Attached files
file | filename |
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EX-32.1 - KRONOS INTERNATINAL 10Q 3Q09 EXHIBIT 32.1 CERTIFICATION - KRONOS INTERNATIONAL INC | kii10w3q09ex32-1.htm |
EX-31.2 - KRONOS INTERNATINAL 10Q 3Q09 EXHIBIT 31.2 CERTIFICATION - KRONOS INTERNATIONAL INC | kii10q3q09ex31-2.htm |
EX-31.1 - KRONOS INTERNATINAL 10Q 3Q09 EXHIBIT 31.1 CERTIFICATION - KRONOS INTERNATIONAL INC | kii10q3q09ex31-1.htm |
EX-10.1 - KII EXH. 10.1 AMENDMENT TO FACILITY AGREEMENT - KRONOS INTERNATIONAL INC | kiiexhibit10_1agmt.htm |
SECURITIES
AND EXCHANGE COMMISSION
|
|
Washington,
D.C. 20549
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|
FORM
10-Q
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QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF
|
|
THE
SECURITIES EXCHANGE ACT OF 1934
|
|
For
the quarter ended September 30,
2009
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Commission
file number 333-100047
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KRONOS INTERNATIONAL,
INC.
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|
(Exact
name of Registrant as specified in its charter)
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DELAWARE
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22-2949593
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(State
or other jurisdiction of
incorporation
or organization)
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(IRS
Employer Identification No.)
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|
|
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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
|
|
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).* Yes No
*
|
The
registrant has not yet been phased into the interactive data
requirements.
|
Indicate
by check mark 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 Securities Exchange Act of 1934). Large
accelerated filer Accelerated
filer
Non-accelerated filer X Smaller
reporting company
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes No
X
Number
of shares of the Registrant's common stock outstanding on October 31, 2009:
2,968.
The
Registrant is a wholly owned subsidiary of Kronos Worldwide, Inc. (File No.
1-31763) and meets the conditions set forth in General Instructions H(1)(a) and
H(1)(b) of Form 10-Q for reduced disclosure format.
KRONOS
INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
Page
|
||
number
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||
Part
I.
|
FINANCIAL
INFORMATION
|
|
Item
1.
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Financial
Statements
|
|
Condensed
Consolidated Balance Sheets -
|
||
December
31, 2008; September 30, 2009 (Unaudited)
|
3
|
|
Condensed
Consolidated Statements of Operations (Unaudited) -
|
||
Three
and nine months ended September 30, 2008 and 2009
|
5
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Condensed
Consolidated Statement of Stockholder’s
|
||
Equity
and Comprehensive Income (Loss) (Unaudited) -
|
||
Nine
months ended September 30, 2009
|
6
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Condensed
Consolidated Statements of Cash Flows (Unaudited) -
|
||
Nine
months ended September 30, 2008 and 2009
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7
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|
Notes
to Condensed Consolidated Financial Statements (Unaudited)
|
8
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial
|
|
Condition
and Results of Operations
|
15
|
|
Item
3.
|
Quantitative
and Qualitative Disclosure About Market Risk
|
25
|
Item
4.
|
Controls
and Procedures
|
25
|
Part
II.
|
OTHER
INFORMATION
|
|
Item
1.
|
Legal
Proceedings
|
27
|
Item
1A.
|
Risk
Factors
|
27
|
Item
6.
|
Exhibits
|
27
|
Items
2, 3, 4 and 5 of Part II are omitted because there is no information to
report.
|
KRONOS
INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
millions)
ASSETS
|
December
31,
|
September
30,
|
||||||
2008
|
2009
|
|||||||
(Unaudited)
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 10.8 | $ | 39.0 | ||||
Restricted
cash
|
1.5 | 1.1 | ||||||
Accounts
and other receivables
|
132.1 | 164.6 | ||||||
Inventories
|
303.9 | 190.8 | ||||||
Prepaid
expenses and other
|
3.0 | 7.1 | ||||||
Total
current assets
|
451.3 | 402.6 | ||||||
Other
assets:
|
||||||||
Deferred
financing costs, net
|
6.8 | 6.3 | ||||||
Deferred
income taxes
|
166.4 | 189.7 | ||||||
Other
|
4.6 | 4.9 | ||||||
Total
other assets
|
177.8 | 200.9 | ||||||
Property
and equipment:
|
||||||||
Land
|
35.9 | 42.3 | ||||||
Buildings
|
171.9 | 181.6 | ||||||
Equipment
|
807.8 | 861.3 | ||||||
Mining
properties
|
73.9 | 114.9 | ||||||
Construction
in progress
|
37.9 | 14.7 | ||||||
1,127.4 | 1,214.8 | |||||||
Less
accumulated depreciation and amortization
|
703.0 | 780.1 | ||||||
Net
property and equipment
|
424.4 | 434.7 | ||||||
Total
assets
|
$ | 1,053.5 | $ | 1,038.2 | ||||
KRONOS
INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In
millions)
LIABILITIES AND STOCKHOLDER’S
EQUITY
|
December
31,
2008
|
September
30,
2009
|
||||||
(Unaudited)
|
||||||||
Current
liabilities:
|
||||||||
Current
maturities of long-term debt
|
$ | .8 | $ | 1.7 | ||||
Accounts
payable and accrued liabilities
|
147.8 | 158.9 | ||||||
Income
taxes
|
3.6 | 3.5 | ||||||
Deferred
income taxes
|
4.6 | 4.9 | ||||||
Total
current liabilities
|
156.8 | 169.0 | ||||||
Noncurrent
liabilities:
|
||||||||
Long-term
debt
|
604.8 | 613.7 | ||||||
Deferred
income taxes
|
13.0 | 13.6 | ||||||
Accrued
pension cost
|
114.0 | 113.2 | ||||||
Other
|
27.6 | 28.3 | ||||||
Total
noncurrent liabilities
|
759.4 | 768.8 | ||||||
