plans for which benefits are still being earned by active
employees) or the average remaining life expectancy of the inactive participants
(for plans for which benefits are not still being earned by active
employees).
At
December 31, 2007, approximately 50%, 23%, 18% and 6% of the plan assets related
to our plans in the Germany, Canada, Norway and the U.S.,
respectively. We use several different long-term rates of return on
plan asset assumptions in determining our consolidated defined benefit pension
plan expense. This is because the plan assets in different countries
are invested in a different mix of investments and the long-term rates of return
for different investments differ from country to country.
In
determining the expected long-term rate of return on plan asset assumptions, we
consider the long-term asset mix (e.g. equity vs. fixed income) for the assets
for each of our plans and the expected long-term rates of return for such asset
components. In addition, we receive advice about appropriate
long-term rates of return from our third-party actuaries. Such
assumed asset mixes are summarized below:
|
·
|
In
Germany, the composition of our plan assets is established to satisfy the
requirements of the German insurance
commissioner.
|
|
·
|
In
Canada, we currently have a plan asset target allocation of 60% to equity
securities and 40% to fixed income securities, with an expected long-term
rate of return for such investments to average approximately 125 basis
points above the applicable equity or fixed income
index.
|
|
·
|
In
Norway, we currently have a plan asset target allocation of 14% to equity
securities, 64% to fixed income securities and the remainder primarily to
cash and liquid investments. The expected long-term rate of
return for such investments is approximately 8.5%, 5.0% and 4.5%,
respectively.
|
|
·
|
In
the U.S. all of the assets were invested in The Combined Master Retirement
Trust (“CMRT”), a collective investment trust sponsored by Contran to
permit the collective investment by certain master trusts which fund
certain employee benefits plans sponsored by Contran and certain of its
affiliates. Harold Simmons is the sole trustee of the
CMRT. The CMRT’s long-term investment objective is to provide a
rate of return exceeding a composite of broad market equity and fixed
income indices (including the S&P 500 and certain Russell indices)
utilizing both third-party investment managers as well as investments
directed by Mr. Simmons. During the 20-year history of the CMRT
through December 31, 2007, the average annual rate of return has been
approximately 14% (with an 11% return for
2007).
|
Our
pension plan weighted average asset allocations by asset category were as
follows:
|
December 31, 2006
|
||||||||||||||||
|
CMRT
|
Germany
|
Canada
|
Norway
|
|||||||||||||
|
Equity
securities and limited
partnerships
|
97 | % | 23 | % | 66 | % | 13 | % | ||||||||
|
Fixed
income securities
|
2 | 48 | 32 | 64 | ||||||||||||
|
Real
estate
|
1 | 14 | - | - | ||||||||||||
|
Cash,
cash equivalents and other
|
- | 15 | 2 | 23 | ||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
|
December 31, 2007
|
||||||||||||||||
|
CMRT
|
Germany
|
Canada
|
Norway
|
|||||||||||||
|
Equity
securities and limited
partnerships
|
98 | % | 28 | % | 60 | % | 18 | % | ||||||||
|
Fixed
income securities
|
- | 49 | 34 | 68 | ||||||||||||
|
Real
estate
|
2 | 12 | - | - | ||||||||||||
|
Cash,
cash equivalents and other
|
- | 11 | 6 | 14 | ||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
We
regularly review our actual asset allocation for each plan, and will
periodically rebalance the investments in each plan to more accurately reflect
the targeted allocation when considered appropriate.
Our assumed long-term rates of return
on plan assets for 2005, 2006 and 2007 were as follows:
|
2005
|
2006
|
2007
|
||||
|
Germany
|
5.5%
|
5.3%
|
5.8%
|
|||
|
Canada
|
7.0%
|
7.0%
|
6.8%
|
|||
|
Norway
|
5.5%
|
6.5%
|
5.5%
|
|||
|
U.S.
|
10.0%
|
10.0%
|
10.0%
|
We
currently expect to use the same long-term rate of return on plan asset
assumptions in 2006 as we used in 2007 for purposes of determining the 2008
defined benefit pension plan expense.
To the
extent that a plan’s particular pension benefit formula calculates the pension
benefit in whole or in part based upon future compensation levels, the projected
benefit obligations and the pension expense will be based in part upon expected
increases in future compensation levels. For all of our plans for
which the benefit formula is so calculated, we generally base the assumed
expected increase in future compensation levels upon average long-term inflation
rates for the applicable country.
In
addition to the actuarial assumptions discussed above, the amount of recognized
defined benefit pension expense and the amount of net pension asset and net
pension liability costs will vary based upon relative changes in foreign
currency exchange rates.
A
reduction in the assumed discount rate generally results in an actuarial loss,
as the actuarially-determined present value of estimated future benefit payments
will increase. Conversely, an increase in the assumed discount rate
generally results in an actuarial gain. In addition, an actual return on plan
assets for a given year that is greater than the assumed return on plan assets
results in an actuarial gain, while an actual return on plan assets that is less
than the assumed return results in an actuarial loss. Other actual outcomes that
differ from previous assumptions, such as individuals living longer or shorter
than assumed in mortality tables which are also used to determine the
actuarially-determined present value of estimated future benefit payments,
changes in such mortality table themselves or plan amendments, will also result
in actuarial losses or gains. Accordingly under GAAP, we do not recognize
all of such actuarial gains and losses in earnings currently; instead these
amounts are deferred and amortized into income in the future as part of net
periodic defined benefit pension cost. However, upon adoption of SFAS
No. 158 effective December 31, 2006, these amounts are recognized in other
comprehensive income. In addition, any actuarial gains generated in
future periods would reduce the negative amortization effect of any cumulative
unrecognized actuarial losses, while any actuarial losses generated in future
periods would reduce the favorable amortization effect of any cumulative
unrecognized actuarial gains.
During
2007, all of our defined benefit pension plans generated a combined net
actuarial gain of approximately $70.4 million. This actuarial gain
resulted primarily from the general overall increase in the assumed discount
rates and the actual return on plan assets in excess of the assumed
return.
Based on
the actuarial assumptions described above and our current expectation for what
actual average foreign currency exchange rates will be during 2008, we expect
our defined benefit pension expense will approximate $16 million in
2008. In comparison, we expect to be required to contribute
approximately $22 million to such plans during 2008.
As noted
above, defined benefit pension expense and the amounts recognized as accrued
pension costs are based upon the actuarial assumptions discussed
above. We believe all of the actuarial assumptions used are
reasonable and appropriate. However, if we had lowered the assumed
discount rate by 25 basis points for all plans as of December 31, 2007, our
aggregate projected benefit obligations would have increased by approximately
$24.8 million at that date, and our defined benefit pension expense would be
expected to increase by approximately $1.8 million during
2007. Similarly, if we lowered the assumed long-term rate of return
on plan assets by 25 basis points for all of our plans, our defined benefit
pension expense would be expected to increase by approximately $1.2 million
during 2007.
OPEB
plans
Certain
subsidiaries of ours in the U.S. and Canada currently provide certain health
care and life insurance benefits for eligible retired employees. See
Note 10 to the Consolidated Financial Statements. We account for such
OPEB costs under SFAS No. 106, Employers Accounting for
Postretirement Benefits other than Pensions, as amended. Under
SFAS No. 106, OPEB expense and accrued OPEB costs are based on certain actuarial
assumptions, principally the assumed discount rate and the assumed rate of
increases in future health care costs.
In
September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans. SFAS No. 158 requires us
to recognize an asset or liability for the over or under funded status of each
of our individual defined benefit pension and postretirement benefit plans on
our Consolidated Balance Sheets. This standard does not change the
existing recognition and measurement requirements that determine the amount of
periodic benefit cost we recognize in net income. We adopted the
asset and liability recognition and disclosure requirements of this standard
effective December 31, 2006 on a prospective basis, in which we recognized
through other comprehensive income all of our prior unrecognized gains and
losses and prior service costs or credits, net of tax, as of December 31,
2006.
We recognized consolidated OPEB cost of approximately $.2 million
in 2005, $.8 million in 2006 and $.9 million in 2007. Similar to
defined benefit pension benefits, the amount of funding will differ from the
expense recognized for financial reporting purposes, and contributions to the
plans to cover benefit payments aggregated $1.3 million in 2005, $1.0 million in
2006 and $.4 million in 2007. Substantially all of our accrued OPEB
cost relates to benefits being paid to current retirees and their dependents,
and no material amount of OPEB benefits are being earned by current
employees. Due to continued increases in healthcare costs, it is
expected that our OPEB expense for financial reporting purposes will be
consistent with the past two years. Our expected OPEB benefit
payments are expected to be similar amounts.
The
assumed discount rates we use for determining OPEB expense and the related
accrued OPEB obligations are generally based on the same discount rates we use
for our U.S. and Canadian defined benefit pension plans.
In
estimating the health care cost trend rate, we consider our actual health care
cost experience, future benefit structures, industry trends and advice from our
third-party actuaries. During each of the past three years, we have
assumed that the relative increase in health care costs will generally trend
downward over the next several years, reflecting, among other things, assumed
increases in efficiency in the health care system and industry-wide cost
containment initiatives. For example, at December 31, 2007, the
expected rate of increase in future health care costs ranges from 8.5% in 2008,
declining to 5.5% in 2014 and thereafter.
Based on
the actuarial assumptions described above and our current expectation for what
actual average foreign currency exchange rates will be during 2008, we expect
our consolidated OPEB expense will approximate $.9 million in
2008. In comparison, we expect to be required to make approximately
$.8 million of contributions to such plans during 2008.
We
believe that all of the actuarial assumptions used are reasonable and
appropriate. However, a 25 basis point change in assumed discount
rates would have the following effects:
|
25
basis
point increase
|
25
basis
point decrease
|
|||||||
|
(In
millions)
|
||||||||
|
Effect
on net OPEB cost during 2007
|
$ | - | $ | - | ||||
|
Effect
at December 31, 2007 on
postretirement
obligation
|
(.6 | ) | .6 | |||||
Assumed
health care cost trend rates have a significant effect on the amounts we report
for health care plans. A one percent change in assumed health care
trend rates would have the following effects:
|
1% Increase
|
1% Decrease
|
|||||||
|
(In
millions)
|
||||||||
|
Effect
on net OPEB cost during 2007
|
$ | (.2 | ) | $ | .2 | |||
|
Effect
at December 31, 2007 on
postretirement
obligation
|
(1.7 | ) | 1.4 | |||||
Foreign
operations
As
discussed above, we have substantial operations located outside the United
States for which the functional currency is not the U.S. dollar. As a
result, the reported amount of our assets and liabilities related to our
non-U.S. operations, and therefore our consolidated net assets, will fluctuate
based upon changes in currency exchange rates. At December 31, 2007,
we had substantial net assets denominated in the euro, Canadian dollar,
Norwegian kroner and United Kingdom pound sterling.
ITEM
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
We are
exposed to market risk from changes in foreign currency exchange rates, interest
rates and security prices. In the past, we have periodically entered
into currency forward contracts, interest rate swaps or other types of contracts
in order to manage a portion of our interest rate market
risk. Otherwise, we do not generally enter into forward or option
contracts to manage such market risks, nor do we enter into any such contract or
other type of derivative instrument for trading or speculative
purposes. Other than as described below, we were not a party to any
material forward or derivative option contract related to foreign exchange
rates, interest rates or equity security prices at December 31, 2006 and
2007. See Notes 1 and 16 to our Consolidated Financial
Statements.
Interest
rates
We are
exposed to market risk from changes in interest rates, primarily related to
indebtedness. At December 31, 2006 and 2007, substantially all of our
aggregate indebtedness was comprised of fixed-rate instruments. The
large percentage of fixed-rate debt instruments minimizes earnings volatility
that would result from changes in interest rates. The following table
presents principal amounts and weighted average interest rates for our aggregate
outstanding indebtedness at December 31, 2007. Information shown
below for such foreign currency denominated indebtedness is presented in its
U.S. dollar equivalent at December 31, 2007 using an exchange rate of 1.4716
U.S. dollars per euro. Certain Norwegian kroner denominated capital
leases totaling $5.3 million in 2007 have been excluded from the table
below.
|
Amount
|
|||||||||||||
|
Indebtedness
|
Carrying
value
|
Fair
value
|
Interest
rate
|
Maturity
date
|
|||||||||
|
(In
millions)
|
|||||||||||||
|
Fixed-rate
indebtedness - Euro-denominated:
|
|||||||||||||
|
Senior
Secured Notes
|
$ | 585.5 | $ | 507.7 |
6.5%
|
2013
|
|||||||
|
Variable
rate indebtedness - dollar-denominated:
|
|||||||||||||
|
U.S.
Credit Facility
|
$ | 15.4 | $ | 15.4 |
|
7.5%
|
|
2008
|
|||||
At
December 31, 2006, euro-denominated fixed-rate indebtedness, consisting solely
of the 6.5% Senior Secured Notes, aggregated $525.0 million (fair value – $512.5
million) with a weighted-average interest rate of 6.5%. Variable rate
indebtedness at December 31, 2006, U.S. dollar denominated, was $6.5 million
with a weighted-average interest rate of 8.25%.
Foreign
currency exchange rates
We are
exposed to market risk arising from changes in foreign currency exchange rates
as a result of manufacturing and selling our products
worldwide. Earnings are primarily affected by fluctuations in the
value of the U.S. dollar relative to the euro, the Canadian dollar, the
Norwegian kroner and the United Kingdom pound sterling.
As described above, at December 31,
2007, we had the equivalent of $585.5 million of outstanding euro-denominated
indebtedness (at December 31, 2006 – the equivalent of $525.0 million of
euro-denominated indebtedness). The potential increase in the U.S.
dollar equivalent of the principal amount outstanding resulting from a
hypothetical 10% adverse change in exchange rates at such date would be
approximately $58.9 million at December 31, 2007 (at December 31, 2006 – $52.8
million).
Certain
of our sales generated by our non-U.S. operations are denominated in U.S.
dollars. We periodically use currency forward contracts to manage a
very nominal portion of foreign exchange rate risk associated with receivables
denominated in a currency other than the holder's functional currency or similar
exchange rate risk associated with future sales. We have not entered
into these contracts for trading or speculative purposes in the past, nor do we
currently anticipate entering into such contracts for trading or speculative
purposes in the future. During 2006 and 2007, we have not used hedge
accounting for any of our contracts. We held no such currency forward
contracts at December 31, 2006 or 2007 and held no other significant derivative
contracts at December 31, 2006 or 2007.
Other
We
believe there may be a certain amount of incompleteness in the sensitivity
analyses presented above. For example, the hypothetical effect of
changes in exchange rates discussed above ignores the potential effect on other
variables which affect our results of operations and cash flows, such as demand
for our products, sales volumes and selling prices and operating
expenses. Accordingly, the amounts presented above are not
necessarily an accurate reflection of the potential losses we would incur
assuming the hypothetical changes in exchange rates were actually to
occur.
The above discussion and estimated
sensitivity analysis amounts include forward-looking statements of market risk
which assume hypothetical changes in currency exchange rates. Actual
future market conditions will likely differ materially from such
assumptions. Accordingly, such forward-looking statements should not
be considered to be projections by us of future events, gains or
losses.
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item
is contained in a separate section of this Annual Report. See "Index
of Financial Statements and Schedules" (page F-1).
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
ITEM 9A. CONTROLS
AND PROCEDURES
Evaluation
of disclosure controls and procedures
We
maintain a system of disclosure controls and procedures. The term
"disclosure controls and procedures," as defined by Exchange Act Rule 13a-15(e),
means controls and other procedures that are designed to ensure that information
required to be disclosed in the reports that we file or submit 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
we are required to disclose in the reports we file or submit to the SEC under
the Act is accumulated and communicated to our management, including our
principal executive officer and our principal financial officer, or persons
performing similar functions, as appropriate to allow timely decisions to be
made regarding required disclosure. Each of Harold C. Simmons, our
Chief Executive Officer, and Gregory M. Swalwell, our Vice President, Finance
and Chief Financial Officer, have evaluated the design and effectiveness of our
disclosure controls and procedures as of December 31, 2007. Based
upon their evaluation, these executive officers have concluded that our
disclosure controls and procedures are effective as of December 31,
2007.
Internal
control over financial reporting
We also
maintain internal control over financial reporting. The term
“internal control over financial reporting,” as defined by Exchange Act Rule
13a-15(f) means a process designed by, or under the supervision of, our
principal executive and principal financial officers, or persons performing
similar functions, and effected by the 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:
|
·
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our
assets,
|
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that
receipts and expenditures are being made only in accordance with
authorizations of management and directors,
and
|
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of an
unauthorized acquisition, use or disposition of assets that could have a
material effect on our Condensed Consolidated Financial
Statements.
|
Section
404 of the Sarbanes-Oxley Act of 2002 requires us to report on internal control
over financial reporting in this Annual Report on Form 10-K for the year ended
December 31, 2007. Our independent registered public accounting firm
is also required to audit our internal control over financial reporting as of
December 31, 2007.
As
permitted by the SEC, our assessment of internal control over financial
reporting excludes (i) internal control over financial reporting of equity
method investees and (ii) internal control over the preparation of our financial
statement schedules required by Article 12 of Regulation
S-X. However, our assessment of internal control over financial
reporting with respect to equity method investees did include controls over the
recording of amounts related to our investment that are recorded in the
consolidated financial statements, including controls over the selection of
accounting methods for our investments, the recognition of equity method
earnings and losses and the determination, valuation and recording of our
investment account balances.
