KRONOS WORLDWIDE INC - Annual Report: 2010 (Form 10-K)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X  Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934:
For the fiscal year ended December 31, 2010
Commission file number 1-31763
KRONOS WORLDWIDE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE	76-0294959
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
5430 LBJ Freeway,  Suite 1700
Dallas, Texas   75240-2697
(Address of principal executive offices)
Registrant's telephone number, including area code:          (972) 233-1700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Name of each exchange on     which registered
Common stock ($.01 par value)	New York Stock Exchange

*	The registrant has not yet been phased into the interactive data requirements.

·	Future supply and demand for our products

·	The extent of the dependence of certain of our businesses on certain market sectors

·	The cyclicality of our businesses

·	Changes in raw material and other operating costs (such as energy and ore costs)

·	Changes in the availability of raw materials (such as ore)

·	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)

·	Competitive products and substitute products

·	Customer and competitor strategies

·	Potential consolidation of our competitors

·	The impact of pricing and production decisions

·	Competitive technology positions

·	The introduction of trade barriers

·	Possible disruption of our business or increases in the cost of doing business resulting from terrorist activities or global conflicts

·	Fluctuations in currency exchange rates (such as changes in the exchange rate between the U.S. dollar and each of the euro, the Norwegian krone and the Canadian dollar)

·	Operating interruptions (including, but not limited to, labor disputes, leaks, natural disasters, fires, explosions, unscheduled or unplanned downtime and transportation interruptions)

·	Our ability to renew or refinance credit facilities

·	Our ability to maintain sufficient liquidity

·	The ultimate outcome of income tax audits, tax settlement initiatives or other tax matters

·	Our ability to utilize income tax attributes, the benefits of which have been recognized under the more-likely-than-not recognition criteria

·	Environmental matters (such as those requiring compliance with emission and discharge standards for existing and new facilities)

·	Government laws and regulations and possible changes therein

·	The ultimate resolution of pending litigation (such as the class action described under “Item 3.  Legal Proceedings”)

·	Possible future litigation

 

 

 

 

 

 

	2008	2009	2010
Europe	19%	19%	22%
North America	16%	16%	19%

 

Sales Volumes Percentages by Geographic Region			Sales Volumes Percentages by End Use
Europe	53%		Coatings	52%
North America	33%		Plastics	35%
Asia Pacific	10%		Other	8%
Rest of World	4%		Paper	5%

 

 

 

·

We own and operate two ilmenite mines in Norway pursuant to a governmental concession with an unlimited term.  We commenced production from our second mine in 2009.  Ilmenite is a raw material used directly as a feedstock by some sulfate-process TiO2 plants.  We believe we have a significant competitive advantage because our mines supply our feedstock requirements for 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 ilmenite reserves that are expected to last at least 60 years.

 

·

We manufacture and sell iron-based chemicals, which are co-products and processed co-products of the sulfate and chloride process TiO2 pigment production.  These co-product chemicals are marketed through our Ecochem division and are primarily used as treatment and conditioning agents for industrial effluents and municipal wastewater as well as in the manufacture of iron pigments, cement and agricultural products.

 

·

We manufacture and sell titanium oxychloride and titanyl sulfate, which are side-stream specialty 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 productions are used in pearlescent pigments, natural gas pipe and other specialty applications.

 

 

·

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 higher yield, less waste, lower energy requirements and lower labor costs.  This process has also gained market share over the sulfate process because of the relatively lower upfront capital investment in plant and equipment required.  The chloride process produces less waste than the sulfate process because much of the chlorine is recycled and feedstock bearing higher titanium content is used.  The chloride process produces an intermediate base pigment with a wide range of properties.

 

·

Sulfate Process.  The Sulfate process is a batch process in which sulfuric acid is used to extract the TiO2 from ilmenite or titanium slag.  After separation from the impurities in the ore (mainly iron) the TiO2 is precipitated and calcined to form an intermediate base pigment ready for sale or can be upgraded through finishing treatment.

 
 

			% of Capacity by TiO2 Manufacturing Process
Facility	Description		Chloride				Sulfate
Leverkusen, Germany (1)	TiO2 production, chloride and sulfate process, co-products			41	%			26	%
Nordenham, Germany	TiO2 production, sulfate process, co-products			-				40
Langerbrugge, Belgium	TiO2 production, chloride process, co-products, titanium chemicals products			20				-
Fredrikstad, Norway (2)	TiO2 production, sulfate process, co-products			-				20
Varennes, Canada	TiO2 production, chloride and sulfate process, slurry facility, titanium chemicals products			20				14
Lake Charles, Louisiana (3)	TiO2 production, chloride process			19				-
Total				100	%			100	%

 

 

 

 

 

(1)

The Leverkusen facility is located within an extensive manufacturing complex owned by Bayer AG.  We own the Leverkusen facility, which represents about one-third of our current TiO2 production capacity, but we lease the land under the facility from Bayer under a long term agreement which expires in 2050.  Lease payments are periodically negotiated with Bayer for periods of at least two years at a time.  Bayer or its affiliates 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.