Stockholder’s
equity:
|
||||||||
Common
stock
|
.3 | .3 | ||||||
Additional
paid-in capital
|
1,947.6 | 1,958.3 | ||||||
Retained
deficit
|
(1,425.1 | ) | (1,472.3 | ) | ||||
Notes
receivable from affiliates
|
(214.5 | ) | (230.0 | ) | ||||
Accumulated
other comprehensive loss
|
(171.0 | ) | (155.9 | ) | ||||
Total
stockholder’s equity
|
137.3 | 100.4 | ||||||
Total
liabilities and stockholder’s equity
|
$ | 1,053.5 | $ | 1,038.2 | ||||
Commitments
and contingencies (Notes 6 and 9)
KRONOS
INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
millions)
Three
months ended
September 30,
|
Nine
months ended
September 30,
|
|||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||
(Unaudited)
|
||||||||||||||||
Net
sales
|
$ | 249.7 | $ | 224.6 | $ | 780.8 | $ | 592.9 | ||||||||
Cost
of sales
|
211.9 | 184.5 | 647.8 | 560.2 | ||||||||||||
Gross
margin
|
37.8 | 40.1 | 133.0 | 32.7 | ||||||||||||
Selling,
general and administrative expense
|
34.8 | 30.2 | 105.5 | 83.4 | ||||||||||||
Currency
transaction gains (losses), net
|
2.7 | 1.6 | (.6 | ) | 7.4 | |||||||||||
Other
operating income, net
|
1.6 | 1.3 | 4.8 | 4.0 | ||||||||||||
Income
(loss) from operations
|
7.3 | 12.8 | 31.7 | (39.3 | ) | |||||||||||
Other
income (expense):
|
||||||||||||||||
Interest
income
|
6.2 | .1 | 18.1 | .1 | ||||||||||||
Interest
expense
|
(10.8 | ) | (10.3 | ) | (31.7 | ) | (29.6 | ) | ||||||||
Income
(loss) before income taxes
|
2.7 | 2.6 | 18.1 | (68.8 | ) | |||||||||||
Income
tax expense (benefit)
|
1.0 | (.4 | ) | (.3 | ) | (21.6 | ) | |||||||||
Net
income (loss)
|
$ | 1.7 | $ | 3.0 | $ | 18.4 | $ | (47.2 | ) | |||||||
KRONOS
INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY AND COMPREHENSIVE INCOME
(LOSS)
Nine
months ended September 30, 2009
(In
millions)
Additional
|
Notes
receivable
|
Accumulated
other
|
Total
|
|||||||||||||||||||||||||
Common
stock
|
paid-in
capital
|
Retained
deficit
|
from
affiliates
|
comprehensive
loss
|
stockholder’s
equity
|
Comprehensive
income (loss)
|
||||||||||||||||||||||
(Unaudited)
|
||||||||||||||||||||||||||||
Balance
at December 31, 2008
|
$ | .3 | $ | 1,947.6 | $ | (1,425.1 | ) | $ | (214.5 | ) | $ | (171.0 | ) | $ | 137.3 | |||||||||||||
Net
loss
|
- | - | (47.2 | ) | - | - | (47.2 | ) | $ | (47.2 | ) | |||||||||||||||||
Other
comprehensive income, net
|
- | - | - | - | 15.1 | 15.1 | 15.1 | |||||||||||||||||||||
Intercompany
interest – Kronos Worldwide, Inc., net
|
- | 10.7 | - | (15.5 | ) | - | (4.8 | ) | - | |||||||||||||||||||
Balance
at September 30, 2009
|
$ | .3 | $ | 1,958.3 | $ | (1,472.3 | ) | $ | (230.0 | ) | $ | (155.9 | ) | $ | 100.4 | |||||||||||||
Comprehensive
loss
|
$ | (32.1 | ) | |||||||||||||||||||||||||
KRONOS
INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
millions)
Nine
months ended
September 30,
|
||||||||
2008
|
2009
|
|||||||
(Unaudited)
|
||||||||
Cash
flows from operating activities:
|
||||||||
Net
income (loss)
|
$ | 18.4 | $ | (47.2 | ) | |||
Depreciation
and amortization
|
35.7 | 30.4 | ||||||
Deferred
income taxes
|
(5.2 | ) | (21.5 | ) | ||||
Defined
benefit pension plan expense less than cash funding
|
(1.8 | ) | (1.8 | ) | ||||
Other,
net
|
1.5 | .9 | ||||||
Change
in assets and liabilities:
|
||||||||
Accounts
and other receivables
|
(24.6 | ) | (24.4 | ) | ||||
Inventories
|
(18.3 | ) | 117.2 | |||||
Prepaid
expenses
|
(1.4 | ) | (3.7 | ) | ||||
Accounts
payable and accrued liabilities
|
21.9 | 5.2 | ||||||
Income
taxes
|
(.7 | ) | .5 | |||||
Accounts
with affiliates
|
(4.9 | ) | 2.6 | |||||
Other,
net
|
.1 | (.2 | ) | |||||
Net
cash provided by operating activities
|
20.7 | 58.0 | ||||||
Cash
flows from investing activities:
|
||||||||
Capital
expenditures
|
(49.5 | ) | (15.1 | ) | ||||
Change
in restricted cash, net
|
.6 | .5 | ||||||
Net
cash used in investing activities
|
(48.9 | ) | (14.6 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Indebtedness:
|
||||||||
Borrowings
|
37.6 | 29.1 | ||||||
Principal
payments
|
(14.4 | ) | (48.3 | ) | ||||
Deferred
financing fees
|
(.9 | ) | (.6 | ) | ||||
Dividends
paid
|
(35.0 | ) | - | |||||
Net
cash used in financing activities
|
(12.7 | ) | (19.8 | ) | ||||
Cash
and cash equivalents - net change from:
|
||||||||
Operating,
investing and financing activities
|
(40.9 | ) | 23.6 | |||||
Currency
translation
|
(.3 | ) | 4.6 | |||||
Cash
and cash equivalents at beginning of period
|
67.0 | 10.8 | ||||||
Cash
and cash equivalents at end of period
|
$ | 25.8 | $ | 39.0 | ||||
Supplemental
disclosures:
|
||||||||
Cash
paid (received) for:
|
||||||||
Interest
|
$ | 22.0 | $ | 19.6 | ||||
Income
taxes
|
4.9 | (.4 | ) | |||||
Accrual
for capital expenditures
|
3.0 | .3 | ||||||
Capital
lease obligation incurred
|
- | 3.6 |
KRONOS
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
(Unaudited)
Note
1
- Organization
and basis of presentation:
Organization – We are a
wholly-owned subsidiary of Kronos Worldwide, Inc. ("Kronos") (NYSE:
KRO). We are incorporated in the state of Delaware, U.S.A., with our
seat of management in Leverkusen, Germany. At September 30, 2009,
Valhi, Inc. (NYSE: VHI) held approximately 59% of Kronos’ outstanding common
stock and NL Industries, Inc. (NYSE: NL) held an additional 36% of Kronos’
common stock. Valhi owns approximately 83% of NL’s outstanding common
stock. Approximately 94% of Valhi’s outstanding common stock is held
by subsidiaries of Contran Corporation. 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 sole trustee), or is held directly by Mr. Simmons or other persons or
entities related to Mr. Simmons. Consequently, Mr. Simmons may be
deemed to control each of these companies.