Changes
in Internal Control Over Financial Reporting
There has
been no change to our internal control over financial reporting during the
quarter ended December 31, 2007 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Our evaluation of the effectiveness of
internal control over financial reporting is based upon the criteria established
in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (commonly referred to as the “COSO”
framework). Based on our evaluation under that framework, we have
concluded that our internal control over financial reporting was effective as of
December 31, 2007.
PricewaterhouseCoopers LLP, the
independent registered public accounting firm that has audited our consolidated
financial statements included in this Annual Report, has audited the
effectiveness of our internal control over financial reporting as of December
31, 2007, as stated in their report, which is included in this Annual Report on
Form 10-K.
Certifications
Our chief executive officer
is required to annually file a certification with the New York Stock Exchange
(“NYSE”), certifying our compliance with the corporate governance listing
standards of the NYSE. During 2007, our chief executive officer filed
such annual certification with the NYSE. The 2007 certification was
unqualified.
Our chief
executive officer and chief financial officer are also required to, among other
things, quarterly file certifications with the SEC regarding the quality of our
public disclosures, as required by Section 302 of the Sarbanes-Oxley Act of
2002. The certifications for the quarter ended December 31, 2007 have
been filed as Exhibits 31.1 and 31.2 to this Annual Report on Form
10-K.
ITEM 9B. OTHER
INFORMATION
Not applicable.
PART
III
ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item
is incorporated by reference to our definitive Proxy Statement to be filed with
the SEC pursuant to Regulation 14A within 120 days after the end of the fiscal
year covered by this report (“Proxy Statement”).
ITEM 11. EXECUTIVE
COMPENSATION
The information required by this Item
is incorporated by reference to our Proxy Statement.
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
ACTIVITY
The information required by this Item
is incorporated by reference to our Proxy Statement.
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORS INDEPENDENCE
The information required by this Item
is incorporated by reference to our Proxy Statement. See also Note 13
to our Consolidated Financial Statements.
ITEM 14. PRINCIPAL
ACCOUNTING FEES AND SERVICES
The
information required by the Item is incorporated by reference to our Proxy
Statement.
PART
IV
ITEM
15. EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
(a)
and (c)
|
Financial
Statements and Schedule
|
The
Registrant
The
consolidated financial statements and schedule of the Registrant listed on the
accompanying Index of Financial Statements and Schedules (see page F-1) are
filed as part of this Annual Report.
(b) Exhibits
Included
as exhibits are the items listed in the Exhibit Index. We will
furnish a copy of any of the exhibits listed below upon payment of $4.00 per
exhibit to cover our costs to furnish the exhibits. Pursuant to Item
601(b)(4)(iii) of Regulation S-K, any instrument defining the rights of holders
of long-term debt issues and other agreements related to indebtedness which do
not exceed 10% of consolidated total assets as of December 31, 2006 will be
furnished to the Commission upon request.
We will
also furnish, without charge, a copy of its Code of Business Conduct and Ethics,
as adopted by the board of directors on February 19, 2004, upon
request. Such requests should be directed to the attention of the
Corporate Secretary at our corporate offices located at 5430 LBJ Freeway, Suite
1700, Dallas, TX 75240.
Item
No. Exhibit
Index
|
2.1
|
Form
of Distribution Agreement between NL Industries, Inc. and Kronos
Worldwide, Inc. – incorporated by reference to Exhibit 2.1 of the
Registration Statement on Form 10 of the Registrant (File No.
001-31763).
|
|
3.1
|
First
Amended and Restated Certificate of Incorporation of Kronos Worldwide,
Inc. – incorporated by reference to Exhibit 3.1 of the Registration
statement on Form 10 of the Registrant (File No.
001-31763).
|
|
3.2
|
Amended
and Restated Bylaws of Kronos Worldwide, Inc. as of October 25, 2007 –
incorporated by reference to Exhibit 3.1 of the Registrant’s Current
Report on Form 8-K filed with the U.S. Securities and Exchange Commission
on October 31, 2007.
|
|
4.1
|
Indenture
governing the 6.5% Senior Secured Notes due 2013,
dated
|
|
as
of April 11, 2006, between Kronos International, Inc. and
The
|
|
|
Bank
of New York, as trustee (incorporated by reference to Exhibit 4.1 to the
Current Report on Form 8-K of Kronos International, Inc. (File No.
333-100047) that was filed with the U.S. Securities and Exchange
Commission on April 11, 2006).
|
|
4.2
|
Form
of certificate of Series A 6.5% Senior Secured Note due
2013 (incorporated by reference to Exhibit 4.2 to the
Current Report on Form 8-K of Kronos
International, Inc. (File No. 333-100047) that
was filed with the U.S. Securities and Exchange
Commission on April 11,
2006).
|
|
4.3
|
Form
of certificate of Series B 6.5% Senior Secured Note due
2013 (incorporated by reference to Exhibit 4.3 to the
Current Report on Form 8-K of Kronos International, Inc.
(File No. 333-100047) that was filed with the U.S.
Securities and Exchange Commission on April 11,
2006).
|
|
4.4
|
Purchase
Agreement dated April 5, 2006 between
Kronos International, Inc. and Deutsche Bank AG London
(incorporated by reference to
Exhibit 4.1 to the Current Report on Form
8-K of Kronos International, Inc.
(File No. 333-100047) that was filed with the
U.S. Securities and
Exchange Commission on April
11, 2006).
|
|
4.5
|
Registration
Rights Agreement dated as of April 11, 2006
between Kronos International, Inc. and Deutsche Bank AG
London (incorporated by reference to Exhibit
4.5 to the Current Report on Form 8-K of
Kronos International, Inc. (File No.
333-100047) that was filed with the
U.S. Securities and Exchange Commission on April 11,
2006)
|
|
4.6
|
Collateral
Agency Agreement, dated April 11, 2006, among The Bank of
New York, U.S. Bank, N.A. and Kronos International,
Inc. (incorporated by reference to Exhibit 4.6 to
the Current Report on Form 8-K of
Kronos International, Inc. (File No.
333-100047) that was filed with the
U.S. Securities and Exchange Commission on April 11,
2006).
|
|
4.7
|
Security
Over Shares Agreement, dated April 11, 2006, between Kronos International,
Inc. and The Bank of New York (incorporated by reference
to Exhibit 4.7 to the Current Report on Form 8-K
of Kronos International, Inc. (File
No. 333-100047) that was filed with the
U.S. Securities and Exchange Commission on April
11, 2006).
|
|
4.8
|
Pledge
of Shares (shares in Kronos Denmark ApS), dated April
11, 2006, between Kronos International, Inc. and U.S.
Bank, N.A. (incorporated by reference to
Exhibit 4.8 to the Current Report on Form 8-K
of Kronos International, Inc. (File No.
333-100047) that was filed with the
U.S. Securities and Exchange Commission on April 11,
2006).
|
|
4.9
|
Pledge
Agreement (shares in Societe Industrielle du Titane
S.A.), dated April 11, 2006, between Kronos
International, Inc. and U.S. Bank, N.A. (incorporated by
reference to Exhibit 4.9 to the Current Report on Form
8-K of Kronos International, Inc. (File No.
333-100047) that was filed with the U.S. Securities and Exchange
Commission on April 11, 2006)
|
|
4.10
|
Share
Pledge Agreement (shares in Kronos Titan GmbH), dated
April 11, 2006, between Kronos International, Inc. and
U.S. Bank, N.A. (incorporated by reference to
Exhibit 4.10 to the Current Report on Form 8-K of Kronos
International, Inc. (File No. 333-100047) that was filed
with the U.S. Securities and Exchange Commission on April 11,
2006).
|
|
10.1
|
Form
of Tax Agreement between Valhi, Inc. and Kronos Worldwide, Inc. –
incorporated by reference to Exhibit 10.1 of the Registration statement on
Form 10 of the Registrant (File No.
001-31763).
|
|
10.2
|
Intercorporate
Services Agreement by and between Contran Corporation and Kronos
Worldwide, Inc., effective as of January 1, 2004 – incorporated by
reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of the
Registrant (File No. 001-31763) for the quarter ended March 31,
2004.
|
|
10.3*
|
Form
of Kronos Worldwide, Inc. Long-Term Incentive Plan – incorporated by
reference to Exhibit 10.4 of the Registration statement on Form 10 of the
Registrant (File No. 001-31763).
|
|
10.4
|
Euro
80,000,000 Facility Agreement, dated June 25, 2002, among Kronos Titan
GmbH & Co. OHG, Kronos Europe S.A./N.V., Kronos Titan A/S and Titania
A/S, as borrowers, Kronos Titan GmbH & Co. OHG, Kronos Europe
S.A./N.V. and Kronos Norge AS, as guarantors, Kronos Denmark ApS, as
security provider, Deutsche Bank AG, as mandated lead arranger, Deutsche
Bank Luxembourg S.A., as agent and security agent, and KBC Bank NV, as
fronting bank, and the financial institutions listed in Schedule 1
thereto, as lenders - incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-Q of NL Industries, Inc. for the quarter ended
June 30, 2002.
|
|
10.5
|
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 10.1 of the Current
Report on Form 8-K of the Registrant dated November 17, 2004 (File No.
333-119639).
|
|
10.6
|
Second
Amendment Agreement Relating to a Facility Agreement dated June 25, 2002
executed as of June 14, 2005 by and among Deutsche Bank AG, as mandated
lead arranger, Deutsche Bank Luxembourg S.A. as agent, the participating
lenders, Kronos Titan GmbH, Kronos Europe S.A./N.V, Kronos Titan AS,
Kronos Norge AS, Titania AS and Kronos Denmark ApS – incorporated by
reference to Exhibit 10.1 of Kronos International, Inc.s’ Form 8-K dated
June 14, 2005. Certain schedules, exhibits, annexes and similar
attachments to this Exhibit 10.9 have not been filed; upon request, the
Reporting Persons will furnish supplementally to the Commission a copy of
any omitted exhibit, annex or
attachment.
|
|
10.7
|
Lease
Contract, dated June 21, 1952, between Farbenfabrieken Bayer
Aktiengesellschaft and Titangesellschaft mit beschrankter Haftung (German
language version and English translation thereof)- incorporated by
reference to Exhibit 10.14 to the Annual Report on Form 10-K of NL
Industries, Inc. for the year ended December 31,
1985.
|
|
10.8
|
Master
Technology Exchange Agreement, dated as of October 18, 1993, among Kronos
Worldwide, Inc. (f/k/a Kronos, Inc.), Kronos Louisiana, Inc., Kronos
International, Inc., Tioxide Group Limited and Tioxide Group Services
Limited - incorporated by reference to Exhibit 10.8 to the Quarterly
Report on Form 10-Q of NL Industries, Inc. for the quarter ended September
30, 1993.
|
|
10.9
|
Form
of Assignment and Assumption Agreement, dated as of January 1, 1999,
between Kronos Inc. (formerly known as Kronos (USA), Inc.) and Kronos
International, Inc. - incorporated by reference to Exhibit 10.9 to Kronos
International, Inc.'s Registration Statement on Form S-4 (File No.
333-100047).
|
|
10.10
|
Form
of Cross License Agreement, effective as of January 1, 1999, between
Kronos Inc. (formerly known as Kronos (USA), Inc.) and Kronos
International, Inc. - incorporated by reference to Exhibit to Kronos
International, Inc.'s Registration Statement on Form S-4 (File No.
333-100047).
|
|
10.11
|
Formation
Agreement dated as of October 18, 1993 among Tioxide Americas Inc., Kronos
Louisiana, Inc. and Louisiana Pigment Company, L.P. - incorporated by
reference to Exhibit 10.2 to NL Industries, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended September 30,
1993.
|
|
10.12
|
Joint
Venture Agreement dated as of October 18, 1993 between Tioxide Americas
Inc. and Kronos Louisiana, Inc. - incorporated by reference to Exhibit
10.3 to NL Industries, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1993.
|
|
10.13
|
Kronos
Offtake Agreement dated as of October 18, 1993 between Kronos Louisiana,
Inc. and Louisiana Pigment Company, L.P. - incorporated by reference to
Exhibit 10.4 to NL Industries, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended September 30,
1993.
|
|
10.14
|
Amendment
No. 1 to Kronos Offtake Agreement dated as of December 20, 1995 between
Kronos Louisiana, Inc. and Louisiana Pigment Company, L.P. - incorporated
by reference to Exhibit 10.22 to NL Industries, Inc.'s Annual Report on
Form 10-K for the year ended December 31,
1995.
|
|
10.15
|
Tioxide
Americas Offtake Agreement dated as of October 18, 1993 between Tioxide
Americas Inc. and Louisiana Pigment Company, L.P. - incorporated by
reference to Exhibit 10.5 to NL Industries, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended September 30,
1993.
|
|
10.16
|
Amendment
No. 1 to Tioxide Americas Offtake Agreement dated as of December 20, 1995
between Tioxide Americas Inc. and Louisiana Pigment Company, L.P. -
incorporated by reference to Exhibit 10.24 to NL Industries, Inc.'s Annual
Report on Form 10-K for the year ended December 31,
1995.
|
|
10.17
|
TCI/KCI
Output Purchase Agreement dated as of October 18, 1993 between Tioxide
Canada Inc. and Kronos Canada, Inc. - incorporated by reference to Exhibit
10.6 to NL Industries, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1993.
|
|
10.18
|
TAI/KLA
Output Purchase Agreement dated as of October 18, 1993 between Tioxide
Americas Inc. and Kronos Louisiana, Inc. - incorporated by reference to
Exhibit 10.7 to NL Industries, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended September 30,
1993.
|
|
10.19
|
Parents'
Undertaking dated as of October 18, 1993 between ICI American Holdings
Inc. and Kronos Worldwide, Inc. (f/k/a Kronos, Inc.) - incorporated by
reference to Exhibit 10.9 to NL Industries, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended September 30,
1993.
|
|
10.20
|
Allocation
Agreement dated as of October 18, 1993 between Tioxide Americas Inc., ICI
American Holdings, Inc., Kronos Worldwide, Inc. (f/k/a Kronos, Inc.) and
Kronos Louisiana, Inc. - incorporated by reference to Exhibit 10.10 to NL
Industries, Inc.'s Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993.
|
|
10.21
|
Insurance
sharing agreement dated October 30, 2003 by and among CompX International
Inc., Contran Corporation, Keystone Consolidated Industries, Inc.,
Titanium Metals Corp., Valhi, Inc., NL Industries, Inc. and Kronos
Worldwide, Inc. – incorporated by reference to Exhibit 10.48 to NL
Industries, Inc.’s Annual Report on Form 10-K for the year ended December
31, 2003.
|
|
10.22*
|
Summary
of Consulting Arrangement beginning on August 1, 2003, as amended January
14, 2008 between Lawrence A. Wigdor and Kronos Worldwide, Inc. -
incorporated by reference to Item 1.01 to the Registrant’s Current Report
on Form 8-K filed with the U.S. Securities and Exchange commission on
January 18, 2008.
|
|
21.1
|
Subsidiaries.
|
|
23.1
|
Consent
of PricewaterhouseCoopers LLP.
|
|
31.1
|
Certification.
|
|
31.2
|
Certification.
|
|
32.1
|
Certification.
|
___________________________________
* Management
contract, compensatory plan or arrangement
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
Kronos Worldwide, Inc.
|
|
(Registrant)
|
|
By:/s/ Harold C.
Simmons
|
|
Harold
C. Simmons
|
|
March
12, 2008
|
|
(Chairman
of the Board and Chief Executive
Officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
|
/s/ Steven L.
Watson
|
|
|
Harold
C. Simmons, March 12, 2008
|
Steven
L. Watson, March 12, 2008
|
|
(Chairman
of the Board and Chief
|
(Director)
|
|
Executive
Officer)
|
|
|
/s/ George E.
Poston
|
/s/ Glenn R.
Simmons
|
|
George
E. Poston, March 12, 2008
|
Glenn
R. Simmons, March 12, 2008
|
|
(Director)
|
(Director)
|
|
/s/ C. H. Moore,
Jr.
|
/s/ Keith R.
Coogan
|
|
C.
H. Moore, Jr., March 12, 2008
|
Keith
R. Coogan, March 12, 2008
|
|
(Director)
|
(Director)
|
|
/s/ R. Gerald
Turner
|
/s/ Gregory M.
Swalwell
|
|
R.
Gerald Turner, March 12, 2008
|
Gregory
M. Swalwell, March 12, 2008
|
|
(Director)
|
(Vice
President, Chief Financial
Officer,
Principal Financial
Officer)
|
|
/s/ Tim C.
Hafer
|
|
|
Tim
C. Hafer, March 12, 2008
|
|
|
(Vice
President, Controller,
Principal
Accounting Officer)
|
KRONOS
WORLDWIDE, INC.
Annual
Report on Form 10-K
Items
8, 15(a) and 15(c)
Index
of Financial Statements and Schedule
|
Financial
Statements
|
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Consolidated
Balance Sheets - December 31, 2006 and 2007;
|
F-4
|
|
Consolidated
Statements of Operations -
|
|
|
Year
ended December 31, 2005, 2006 and 2007
|
F-6
|
|
Consolidated
Statements of Comprehensive Income (Loss) -
|
|
|
Year
ended December 31, 2005, 2006 and 2007
|
F-7
|
|
Consolidated
Statements of Stockholders' Equity -
|
|
|
Year
ended December 31, 2005, 2006 and 2007
|
F-8
|
|
Consolidated
Statements of Cash Flows -
|
|
|
Year
ended December 31, 2005, 2006 and 2007
|
F-9
|
|
Notes
to Consolidated Financial Statements
|
F-11
|
|
Financial
Statement Schedule
|
|
|
Schedule
I – Condensed Financial Information of Registrant
|
S-1
|
|
Schedules
II, III and IV are omitted because they are not applicable or the required
amounts are either not material or are presented in the Notes to the
Consolidated Financial Statements.