 

(2)

The Fredrikstad plant is located on public land and is leased until April 2013 with an option to extend the lease for an additional 50 years.

 

(3)

We operate this facility in a 50/50 joint venture with Tioxide Americas Inc., a subsidiary of Huntsman Corporation.  See Note 5 to our Consolidated Financial Statements and “TiO2 Manufacturing Joint Venture.”

 
 

 

Production Process/Raw Material	Raw Materials Procured or Mined
	(In thousands of metric tons)
Chloride process plants:
Purchased slag or natural rutile ore	439
Sulfate process plants:
Ilmenite ore mined and used internally	328
Purchased slag	31

Worldwide Production Capacity - 2010
DuPont			23	%
Cristal			14	%
Kronos			10	%
Huntsman			9	%
Tronox			7	%
Other			37	%

 

 

 
 

 

Europe			2,000
Canada			400
United States (1)			40
Total			2,440

(1)	Excludes employees of our Louisiana joint venture.

 
 

 

Website and other available information

 

·	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 the ability of our subsidiaries to pay dividends to us;

 

·	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.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS.

None.

ITEM 2.

PROPERTIES

ITEM 5.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

		High				Low				Cash Dividends  Paid
Year ended December 31, 2009
First Quarter		$	17.00			$	5.25			$	-
Second Quarter			8.90				6.50				-
Third Quarter			10.31				5.85				-
Fourth Quarter			17.34				9.59				-
Year ended December 31, 2010
First Quarter		$	17.20				13.56			$	-
Second Quarter			20.25				14.65				-
Third Quarter			39.84				18.15				-
Fourth Quarter			44.77				36.15				.25
January 1, 2011 through February 28, 2011		$	51.99			$	40.02			$	1.00

		2005				2006				2007				2008				2009				2010
Kronos common stock		$	100			$	116			$	65			$	46			$	65			$	170
S&P 500 Composite Stock Index			100				116				122				77				97				112
S&P 500 Diversified Chemicals Index			100				111				109				57				92				130

 

 

ITEM 6.

SELECTED FINANCIAL DATA

		Years ended December 31,
		2006(3)				2007				2008				2009				2010
		(In millions, except per share data and TiO2 operating statistics)
STATEMENTS OF OPERATIONS DATA:
Net sales		$	1,279.4			$	1,310.3			$	1,316.9			$	1,142.0			$	1,449.7
Gross margin			310.5				251.4				220.6				130.3				345.3
Income (loss) from operations			143.2				84.9				47.2				(15.7	)			178.4
Net income (loss)			82.0				(66.7	)			9.0				(34.7	)			130.6
Net income (loss) per share (1)			1.67				(1.36	)			.18				(.71	)			2.59
Cash dividends per share			1.00				1.00				1.00				-				.25
BALANCE SHEET DATA (at year end):
Total assets		$	1,421.5			$	1,455.0			$	1,358.7			$	1,325.0			$	1,707.6
Notes payable and long-term debt including current maturities			536.2				606.2				638.5				613.2				539.6
Common stockholders’ equity (1)			448.4				411.0				317.9				312.5				761.2
STATEMENTS OF CASH FLOW DATA:
Net cash provided by (used in):
Operating activities		$	71.9			$	90.0			$	2.7			$	86.3			$	126.0
Investing activities			(50.9	)			(47.4	)			(68.1	)			(23.7	)			(145.8	)
Financing activities (1)			(35.0	)			(39.8	)			10.3				(49.8	)			295.1
TiO2 OPERATING STATISTICS:
Sales volume(2)			511				519				478				445				528
Production volume(2)			516				512				514				402				524
Production capacity at beginning of year(2)			516				525				532				532				532
Production rate as a percentage of capacity		Full					98	%			97	%			76	%			99	%
________________________________

(1)

In November, 2010, we completed a secondary public offering of 8.97 million shares of our common stock in an underwritten offering for net proceeds of $337.6 million.  Net income per share for 2010 reflects the impact of the issuance of the 8.97 million shares of common stock in November 2010.  See Item 5. Market for Common Equity and Related Stockholder Matters and Note 13 to our Consolidated Financial Statements.