Basis of presentation – The unaudited Condensed
Consolidated Financial Statements contained in this Quarterly Report have been
prepared on the same basis as the audited Consolidated Financial Statements in
our Annual Report on Form 10-K for the year ended December 31, 2008 that we
filed with the Securities and Exchange Commission (“SEC”) on March 12, 2009 (the
“2008 Annual Report”). In our opinion, we have made all necessary
adjustments (which include only normal recurring adjustments) in order to state
fairly, in all material respects, our consolidated financial position, results
of operations and cash flows as of the dates and for the periods
presented. We have condensed the Consolidated Balance Sheet and
Statement of Stockholder’s Equity and Comprehensive Income (Loss) at December
31, 2008 contained in this Quarterly Report as compared to our audited
Consolidated Financial Statements at that date, and we have omitted certain
information and footnote disclosures (including those related to the
Consolidated Balance Sheet at December 31, 2008) normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America (“GAAP”). Our results of operations
for the interim periods ended September 30, 2009 may not be indicative of our
operating results for the full year. The Condensed Consolidated
Financial Statements contained in this Quarterly Report should be read in
conjunction with our 2008 Consolidated Financial Statements contained in our
2008 Annual Report.
Unless
otherwise indicated, references in this report to “we,” “us” or “our” refer to
Kronos International, Inc. and its subsidiaries taken as a whole.
Note
2 – Accounts and other receivables:
December
31,
2008
|
September
30,
2009
|
|||||||
(In
millions)
|
||||||||
Trade
receivables
|
$ | 113.5 | $ | 145.1 | ||||
Recoverable
VAT and other receivables
|
18.5 | 20.3 | ||||||
Refundable
income taxes
|
.7 | - | ||||||
Receivable
from affiliate - Kronos Canada
|
1.2 | 1.6 | ||||||
Allowance
for doubtful accounts
|
(1.8 | ) | (2.4 | ) | ||||
Total
|
$ | 132.1 | $ | 164.6 |
Note
3 - Inventories:
December
31,
2008
|
September
30,
2009
|
|||||||
(In
millions)
|
||||||||
Raw
materials
|
$ | 58.7 | $ | 38.1 | ||||
Work
in process
|
16.1 | 14.3 | ||||||
Finished
products
|
183.2 | 89.6 | ||||||
Supplies
|
45.9 | 48.8 | ||||||
Total
|
$ | 303.9 | $ | 190.8 |
Note
4 - Accounts payable and accrued liabilities:
December
31,
2008
|
September
30,
2009
|
|||||||
(In
millions)
|
||||||||
Accounts
payable
|
$ | 81.8 | $ | 65.9 | ||||
Employee
benefits
|
16.0 | 20.9 | ||||||
Accrued
sales discounts and rebates
|
11.6 | 16.2 | ||||||
Payable
to affiliates:
|
||||||||
Kronos (US), Inc.
|
13.3 | 16.3 | ||||||
Kronos Canada
|
- | 1.2 | ||||||
Accrued
interest
|
7.7 | 17.6 | ||||||
Other
|
17.4 | 20.8 | ||||||
Total
|
$ | 147.8 | $ | 158.9 |
Note
5 - Long-term debt:
December
31,
2008
|
September
30,
2009
|
|||||||
(In
millions)
|
||||||||
Long
term debt:
|
||||||||
6.5%
Senior Secured Notes
|
$ | 560.0 | $ | 582.2 | ||||
Revolving
credit facility
|
42.2 | 26.3 | ||||||
Other
|
3.4 | 6.9 | ||||||
Total
debt
|
605.6 | 615.4 | ||||||
Less
current maturities
|
.8 | 1.7 | ||||||
Total
long-term debt
|
$ | 604.8 | $ | 613.7 |
During
the first nine months of 2009, we made net payments of euro 12.0 million ($18.2
million when borrowed/repaid) under our bank credit facility. The
average interest rate on these borrowings at September 30, 2009 was
3.44%.
Restrictions and Other. Under the cross-default
provisions of the 6.5% Senior Secured Notes, the 6.5% Notes may be accelerated
prior to their stated maturity if we or any of our 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 credit
facility, any outstanding borrowings under the credit facility may be
accelerated prior to its stated maturity if we or the borrowers default under
any other indebtedness in excess of euro 5 million due to a failure to pay the
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). The credit facility contains provisions that allow the
lender to accelerate the maturity of the applicable facility in the event of a
change of control, as defined in the respective agreement, of the applicable
borrower. In the event the cross-default provisions 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.