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Stockholders and Board of Directors of Kronos Worldwide, Inc.:
In our
opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of comprehensive income (loss), of
changes in stockholders’ equity and of cash flows present fairly, in all
material respects, the financial position of Kronos Worldwide, Inc. and its
subsidiaries at December 31, 2006 and 2007 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2007 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. Also in our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007, based on criteria
established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's
management is responsible for these financial statements and financial statement
schedule, for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in Management’s Report on Internal Control Over Financial
Reporting appearing under Item 9A. Our responsibility is to express
opinions on these financial statements, on the financial statement schedule, and
on the Company's internal control over financial reporting based on our
integrated audits. We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of
internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
As
discussed in Note 17 to the Consolidated Financial Statements, the Company
changed the manner in which it accounts for pension and other postretirement
benefit obligations in 2006 and the manner in which it accounts for uncertain
tax positions in 2007.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) 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 financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers LLP
Dallas,
Texas
March 12,
2008
KRONOS
WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
millions, except per share data)
|
ASSETS
|
December 31,
|
|||||||
|
2006
|
2007
|
|||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 63.3 | $ | 72.2 | ||||
|
Restricted
cash
|
1.5 | 1.8 | ||||||
|
Accounts
and other receivables
|
203.6 | 224.4 | ||||||
|
Receivable
from affiliates
|
.2 | 2.9 | ||||||
|
Inventories
|
286.5 | 312.8 | ||||||
|
Prepaid
expenses
|
5.7 | 6.0 | ||||||
|
Deferred
income taxes
|
2.1 | 1.6 | ||||||
|
Total
current assets
|
562.9 | 621.7 | ||||||
|
Other
assets:
|
||||||||
|
Investment
in TiO2
manufacturing joint venture
|
113.6 | 118.5 | ||||||
|
Deferred
income taxes
|
264.4 | 168.8 | ||||||
|
Other
|
18.6 | 19.5 | ||||||
|
Total
other assets
|
396.6 | 306.8 | ||||||
|
Property
and equipment:
|
||||||||
|
Land
|
35.7 | 39.7 | ||||||
|
Buildings
|
203.2 | 232.6 | ||||||
|
Equipment
|
884.7 | 1,009.8 | ||||||
|
Mining
properties
|
82.1 | 89.7 | ||||||
|
Construction
in progress
|
17.9 | 45.6 | ||||||
| 1,223.6 | 1,417.4 | |||||||
|
Less
accumulated depreciation and amortization
|
761.6 | 890.9 | ||||||
|
Net
property and equipment
|
462.0 | 526.5 | ||||||
|
Total
assets
|
$ | 1,421.5 | $ | 1,455.0 | ||||
KRONOS
WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS (CONTINUED)
(In
millions, except per share data)
|
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
December 31,
|
|||||||
|
2006
|
2007
|
|||||||
|
Current
liabilities:
|
||||||||
|
Current
maturities of long-term debt
|
$ | .9 | $ | 16.2 | ||||
|
Accounts
payable and accrued liabilities
|
155.3 | 184.1 | ||||||
|
Payable
to affiliates
|
10.8 | 11.3 | ||||||
|
Income
taxes
|
10.3 | 9.6 | ||||||
|
Deferred
income taxes
|
2.2 | 3.3 | ||||||
|
Total
current liabilities
|
179.5 | 224.5 | ||||||
|
Noncurrent
liabilities:
|
||||||||
|
Long-term
debt
|
535.3 | 590.0 | ||||||
|
Deferred
income taxes
|
47.3 | 48.2 | ||||||
|
Accrued
pension cost
|
185.9 | 138.3 | ||||||
|
Accrued
postretirement benefits cost
|
9.8 | 11.6 | ||||||
|
Other
|
15.3 | 31.4 | ||||||
|
Total
noncurrent liabilities
|
793.6 | 819.5 | ||||||
|
Stockholders'
equity:
|
||||||||
|
Common
stock, $.01 par value; 60.0 shares authorized; 48.9 shares
issued
|
.5 | .5 | ||||||
|
Additional
paid-in capital
|
1,061.6 | 1,061.7 | ||||||
|
Retained
deficit
|
(406.3 | ) | (527.9 | ) | ||||
|
Accumulated
other comprehensive income (loss):
|
||||||||
|
Currency
translation
|
(81.3 | ) | (46.5 | ) | ||||
|
Defined
benefit pension plans
|
(126.2 | ) | (77.1 | ) | ||||
|
Postretirement
benefit (OPEB) plans
|
.1 | .3 | ||||||
|
Total
stockholders' equity
|
448.4 | 411.0 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 1,421.5 | $ | 1,455.0 | ||||
Commitments
and contingencies (Notes 9 and 14)
See
accompanying Notes to Consolidated Financial Statements.
KRONOS
WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
millions, except per share data)
|
Years ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
Net
sales
|
$ | 1,196.7 | $ | 1,279.4 | $ | 1,310.3 | ||||||
|
Cost
of sales
|
869.2 | 968.9 | 1,058.9 | |||||||||
|
Gross
margin
|
327.5 | 310.5 | 251.4 | |||||||||
|
Selling,
general and administrative expense
|
150.7 | 158.1 | 162.1 | |||||||||
|
Other
operating income (expense):
|
||||||||||||
|
Currency
transaction gains (losses), net
|
5.2 | (3.6 | ) | .2 | ||||||||
|
Disposition
of property and equipment
|
(1.5 | ) | (1.9 | ) | (.8 | ) | ||||||
|
Other
income
|
.6 | 2.2 | 1.4 | |||||||||
|
Corporate
expense
|
(5.0 | ) | (5.8 | ) | (5.1 | ) | ||||||
|
Other
expense
|
(.1 | ) | (.1 | ) | (.1 | ) | ||||||
|
Income
from operations
|
176.0 | 143.2 | 84.9 | |||||||||
|
Other
income (expense):
|
||||||||||||
|
Trade
interest income
|
1.2 | 2.3 | 2.2 | |||||||||
|
Other
interest income
|
1.0 | 1.3 | .3 | |||||||||
|
Securities
transaction gain
|
5.4 | - | - | |||||||||
|
Loss
on prepayment of debt
|
- | (22.3 | ) | - | ||||||||
|
Interest
expense
|
(44.7 | ) | (43.2 | ) | (39.4 | ) | ||||||
|
Income
before income taxes
|
138.9 | 81.3 | 48.0 | |||||||||
|
Provision
(benefit) for income taxes
|
67.4 | (.7 | ) | 114.7 | ||||||||
|
Net
income (loss)
|
$ | 71.5 | $ | 82.0 | $ | (66.7 | ) | |||||
|
Net
income (loss) per basic and diluted
share
|
$ | 1.46 | $ | 1.67 | $ | (1.36 | ) | |||||
|
Basic
and diluted weighted average shares used in the calculation of net income
(loss) per share
|
49.0 | 49.0 | 49.0 | |||||||||
See
accompanying Notes to Consolidated Financial Statements.
KRONOS
WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In
millions)
|
Years ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
Net
income (loss)
|
$ | 71.5 | $ | 82.0 | $ | (66.7 | ) | |||||
|
Other
comprehensive income (loss), net of tax:
|
||||||||||||
|
Currency
translation
|
(26.9 | ) | 33.1 | 34.8 | ||||||||
|
Pension
plans:
|
||||||||||||
|
Amortization
of prior service cost, net transition obligation and net losses included
in periodic pension cost
|
- | - | 6.2 | |||||||||
|
Net
actuarial gain arising during year
|
- | - | 41.2 | |||||||||
|
Minimum
pension liability change
|
(57.1 | ) | 7.1 | - | ||||||||
| (57.1 | ) | 7.1 | 47.4 | |||||||||
|
OPEB
plans:
|
||||||||||||
|
Amortization
of prior service credit and net losses included in periodic OPEB
cost
|
- | - | .1 | |||||||||
|
Net
actuarial gain arising during year
|
- | - | .1 | |||||||||
| - | - | .2 | ||||||||||
|
Total
other comprehensive income (loss)
|
(84.0 | ) | 40.2 | 82.4 | ||||||||
|
Comprehensive
income (loss)
|
$ | (12.5 | ) | $ | 122.2 | $ | 15.7 | |||||
See
accompanying Notes to Consolidated Financial Statements.
KRONOS
WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
Years
ended December 31, 2005, 2006 and 2007
(In
millions)
|
Accumulated
other
|
||||||||||||||||||||||||||||
|
comprehensive
|
||||||||||||||||||||||||||||
|
Additional
|
Retained
|
income (loss)
|
||||||||||||||||||||||||||
|
Common
|
paid-in
|
earnings
|
Currency
|
Pension
|
OPEB
|
|||||||||||||||||||||||
|
stock
|
capital
|
(deficit)
|
translation
|
plans
|
plans
|
Total
|
||||||||||||||||||||||
|
Balance
at December 31, 2004
|
$ | .5 | $ | 1,060.6 | $ | (461.8 | ) | $ | (87.5 | ) | $ | (38.7 | ) | $ | - | $ | 473.1 | |||||||||||
|
Net
income
|
- | - | 71.5 | - | - | - | 71.5 | |||||||||||||||||||||
|
Other
comprehensive loss, net of tax
|
- | - | - | (26.9 | ) | (57.1 | ) | - | (84.0 | ) | ||||||||||||||||||
|
Issuance
of common stock
|
- | .1 | - | - | - | - | .1 | |||||||||||||||||||||
|
Cash
dividends declared - $1.00 per share
|
- | - | (49.0 | ) | - | - | - | (49.0 | ) | |||||||||||||||||||
|
Other
|
- | .8 | - | - | - | - | .8 | |||||||||||||||||||||
|
Balance
at December 31, 2005
|
.5 | 1,061.5 | (439.3 | ) | (114.4 | ) | (95.8 | ) | - | 412.5 | ||||||||||||||||||
|
Net
income
|
- | - | 82.0 | - | - | - | 82.0 | |||||||||||||||||||||
|
Other
comprehensive income, net of tax
|
- | - | - | 33.1 | 7.1 | - | 40.2 | |||||||||||||||||||||
|
Issuance
of common stock
|
- | .1 | - | - | - | - | .1 | |||||||||||||||||||||
|
Cash
dividends declared - $1.00 per share
|
- | - | (49.0 | ) | - | - | - | (49.0 | ) | |||||||||||||||||||
|
Change
in accounting – asset and liability
recognition
provisions of SFAS No. 158
|
- | - | - | - | (37.5 | ) | .1 | (37.4 | ) | |||||||||||||||||||
|
Balance
at December 31, 2006
|
.5 | 1,061.6 | (406.3 | ) | (81.3 | ) | (126.2 | ) | .1 | 448.4 | ||||||||||||||||||
|
Net
loss
|
- | - | (66.7 | ) | - | - | - | (66.7 | ) | |||||||||||||||||||
|
Other
comprehensive income, net of tax
|
- | - | - | 34.8 | 47.4 | .2 | 82.4 | |||||||||||||||||||||
|
Issuance
of common stock
|
- | .1 | - | - | - | - | .1 | |||||||||||||||||||||
|
Cash
dividends declared - $1.00 per share
|
- | - | (49.0 | ) | - | - | - | (49.0 | ) | |||||||||||||||||||
|
Change
in accounting:
|
||||||||||||||||||||||||||||
|
FIN
48
|
- | - | (2.2 | ) | - | - | - | (2.2 | ) | |||||||||||||||||||
|
SFAS
No. 158 - measurement date provisions
|
- | - | (3.7 | ) | - | 1.7 | - | (2.0 | ) | |||||||||||||||||||
|
Balance
at December 31, 2007
|
$ | .5 | $ | 1,061.7 | $ | (527.9 | ) | $ | (46.5 | ) | $ | (77.1 | ) | $ | .3 | $ | 411.0 | |||||||||||
See
accompanying Notes to Consolidated Financial Statements.
KRONOS
WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
millions)
|
Years ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income (loss)
|
$ | 71.5 | $ | 82.0 | $ | (66.7 | ) | |||||
|
Depreciation
and amortization
|
43.5 | 44.3 | 48.9 | |||||||||
|
Loss
on prepayment of debt
|
- | 22.3 | - | |||||||||
|
Call
premium paid
|
- | (20.9 | ) | - | ||||||||
|
Deferred
income taxes
|
26.8 | (28.2 | ) | 104.8 | ||||||||
|
Securities
transaction gain
|
(5.4 | ) | - | - | ||||||||
|
Benefit
plan expense greater (less) than cash funding:
|
||||||||||||
|
Defined
benefit pension plans
|
(5.3 | ) | (.9 | ) | 2.1 | |||||||
|
Other
postretirement benefit plans
|
(1.3 | ) | - | .4 | ||||||||
|
Distributions
from (to) TiO2
manufacturing joint venture, net
|
4.9 | 2.3 | (4.9 | ) | ||||||||
|
Other,
net
|
2.3 | 3.1 | 3.4 | |||||||||
|
Change
in assets and liabilities:
|
||||||||||||
|
Accounts
and other receivable
|
(13.9 | ) | 1.8 | 6.0 | ||||||||
|
Inventories
|
(47.9 | ) | (6.1 | ) | 5.7 | |||||||
|
Prepaid
expenses
|
(.2 | ) | (1.2 | ) | .6 | |||||||
|
Accounts
payable and accrued liabilities
|
13.4 | (5.8 | ) | 2.6 | ||||||||
|
Income
taxes
|
10.3 | (21.5 | ) | (8.5 | ) | |||||||
|
Accounts
with affiliates
|
1.2 | (1.0 | ) | (2.0 | ) | |||||||
|
Other
noncurrent assets
|
.5 | .2 | .2 | |||||||||
|
Other
noncurrent liabilities
|
(2.6 | ) | 1.5 | (2.6 | ) | |||||||
|
Net
cash provided by operating activities
|
97.8 | 71.9 | 90.0 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Capital
expenditures
|
(43.4 | ) | (50.9 | ) | (47.3 | ) | ||||||
|
Change
in restricted cash equivalents
|
.1 | - | (.1 | ) | ||||||||
|
Proceeds
from disposal of interest in Norwegian smelting operation
|
3.6 | - | - | |||||||||
|
Net
cash used by investing activities
|
(39.7 | ) | (50.9 | ) | (47.4 | ) | ||||||
KRONOS
WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
(In
millions)
|
Years ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Indebtedness:
|
||||||||||||
|
Borrowings
|
$ | 51.9 | $ | 772.7 | $ | 330.9 | ||||||
|
Principal
payments
|
(49.0 | ) | (749.9 | ) | (321.7 | ) | ||||||
|
Deferred
financing fees
|
- | (8.8 | ) | - | ||||||||
|
Dividends
paid
|
(49.0 | ) | (49.0 | ) | (49.0 | ) | ||||||
|
Other,
net
|
1.3 | - | - | |||||||||
|
Net
cash used by financing activities
|
(44.8 | ) | (35.0 | ) | (39.8 | ) | ||||||
|
Cash
and cash equivalents - net change from:
|
||||||||||||
|
Operating,
investing and financing activities
|
13.3 | (14.0 | ) | 2.8 | ||||||||
|
Currency
translation
|
(2.1 | ) | 5.3 | 6.1 | ||||||||
| 11.2 | (8.7 | ) | 8.9 | |||||||||
|
Balance
at beginning of year
|
60.8 | 72.0 | 63.3 | |||||||||
|
Balance
at end of year
|
$ | 72.0 | $ | 63.3 | $ | 72.2 | ||||||
|
Supplemental
disclosures –
Cash
paid for:
|
||||||||||||
|
Interest
|
$ | 41.3 | $ | 33.9 | $ | 38.4 | ||||||
|
Income
taxes
|
30.0 | 44.3 | 23.5 | |||||||||
|
Accrual
for capital expenditures
|
- | - | 9.0 | |||||||||
|
Inventories
received as partial consideration for disposal of interest in Norwegian
smelting operation
|
$ | 1.9 | $ | - | $ | - | ||||||
See
accompanying notes to consolidated financial statements.
KRONOS
WORLDWIDE, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 - Summary of significant accounting policies:
Organization and
basis of presentation. At December 31,
2007, (i) Valhi, Inc. (NYSE:VHI) held approximately 59% of our outstanding
common stock (ii) NL Industries, Inc. (NYSE:NL) held an additional 36% of our
common stock, (iii) Valhi owned approximately 83% of NL's outstanding common
stock and (iv) a subsidiary of Contran Corporation held approximately 93% 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 (for which Mr. Simmons
is the sole trustee), or is held by Mr. Simmons or other persons or related
companies to Mr. Simmons. Consequently, Mr. Simmons may be deemed to
control each of such companies.
Unless
otherwise indicated, reference in this report to “we,” “us” or “our” refers to
Kronos Worldwide, Inc. and its subsidiaries, taken as a whole.
Management’s
estimates. In preparing our
financial statements in conformity with accounting principles generally accepted
in the United States of America (“GAAP”) we are required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the
reporting period. Actual results may differ significantly from
previously-estimated amounts under different assumptions or
conditions.