(2)	Metric tons in thousands

(3)	We adopted the asset and liability recognition provisions of Accounting Standard Codification Topic 715, Compensation – Retirement Benefits, effective December 31, 2006.  See Note 11 to our Consolidated Financial Statements.

ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

·	Our TiO2 sales and production volumes,

·	TiO2 selling prices,

·	Currency exchange rates (particularly the exchange rate for the U.S. dollar relative to the euro, Norwegian krone and the Canadian dollar) and

·	Manufacturing costs, particularly raw materials, maintenance and energy-related expenses.

 

 

 

·

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 of Accounting Standard Codification (“ASC”) Topic 360-10-35 Property, Plant and Equipment 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 specified in ASC Topic 360-10-35 are present.  We did not evaluate any long-lived assets for impairment during 2010 because no such impairment indicators were present.

 

·

Benefit 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.  We recognize deferred taxes for future tax effects of temporary differences between financial and income tax reporting.  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 $952 million for German corporate purposes and $349 million for German trade tax purposes at December 31, 2010).  At December 31, 2010, we have concluded that no deferred income tax asset valuation allowance is required to be recognized with respect to such carryforwards, principally because (i) such carryforwards have an indefinite carryforward period, (ii) we have utilized a portion of such carryforwards during the most recent three-year period and (iii) we currently expect to utilize the remainder of such carryforwards over the long term.  However, prior to the complete utilization of such carryforwards, if we were to generate losses in our German operations for an extended period of time, 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.

 

·

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).

 

		Year ended  December 31,
		2009								2010
		(Dollars in millions)
Net sales		$	1,142.0				100	%		$	1,449.7				100	%
Cost of sales			1,011.7				89				1,104.4				76
Gross margin			130.3				11				345.3				24
Other operating income and expenses, net			146.0				13				166.9				12
Income (loss) from operations		$	(15.7	)			(2	)%		$	178.4				12	%
														%
														Change
TiO2 operating statistics:
Sales volumes*			445								528				19	%
Production volumes*			402								524				30	%
Percent change in net sales:
TiO2 product pricing															11	%
TiO2 sales volumes															19
TiO2 product mix															-
Changes in currency exchange rates															(3	)
Total															27	%

·

Our income tax provision in 2010 includes a $35.2 million non-cash income tax benefit related to a European Court ruling that resulted in the favorable resolution of certain income tax issues in Germany and an increase in the amount of our German corporate and trade tax net operating loss carryforwards.

 

·	Our income tax benefit for 2009 includes a non-cash benefit of $4.7 million related to a net decrease in our reserve for uncertain tax positions, primarily as a result of the resolution of tax audits in Belgium and Germany in the third and fourth quarters.

 

		Year ended  December 31,
		2008								2009
		(Dollars in millions)
Net sales		$	1,316.9				100	%		$	1,142.0				100	%
Cost of sales			1,096.3				83				1,011.7				89
Gross margin			220.6				17				130.3				11
Other operating income and expenses, net			173.4				13				146.0				13
Income (loss) from operations		$	47.2				4	%		$	(15.7	)			(2	)%
														%
														Change
TiO2 operating statistics:
Sales volumes*			478								445				(7	)%
Production volumes*			514								402				(22	)%
Percent change in net sales:
TiO2 product pricing															(1	)%
TiO2 sales volumes															(7	)
TiO2 product mix															(2	)
Changes in currency exchange rates															(3	)
Total															(13	)%

·	Our income tax benefit for 2009 includes a non-cash benefit of $4.7 million related to a net decrease in our reserve for uncertain tax positions, primarily as a result of the resolution of tax audits in Belgium and Germany in the third and fourth quarters.

 

·	Our income tax benefit for 2008 includes a non-cash benefit of $7.2 million relating to a European Court ruling that resulted in the favorable resolution of certain income tax issues in Germany and an increase in the amount of our German corporate and trade tax net operating loss carryforwards.

 

Impact of changes in currency exchange rates - 2009 vs 2010
		Transaction gains/(losses) recognized												Translation gain/loss- impact of rate changes				Total currency impact 2009 vs 2010
		2009				2010				Change
		(in millions)
Impact on:
Net sales		$	-			$	-			$	-			$	(36	)		$	(36	)
Income (loss)  from operations			10				8				(2	)			(25	)			(27	)

Impact of changes in currency exchange rates - 2008 vs 2009
		Transaction gains/(losses) recognized												Translation gain/loss- impact of rate changes				Total currency impact 2008 vs 2009
		2008				2009				Change
		(in millions)
Impact on:
Net sales		$	-			$	-			$	-			$	(35	)		$	(35	)
Income (loss)  from operations			1				10				9				31				40

 
 

·	higher income (loss) from operations in 2010 of $194.1 million;

·	higher cash paid for income taxes in 2010 of $21.3 million resulting from our increased profitability;

·	lower cash paid for interest in 2010 of $3.1 due to lower average borrowings in 2010;

·	higher net cash used by related changes in our inventories, receivables, payables and accruals of $145.7 million in 2010 compared to 2009; and

·	lower net distribution from our TiO2 venture in 2010 of $5.3 million due to related changes in their cash requirements.