The
credit facility described above requires the respective borrowers to maintain
minimum levels of equity, requires the maintenance of certain financial ratios,
limits dividends and additional indebtedness and contains other provisions and
restrictive covenants customary in lending transactions of this
type. In this regard, in the first half of 2009 we reduced our
production levels in response to the current economic environment, which has
favorably impacted our liquidity and cash flows by reducing our inventory
levels. The reduced capacity utilization levels negatively impacted
our 2009 results of operations due to the resulting unabsorbed fixed production
costs that are charged to expense as incurred. Furthermore, our lower
sales negatively impacted our results of operations in the first half of
2009. As a result, we did not expect we would be able to maintain
compliance under our revolving credit facility with the required financial ratio
of the borrowers’ net secured debt to earnings before income taxes, interest and
depreciation, as defined in the credit facility, for the 12-month period ending
March 31, 2009. Beginning March 20, 2009, the lenders associated with
our revolving credit facility agreed to a series of waivers for compliance with
such required financial ratio. On September 15, 2009 we and the
lenders entered into the Fourth Amendment to the credit
facility. Among other things, the Fourth Amendment added two
additional financial covenants and increased the rate on outstanding borrowings
to LIBOR plus a margin ranging from 3% to 4% depending on the amount of
outstanding borrowings. Upon achieving a specified financial
covenant, these two additional financial covenants will no longer be in effect,
and the interest rate on outstanding borrowings would be reduced to LIBOR plus
1.75%. Additionally the borrowing availability under the line has
been limited to euro 51 million ($74.5 million) until we are in compliance with
certain specified financial covenants, and in any event no earlier than March
31, 2010. The maturity date of the Amended Revolving Credit Facility
remains May 26, 2011. We believe we will be able to comply with the
new financial covenants through the maturity of the facility; however if future
operating results differ materially from our expectations we may be unable to
maintain compliance.
The terms
of the indenture governing the Senior Secured Notes limits our ability to pay
dividends and make other restricted payments. At September 30, 2009,
the maximum amount of dividends and other restricted payments that we could make
(the “Restricted Payment Basket”) was $1.6 million. However, the
indenture currently prohibits us from utilizing such Restricted Payment Basket
because we have not met a specified financial ratio contained in the indenture;
such prohibition will continue until such time as we meet the specified
financial
ratio.
Note
6 - Income taxes:
Nine
months ended
September 30,
|
||||||||
2008
|
2009
|
|||||||
(In
millions)
|
||||||||
Expected
tax expense (benefit), at U.S. federal statutory income tax rate of
35%
|
$ | 6.3 | $ | (24.1 | ) | |||
Non-U.S.
tax rates
|
(.9 | ) | 2.3 | |||||
Nondeductible
expenses
|
1.0 | 1.5 | ||||||
German
tax attribute
|
(7.2 | ) | (.4 | ) | ||||
Change
in reserve for uncertain tax positions
|
.8 | (.2 | ) | |||||
Other
|
(.3 | ) | (.7 | ) | ||||
Total
|
$ | (.3 | ) | $ | (21.6 | ) |
Certain
of our non-U.S. tax returns are being examined and tax authorities may propose
tax deficiencies including interest and penalties. 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. We do not currently believe
that our unrecognized tax benefits will change significantly within the next
twelve months.
Note
7 – Employee benefit plans:
The
components of net periodic defined benefit pension cost are presented in the
table below.
Three
months ended
September 30,
|
Nine
months ended
September 30,
|
|||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||
(In
millions)
|
||||||||||||||||
Service
cost
|
$ | 1.1 | $ | 1.4 | $ | 3.2 | $ | 4.1 | ||||||||
Interest
cost
|
4.9 | 4.4 | 14.9 | 13.4 | ||||||||||||
Expected
return on plan assets
|
(3.5 | ) | (2.9 | ) | (10.4 | ) | (8.8 | ) | ||||||||
Amortization
of prior service cost
|
.1 | .1 | .4 | .4 | ||||||||||||
Amortization
of net transition obligations
|
- | - | .1 | .1 | ||||||||||||
Recognized
actuarial losses
|
1.2 | 1.1 | 3.3 | 3.2 | ||||||||||||
Total
|
$ | 3.8 | $ | 4.1 | $ | 11.5 | $ | 12.4 |
Contributions – We expect our
2009 contributions for our pension plans to be approximately $18 million during
2009.
Note
8 – Other noncurrent liabilities:
December
31,
2008
|
September
30,
2009
|
|||||||
(In
millions)
|
||||||||
Reserve
for uncertain tax positions
|
$ | 13.1 | $ | 13.6 | ||||
Employee
benefits
|
8.8 | 9.0 | ||||||
Insurance
claims and expenses
|
1.5 | 1.3 | ||||||
Other
|
4.2 | 4.4 | ||||||
Total
|
$ | 27.6 | $ | 28.3 |
Note
9 – Commitments and contingencies:
Litigation matters –
From time-to-time we are involved in various environmental, contractual,
product liability, patent (or intellectual property), employment and other
claims and disputes incidental to our operations. In certain cases,
we have insurance coverage for these items. 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 position,
results of operations or liquidity beyond the accruals we have already provided
for.
Please
refer to our 2008 Annual Report for a discussion of certain other legal
proceedings to which we are a party.
Note
10 – Financial Instruments:
The
following table summarizes the valuation of our short-term investments and
financial instruments recorded on a fair value basis as of December 31, 2008 and
September 30, 2009:
Fair Value Measurements
|
||||
Total
|
Quoted
Prices in Active Markets (Level
1)
|
Significant
Other Observable Inputs (Level
2)
|
Significant
Unobservable Inputs (Level
3)
|
|
(in
millions)
|
||||
Currency
forward contracts
|
||||
December 31, 2008
|
$ (2.6)
|
$ (2.6)
|
$ -
|
$ -
|
September 30,
2009
|
1.5
|
1.5
|
-
|
-
|
Certain
of our sales generated by our operations are denominated in U.S. dollars.