Principles of
consolidation. The consolidated
financial statements include our accounts and those of our majority-owned
subsidiaries. We have eliminated all material intercompany accounts
and balances.
Translation of
foreign currencies. We translate the
assets and liabilities of our subsidiaries whose functional currency is other
than the U.S. dollar at year-end rates of exchange, while we translate our
revenues and expenses at average exchange rates prevailing during the
year. We accumulate the resulting translation adjustments in
stockholders’ equity as part of accumulated other comprehensive income (loss),
net of related deferred income taxes. We recognize currency
transaction gains and losses in income currently.
Derivatives and
hedging activities.
We recognize derivatives as either assets or liabilities measured at fair
value in accordance with Statement of Financial Accounting Standard (“SFAS”) No.
133, Accounting for Derivative
Instruments and Hedging Activities, as amended and
interpreted. We recognize the effect of changes in the fair value of
derivatives either in net income (loss) or other comprehensive income (loss),
depending on the intended use of the derivative.
Cash and cash
equivalents. We classify bank
time deposits and U.S. Treasury securities purchased under short-term agreements
to resell with original maturities of three months or less as cash
equivalents.
Restricted
marketable debt securities. We classify marketable
debt securities that have been segregated or otherwise limited in use as
restricted. Restricted marketable debt securities are primarily
invested in corporate debt securities, and include amounts restricted in
accordance with applicable Norwegian law regarding certain requirements of our
Norwegian defined benefit pension plans ($2.8 million and $3.2 million at
December 31, 2006 and 2007, respectively). The restricted marketable debt
securities are generally classified as either a current or noncurrent asset
depending upon the maturity date of each such debt security and are carried at
market which approximates cost.
Accounts
receivable. We provide an
allowance for doubtful accounts for known and estimated potential losses arising
from sales to customers based on a periodic review of these
accounts.
Investment in
TiO2 manufacturing
joint venture. We
account for our investment in a 50%-owned manufacturing joint venture by the
equity method.
Property and
equipment and depreciation. We state property and
equipment at cost, including capitalized interest on borrowings during the
actual construction period of major capital projects. Capitalized interest costs
were not material in 2005, 2006 or 2007. We compute depreciation of
property and equipment for financial reporting purposes (including mining
properties) principally by the straight-line method over the estimated useful
lives of ten to 40 years for buildings and three to 20 years for
equipment. We use accelerated depreciation methods for income tax
purposes, as permitted. Upon the sale or retirement of an asset, we
remove the related cost and accumulated depreciation from the accounts and
recognize any gain or loss in income currently.
We
expense costs incurred for maintenance, repairs and minor renewals (including
planned major maintenance), while we capitalize expenditures for major
improvements.
We have a
governmental concession with an unlimited term to operate an ilmenite mine in
Norway. Mining properties consist of buildings and equipment used in
our Norwegian ilmenite mining operations. While we own the land and
ilmenite reserves associated with the mine, such land and reserves were acquired
for nominal value and we have no material asset recognized for the land and
reserves related to such mining operations.
We
perform impairment tests when events or changes in circumstances indicate the
carrying value may not be recoverable. We consider all relevant
factors. We perform the impairment test by comparing the estimated
future undiscounted cash flows (exclusive of interest expense) associated with
the asset to the asset's net carrying value to determine if a write-down to
market value or discounted cash flow value is required. We assess
impairment of property and equipment in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.
Long-term
debt. We state
long-term debt net of any unamortized original issue premium or
discount. We classify amortization of deferred financing costs and
any premium or discount associated with the issuance of indebtedness as interest
expense and compute such amortization by the interest method over the term of
the applicable issue.
Employee benefit
plans. Accounting and
funding policies for our retirement plans are described in Notes 10 and
17.
Income
taxes. We, Valhi and our
qualifying subsidiaries are members of Contran’s consolidated U.S. federal
income tax group (the "Contran Tax Group"), and we and certain of our qualifying
subsidiaries also file consolidated income tax returns with Contran in various
U.S. state jurisdictions. As a member of the Contran Tax Group, we
are jointly and severally liable for the federal income tax liability of Contran
and the other companies included in the Contran Tax Group for all periods in
which we are included in the Contran Tax Group. See Note
14. As a member of the Contran Tax Group, we are a party to a tax
sharing agreement which provides that we compute our provision for U.S. income
taxes on a separate-company basis using the tax elections made by Contran.
Pursuant to the tax sharing agreement, we make payments to or receive payments
from Valhi in amounts we would have paid to or received from the U.S. Internal
Revenue Service or the applicable state tax authority had we not been a member
of the Contran Tax Group. We made net payments to Valhi of $7.7
million in 2005, $5.0 million in 2006, and $3.0 million in 2007.
We
recognize deferred income tax assets and liabilities for the expected future tax
consequences of temporary differences between the income tax and financial
reporting carrying amounts of assets and liabilities, including investments in
our subsidiaries and affiliates who are not members of the Contran Tax Group and
undistributed earnings of foreign subsidiaries which are not deemed to be
permanently reinvested. The earnings of foreign subsidiaries subject
to permanent reinvestment plans aggregated $739 million at December 31, 2006 and
$714 million at December 31, 2007. It is not practical for us to
determine the amount of the unrecognized deferred income tax liability related
to such earnings due to the complexities associated with the U.S. taxation on
earnings of foreign subsidiaries repatriated to the U.S. We
periodically evaluate our deferred tax assets in the various taxing
jurisdictions in which we operate and adjust any related valuation allowance
based on the estimate of the amount of such deferred tax assets that we believe
does not meet the more-likely-than-not recognition criteria.
Prior to
2007, we provided a reserve for uncertain income tax positions when we believed
the benefit associated with a tax position was not probable of prevailing with
the applicable tax authority and the amount of the lost benefit associated with
such tax position was reasonably estimable. Beginning in 2007, we
record a reserve for uncertain tax positions in accordance with Financial
Accounting Standards Board Interpretation No. (“FIN”) 48, Accounting for Uncertain Tax
Positions, for tax positions where we believe it is more-likely-than-not
our position will not prevail with the applicable tax
authorities. See Note 17.
Net sales. We record sales
when products are shipped and title and other risks and rewards of ownership
have passed to the customer, or when services are performed. Shipping
terms of products shipped are generally FOB shipping point, although in some
instances shipping terms are FOB destination point (for which we do not
recognize sales until the product is received by the customer). We
state sales net of price, early payment and distributor discounts and volume
rebates. We report any tax assessed by a governmental authority that
we collect from our customers that is both imposed on and concurrent with our
revenue-producing activities (such as sales, use, value added and excise taxes)
on a net basis (meaning we do not recognize these taxes either in our revenues
or in our costs and expenses).
Inventories and
cost of sales. We state
inventories at the lower of cost (principally average cost) or market, net of
allowance for slow-moving inventories. We remove amounts from
inventories at average cost. Cost of sales includes costs for
materials, packing and finishing, utilities, salary and benefits, maintenance
and depreciation.
Selling, general
and administrative expense; shipping and handling
costs. Selling, general and administrative expense includes
costs related to marketing, sales, distribution, shipping and handling, research
and development, legal, and administrative functions such as accounting,
treasury and finance, and includes costs for salaries and benefits, travel and
entertainment, promotional materials and professional fees. We
include shipping and handling costs in selling, general and administrative
expense and these costs were $76 million in 2005, $81 million in 2006 and $82
million in 2007. We expense advertising costs as incurred and these
costs were $1 million in each of 2005, 2006 and 2007. We expense
research, development and certain sales technical support costs as incurred and
these costs approximated $9 million in 2005, $11 million in 2006 and $12 million
in 2007.
Note
2 - Geographic information:
Our
operations are associated with the production and sale of titanium dioxide
pigments (“TiO2”). Titanium
dioxide pigments are used to impart whiteness, brightness and opacity to a wide
variety of products, including paints, plastics, paper, fibers and
ceramics. At December 31, 2006, and 2007 the net assets of non-U.S.
subsidiaries included in consolidated net assets approximated $299 million and
$274 million, respectively.
For
geographic information, we attribute net sales to the place of manufacture
(point of origin) and to the location of the customer (point of destination); we
attribute property and equipment to their physical location.
|
Years ended December
31, __
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
(In
millions)
|
||||||||||||
|
Geographic
areas
|
||||||||||||
|
Net
sales – point of origin:
|
||||||||||||
|
Germany
|
$ | 613.1 | $ | 672.0 | $ | 700.6 | ||||||
|
United
States
|
495.5 | 527.7 | 515.8 | |||||||||
|
Belgium
|
186.9 | 192.8 | 209.7 | |||||||||
|
Canada
|
202.1 | 212.8 | 208.0 | |||||||||
|
Norway
|
160.5 | 173.5 | 184.3 | |||||||||
|
Eliminations
|
(461.4 | ) | (499.4 | ) | (508.1 | ) | ||||||
|
Total
|
$ | 1,196.7 | $ | 1,279.4 | $ | 1,310.3 | ||||||
|
Net
sales – point of destination:
|
||||||||||||
|
Europe
|
$ | 690.9 | $ | 730.6 | $ | 809.6 | ||||||
|
North
America
|
404.9 | 424.1 | 374.7 | |||||||||
|
Other
|
100.9 | 124.7 | 126.0 | |||||||||
|
Total
|
$ | 1,196.7 | $ | 1,279.4 | $ | 1,310.3 | ||||||
|
December 31,
|
||||||||
|
2006
|
2007
|
|||||||
|
(In
millions)
|
||||||||
|
Identifiable
assets -
|
||||||||
|
net
property and equipment:
|
||||||||
|
Germany
|
$ | 262.5 | $ | 291.0 | ||||
|
Belgium
|
64.0 | 70.5 | ||||||
|
Norway
|
68.8 | 89.0 | ||||||
|
Canada
|
63.7 | 72.5 | ||||||
|
Other
|
3.0 | 3.5 | ||||||
|
Total
|
$ | 462.0 | $ | 526.5 | ||||
Note
3 - Accounts and other receivables:
|
December 31,
|
||||||||
|
2006
|
2007
|
|||||||
|
(In
millions)
|
||||||||
|
Trade
receivables
|
$ | 183.0 | $ | 189.9 | ||||
|
Recoverable
VAT and other receivables
|
20.5 | 28.7 | ||||||
|
Refundable
income taxes
|
1.6 | 7.5 | ||||||
|
Allowance
for doubtful accounts
|
(1.5 | ) | (1.7 | ) | ||||
|
Total
|
$ | 203.6 | $ | 224.4 | ||||
Note
4 - Inventories
|
December 31,
|
||||||||
|
2006
|
2007
|
|||||||
|
(In
millions)
|
||||||||
|
Raw
materials
|
$ | 46.1 | $ | 66.2 | ||||
|
Work
in process
|
25.6 | 19.9 | ||||||
|
Finished
products
|
167.7 | 170.9 | ||||||
|
Supplies
|
47.1 | 55.8 | ||||||
|
Total
|
$ | 286.5 | $ | 312.8 | ||||
Note
5 - Other noncurrent assets:
|
December 31,
|
||||||||
|
2006
|
2007
|
|||||||
|
(In
millions)
|
||||||||
|
Deferred
financing costs, net
|
$ | 9.1 | $ | 8.3 | ||||
|
Pension
asset
|
5.6 | 7.2 | ||||||
|
Restricted
marketable debt securities
|
2.8 | 3.2 | ||||||
|
Other
|
1.1 | .8 | ||||||
|
Total
|
$ | 18.6 | $ | 19.5 | ||||
Note 6 - Investment in TiO2
manufacturing joint venture:
We own a
50% interest in Louisiana Pigment Company, L.P. (“LPC”). LPC is a
manufacturing joint venture whose other 50%-owner is Tioxide Americas Inc.
(“Tioxide”). Tioxide is a wholly-owned subsidiary of Huntsman
Holdings LLC. LPC owns and operates a chloride-process TiO2 plant in
Lake Charles, Louisiana.
We and
Tioxide are both required to purchase one-half of the TiO2 produced
by LPC. LPC operates on a break-even basis and, accordingly, we
report no equity in earnings of LPC. Each owner’s acquisition
transfer price for its share of the TiO2 produced
is equal to its share of the joint venture’s production costs and interest
expense, if any. Our share of net cost is reported as cost of sales
as the related TiO2 acquired
from LPC is sold. We report distributions we receive from LPC, which
generally relate to excess cash generated by LPC from its non-cash production
costs, and contributions we make to LPC, which generally relate to cash required
by LPC when it builds working capital, as part of our cash flows from operating
activities in our Consolidated Statements of Cash Flows. The net of
these distributions and contributions is reported during the
periods. Net distributions were $4.9 million in 2005 and $2.3 million
in 2006, and net contributions were $4.9 million in 2007. The net
distribution in 2005 and 2006 are stated net of contributions of $10.1 million
and $11.9 million, respectively, and the net contributions in 2007 are stated
net of distributions of $8.0 million.
Summary
balance sheets of LPC are shown below:
|
_____December 31,_____
|
|||||||||
|
2006
|
2007
|
||||||||
|
(In
millions)
|
|||||||||
|
ASSETS
|
|||||||||
|
Current
assets
|
$ | 56.2 | $ | 68.3 | |||||
|
Property
and equipment, net
|
192.6 | 195.2 | |||||||
|
Total
assets
|
$ | 248.8 | $ | 263.5 | |||||
|
LIABILITIES
AND PARTNERS’ EQUITY
|
|||||||||
|
Other
liabilities, primarily current
|
$ | 18.8 | $ | 23.8 | |||||
|
Partners’
equity
|
230.0 | 239.7 | |||||||
|
Total
liabilities and partners’ equity
|
$ | 248.8 | $ | 263.5 | |||||
Summary
income statements of LPC are shown below:
|
Years ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
(In
millions)
|
||||||||||||
|
Revenues
and other income:
|
||||||||||||
|
Kronos
|
$ | 109.4 | $ | 124.2 | $ | 124.6 | ||||||
|
Tioxide
|
110.4 | 125.2 | 125.0 | |||||||||
|
Interest
|
.2 | .4 | .5 | |||||||||
| 220.0 | 249.8 | 250.1 | ||||||||||
|
Cost
and expenses:
|
||||||||||||
|
Cost
of sales
|
219.6 | 249.3 | 249.6 | |||||||||
|
General
and administrative
|
.4 | .5 | .5 | |||||||||
| 220.0 | 249.8 | 250.1 | ||||||||||
|
Net
income
|
$ | - | $ | - | $ | - | ||||||
On
September 22, 2005, LPC temporarily halted production due to Hurricane
Rita. Although storm damage to core processing facilities was not
extensive, a variety of factors, including loss of utilities, limited access and
availability of employees and raw materials, prevented the resumption of partial
operations until October 9, 2005 and full operations until late
2005. The majority of LPC’s property damage and unabsorbed fixed
costs, for periods in which normal production levels were not achieved, were
covered by insurance, and insurance covered our lost profits (subject to
applicable deductibles) resulting from our share of the lost production from
LPC. Both we and LPC have filed claims with our
insurers. We recognized income of $1.8 million related to our
business interruption claim in the fourth quarter of 2006, which is included in
other income on our Consolidated Statement of Operations.
Note
7 -Accounts payable and accrued liabilities:
|
December 31,
|
||||||||
|
2006
|
2007
|
|||||||
|
(In
millions)
|
||||||||
|
Accounts
payable
|
$ | 88.8 | $ | 105.7 | ||||
|
Employee
benefits
|
25.7 | 26.5 | ||||||
|
Accrued
sales discounts and rebates
|
8.5 | 15.2 | ||||||
|
Accrued
interest
|
7.5 | 8.2 | ||||||
|
Other
|
24.8 | 28.5 | ||||||
|
Total
|
$ | 155.3 | $ | 184.1 | ||||
Note
8
- Long-term
debt:
|
December 31,
|
||||||||
|
2006
|
2007
|
|||||||
|
(In
millions)
|
||||||||
|
Kronos
International, Inc. 6.5% Senior Secured Notes
|
$ | 525.0 | $ | 585.5 | ||||
|
Revolving
credit facility:
|
||||||||
|
Kronos
U.S. subsidiaries
|
6.5 | 15.4 | ||||||
|
Other
|
4.7 | 5.3 | ||||||
|
Total
debt
|
536.2 | 606.2 | ||||||
|
Less
current maturities
|
.9 | 16.2 | ||||||
|
Total
long-term debt
|
$ | 535.3 | $ | 590.0 | ||||
Senior Secured Notes. On April 11, 2006, Kronos International, Inc.