·	lower income (loss) from operations in 2009 of $62.9 million;

·	higher net cash provided by relative changes in our inventories, receivables, payables and accruals of $148.3 million in 2009 as compared to 2008, primarily due to relative changes in our inventory levels, as discussed below; and

·	lower net distributions from our TiO2 joint venture in 2009 of $2.3 million due to related changes in their cash requirements.

·	Our average days sales outstanding decreased at December 31, 2010 compared to December 31, 2009 due to the timing of collections on receivable balances; and

·	Our average days sales in inventory decreased at December 31, 2010 compared to December 31, 2009, as our TiO2 sales volumes in 2010 exceeded our production volumes.

	December 31,	December 31,	December 31,
	2008	2009	2010
Days sales outstanding	64 days	56 days	55 days
Days sales in inventory	113 days	58 days	52 days

·	repaid $16.7 million under our U.S. credit facility; and

·	repaid net euro 9 million ($8.5 million when borrowed/repaid) under our European credit facility.

·	borrowed a net of $3.0 million under our U.S. credit facility;

·	borrowed and repaid $31.5 million under our European credit facility; and

·	made net payments of $19.2 million on our credit facility with our affiliate NL.

·	made net payments of $1.7 million on our U.S. credit facility;

·	borrowed a net of $44.4 million on our European credit facility; and

·	borrowed a net of $19.2 million on our credit facility with our affiliate NL.

·	euro 400 million principal amount of our 6.5% Senior Secured Notes ($532.8 million) due in 2013; and

·	approximately $6.8 million of other indebtedness.

		Held by
		U.S. Entities				Non-U.S. Entities				Total
Cash and cash equivalents		$	252.1			$	52.6			$	304.7
Restricted cash			-				1.9				1.9
Marketable equity securities			49.7				-				49.7

		Payment due date
Contractual commitment		2011					2012/ 2013				2014/ 2015			2016 and   after				Total
		(In millions)
Indebtedness(1)		$	2.2			$	536.2			$	.9			$	.3			$	539.6
Interest payments onindebtedness (2)			34.9				46.4				-				-				81.3
Operating leases			10.4				11.6				6.1				18.0				46.1
Long-term supply contracts for the purchase of TiO2 feedstock (3)			260.0				185.0				147.0				-				592.0
Long-term service and other supply contracts (4)			53.4				50.8				26.6				1.2				132.0
Fixed asset acquisitions			23.4				-				-				-				23.4
Estimated tax obligations (5)			7.8				-				-				-				7.8
		$	392.1			$	830.0			$	180.6			$	19.5			$	1,422.2

(1)

A significant portion of the amount shown for indebtedness relates to our 6.5% Senior Secured Notes ($532.8 million at December 31, 2010).  Such indebtedness is denominated in euro.  See Item 7A – “Quantitative and Qualitative Disclosures About Market Risk” and Note 9 to the Consolidated Financial Statements.

(2)	The amounts shown for interest for any outstanding variable-rate indebtedness is based upon the December 31, 2010 interest rates and assumes that such variable-rate indebtedness remains outstanding until maturity.

(3)

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, 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.  Our obligation for the purchase of TiO2 feedstock is more fully described in Note 15 to our Consolidated Financial Statements and above in “Business – raw materials.”

(4)

The amounts shown for the long-term service and other supply contracts primarily pertain to agreements we have entered into with various providers of products or services which help to run our plant facilities (electricity, natural gas, etc.), utilizing December 31, 2010 exchange rates.  See Note 15 to our Consolidated Financial Statements.

(5)	The amount shown for estimated tax obligations is the consolidated amount of net income taxes payable at December 31, 2010, which is assumed to be paid during 2011.

·

Any amounts 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.  We expect to be required to contribute approximately $28 million to our defined benefit pension plans and OPEB plans during 2011.  Such defined benefit pension plans and OPEB plans are discussed below in greater detail.  See Note 11 to our Consolidated Financial Statements.

·	Any amounts we might pay related to our asset retirement obligations as the terms and amounts of such future fundings are unknown;

·	Any amounts 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 Note 10 to our Consolidated Financial Statements; and

·

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 5 to our Consolidated Financial Statements.