We periodically use currency forward contracts to manage a nominal portion of
currency exchange rate risk associated with trade 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. The fair value of the currency forward contracts is
determined using Level 1 inputs as defined by Accounting Standards Codification
(“ASC”) Topic 820-10-35 based on the currency spot forward rates quoted by banks
or currency dealers.
At
September 30, 2009, we had currency forward contracts to exchange an aggregate
euro 21.4 million for an equivalent value of Norwegian kroner at exchange rates
ranging from kroner 8.70 to kroner 9.22 per euro. These contracts with DnB
Nor Bank ASA mature from October 2009 through September 2010 at a rate of euro
.1 million to euro 1.8 million per month, subject to early redemption provisions
at our option. At September 30, 2009, the actual exchange rate was
kroner 8.46 per euro. The estimated fair value of our currency
forward contracts at September 30, 2009 was a $1.5 million asset, which is the
result of $1.5 million recognized as part of Prepaid Expenses and Other in our
Condensed Consolidated Balance Sheet. There is also a corresponding
$1.5 million currency transaction gain in our Condensed Consolidated Statement
of Operations. To the extent we held such contracts during 2008, we
did not use hedge accounting for any of such contracts, and we are not currently
using hedge accounting for our existing contracts.
The
following table presents the financial instruments that are not carried at fair
value but which require fair value disclosure.
December
31,
|
September
30,
|
|||||||||||||||
2008
|
2009
|
|||||||||||||||
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|||||||||||||
(In
millions)
|
||||||||||||||||
Cash,
cash equivalents and restricted cash
|
$ | 12.3 | $ | 12.3 | $ | 40.1 | $ | 40.1 | ||||||||
Notes
payable and long-term debt:
|
||||||||||||||||
Fixed
rate with market quotes -
|
||||||||||||||||
6.5%
Senior Secured Notes
|
$ | 560.0 | $ | 129.4 | $ | 582.2 | $ | 370.0 | ||||||||
European
revolving credit facility
|
42.2 | 42.2 | 26.3 | 26.3 |
At
September 30, 2009, the estimated market price of the 6.5% Senior Secured Notes
was approximately euro 633 per euro 1,000 principal amount. The fair
value of our 6.5% Senior Secured Notes is based upon quoted market prices at
each balance sheet date; these quoted market prices represent Level 2 inputs as
defined by the ASC Topic 820-10-35 because the markets in which the Senior
Secured Notes trade are not active. The fair value of variable
interest rate debt is deemed to approximate book value. Due to their
near-term maturities, the carrying amounts of accounts receivable and accounts
payable are considered equivalent to fair value.
Note
11 – Recent accounting pronouncements:
Fair Value
Disclosure. In April 2009,
the Financial Accounting Standard Board (“FASB”) issued FSP FAS 107-1 and APB
28-1, Interim Disclosures
about Fair Value of Financial Instruments, which is now included with ASC
Topic 825-10 Financial
Instruments. This FSP requires us to disclose the fair value
of all financial instruments for which it is practicable to estimate the value,
whether recognized or not in the statement of financial position, as required by
SFAS No. 107, Disclosures
about Fair Value of Financial Instruments at interim as well as annual
periods. Prior to the adoption of the FSP, we were only
required to disclose this information annually. This FSP became
effective for us in the second quarter of 2009, and is included in Note 10 to
our Condensed Consolidated Financial Statements. The adoption of the
FSP did not affect our Condensed Consolidated Financial Statements.
Derivative
Disclosures. In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an Amendment of FASB Statement No. 133,
which is now included with ASC Topic 815-10 Derivates and Hedging.
SFAS No. 161 changes the disclosure requirements for derivative instruments and
hedging activities to provide enhanced disclosures about how and why we use
derivative instruments, how derivative instruments and related hedged items are
accounted for under SFAS No. 133 and how derivative instruments and related
hedged items affect our financial position and performance and cash flows.
This statement became effective for us in the first quarter of
2009. We periodically use currency forward contracts to manage a
portion of our currency exchange rate market risk associated with trade
receivables or future sales. See Note 10. Because our prior
disclosures regarding these forward contracts substantially met all of the
applicable disclosure requirements of the new standard, its effectiveness did
not have a significant effect on our Condensed Consolidated Financial
Statements.
Benefit Plan
Asset Disclosures. During
the fourth quarter of 2008, the FASB issued FSP SFAS 132 (R)-1, Employers’ Disclosures about
Postretirement Benefit Plan Assets, which is now included with ASC Topic
715-20 Defined Benefit
Plans. This statement amends SFAS No. 87, 88 and 106 to
require expanded disclosures about employers’ pension plan
assets. FSP 132 (R)-1 will become effective for us beginning with our
2009 annual report, and we will provide the expanded disclosures about our
pension plan assets at that time.
Other-Than-Temporary-Impairments. In
April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary-Impairments, which is now included with ASC Topic
320-10 Debt and Equity
Securities. The FSP amends existing guidance for the
recognition and measurement of other-than-temporary impairments for debt
securities classified as available-for-sale and held-to-maturity, and expands
the disclosure requirements for interim and annual periods for
available-for-sale and held-to-maturity debt and equity securities, including
information about investments in an unrealized loss position for which an
other-than-temporary impairment has or has not been recognized. This
FSP became effective for us in the second quarter of 2009 and it did not have a
material effect on our Condensed Consolidated Financial Statements.
Subsequent
Events. In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which is
now included with ASC Topic 855-10 Subsequent
Events. SFAS No. 165 establishes general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued, which are referred to as subsequent
events. The statement clarifies existing guidance on subsequent events including
a requirement that a public entity should evaluate subsequent events through the
issue date of the financial statements, the determination of when the effects of
subsequent events should be recognized in the financial statements and
disclosures regarding all subsequent events. SFAS No. 165 also
requires a public entity to disclose the date through which an entity has
evaluated subsequent events; we have evaluated for subsequent events though
November 2, 2009 which is the date this report was filed with the
SEC. SFAS No. 165 became effective for us in the second quarter of
2009 and its adoption did not have a material effect on our Condensed
Consolidated Financial Statements.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS
OF OPERATIONS:
Business
and results of operations overview
We are a leading global producer and
marketer of value-added titanium dioxide pigments (“TiO2”). TiO2 is used
for a variety of manufacturing applications, including plastics, paints, paper
and other industrial products. For the nine months ended September
30, 2009, approximately three-fourths of our sales volumes were into European
markets. We believe we are the second largest producer of TiO2 in Europe
with an estimated 19% share of European TiO2 sales
volumes. Our production facilities are located throughout
Europe.