(“KII”), one of our subsidiaries, issued an aggregate of euro 400 million
principal amount of new 6.5% Senior Secured Notes due April 2013, at 99.306% of
their principal amount ($498.5 million when issued) to yield an effective
interest rate of 7.1%. These Senior Secured Notes are collateralized
by a pledge of 65% of the common stock or other ownership interests of certain
of our first-tier European operating subsidiaries. Such operating
subsidiaries are Kronos Titan GmbH, Kronos Denmark ApS, Kronos Limited and
Societe Industrielle Du Titane, S.A. We issued the 6.5% Notes
pursuant to an indenture which contains a number of covenants and restrictions
which, among other things, restricts our ability to incur debt, incur liens, pay
dividends or merge or consolidate with, or sell or transfer all or substantially
all of the assets of these subsidiaries to, another entity. At our
option, we may redeem the 6.5% Notes on or after October 15, 2009 at redemption
prices ranging from 103.25% of the principal amount, declining to 100% on or
after October 15, 2012. In addition, on or before April 15, 2009, we
may redeem up to 35% of the 6.5% Notes with the net proceeds of a qualified
public equity offering at 106.5% of the principal amount. In the
event of a change of control, as defined, we would be required to make an offer
to purchase the 6.5% Notes at 101% of the principal amount. We would
also be required to make an offer to purchase a specified portion of the 6.5%
Notes at par value in the event we generate a certain amount of net proceeds
from the sale of assets outside the ordinary course of business, and such net
proceeds are not otherwise used for specified purposes within a specified time
period. At December 31, 2006 and 2007, the estimated market price of
the 6.5% Notes was approximately euro 970 and euro 860 per euro 1,000 principal
amount, respectively. See Note 16. At December 31, 2007,
the carrying amount of the Notes includes euro 2.1 million ($3.1 million) of
unamortized original issue discount (2006 – euro 2.5 million, or $3.3
million).
We used
the proceeds from the 6.5% Notes to fund the May 2006 redemption of our 8.875%
Senior Secured Notes at 104.437% of the aggregate principal amount of euro 375
million for an aggregate of $491.4 million, including the $20.9 million call
premium. We recognized a $22.3 million pre-tax interest charge in
2006 related to the prepayment of the 8.875% Notes, consisting of the call
premium on the 8.875% Notes and the write-off of deferred financing costs and
unamortized premium related to the notes.
Revolving credit facilities.
Our operating subsidiaries in Germany, Belgium, Norway and Denmark have a euro
80 million secured revolving bank credit facility that matures in June
2008. We may denominate borrowings in euros, Norwegian kroners or
U.S. dollars. Outstanding borrowings bear interest at the applicable
interbank market rate plus 1.125%. We may also issue up to euro 5
million of letters of credit under the facility. The credit facility
is collateralized by the accounts receivable and inventories of the borrowers,
plus a limited pledge of all of the other assets of the Belgian
borrower. The credit facility contains certain restrictive covenants
which, among other things, restricts the ability of the borrowers to incur debt,
incur liens, pay dividends or merge or consolidate with, or sell or transfer all
or substantially all of their assets to, another entity. In addition,
the credit facility contains customary cross-default provisions with respect to
other debt and obligations of the borrowers, KII and its other
subsidiaries. At December 31, 2007, no amounts were outstanding under
the European Credit Facility, and the equivalent of $117.7 million was available
for additional borrowing by the subsidiaries. We expect to obtain an
extension of our European secured revolving bank credit facility sometime prior
to the current June 2008 maturity.
Certain
of our U.S. subsidiaries have a $50 million revolving credit facility ($15.4
million outstanding at December 31, 2007) that matures in September
2008. The facility is collateralized by the accounts receivable,
inventories and certain fixed assets of the borrowers. Borrowings
under this facility are limited to the lesser of $45 million or a
formula-determined amount based upon the accounts receivable and inventories of
the borrowers. Borrowings bear interest at either the prime rate or
rates based upon the eurodollar rate (7.5% at December 31, 2007). The
facility contains certain restrictive covenants which, among other things,
restricts the abilities of the borrowers to incur debt, incur liens, pay
dividends in certain circumstances, sell assets or enter into
mergers. At December 31, 2007, $23.0 million was available for
additional borrowing under the facility. We expect to obtain an
extension of our U.S. revolving credit facility sometime prior to the current
September 2008 maturity.
Our
Canadian subsidiary has a Cdn. $30 million revolving credit facility that
matures in January 2009. The facility is collateralized by the
accounts receivable and inventories of the borrower. Borrowings under
this facility are limited to the lesser of Cdn. $26 million or a
formula-determined amount based upon the accounts receivable and inventories of
the borrower. Borrowings bear interest at rates based upon either the
Canadian prime rate, the U.S. prime rate or LIBOR. The facility
contains certain restrictive covenants which, among other things, restrict the
ability of the borrower to incur debt, incur liens, pay dividends in certain
circumstances, sell assets or enter into mergers. At December 31,
2007, no amounts were outstanding and the equivalent of $11.4 million was
available for borrowing under the facility.
Under the
cross-default provisions of the 6.5% Notes, the 6.5% Notes may be accelerated
prior to their stated maturity if KII or any of KII’s subsidiaries default under
any other indebtedness in excess of $20 million due to a failure to pay such
other indebtedness at its due date (including any due date that arises prior to
the stated maturity as a result of a default under such other
indebtedness). Under the cross-default provisions of the European
credit facility, any outstanding borrowings under the facility may be
accelerated prior to their stated maturity if the borrowers or KII default under
any other indebtedness in excess of euro 5 million due to a failure to pay such
other indebtedness at its due date (including any due date that arises prior to
the stated maturity as a result of a default under such other
indebtedness). Under the cross-default provisions of our U.S. credit
facility, any outstanding borrowing under such facility may be accelerated prior
to their stated maturity in the event of our bankruptcy. The Canadian
revolving credit facility contains no cross-default provisions. The
European, U.S. and Canadian revolving credit facilities each contain provisions
that allow the lender to accelerate the maturity of the applicable facility in
the event of a change of control, as defined, of the applicable
borrower. In the event any of these cross-default or
change-of-control provisions become applicable, and such indebtedness is
accelerated, we would be required to repay such indebtedness prior to their
stated maturity.
Aggregate
maturities of long-term debt at December 31, 2007 are shown in the table
below.
|
Years ending December 31,
|
_____Amount____
|
|||
|
(In
millions)
|
||||
|
2008
|
$ | 16.2 | ||
|
2009
|
1.0 | |||
|
2010
|
1.1 | |||
|
2011
|
1.1 | |||
|
2012
|
1.2 | |||
|
2013
and thereafter
|
585.6 | |||
|
Total
|
$ | 606.2 | ||
Restrictions. Certain of the
credit facilities described above require the respective borrower to maintain
minimum levels of equity, require the maintenance of certain financial ratios,
limit dividends and additional indebtedness and contain other provisions and
restrictive covenants customary in lending transactions of this
type. We are currently in compliance with all of our applicable debt
covenants. At December 31, 2007, the restricted net assets of
consolidated subsidiaries approximated $103 million. At December 31,
2007, there were no restrictions on our ability to pay dividends.
Note
9 – Income taxes:
|
Years ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
(In
millions)
|
||||||||||||
|
Pre-tax
income:
|
||||||||||||
|
U.S.
|
$ | 13.0 | $ | 9.4 | $ | .6 | ||||||
|
Non-U.S.
|
125.8 | 71.9 | 47.4 | |||||||||
|
Total
|
$ | 138.8 | $ | 81.3 | $ | 48.0 | ||||||
|
Expected
tax expense, at U.S. federal statutory income tax rate of
35%
|
$ | 48.6 | $ | 28.5 | $ | 16.8 | ||||||
|
Non-U.S.
tax rates
|
.3 | (1.6 | ) | .3 | ||||||||
|
German
tax attribute adjustment
|
17.5 | (21.7 | ) | 8.7 | ||||||||
|
Incremental
U.S. tax and rate differences on equity in earnings of non-tax group
companies
|
.2 | 2.3 | (1.7 | ) | ||||||||
|
Nondeductible
expenses
|
4.6 | 4.4 | 2.9 | |||||||||
|
U.S.
state income taxes, net
|
4.3 | 1.1 | (.5 | ) | ||||||||
|
Tax
contingency reserve adjustment, net
|
(11.5 | ) | (10.7 | ) | (2.0 | ) | ||||||
|
Foreign
tax rate changes
|
.9 | (1.1 | ) | 91.0 | ||||||||
|
Assessment
(refund) of prior year income taxes
|
2.3 | (1.4 | ) | (.9 | ) | |||||||
|
Other,
net
|
.2 | (.5 | ) | .1 | ||||||||
|
Provision
for income taxes (benefit)
|
$ | 67.4 | $ | (.7 | ) | $ | 114.7 | |||||
|
Years ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
(In
millions)
|
||||||||||||
|
Components
of income tax expense (benefit):
|
||||||||||||
|
Currently
payable (refundable):
|
||||||||||||
|
U.S.
federal and state
|
$ | 8.2 | $ | 5.5 | $ | (1.2 | ) | |||||
|
Non-U.S.
|
32.4 | 22.0 | 10.9 | |||||||||
| 40.6 | 27.5 | 9.7 | ||||||||||
|
Deferred
income taxes (benefit):
|
||||||||||||
|
U.S.
federal and state
|
(1.0 | ) | .4 | (1.5 | ) | |||||||
|
Non-U.S.
|
27.8 | (28.6 | ) | 106.5 | ||||||||
| 26.8 | (28.2 | ) | 105.0 | |||||||||
|
Provision
for income taxes (benefit)
|
$ | 67.4 | $ | (.7 | ) | $ | 114.7 | |||||
|
Comprehensive
provision for income taxes allocable to:
|
||||||||||||
|
Net
income
|
$ | 67.4 | $ | (.7 | ) | $ | 114.7 | |||||
|
Other
comprehensive income -
|
||||||||||||
|
Pension
plans
|
(33.8 | ) | 7.1 | 28.5 | ||||||||
|
OPEB
|
- | - | .1 | |||||||||
|
Adoption
of SFAS No. 158:
|
||||||||||||
|
Pension
plans
|
- | (20.0 | ) | (1.2 | ) | |||||||
|
OPEB
|
- | .3 | - | |||||||||
|
Total
|
$ | 33.6 | $ | (13.3 | ) | $ | 142.1 | |||||
The
components of our net deferred income taxes at December 31, 2006 and 2007, and
changes in the deferred income tax valuation allowance during the past three
years, are summarized in the following tables.
|
December 31,
|
||||||||||||||||
|
2006
|
2007
|
|||||||||||||||
|
Assets
|
Liabilities
|
Assets
|
Liabilities
|
|||||||||||||
|
(In
millions)
|
||||||||||||||||
|
Tax
effect of temporary differences related to:
|
||||||||||||||||
|
Inventories
|
$ | 2.5 | $ | (2.4 | ) | $ | .6 | $ | (3.0 | ) | ||||||
|
Property
and equipment
|
19.4 | (55.9 | ) | .1 | (58.8 | ) | ||||||||||
|
Accrued
postretirement benefits other than pension (“OPEB”) costs
|
2.9 | - | 3.6 | - | ||||||||||||
|
Pension
asset
|
- | (37.6 | ) | - | (31.5 | ) | ||||||||||
|
Accrued
pension cost
|
68.5 | - | 37.4 | - | ||||||||||||
|
Other
accrued liabilities and deductible differences
|
25.5 | - | 23.5 | - | ||||||||||||
|
Other
taxable differences
|
- | (20.3 | ) | - | (5.2 | ) | ||||||||||
|
Tax
on unremitted earnings of non-U.S. subsidiaries
|
- | (4.9 | ) | - | (3.5 | ) | ||||||||||
|
Tax
loss and tax credit carryforwards
|
219.3 | - | 158.7 | - | ||||||||||||
|
Valuation
allowance
|
- | - | (3.0 | ) | - | |||||||||||
|
Adjusted
gross deferred tax assets (liabilities)
|
338.1 | (121.1 | ) | 220.9 | (102.0 | ) | ||||||||||
|
Netting
of items by tax jurisdiction
|
(71.6 | ) | 71.6 | (50.5 | ) | 50.5 | ||||||||||
| 266.5 | (49.5 | ) | 170.4 | (51.5 | ) | |||||||||||
|
Less
net current deferred tax asset (liability)
|
2.1 | (2.2 | ) | 1.6 | (3.3 | ) | ||||||||||
|
Net
noncurrent deferred tax asset (liability)
|
$ | 264.4 | $ | (47.3 | ) | $ | 168.8 | $ | (48.2 | ) | ||||||
|
Years ended December 31,
|
|||
|
2005
|
2006
|
2007
|
|
|
(In
millions)
|
|||
|
Increase
in valuation allowance:
|
|||
|
Offset
to the change in gross deferred income tax assets due to redeterminations
of certain tax attributes
|
$ -
|
$ -
|
$ 3.0
|
Tax
authorities are examining certain of our non-U.S. tax returns and have or may
propose tax deficiencies, including penalties and interest. For
example:
|
·
|
We
previously received a preliminary tax assessment related to 1993 from the
Belgian tax authorities proposing tax deficiencies, including related
interest, of approximately euro 6 million. The Belgian tax
authorities filed a lien on the fixed assets of our Belgian TiO2
operations in connection with their assessment. This lien did not
interfere with on-going operations at the facility. We filed a protest to
this assessment, and in July 2006 the Belgian tax authorities withdrew the
assessment. The lien was subsequently
released.
|
|
·
|
The
Norwegian tax authorities previously notified us of their intent to assess
tax deficiencies of approximately kroner 12 million relating to the years
1998 through 2000. We objected to this proposed assessment, and
in May 2006 the Norwegian tax authorities withdrew the
assessment.
|
Following
a European Union Court of Justice decision and subsequent proceedings which
concluded in the second quarter of 2007 that we believe may favorably impact us,
we initiated a new tax planning strategy. If we are successful, we
would generate a substantial cash tax benefit in the form of refunds of income
taxes we have previously paid in Europe which we currently do not expect would
affect our future earnings when received. It may be a number of years before we
know if our implementation of this tax planning strategy will be successful, and
accordingly we have not currently recognized any refundable income taxes that we
might ultimately receive. Partially as a result of and consistent with our
initiation of this tax planning strategy, in the second quarter of 2007 we
amended prior-year income tax returns in Germany. As a consequence of amending
our tax returns, our German corporate and trade tax net operating loss
carryforwards were reduced by an aggregate of euro 13.4 million and euro 22.6
million, respectively, and, accordingly, we recognized an $8.7 million provision
for deferred income taxes in the second quarter of 2007 related to the
adjustment of our German tax attributes.
In August
2007, Germany enacted certain changes in their income tax
laws. The most significant change is the reduction of the German
corporate and trade income tax rates. We have a significant net deferred income
tax asset in Germany, primarily related to the benefit associated with our
corporate and trade tax net operating loss carryforwards. We measure
our net deferred taxes using the applicable enacted tax rates, and the effect of
any change in the applicable enacted tax rate is recognized in the period of
enactment. Accordingly, we reported a decrease in our net deferred
tax asset in Germany of $90.8 million in the third quarter of 2007, which is
recognized as a component of our provision for income taxes.
Principally
as a result of the withdrawal of the Belgian and Norwegian assessments discussed
above and the resolution of our ongoing income tax audits in Germany, we
recognized a $10.7 million income tax benefit in 2006 related to the total
reduction in our income tax contingency reserve.
Due to the favorable resolution of
certain income tax audits related to our German and Belgian operations during
2006, we recognized a net $1.4 million income tax benefit related to adjustments
of prior year income taxes.
Due to the resolution of certain income
tax audits in Germany, we also recognized a $21.7 million income tax benefit in
2006 primarily related to an increase in the amount of our German trade tax net
operating loss carryforward. The increase resulted from a
reallocation of expenses between our German units related to periods in which
such units did not file on a consolidated basis for German trade tax purposes,
with the net result that the amount of our German trade tax carryforward
recognized by the German tax authorities has increased.
Other income tax examinations related
to our operations continue, and we cannot guarantee that these tax matters will
be resolved in our favor due to the inherent uncertainties involved in
settlement initiatives and court and tax proceedings. We believe we
have adequate accruals for additional taxes and related interest expense which
could ultimately result from tax examinations. We believe the
ultimate disposition of tax examinations should not have a material adverse
effect on our consolidated financial position, results of operations or
liquidity.
In June
2006, Canada enacted a 2% reduction in the Canadian federal income tax rate and
the elimination of the federal surtax. The 2% reduction will be
phased in from 2008 to 2010, and the federal surtax will be eliminated in
2008. As a result, in 2006, we recognized a $1.1 million income tax
benefit related to the effect of such reduction on our previously-recorded net
deferred income tax liability.
In 2005,
we reached an agreement in principle with the German tax authorities regarding
such tax authorities’ objection to the value assigned to certain intellectual
property rights held by our operating subsidiary in Germany. Under
the agreement in principle, the value assigned to such intellectual property for
German income tax purposes was reduced retroactively, resulting in a reduction
in the amount of our net operating loss carryforward in Germany as well as a
future reduction in the amount of amortization expense attributable to such
intellectual property. As a result, we recognized a $17.5 million
non-cash deferred income tax expense in the third quarter of 2005 related to
such agreement. The $11.5 million tax contingency adjustment income
tax benefit in 2005 relates primarily to the withdrawal of the Belgium tax
authorities’ assessment related to 1999 and the Canadian tax authorities’
reduction of one of its assessments relating to 1998 and 1999.
At
December 31, 2007, we had the equivalent of $780 million and $215 million of net
operating loss carryforwards for German corporate and trade tax purposes,
respectively, all of which have no expiration date.
Note
10 – Employee benefit plans:
Defined
contribution plans. We maintain
various defined contribution pension plans with our contributions based on
matching or other formulas. Defined contribution plan expense
approximated $.6 million in 2005, $.6 million in 2006 and $.5 million in
2007.
Defined benefit
plans. We maintain
various defined benefit pension plans. Non-U.S. employees are covered
by plans in their respective countries and a majority of U.S. employees are
eligible to participate in a contributory savings plan. Prior to
December 31, 2007, we used a September 30 measurement date for our defined
benefit pension plans. Effective December 31, 2007, all of our
defined benefit pension plans now use a December 31 measurement
date. See Note 17.