We reported net income of $3 million in
the third quarter of 2009 as compared to net income of $1.7 million in the third
quarter of 2008. For the first nine months of 2009, we reported a net
loss of $47.2 million, compared to net income of $18.4 million in the first nine
months of 2008. Our net income increased for the third quarter of
2009 as compared to the same period of 2008 primarily due to higher income from
operations resulting from lower maintenance and other costs. Our net
income decreased for the first nine months of 2009 as compared to the same
period of 2008 primarily due to the net effects of lower income from operations
in 2009 resulting principally from lower sales and production volumes in the
2009 periods. In late 2008, as a result of the sharp decline in
global demand, we experienced a build up in our inventory levels. In
order to decrease our inventory levels and improve our liquidity, we implemented
production curtailments during the first half of 2009. In addition,
throughout all of 2009 we have implemented cost controls and reduced our capital
spending. Through these actions we have successfully reduced our
inventory and increased our liquidity, although the resulting curtailments led
to a net loss in the first six months of 2009 due to the large amounts of
unabsorbed fixed production costs we charged to expense as
incurred.
Our net
income for the first nine months of 2008 includes a second quarter income tax
benefit of $7.2 million related to a European Court ruling that resulted in the
favorable resolution of certain income tax issues in Germany.
Forward-looking
information
This report contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Statements in this Quarterly Report on Form 10-Q that are not
historical in nature are forward-looking in nature about our future that are not
statements of historical fact. Statements in this report including,
but not limited to, statements found in Item 2 - "Management’s Discussion and
Analysis of Financial Condition and Results of Operations," are forward-looking
statements that represent our beliefs and assumptions based on currently
available information. In some cases you can identify these
forward-looking statements 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 forward-looking statements are reasonable, we do not
know if these expectations will be correct. Forward-looking
statements by their nature involve substantial risks and uncertainties that
could significantly impact expected results. Actual future results
could differ materially from those predicted. While it is not
possible to identify all factors, we continue to face many risks and
uncertainties. Among the factors that could cause our actual future
results to differ materially from those described herein are the risks and
uncertainties discussed in this Quarterly Report and those described from time
to time in our other filings with the SEC including, but not limited to, the
following:
·
|
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
|
·
|
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)
|
·
|
Changes
in raw material and other operating costs (such as energy
costs)
|
·
|
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 or solvency of our
competitors
|
·
|
The
impact of pricing and production
decisions
|
·
|
Competitive
technology positions
|
·
|
Possible
disruption of our business or increases in the cost of doing business
resulting from terrorist activities or global
conflicts
|
·
|
The
introduction of trade barriers
|
·
|
Fluctuations
in currency exchange rates (such as changes in the exchange rate between
the U.S. dollar and each of the euro and the Norwegian
krone)
|
·
|
Operating
interruptions (including, but not limited to, labor disputes, leaks,
natural disasters, fires, explosions, unscheduled or unplanned downtime
and transportation interruptions)
|
·
|
The
timing and amounts of insurance
recoveries
|
·
|
Our
ability to renew, amend, refinance or comply with our credit
facilities
|
·
|
Our
ability to maintain sufficient
liquidity
|
·
|
The
ultimate outcome of income tax audits, tax settlement initiatives or other
tax matters
|
·
|
The
ultimate 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
|
·
|
Possible
future litigation
|
Should
one or more of these risks materialize (or the consequences of such a
development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or
expected. We disclaim any intention or obligation to update or revise
any forward-looking statement whether as a result of changes in information,
future events or otherwise.
Results
of operations
We
consider TiO2 to be a
“quality of life” product, with demand affected by gross domestic product (or
“GDP”) in various regions of the world. Over the long-term, we expect
that demand for TiO2 will grow
by 2% to 3% per year, consistent with our expectations for the long-term growth
in GDP. However, even if we and our competitors maintain consistent
shares of the worldwide market, demand for TiO2 in any
interim or annual period may not change in the same proportion as the change in
GDP, in part due 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 market
TiO2
selling prices. The majority of our TiO2 grades and
substantially all of our production are considered commodity pigment products;
we compete for sales primarily on the basis of price.
The
factors having the most impact on our reported operating results
are:
·
|
Our
TiO2
sales and production volumes,
|
·
|
Our
TiO2
selling prices,
|
·
|
Currency
exchange rates (particularly the exchange rate for the U.S. dollar
relative to the euro), and
|
·
|
Manufacturing
costs, particularly raw materials, maintenance and energy-related
expenses.
|
Our key
performance indicators are our TiO2 average
selling prices, and our level of TiO2 sales and
production volumes. TiO2 selling
prices generally follow industry trends and prices will increase or decrease
generally as a result of competitive market pressures.