We expect
to contribute the equivalent of approximately $22 million to all of our defined
benefit pension plans during 2008. Benefit payments to plan
participants out of plan assets are expected to be the equivalent
of:
|
Years ending December 31,
|
Amount
|
|||
|
(In
millions)
|
||||
|
2008
|
$ | 23.3 | ||
|
2009
|
22.2 | |||
|
2010
|
20.9 | |||
|
2011
|
21.9 | |||
|
2012
|
24.4 | |||
|
Next
5 years
|
123.6 | |||
The
funded status of our defined benefit pension plans is presented in the table
below.
|
Years ended December 31,
|
||||||||
|
2006
|
2007
|
|||||||
|
(In
millions)
|
||||||||
|
Change
in projected benefit obligations (“PBO”):
|
||||||||
|
Benefit
obligations at beginning of the year
|
$ | 429.6 | $ | 460.1 | ||||
|
Change
in measurement date,net
|
- | 7.1 | ||||||
|
Service
cost
|
7.6 | 7.9 | ||||||
|
Interest
cost
|
19.0 | 22.0 | ||||||
|
Participant
contributions
|
1.5 | 2.1 | ||||||
|
Plan
amendments
|
- | 4.4 | ||||||
|
Actuarial
gains
|
(16.1 | ) | (70.2 | ) | ||||
|
Change
in foreign currency exchange rates
|
39.2 | 52.8 | ||||||
|
Benefits
paid
|
(20.7 | ) | (30.7 | ) | ||||
|
Benefit
obligations at end of the year
|
$ | 460.1 | $ | 455.5 | ||||
|
Change
in plan assets:
|
||||||||
|
Fair
value of plan assets at beginning of the year
|
$ | 238.0 | $ | 279.8 | ||||
|
Change
in measurement date, net
|
- | (2.1 | ) | |||||
|
Actual
return on plan assets
|
14.3 | 12.6 | ||||||
|
Employer
contributions
|
26.8 | 27.1 | ||||||
|
Participant
contributions
|
1.5 | 2.1 | ||||||
|
Change
in foreign currency exchange rates
|
19.9 | 35.5 | ||||||
|
Benefits
paid
|
(20.7 | ) | (30.7 | ) | ||||
|
Fair
value of plan assets at end of year
|
$ | 279.8 | $ | 324.3 | ||||
|
Funded
status
|
$ | (180.4 | ) | $ | (131.2 | ) | ||
|
Amounts
recognized in the balance sheet:
|
||||||||
|
Pension
asset
|
$ | 5.6 | $ | 7.2 | ||||
|
Accrued
pension costs:
|
||||||||
|
Current
|
(.1 | ) | (.1 | ) | ||||
|
Noncurrent
|
(185.9 | ) | (138.3 | ) | ||||
|
Total
|
$ | (180.4 | ) | $ | (131.2 | ) | ||
|
Accumulated
other comprehensive loss:
|
||||||||
|
Actuarial
losses
|
$ | 188.5 | $ | 111.5 | ||||
|
Prior
service cost
|
7.4 | 6.6 | ||||||
|
Net
transition obligations
|
4.3 | 3.7 | ||||||
|
Total
|
$ | 200.2 | $ | 121.8 | ||||
|
Accumulated
benefit obligations (“ABO”)
|
$ | 400.3 | $ | 384.4 | ||||
The
amounts shown in the table above for actuarial losses, prior service cost and
net transition obligations at December 31, 2006 and 2007 have not yet been
recognized as components of our periodic defined benefit pension cost as of
those dates. These amounts will be recognized as components of our
periodic defined benefit cost in future years. In accordance with
SFAS No. 158, these amounts, net of deferred income taxes, are recognized in our
accumulated other comprehensive income (loss) at December 2006 and
2007. We expect approximately $4.7 million, $.9 million and $.5
million of the unrecognized actuarial losses, prior service costs and net
transition obligations, respectively, as of December 31, 2007 will be recognized
as components of our net periodic defined benefit pension cost in
2008.
The table
below details the changes in plan assets and benefit obligations recognized in
accumulated other comprehensive income (loss) during 2007.
|
Year
Ended
|
||||
|
December 31, 2007
|
||||
|
(In
millions)
|
||||
|
Changes
in plan assets and benefit obligations
recognized
in other comprehensive income (loss):
|
||||
|
Current
year:
|
||||
|
Net
actuarial gain
|
$ | 70.4 | ||
|
Plan
amendment
|
(4.4 | ) | ||
|
Amortization
of unrecognized:
|
||||
|
Prior service cost
|
.7 | |||
|
Net transition obligations
|
.5 | |||
|
Net
actuarial losses
|
8.5 | |||
|
Change
in measurement date:
|
||||
|
Prior service cost
|
.2 | |||
|
Net transition obligations
|
.1 | |||
|
Net
actuarial losses
|
2.4 | |||
|
Total
|
$ | 78.4 | ||
The
components of our net periodic defined benefit pension cost are presented in the
table below. During 2007, the amounts shown below for the
amortization of unrecognized actuarial losses, prior service cost and net
transition obligations, net of deferred income taxes were recognized as
components of our accumulated other comprehensive income (loss) at December 31,
2006.
|
Years ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
(In
millions)
|
||||||||||||
|
Net
periodic pension cost:
|
||||||||||||
|
Service
cost benefits
|
$ | 7.4 | $ | 7.6 | $ | 7.9 | ||||||
|
Interest
cost on PBO
|
17.7 | 19.0 | 22.0 | |||||||||
|
Expected
return on plan assets
|
(15.7 | ) | (15.9 | ) | (17.2 | ) | ||||||
|
Amortization
of prior service cost
|
.6 | .6 | .7 | |||||||||
|
Amortization
of net transition obligations
|
.4 | .4 | .5 | |||||||||
|
Recognized
actuarial losses
|
3.7 | 8.7 | 8.5 | |||||||||
|
Total
|
$ | 14.1 | $ | 20.4 | $ | 22.4 | ||||||
Certain
information concerning our defined benefit pension plans is presented in the
table below.
|
December 31,
|
||||||||
|
2006
|
2007
|
|||||||
|
(In
millions)
|
||||||||
|
PBO
at end of the year:
|
||||||||
|
U.S.
plans
|
$ | 14.3 | $ | 14.1 | ||||
|
Non-U.S.
plans
|
445.8 | 441.4 | ||||||
|
Total
|
$ | 460.1 | $ | 455.5 | ||||
|
Fair
value of plan assets at end of the year:
|
||||||||
|
U.S.
plans
|
$ | 19.1 | $ | 20.5 | ||||
|
Non-U.S.
plans
|
260.7 | 303.8 | ||||||
|
Total
|
$ | 279.8 | $ | 324.3 | ||||
|
Plans
for which the ABO exceeds plan assets (all non-U.S.
plans):
|
||||||||
|
PBO
|
$ | 445.8 | $ | 287.4 | ||||
|
ABO
|
361.7 | 240.6 | ||||||
|
Fair
value of plan assets
|
260.7 | 164.4 | ||||||
The
weighted-average rate assumptions used in determining the actuarial present
value of benefit obligations as of December 31, 2006 and 2007 are presented in
the table below. Such weighted-average rates were determined using
the projected benefit obligations at each date.
|
Rate
|
December 31,
|
|||||||
|
2006
|
2007
|
|||||||
|
Discount
rate
|
4.7 | % | 5.5 | % | ||||
|
Increase
in future compensation levels
|
3.0 | % | 3.0 | % | ||||
The
weighted-average rate assumptions used in determining the net periodic pension
cost for 2005, 2006 and 2007 are presented in the table below. The
weighted-average discount rate and the weighted-average increase in future
compensation levels were determined using the projected benefit obligations as
of the beginning of each year, and the weighted-average long-term return on plan
assets was determined using the fair value of plan assets as of the beginning of
each year.
|
Rate
|
Years ended December
31,
|
|||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
Discount
rate
|
5.2 | % | 4.3 | % | 4.7 | % | ||||||
|
Increase
in future compensation levels
|
2.8 | % | 2.8 | % | 3.0 | % | ||||||
|
Long-term
return on plan assets
|
6.4 | % | 6.1 | % | 6.2 | % | ||||||
Variances
from actuarially assumed rates will result in increases or decreases in
accumulated pension obligations, pension expense and funding requirements in
future periods.
In
determining the expected long-term rate of return on plan asset assumptions, we
consider the long-term asset mix (e.g. equity vs. fixed income) for the assets
for each of our plans and the expected long-term rates of return for such asset
components. In addition, we receive advice about appropriate
long-term rates of return from our third-party actuaries. Such
assumed asset mixes are summarized below:
|
·
|
In
Germany, the composition of our plan assets is established to satisfy the
requirements of the German insurance
commissioner.
|
|
·
|
In
Canada, we currently have a plan asset target allocation of 60% to equity
managers and 40% to fixed income managers. We expect the
long-term rate of return for such investments to average approximately 125
basis points above the applicable equity or fixed income
index.
|
|
·
|
In
Norway, we currently have a plan asset target allocation of 14% to equity
managers, 64% to fixed income managers and the remainder primarily to
liquid investments such as money markets. The expected
long-term rate of return for such investments is approximately
8.5%, 5.0% and 4.5%,
respectively.
|
|
·
|
In
the U.S., all of the assets were invested in The Combined Master
Retirement Trust (“CMRT”), a collective investment trust sponsored by
Contran to permit the collective investment by certain master trusts which
fund certain employee benefit plans sponsored by Contran and certain of
its affiliates.
|
The CMRT’s long-term investment objective is to provide a rate of return
exceeding a composite of broad market equity and fixed income indices (including
the S&P 500 and certain Russell indices) utilizing both third-party
investment managers as well as investments directed by Mr.
Simmons. Mr. Simmons is the sole trustee of the CMRT. The
trustee of the CMRT, along with the CMRT’s investment committee, of which Mr.
Simmons is a member, actively manage the investments of the
CMRT. Such parties have in the past, and may in the future,
periodically change the asset mix of the CMRT based upon, among other things,
advice they receive from third-party advisors and their expectations as to what
asset mix will generate the greatest overall return. For the years
ended December 31, 2005, 2006 and 2007, the assumed long-term rate of return for
plan assets invested in the CMRT was 10%. In determining the
appropriateness of such long-term rate of return assumption, we considered,
among other things, the historical rates of return for the CMRT, the current and
projected asset mix of the CMRT and the investment objectives of the CMRT’s
managers. During the 20-year history of the CMRT from its inception
in 1987 through December 31, 2007, the average annual rate of return has been
14% (including a 17% return for 2006 and a 11% return for 2007).
Our
pension plan weighted average asset allocations by asset category were as
follows:
|
December 31, 2006
|
||||||||||||||||
|
CMRT
|
Germany
|
Canada
|
Norway
|
|||||||||||||
|
Equity
securities and limited
partnerships
|
97 | % | 23 | % | 66 | % | 13 | % | ||||||||
|
Fixed
income securities
|
2 | 48 | 32 | 64 | ||||||||||||
|
Real
estate
|
1 | 14 | - | - | ||||||||||||
|
Cash,
cash equivalents and other
|
- | 15 | 2 | 23 | ||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
|
December 31, 2007
|
||||||||||||||||
|
CMRT
|
Germany
|
Canada
|
Norway
|
|||||||||||||
|
Equity
securities and limited
partnerships
|
98 | % | 28 | % | 60 | % | 18 | % | ||||||||
|
Fixed
income securities
|
- | 49 | 34 | 68 | ||||||||||||
|
Real
estate
|
2 | 12 | - | - | ||||||||||||
|
Cash,
cash equivalents and other
|
- | 11 | 6 | 14 | ||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
We
regularly review our actual asset allocation for each of our plans, and
periodically rebalance the investments in each plan to more accurately reflect
the targeted allocation when we consider it appropriate.
Postretirement
benefits other than pensions (“OPEB”). We provide certain
health care and life insurance benefits for eligible retired
employees. Certain of our Canadian employees may become eligible for
such postretirement health care and life insurance benefits if they reach
retirement age while working for us. In 1989 we began phasing out
such benefits for active U.S. employees over a ten-year period and U.S.
employees retiring after 1998 are not entitled to any such
benefits. The majority of all retirees are required to contribute a
portion of the cost of their benefits and certain current and future retirees
are eligible for reduced health care benefits at age 65. We use a
December 31 measurement date for our OPEB plans. We have no OPEB plan
assets, rather, we fund medical claims as they are paid. Benefit
payments to OPEB plans are expected to be the equivalent of:
|
Years ending December 31,
|
Amount
|
|||
|
(In
millions)
|
||||
|
2008
|
$ | .8 | ||
|
2009
|
.7 | |||
|
2010
|
.7 | |||
|
2011
|
.7 | |||
|
2012
|
.6 | |||
|
Next
5 years
|
2.9 | |||
The
funded status of our OPEB plans is presented in the table below:
|
Years ended December 31,
|
||||||||
|
2006
|
2007
|
|||||||
|
(In
millions)
|
||||||||
|
Change
in accumulated OPEB obligations:
|
||||||||
|
Obligations
at beginning of the year
|
$ | 11.3 | $ | 10.8 | ||||
|
Service
cost
|
.3 | .3 | ||||||
|
Interest
cost
|
.6 | .7 | ||||||
|
Actuarial
gains
|
(.4 | ) | (.2 | ) | ||||
|
Plan
amendments
|
- | (.1 | ) | |||||
|
Change
in foreign currency exchange rates
|
- | 1.3 | ||||||
|
Benefits
paid from employer contributions
|
(1.0 | ) | (.4 | ) | ||||
|
Obligations
at end of the year
|
10.8 | 12.4 | ||||||
|
Fair
value of plan assets
|
- | - | ||||||
|
Funded
status
|
$ | (10.8 | ) | $ | (12.4 | ) | ||
|
Amounts
recognized in the balance sheet:
|
||||||||
|
Current
accrued pension costs
|
$ | (1.0 | ) | $ | (.8 | ) | ||
|
Noncurrent
accrued pension costs
|
(9.8 | ) | (11.6 | ) | ||||
|
Total
|
$ | (10.8 | ) | $ | (12.4 | ) | ||
|
Accumulated
other comprehensive income:
|
||||||||
|
Net
actuarial losses
|
$ | .6 | $ | .3 | ||||
|
Prior
service credit
|
(1.0 | ) | (.9 | ) | ||||
|
Total
|
$ | (.4 | ) | $ | (.6 | ) | ||
The
amounts shown in the table above for actuarial losses and prior service credit
at December 31, 2006 and 2007 have not yet been recognized as components of our
periodic OPEB cost as of those dates. These amounts will be
recognized as components of our periodic OPEB cost in future
years. In accordance with SFAS No. 158, these amounts, net of
deferred income taxes, are now recognized in our accumulated other comprehensive
income (loss). We expect to recognize approximately $.1 million of
the unrecognized actuarial losses and $.2 million of prior service credit as
components of our periodic OPEB cost in 2008. See Note
17.
The table
below details the changes in benefit obligations recognized in other
comprehensive income during 2007.
|
Year
Ended
|
||||
|
December 31, 2007
|
||||
|
(In
millions)
|
||||
|
Changes
in benefit obligations recognized in
other
comprehensive income:
|
||||
|
Current
year:
|
||||
|
Net
actuarial gain
|
$ | .2 | ||
|
Plan
amendment
|
.1 | |||
|
Amortization
of unrecognized:
|
||||
|
Prior service credit
|
(.2 | ) | ||
|
Net
actuarial losses
|
.1 | |||
|
Total
|
$ | .2 | ||
At
December 31, 2007, the accumulated OPEB obligations for all OPEB plans was
comprised of $3.4 million related to U.S. plans and $9.0 million related to our
Canadian plan (2006 - $3.8 million and $7.0 million, respectively).
The
components of our periodic OPEB costs are presented in the table
below. During 2007, the amounts shown below for the amortization of
recognized actuarial losses and prior service credit, net of deferred income
taxes, were recognized as components of our accumulated other comprehensive
income (loss) at December 31, 2006.
|
Years ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
(In
millions)
|
||||||||||||
|
Net
periodic OPEB cost (credit):
|
||||||||||||
|
Service
cost
|
$ | .2 | $ | .3 | $ | .3 | ||||||
|
Interest
cost
|
.5 | .6 | .7 | |||||||||
|
Amortization
of prior service credit
|
(.6 | ) | (.2 | ) | (.2 | ) | ||||||
|
Recognized
actuarial losses
|
.1 | .1 | .1 | |||||||||
|
Total
|
$ | .2 | $ | .8 | $ | .9 | ||||||
A summary
of our key actuarial assumptions used to determine the net benefit obligation as
of December 31, 2006 and 2007 are presented in the table below. The
weighted average discount rate was determined using the projected benefit
obligation as of such dates. The impact of assumed increases in
future compensation levels does not have a material effect on the actuarial
present value of the benefit obligation as substantially all of such benefits
relate solely to eligible retirees, for which compensation is not
applicable.
|
2006
|
2007
|
|||||||
|
Healthcare
inflation:
|
||||||||
|
Initial
rate
|
7.0 | % | 8.5 | % | ||||
|
Ultimate
rate
|
5.5 | % | 5.5 | % | ||||
|
Year
of ultimate rate achievement
|
2010
|
2014
|
||||||
|
Weighted
average discount rate
|
5.8 | % | 6.2 | % | ||||
Assumed
health care cost trend rates have a significant effect on the amounts we report
for health care plans. A one percent change in assumed health care
trend rates would have the following effects:
|
1% Increase
|
1% Decrease
|
|||||||
|
(In
millions)
|
||||||||
|
Effect
on net OPEB cost during 2007
|
$ | (.2 | ) | $ | .2 | |||
|
Effect
at December 31, 2007 on
postretirement
obligation
|
(1.7 | ) | 1.4 | |||||
The
weighted average discount rate used in determining the net periodic OPEB cost
for 2007 was 5.8% (2006 – 5.6%; 2005 – 5.7%). Such weighted average
rate was determined using the projected benefit obligation as of the beginning
of each year. The impact of assumed increases in future compensation
levels does not have a material effect on the net periodic OPEB cost as
substantially all of such benefits relate solely to eligible retirees, for which
compensation is not applicable. The impact of assumed rate of return
on plan assets also does not have a material affect on the net periodic OPEB
cost as there were no plan assets as of December 31, 2006 or 2007.