Quarter
ended September 30, 2009 compared to the Quarter ended September 30,
2008-
Three
months ended
September
30,
|
||||||||||||||||
2008
|
2009
|
|||||||||||||||
(Dollars
in millions)
|
||||||||||||||||
Net
sales
|
$ | 249.7 | 100 | % | $ | 224.6 | 100 | % | ||||||||
Cost
of sales
|
211.9 | 85 | 184.5 | 82 | ||||||||||||
Gross
margin
|
37.8 | 15 | 40.1 | 18 | ||||||||||||
Other
operating expenses, net
|
30.5 | 12 | 27.3 | 12 | ||||||||||||
Income
from operations
|
$ | 7.3 | 3 | % | $ | 12.8 | 6 | % | ||||||||
% Change
|
||||||||||||||||
Ti02
operating statistics:
|
||||||||||||||||
Sales
volumes*
|
79 | 86 | 8 | % | ||||||||||||
Production
volumes*
|
85 | 86 | 1 | % | ||||||||||||
Percent
change in net sales:
|
||||||||||||||||
TiO2
product pricing
|
(6 | )% | ||||||||||||||
TiO2
sales volumes
|
8 | |||||||||||||||
TiO2
product mix
|
(5 | ) | ||||||||||||||
Changes
in currency exchange rates
|
(7 | ) | ||||||||||||||
Total
|
(10 | )% |
________________________________
*
Thousands of metric tons
Net sales – Net sales
decreased 10% or $25.1 million compared to the third quarter of 2008 primarily
due to a 6% decrease in average TiO2 selling
prices and unfavorable changes in product mix, partially offset by an 8%
increase in sales volumes. In addition, we estimate the unfavorable
effect of changes in currency exchange rates decreased our net sales by
approximately $17 million, or 7%, as compared to the same period in
2008. We expect average selling prices in the last three months of
2009 to be higher than the average selling prices in the three months ended
September 30, 2009, as discussed below.
Sales
volumes in the third quarter of 2009 were 8% higher as compared to 2008 due
primarily to the higher demand in our markets resulting from the improvement in
current economic conditions.
Cost of sales
- Cost of sales decreased
$27.4 million or 13% in the third quarter of 2009 compared to 2008 primarily due
to lower raw material costs of $8 million, lower utility costs of $2 million, a
decrease in maintenance costs of $8.7 million as part of our continuing efforts
to reduce operating costs where possible and currency fluctuations (primarily
the euro). Cost of sales as a percentage of net sales decreased to
82% in the third quarter of 2009 compared to 85% in the third quarter of 2008
due to the favorable effects of lower maintenance and other
costs. TiO2 production volumes increased to near
full capacity in the third quarter of 2009 as temporary plant curtailments
implemented during the first half of the year had ceased by the third
quarter.
Income from operations –
Income from operations increased by $5.5 million from $7.3 million in the
third quarter of 2008 to $12.8 million in the third quarter of
2009. Income from operations as a percentage of net sales
increased to 6% in the third quarter of 2009 from 3% in the same period for
2008. This increase is driven by the increase in gross margin, which
grew to 18% for the third quarter of 2009 compared to 15% for the third quarter
of 2008. Our gross margin has increased primarily because of lower
maintenance and other costs as well as the positive effects of higher sales
volumes, all of which more than offset the impact of lower average TiO2 selling
prices and changes in currency exchange rates. We estimate that
changes in currency exchange rates negatively affected income from operations by
approximately $1 million in the third quarter of 2009 as compared to the same
period in 2008.
Interest expense – Interest
expense decreased $.5 million from $10.8 million in the third quarter of 2008 to
$10.3 million in the third quarter of 2009 primarily due to changes in currency
exchange rates. Excluding the effect of currency exchange rates, we
expect interest expense will be higher in 2009 as compared to 2008 due to
anticipated increased average borrowings and higher interest rates under our
revolving credit facility.
We have a
significant amount of indebtedness denominated in the euro, primarily the 6.5%
Senior Secured Notes. The interest expense we recognize varies with
fluctuations in the euro exchange rate.
Income tax expense (benefit)
– Our income tax benefit was $.4 million in the third quarter of 2009
compared to a provision for income taxes of $1.0 million in the same period last
year. See Note 6 to our Condensed Consolidated Financial Statements for a
tabular reconciliation of our statutory income tax benefit to our actual income
tax benefit.
We have
substantial net operating loss carryforwards in Germany (the equivalent of $817
million for German corporate purposes and $229 million for German trade tax
purposes at December 31, 2008). At September 30, 2009, 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 these
carryforwards, particularly if the current economic downturn continues and we
generate operating losses in our German operations for an extended period of
time, it is possible we might conclude the benefit of the 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.
Nine months ended September 30, 2009
compared to the Nine months ended September 30, 2008-
Nine
months ended
September 30,
|
||||||||||||||||
2008
|
2009
|
|||||||||||||||
(Dollars
in millions)
|
||||||||||||||||
Net
sales
|
$ | 780.8 | 100 | % | $ | 592.9 | 100 | % | ||||||||
Cost
of sales
|
647.8 | 83 | 560.2 | 94 | ||||||||||||
Gross
margin
|
133.0 | 17 | 32.7 | 6 | ||||||||||||
Other
operating expenses, net
|
101.3 | 13 | 72.0 | 12 | ||||||||||||
Income
(loss) from operations
|
$ | 31.7 | 4 | % | $ | (39.3 | ) | (6 | )% | |||||||
% Change
|
||||||||||||||||
TiO2
operating statistics:
|
||||||||||||||||
Sales
volumes*
|
258 | 226 | (13 | )% | ||||||||||||
Production
volumes*
|
267 | 176 | (34 | )% | ||||||||||||
Percent
change in net sales:
|
||||||||||||||||
TiO2
product pricing
|
(1 | ) % | ||||||||||||||
TiO2
sales volumes
|
(13 | ) | ||||||||||||||
TiO2
product mix
|
(2 | ) | ||||||||||||||
Changes
in currency exchange rates
|
(8 | ) | ||||||||||||||
Total
|
(24 | )% |
*
Thousands of metric tons
Net sales – Net sales
decreased 24% or $187.9 million compared to the nine months ended September 30,
2008 primarily due to a 13% decrease in sales volumes, a 1% decrease in average
TiO2
selling prices and unfavorable changes in product mix. In addition,
we estimate the unfavorable effect of changes in currency exchange rates
decreased our net sales by approximately $59 million, or 8%, as compared to the
same period in 2008. We expect average selling prices in the fourth
quarter of 2009 to be higher than the average selling prices in the first nine
months of 2009, as discussed below.