Variances
from actuarially-assumed rates will result in additional increases or decreases
in accumulated OPEB obligations, net periodic OPEB cost and funding requirements
in future periods.
The
Medicare Prescription Drug, Improvement and Modernization Act of 2003 provides a
federal subsidy to sponsors of retiree health care benefit plans that provide a
benefit that is at least actuarially equivalent to Medicare Part
D. We are eligible for the federal subsidy. We
account for the effect of this subsidy prospectively from the date we determine
actuarial equivalence. The subsidy did not have a material impact on
the applicable accumulated postretirement benefit obligation, and will not have
a material impact on the net periodic OPEB cost going forward.
Note
11 – Other noncurrent liabilities:
|
December
31,
2006
|
December
31,
2007
|
|||||||
|
(In
millions)
|
||||||||
|
Reserve
for uncertain tax positions
|
$ | - | $ | 14.9 | ||||
|
Employee
benefits
|
6.9 | 8.2 | ||||||
|
Insurance
claims and expenses
|
1.9 | 2.3 | ||||||
|
Other
|
6.5 | 6.0 | ||||||
|
Total
|
$ | 15.3 | $ | 31.4 | ||||
Note
12 – Common stock compensation and other stock transactions:
NL common stock
options held by our employees. Certain of our employees have
been granted nonqualified options to purchase NL common stock under the terms of
certain option plans sponsored by NL. Generally, the stock options
are granted at a price equal to or greater than 100% of the market price of NL's
common stock at the date of grant, vest over a five-year period and expire ten
years from the date of grant.
At
December 31, 2007, our employees held options to purchase approximately 97,000
shares of NL common stock. These options are exercisable at various
dates through 2011; 25,000 have exercise prices ranging from $2.66 to $5.63 per
share and 72,000 have an exercise price of $11.49 per share.
At
December 31, 2007, all of the outstanding options were exercisable, with an
aggregate intrinsic value (defined as the excess of the market price of NL’s
common stock over the exercise price) of $151,000. Of such
outstanding options, 25,000 had exercise prices less than NL’s December 31, 2007
quoted market price of $11.43 per share. Outstanding options at
December 31, 2007 expire at various dates through 2011.
The
intrinsic value of these NL options that were exercised aggregated $1.2 million
in 2005, $.1 million in 2006 and nil in 2007 and the related income tax benefit
from such exercises was $.4 million in 2005, less than $.1 million in 2006 and
nil in 2007.
Long-term
incentive compensation plan. We have a long-term incentive
compensation plan that provides for the discretionary grant of, among other
things, qualified incentive stock options, nonqualified stock options,
restricted common stock, stock awards and stock appreciation
rights. Up to 150,000 shares of our common stock may be issued
pursuant to this plan. As of December 31, 2007, no options had been
granted pursuant to this plan, and 136,500 shares were available for future
grants. During each of 2005, 2006 and 2007, we awarded an aggregate
of 3,500 shares of our common stock pursuant to this plan to members of our
board of directors.
Other capital
transactions. In December 2005, NL sold certain shares of our
common stock in market transactions. Within six months of such sale
by NL, Valhi purchased shares of our common stock in market transactions. In
settlement of any alleged short-swing profits derived from these transactions as
calculated pursuant to Section
16(b) of the Securities Exchange Act of 1934, as amended, Valhi remitted
approximately $1.2 million to us during 2005. We recorded these
amounts, net of applicable income taxes, as capital contributions that increased
our additional paid-in capital.
Note
13 - Related party transactions:
We
may be deemed to be controlled by Harold C. Simmons. See
Note 1. Corporations that may be deemed to be controlled by or
affiliated with Mr. Simmons sometimes engage in (a) intercorporate transactions
such as guarantees, management and expense sharing arrangements, shared fee
arrangements, joint ventures, partnerships, loans, options, advances of funds on
open account, and sales, leases and exchanges of assets, including securities
issued by both related and unrelated parties and (b) common investment and
acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases, and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties and
have included transactions which resulted in the acquisition by one related
party of a publicly-held minority equity interest in another related
party. While no transactions of the type described above are planned
or proposed with respect to us other than as set forth in these financial
statements, we continuously consider, review and evaluate, and understand that
Contran and related entities consider, review and evaluate such
transactions. Depending upon the business, tax and other objectives
then relevant, it is possible that we might be a party to one or more such
transactions in the future.
Current
receivables from and payables to affiliates are summarized in the table
below.
|
December 31,
|
||||||||
|
2006
|
2007
|
|||||||
|
(In
millions)
|
||||||||
|
Current
receivables from affiliate:
|
||||||||
|
Income
taxes receivable from Valhi
|
$ | - | $ | 2.7 | ||||
|
Other
|
.2 | .2 | ||||||
|
Total
|
$ | .2 | $ | 2.9 | ||||
|
Current
payables to affiliates:
|
||||||||
|
LPC
|
$ | 10.3 | $ | 11.3 | ||||
|
Income
taxes payable to Valhi
|
.3 | - | ||||||
|
Other
|
.2 | - | ||||||
|
Total
|
$ | 10.8 | $ | 11.3 | ||||
Amounts
payable to LPC are generally for the purchase of TiO2 (see Note
6). Purchases of TiO2 from LPC
were $109.4 million in 2005, $124.2 million in 2006, and $124.6 million in
2007.
Under the
terms of various intercorporate services agreements ("ISAs") entered into
between us and various related parties, including Contran, employees of one
company will provide certain management, tax planning, financial and
administrative services to the other company on a fee basis. Such
charges are based upon estimates of the time devoted by the employees of the
provider of the services to the affairs of the recipient, and the compensation
and associated expenses of such persons. Because of the large number
of companies affiliated with Contran, we believe we benefit from cost savings
and economies of scale gained by not having certain management, financial and
administrative staffs duplicated at each entity, thus allowing certain
individuals to provide services to multiple companies but only be compensated by
one entity. The net ISA fee charged to us, approved by the
independent members of our board of directors, is included in selling, general
and administrative expense and corporate expense and was $5.7 million in 2005,
$6.3 million in 2006, and $6.5 million in 2007.
Tall
Pines Insurance Company, and EWI RE, Inc. provide for or broker certain
insurance policies for Contran and certain of its subsidiaries and affiliates,
including ourselves. Tall Pines and EWI are subsidiaries of
Valhi. Consistent with insurance industry practices, Tall Pines and
EWI receive commissions from insurance and reinsurance underwriters and/or
assess fees for the policies that they provide or broker. The
aggregate premiums paid to Tall Pines and EWI by us and our joint venture were
$7.0 million in 2005, $8.2 million in 2006, $6.9 million in 2007. These amounts
principally included payments for insurance and reinsurance premiums paid to
third parties, but also included commissions paid to Tall Pines and
EWI. Tall Pines purchases reinsurance for substantially all of the
risks it underwrites. We expect that these relationships with Tall
Pines and EWI will continue in 2008.
Contran
and certain of its subsidiaries and affiliates, including us, purchase certain
of their insurance policies as a group, with the costs of the jointly-owned
policies being apportioned among the participating companies. With
respect to certain of such policies, it is possible that unusually large losses
incurred by one or more insureds during a given policy period could leave the
other participating companies without adequate coverage under that policy for
the balance of the policy period. As a result, Contran and certain of
its subsidiaries and affiliates, including us, have entered into a loss sharing
agreement under which any uninsured loss is shared by those entities who have
submitted claims under the relevant policy. We believe the benefits,
in the form of reduced premiums and broader coverage associated with the group
coverage for such policies, justifies the risk associated with the potential for
any uninsured loss.
Note
14 - Commitments and contingencies:
Environmental
matters. Our operations are governed by various environmental
laws and regulations. Certain of our operations are and have been
engaged in the handling, manufacture or use of substances or compounds that may
be considered toxic or hazardous within the meaning of applicable environmental
laws and regulations. As with other companies engaged in similar
businesses, certain of our past and current operations and products have the
potential to cause environmental or other damage. We have implemented
and continue to implement various policies and programs in an effort to minimize
these risks. Our policy is to maintain compliance with applicable
environmental laws and regulations at all of our facilities and to strive to
improve its environmental performance. From time to time, we may be
subject to environmental regulatory enforcement under U.S. and foreign statutes,
resolution of which typically involves the establishment of compliance
programs. It is possible that future developments, such as stricter
requirements of environmental laws and enforcement policies thereunder, could
adversely affect our production, handling, use, storage, transportation, sale or
disposal of such substances. We believe all of our plants are in
substantial compliance with applicable environmental laws.
Litigation
matters. We are involved in various environmental,
contractual, product liability, patent (or intellectual property), employment
and other claims and disputes incidental to our business. We currently believe
the disposition of all claims and disputes, individually or in the aggregate,
should not have a material adverse effect on our consolidated financial
condition, results of operations or liquidity.
Concentrations of
credit risk. Sales of TiO2 accounted
for approximately 90% of our sales during each of the past three
years. The remaining sales result from the mining and sale of
ilmenite ore (a raw material used in the sulfate pigment production process),
and the manufacture and sale of iron-based water treatment chemicals and certain
titanium chemical products (derived from co-products of the TiO2 production
processes). TiO2 is
generally sold to the paint, plastics and paper industries. Such
markets are generally considered “quality-of-life” markets whose demand for
TiO2
is influenced by the relative economic well-being of the various geographic
regions. We sell TiO2 to over
4,000 customers, with the top ten customers approximating 26% of net sales in
2005, 28% of net sales in 2006 and 27% of net sales in 2007. We did not have
sales to a single customer of over 10% in any of the previous three
years. By volume, approximately one-half of our TiO2 sales were
to Europe in each of the past three years and approximately 38% in 2005, 36% in
2006 and 34% in 2007 were attributable to North America.
Long-term
contracts. We have long-term
supply contracts that provide for our TiO2 feedstock
requirements through 2011. The agreements require us to purchase
certain minimum quantities of feedstock with minimum purchase commitments
aggregating approximately $712 million at December 31, 2007.
Operating
leases. Our principal
German operating subsidiary leases the land under its Leverkusen TiO2 production
facility pursuant to a lease with Bayer AG that expires in 2050. The
Leverkusen facility itself, which we own and which represents approximately
one-third of our current TiO2 production
capacity, is located within Bayer's extensive manufacturing
complex. We periodically establish the amount of rent for the land
lease associated with the Leverkusen facility by agreement with Bayer for
periods of at least two years at a time. The lease agreement provides
for no formula, index or other mechanism to determine changes in the rent for
such land lease; rather, any change in the rent is subject solely to periodic
negotiation between Bayer and ourselves. We recognize any change in
the rent based on such negotiations as part of lease expense starting from the
time such change is agreed upon by both parties, as any such change in the rent
is deemed “contingent rentals” under GAAP. Under a separate supplies
and services agreement expiring in 2011, the lessor provides some raw materials,
including chlorine, auxiliary and operating materials, utilities and services
necessary to operate the Leverkusen facility.
We also
lease various other manufacturing facilities and equipment. Some of
the leases contain purchase and/or various term renewal options at fair market
and fair rental values, respectively. In most cases we expect that,
in the normal course of business, such leases will be renewed or replaced by
other leases. Net rent expense approximated $11 million in each of
2005, 2006 and 2007. At December 31, 2007, future minimum payments
under noncancellable operating leases having an initial or remaining term of
more than one year were as follows:
|
Years ending December
31,
|
Amount
|
|||
|
(In
millions)
|
||||
|
2008
|
$ | 9.5 | ||
|
2009
|
6.8 | |||
|
2010
|
5.1 | |||
|
2011
|
3.2 | |||
|
2012
|
2.9 | |||
|
2013
and thereafter
|
21.6 | |||
|
Total
|
$ | 49.1 | ||
Approximately
$24 million of the $49.1 million aggregate future minimum rental commitments at
December 31, 2007 relates to our Leverkusen facility lease discussed
above. The minimum commitment amounts for such lease included in the
table above for each year through the 2050 expiration of the lease are based
upon the current annual rental rate as of December 31, 2007. As
discussed above, any change in the rent is based solely on negotiations between
Bayer and ourselves, and any such change in the rent is deemed “contingent
rentals” under GAAP which is excluded from the future minimum lease payments
disclosed above.
Income
taxes. We and Valhi
have agreed to a policy providing for the allocation of tax liabilities and tax
payments as described in Note 1. Under applicable law, we, along with
every other member of the Contran Tax Group, are each jointly and severally
liable for the aggregate federal income tax liability of Contran and the other
companies included in the Contran Tax Group for all periods in which we are
included in the Contran Tax Group. Valhi has agreed, however, to
indemnify us for any liability for income taxes of the Contran Tax Group in
excess of our tax liability previously computed and paid by us in accordance
with the tax allocation policy.
Note
15 – Other income:
|
Years ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
(In
millions)
|
||||||||||||
|
Business
interruption insurance proceeds
|
$ | - | $ | 1.8 | $ | - | ||||||
|
Other
income
|
.6 | .4 | 1.4 | |||||||||
|
Total
|
$ | .6 | $ | 2.2 | $ | 1.4 | ||||||
We
recognized a gain of $1.8 million in the fourth quarter of 2006 for business
interruption insurance proceeds we received related to Hurricane
Rita. See Note 6.
The
Securities transaction gain in 2005, classified as nonoperating income, relates
to the sale of our passive interest in a Norwegian smelting operation, which had
a nominal carrying value for financial reporting purposes, for aggregate
consideration of approximately $5.4 million consisting of cash of $3.5 million
and inventory with a value of $1.9 million.
Note
16 - Financial instruments:
Summarized
below is the estimated fair value and related net carrying value of our
financial instruments.
|
December
31,
|
December
31,
|
|||||||||||||||
|
2006
|
2007
|
|||||||||||||||
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|||||||||||||
|
(In
millions)
|
||||||||||||||||
|
Cash,
cash equivalents, restricted cash and noncurrent restricted marketable
debt securities
|
$ | 67.6 | $ | 67.6 | $ | 77.2 | $ | 77.2 | ||||||||
|
Notes
payable and long-term debt:
|
||||||||||||||||
|
Fixed
rate with market quotes -
|
||||||||||||||||
|
6.5%
Senior Secured Notes
|
$ | 525.0 | $ | 512.5 | $ | 585.5 | $ | 507.7 | ||||||||
|
Revolving
credit facility
|
6.5 | 6.5 | 15.4 | 15.4 | ||||||||||||
|
Common
stockholders’ equity
|
448.4 | 1,593.9 | 411.0 | 854.3 | ||||||||||||
Fair
value of our restricted marketable debt securities, the 6.5% Notes and the fair
value of our common stockholders’ equity are based upon quoted market prices at
each balance sheet date, which represent Level 1 inputs as defined by SFAS No.
157, Fair Value
Measurements. See Note 17.
Certain
of our sales generated by our non-U.S. operations are denominated in U.S.
dollars. We periodically use currency forward contracts to manage a
very nominal portion of foreign exchange rate risk associated with receivables
denominated in a currency other than the holder's functional currency or similar
exchange rate risk associated with future sales. We have not entered into these
contracts for trading or speculative purposes in the past, nor do we currently
anticipate entering into such contracts for trading or speculative purposes in
the future. Derivatives used to hedge forecasted transactions and
specific cash flows associated with foreign currency denominated financial
assets and liabilities which meet the criteria for hedge accounting are
designated as cash flow hedges. Consequently, the effective portion
of gains and losses is deferred as a component of accumulated other
comprehensive income and is recognized in earnings at the time the hedged item
affects earnings. Contracts that do not meet the criteria for hedge
accounting are marked-to-market at each balance sheet date with any resulting
gain or loss recognized in income currently as part of net currency
transactions. During 2006 and 2007, we have not used hedge accounting
for any of our contracts. We held no such currency forward contracts
at December 31, 2006 or 2007 and held no other significant derivative contracts
at December 31, 2006 or 2007.
Note
17 – Recent accounting pronouncements:
Pension and Other Postretirement
Plans - In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans. SFAS No. 158
requires us to recognize an asset or liability for the over or under funded
status of each of our individual defined benefit pension and postretirement
benefit plans on our Consolidated Balance Sheets. This standard does not
change the existing recognition and measurement requirements that determine the
amount of periodic benefit cost we recognize in net income.
We
adopted the asset and liability recognition and disclosure requirements of this
standard effective December 31, 2006 on a prospective basis, in which we
recognized through other comprehensive income all of our prior unrecognized
gains and losses and prior service costs or credits, net of tax, as of December
31, 2006. The effect of adopting the asset and liability recognition
requirements of this standard resulted in a $37.4 million net decrease in our
accumulated other comprehensive income, consisting of a $37.5 million loss
related to our defined benefit pension plans and $.1 million of income related
to our postretirement benefit plans. Starting January 1, 2007, we now
recognize all changes in the funded status of these plans through comprehensive
income, net of tax. Any future changes will be recognized either in
net income, to the extent they are reflected in periodic benefit cost, or
through other comprehensive income.
In
addition, prior to December 31, 2007 we used September 30 as a measurement date
for our defined benefit pension plans. In accordance with the measurement date
requirements of this standard, effective December 31, 2007 we commenced to use a
December 31 measurement date for all of our defined benefit pension plans using
a 15 month net periodic benefit cost based on the September 30, 2006 actuarial
valuations. Accordingly, four-fifths of the net periodic benefit cost for such
15-month period has been included in the determination of our net income for
2007, and one-fifth of such the net periodic benefit cost for such 15-month
period, net of income taxes, has been allocated as a direct adjustment to our
retained deficit in accordance with the transition provisions of the standard to
reflect the change in measurement dates. To the extent the net
periodic benefit cost included amortization of unrecognized actuarial losses,
prior service cost and net transition obligations, which were previously
recognized as a component of accumulated other comprehensive income at December
31, 2006, the effect on retained earnings, net of income taxes, was offset by a
change in our accumulated other comprehensive income. See Note
10.
Fair Value Measurements – In September 2006, the
FASB issued SFAS No. 157, Fair
Value Measurements, which will become effective for us on January 1,
2008. SFAS No. 157 generally provides a consistent, single fair value
definition and measurement techniques for GAAP pronouncements. SFAS
No. 157 also establishes a fair value hierarchy for different measurement
techniques based on the objective nature of the inputs in various valuation
methods. In February 2008, the FASB issued FSP No. FAS 157-2, Effective Date of FASB Statement No.
157 which will delay the provisions of SFAS No. 157 for one year for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). We will be required to ensure all of our
fair value measurements are in compliance with SFAS No. 157 on a prospective
basis beginning in the first quarter of 2008, except for non financial assets
and liabilities, which will be required to be in compliance with SFAS No. 157
prospectively beginning in the first quarter of 2009. In addition, we
will be required to expand our disclosures regarding the valuation methods and
level of inputs we utilize in the first quarter of 2008, except for non
financial assets and liabilities, which will require disclosure in the first
quarter of 2009. The adoption of this standard will not have a
material effect on our Consolidated Financial Statements.
Fair Value Option - In the
first quarter of 2007 the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. SFAS No. 159 permits companies to
chose, at specified election dates, to measure eligible items at fair value,
with unrealized gains and losses included in the determination of net
income. The decision to elect the fair value option is generally applied
on an instrument-by-instrument basis, is irrevocable unless a new election date
occurs, and is applied to the entire instrument and not to only specified risks
or cash flows or a portion of the instrument. Items eligible for the fair
value option include recognized financial assets and liabilities, other than an
investment in a consolidated subsidiary, defined benefit pension plans, OPEB
plans, leases and financial instruments classified in equity. An
investment accounted for by the equity method is also an eligible item.
The specified election dates include the date the company first recognizes the
eligible item, the date the company enters into an eligible commitment, the date
an investment first becomes eligible to be accounted for by the equity method
and the date SFAS No. 159 first becomes effective for the company. If we
elect to measure eligible items at fair value under the standard, we would be
required to present certain additional disclosures for each item we
elect. SFAS No. 159 becomes effective for us on January 1,
2008. We do not expect to elect to measure any additional assets or
liabilities at fair value that are not already measured at fair value under
existing standards, therefore the adoption of this standard will not have a
material effect on our Consolidated Financial Statements.
Business Combinations – Also in December 2007 the FASB issued SFAS No.
141 (revised 2007), Business
Combinations, which applies to us prospectively for business combinations
that close in 2009 and beyond. The statement expands the definition
of a business combination to include more transactions including some asset
purchases and requires an acquirer to recognize assets acquired, liabilities
assumed and any noncontrolling interest in the acquiree at the acquisition date
at fair value as of that date with limited exceptions. The statement
also requires that acquisition costs be expensed as incurred and restructuring
costs that are not a liability of the acquiree at the date of the acquisition be
recognized in accordance with SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. Due to the unpredictable nature
of business combinations and the prospective application of this statement we
are unable to predict the impact of the statement on our Consolidated Financial
Statements.
Uncertain Tax Positions - On January 1, 2007, we
adopted FIN 48, Accounting for
Uncertain Tax Positions. FIN 48 clarifies when and how much of
a benefit we can recognize in our consolidated financial statements for certain
positions taken in our income tax returns under Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes,
and enhances the disclosure requirements for our income tax policies and
reserves. Among other things, FIN 48 prohibits us from recognizing
the benefits of a tax position unless we believe it is more-likely-than-not our
position will prevail with the applicable tax authorities and limits the amount
of the benefit to the largest amount for which we believe the likelihood of
realization is greater than 50%. FIN 48 also requires companies to
accrue penalties and interest on the difference between tax positions taken on
their tax returns and the amount of benefit recognized for financial reporting
purposes under the new standard. We are required to classify any
future reserves for uncertain tax positions in a separate current or noncurrent
liability, depending on the nature of the tax position.
Upon
adoption of FIN 48 on January 1, 2007, we increased our existing reserve for
uncertain tax positions, which we previously classified as part of our deferred
income taxes, from $14.1 million to $16.3 million and accounted for such $2.2
million increase as a reduction of retained earnings in accordance with the
transition provisions of the new standard.
We accrue
interest and penalties on our uncertain tax positions as a component of our
provision for income taxes. The amount of interest and penalties we
accrued during 2007 was not material, and at December 31, 2007 we had $3.0
million accrued for interest and penalties for our uncertain tax
positions.
The
following table shows the changes in the amount of our uncertain tax positions
(exclusive of the effect of interest and penalties) during 2007:
|
Amount
|
||||
|
(In
millions)
|
||||
|
Unrecognized
tax benefits:
|
||||
|
Amount
at adoption of FIN 48
|
$ | 12.6 | ||
|
Tax
positions taken in prior periods:
|
||||
|
Gross
increases
|
- | |||
|
Gross
decreases
|
(1.9 | ) | ||
|
Tax
positions taken in current period:
|
||||
|
Gross
increases
|
2.2 | |||
|
Gross
decreases
|
- | |||
|
Settlements
with taxing authorities –
cash
paid
|
(.3 | ) | ||
|
Lapse
of applicable statute of limitations
|
(1.7 | ) | ||
|
Change
in foreign currency exchange rates
|
1.0 | |||
|
Amount
at December 31, 2007
|
$ | 11.9 | ||
If our
uncertain tax positions were recognized, a benefit of $14.9 million would affect
our effective income tax rate from continuing operations. We
currently estimate that our unrecognized tax benefits will not change materially
during the next twelve months.
We file
income tax returns in various U.S. federal, state and local jurisdictions.
We also file income tax returns in various foreign jurisdictions, principally in
Germany, Canada, Belgium and Norway. Our domestic income tax returns prior
to 2004 are generally considered closed to examination by applicable tax
authorities. Our foreign income tax returns are generally considered
closed to examination for years prior to 2003 for Germany, 2002 for Belgium and
Canada and 1998 for Norway.
Note
18
- Quarterly
results of operations (unaudited):
|
Quarter ended
|
||||||||||||||||
|
March 31
|
June 30
|
September 30
|
December 31
|
|||||||||||||
|
(In
millions, except per share data)
|
||||||||||||||||
|
Year
ended December 31, 2006
|
||||||||||||||||
|
Net
sales
|
$ | 304.3 | $ | 345.1 | $ | 331.6 | $ | 298.4 | ||||||||
|
Gross
margin
|
75.8 | 80.9 | 76.4 | 77.4 | ||||||||||||
|
Net
income
|
15.7 | 12.8 | 12.2 | 41.3 | ||||||||||||
|
Basic
and diluted earnings per common share
|
$ | .32 | $ | .26 | $ | .25 | $ | .84 | ||||||||
|
Year
ended December 31, 2007
|
||||||||||||||||
|
Net
sales
|
$ | 314.0 | $ | 342.6 | $ | 343.3 | $ | 310.4 | ||||||||
|
Gross
margin
|
70.4 | 63.6 | 66.9 | 50.5 | ||||||||||||
|
Net
income (loss)
|
12.9 | - | (81.2 | ) | 1.6 | |||||||||||
|
Basic
and diluted earnings per common share
|
$ | .26 | $ | - | $ | (1.66 | ) | $ | .03 | |||||||
In the
fourth quarter of 2007 we determined that a liability established in 1992 was no
longer necessary. Therefore, net income for the fourth quarter of
2007 includes $.8 million ($.5 million net of income tax), or $.01 per diluted
share related to the reversal of this non current liability.
The sum
of the quarterly per share amounts may not equal the annual per share amounts
due to relative changes in the weighted average number of shares used in the per
share computations.
KRONOS
WORLDWIDE, INC. AND SUBSIDIARIES
SCHEDULE
I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed
Balance Sheets
(In
millions)
|
December 31,
|
||||||||
|
2006
|
2007
|
|||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | .1 | $ | - | ||||
|
Receivables
from subsidiary
|
5.3 | 13.9 | ||||||
|
Prepaid
expenses
|
.3 | .3 | ||||||
|
Total
current assets
|
5.7 | 14.2 | ||||||
|
Other
assets:
|
||||||||
|
Notes
receivable from subsidiary
|
5.9 | - | ||||||
|
Investment
in subsidiaries
|
657.5 | 668.6 | ||||||
|
Other
|
.3 | .5 | ||||||
|
Total
other assets
|
663.7 | 669.1 | ||||||
|
Total
assets
|
$ | 669.4 | $ | 683.3 | ||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable and accrued liabilities
|
$ | .4 | $ | .1 | ||||
|
Payable
to affiliate and subsidiary
|
.3 | 28.7 | ||||||
|
Total
current liabilities
|
.7 | 28.8 | ||||||
|
Noncurrent
liabilities:
|
||||||||
|
Notes
payable to subsidiary
|
215.4 | 240.0 | ||||||
|
Deferred
income taxes
|
4.9 | 3.5 | ||||||
|
Total
noncurrent liabilities
|
220.3 | 243.5 | ||||||
|
Stockholders’
equity
|
448.4 | 411.0 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 669.4 | $ | 683.3 | ||||
Contingencies
(Note 4)
The
accompanying Notes are an integral part of the financial
statements.
KRONOS
WORLDWIDE, INC. AND SUBSIDIARIES
SCHEDULE
I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
Condensed
Statements of Operations
(In
millions)
|
Years ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
Revenues
and other income:
|
||||||||||||
|
Equity
in earnings (loss) of subsidiaries
|
$ | 77.9 | $ | 96.9 | $ | (57.4 | ) | |||||
|
Interest
income from affiliates
|
2.6 | .6 | .1 | |||||||||
|
Interest
and dividends
|
.1 | - | - | |||||||||
|
Other
income
|
1.8 | .8 | 5.6 | |||||||||
|
Total
revenues and other income
|
82.4 | 98.3 | (51.7 | ) | ||||||||
|
Costs
and expenses:
|
||||||||||||
|
General
and administrative
|
2.0 | 2.3 | 2.5 | |||||||||
|
Intercompany
interest and other
|
18.9 | 18.8 | 20.6 | |||||||||
|
Other
expense
|
- | .2 | - | |||||||||
|
Total
costs and expenses
|
20.9 | 21.3 | 23.1 | |||||||||
|
Income
(loss) before income taxes
|
61.5 | 77.0 | (74.8 | ) | ||||||||
|
Income
tax benefit
|
10.0 | 5.0 | 8.1 | |||||||||
|
Net
income (loss)
|
$ | 71.5 | $ | 82.0 | $ | (66.7 | ) | |||||
The
accompanying Notes are an integral part of the financial
statements.
KRONOS
WORLDWIDE, INC. AND SUBSIDIARIES
SCHEDULE
I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
Condensed
Statements of Cash Flows
(In
millions)
|
Years ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income (loss)
|
$ | 71.5 | $ | 82.0 | $ | (66.7 | ) | |||||
|
Cash
distributions from subsidiaries
|
25.5 | 50.1 | 34.9 | |||||||||
|
Deferred
income taxes
|
(4.3 | ) | 1.9 | (2.1 | ) | |||||||
|
Equity
in earnings of subsidiaries
|
(77.9 | ) | (96.9 | ) | 57.4 | |||||||
|
Other,
net
|
(.2 | ) | .4 | (.6 | ) | |||||||
|
Net
change in assets and liabilities
|
(2.5 | ) | (5.0 | ) | 20.3 | |||||||
|
Net
cash provided by operating activities
|
12.1 | 32.5 | 43.2 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Loans
to affiliates
|
- | (32.7 | ) | - | ||||||||
|
Collections
of loans to affiliates
|
28.0 | 49.4 | 5.9 | |||||||||
|
Other,
net
|
- | (.3 | ) | (.2 | ) | |||||||
|
Net
cash provided by investing activities
|
28.0 | 16.4 | 5.7 | |||||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Dividends
paid
|
(49.0 | ) | (49.0 | ) | (49.0 | ) | ||||||
|
Capital
contributions
|
1.4 | - | - | |||||||||
|
Net
cash used by financing activities:
|
(47.6 | ) | (49.0 | ) | (49.0 | ) | ||||||
|
Net
change during the year from operating, investing and financing
activities
|
(7.5 | ) | (.1 | ) | (.1 | ) | ||||||
|
Balance
at beginning of year
|
7.7 | .2 | .1 | |||||||||
|
Balance
at end of year
|
$ | .2 | $ | .1 | $ | - | ||||||
The
accompanying Notes are an integral part of the financial
statements.
KRONOS
WORLDWIDE, INC. AND SUBSIDIARIES
SCHEDULE
I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
Notes to Condensed Financial
Information
Note
1 - Basis of presentation:
The
accompanying financial statements of Kronos Worldwide, Inc. reflect our
investment in majority-owned subsidiaries on the equity method. The
Consolidated Financial Statements of Kronos and its majority-owned subsidiaries
(the “Company”) and the related Notes to Consolidated Financial Statements are
incorporated herein by reference.
Note
2 - Receivable from (payable to) subsidiaries and affiliates:
|
December 31,
|
||||||||
|
2006
|
2007
|
|||||||
|
(In
millions)
|
||||||||
|
Current:
|
||||||||
|
Receivable
from:
|
||||||||
|
Kronos
Louisiana, Inc. (“KLA”)
|
$ | 1.8 | $ | 9.7 | ||||
|
Valhi
– income taxes
|
- | 2.7 | ||||||
|
KLA
– income taxes
|
3.5 | 1.5 | ||||||
|
Total
|
$ | 5.3 | $ | 13.9 | ||||
|
Payable
to:
|
||||||||
|
Kronos
(US), Inc. (“KUS”)
|
$ | - | $ | (28.7 | ) | |||
|
Valhi
– income taxes
|
(.3 | ) | - | |||||
|
Total
|
$ | (.3 | ) | $ | (28.7 | ) | ||
|
Noncurrent:
|
||||||||
|
Receivable
from KUS
|
$ | 5.9 | $ | - | ||||
|
Payable
to KII
|
$ | (215.4 | ) | $ | (240.0 | ) | ||
Prior to
2005, KII loaned us an aggregate euro 163.1 million ($209.5 million at the
borrowing date) instead of paying us cash dividends. Interest on both
notes is payable on a quarterly basis at an annual rate of 9.25%, such interest
was and is expected to be paid quarterly. The notes mature on
December 31, 2010, with all principal due at that date. The notes are
unsecured, contain no financial covenants and provide for default only upon our
failure to pay any amount when due (subject to a short grace
period). Due to the long-term investment nature of these
notes, settlement of the principal balance of the notes is not contemplated
within the foreseeable future. We currently expect that settlement of
the principal amount of the notes will occur through a capital
transaction. We recognize interest expense on such notes, which is
expected to be paid quarterly, as incurred. Until such time as the
notes are settled, we will recognize interest expense on the promissory
notes.
Note
3 – Investment in subsidiaries:
|
December 31,
|
||||||||
|
2006
|
2007
|
|||||||
|
(In
millions)
|
||||||||
|
Investment
in:
|
||||||||
|
KLA
|
$ | 148.4 | $ | 185.0 | ||||
|
KC
|
88.1 | 92.7 | ||||||
|
KII
|
421.0 | 390.9 | ||||||
|
Total
|
$ | 657.5 | $ | 668.6 | ||||
|
2005
|
2006
|
2007
|
||||||||||
|
(In
millions)
|
||||||||||||
|
Equity
in earnings (loss) from continuing operations of
subsidiaries:
|
||||||||||||
|
KLA
|
$ | 19.7 | $ | 17.5 | $ | 12.1 | ||||||
|
KC
|
1.4 | 5.0 | (11.8 | ) | ||||||||
|
KII
|
56.8 | 74.4 | (57.7 | ) | ||||||||
|
Total
|
$ | 77.9 | $ | 96.9 | $ | (57.4 | ) | |||||
Note
4 - Contingencies:
See Note
14 to the Consolidated Financial Statements.