Our 13%
decrease in sales volumes in the nine months ended September 30, 2009 is
primarily due to the impact of lower demand in our markets resulting from the
current economic conditions, principally in the first half of 2009.
Cost of
sales - Cost of sales decreased $87.6 million
or 14% in the nine months ended September 30, 2009 compared to the same period
in 2008 primarily due to the impact of a 13% decrease in sales volumes, lower
raw material costs of $8.4 million, a decrease in maintenance costs of $21.2
million and currency fluctuations (primarily the euro). Cost of sales
as a percentage of net sales increased to 94% in the first nine months of 2009
compared to 83% in the same period 2008 due to the unfavorable effects of the
significant amount of unabsorbed fixed production costs resulting from reduced
production volumes during the first six months of
2009. TiO2 production volumes decreased due to
temporary plant curtailments during the first six months of 2009 that resulted
in approximately $70 million of unabsorbed fixed production costs which were
charged directly to cost of sales in the first six months of
2009.
Income (loss) from operations –
Income (loss) from operations declined by $71 million from income from
operations of $31.7 million in the first nine months of 2008 to a loss from
operations of $39.3 million in the same period in 2009. Income
(loss) from operations as a percentage of net sales declined to (6%) in the
first nine months of 2009 from 4% in the same period for 2008. This
decrease is driven by the decline in gross margin, which fell to 6% for the
first nine months of 2009 compared to 17% for the same period of
2008. Our gross margin has decreased primarily because of the
significant amount of unabsorbed fixed production costs resulting from the
production curtailments we implemented during the first six months of 2009 as
well as the effect of lower sales volumes. In addition, changes in
currency rates have positively affected our gross margin and income (loss) from
operations. We estimate that changes in currency exchange rates
increased income from operations by approximately $31 million in the first nine
months of 2009 as compared to the same period in 2008.
Interest expense – Despite
the increase in total debt, interest expense decreased $2.1 million from $31.7
million in the first nine months of 2008 to $29.6 million in the same period for
2009 due to changes in currency exchange rates. Excluding the effect
of currency exchange rates, we expect interest expense will be higher in 2009 as
compared to 2008 due to anticipated increased average borrowings and higher
interest rates under our revolving credit facility.
Income tax benefit – Our income tax
benefit was $21.6 million in the first nine months of 2009 compared to an income
tax benefit of $.3 million in the same period last year. Our income tax
benefit in 2008 includes a $7.2 million income tax
benefit related to a European Court ruling that resulted in the favorable
resolution of certain tax issues in Germany and an increase in the amount of our
German corporate and trade tax net operating loss carryforwards. See
Note 6 to our Condensed Consolidated Financial Statements for a tabular
reconciliation of our statutory income tax benefit to our actual income tax
benefit.
Currency
exchange
We
have substantial
operations and assets located outside the United States (primarily in Germany,
Belgium and Norway). The majority of our sales are denominated in
currencies other than the U.S. dollar, principally the euro and other major
European currencies. A portion of our sales generated from our
operations is 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
sales and operating results are subject to currency exchange rate fluctuations
which may favorably or adversely impact reported earnings and may affect the
comparability of period-to-period operating results. Overall, we
estimate that fluctuations in currency exchange rates had the following effects
on our sales and income (loss) from operations in 2009 as compared to
2008.
Three
months ended
September
30, 2009
vs. 2008
|
Nine
months ended
September
30, 2009
vs. 2008
|
|||||||
Increase
(decrease), in millions
|
||||||||
Impact
on:
|
||||||||
Net
sales
|
$ | (17 | ) | $ | (59 | ) | ||
Income
(loss) from operations
|
(1 | ) | 31 |
Outlook
In
response to the worldwide economic slowdown and weak consumer confidence, we
reduced our production volumes in the first half of 2009 in order to reduce our
finished goods inventory, improve our liquidity and match production to market
demand. Overall industry pigment demand is expected to be lower in
2009 as compared to 2008 as a result of worldwide economic
conditions. While we currently expect our sales volumes in 2009 will
be lower as compared to 2008, we expect to gain market share following
anticipated reductions in industry capacity due to competitors’ permanent plant
shutdowns. During the second and third quarters of 2009, we and our
competitors have announced price increases, a small portion of which were
implemented in the third quarter of 2009, with the remainder expected to be
implemented in the fourth quarter of 2009 and into the first quarter of
2010. As a result, the decline in our average selling prices we
experienced during the first half of 2009 has ceased, and our average selling
prices increased slightly during the third quarter of 2009. As a
result of expected continued implementation of these price increases, we
anticipate our average selling prices will rise during the fourth quarter of
2009 and into 2010.
We
currently expect income from operations to be lower in 2009 as compared to 2008
primarily due to higher production costs resulting in part from reduced
production volumes during the first half of the year and the resulting
unabsorbed fixed production costs. While we operated our facilities
at approximately 50% of capacity during the first six months of 2009, we
increased our capacity utilization to approximately 95% of capacity during the
third quarter of 2009, and we expect to operate our facilities at approximately
90% to 95% of capacity during the fourth quarter of this year. We
expect to report a net loss in 2009 as compared to reporting net income in 2008
due to lower expected income from operations in 2009 resulting principally from
the negative effects of the production curtailments we implemented in the first
half of 2009. In addition, we currently expect our income from
operations in the fourth quarter of 2009 will be lower as compared to the third
quarter of 2009 due to the net effects of higher average selling prices, lower
sales volumes resulting from normal seasonal changes in demand and higher
maintenance costs due to the relative timing of maintenance activities
throughout the year.
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, solvency and
continued operation of competitors, unexpected or earlier than expected capacity
additions or reductions and technological advances. If actual
developments differ from our expectations, our results of operations could be
unfavorably affected.
We
believe that our annual attainable production capacity for 2009 is approximately
362,000 metric tons. We expect our production volumes in 2009 will be
significantly lower than our attainable capacity due to the production
curtailments we implemented in the first half of the year. We
currently expect we will operate at 65% to 75% of our attainable production
capacity in calendar 2009. Our expected capacity utilization levels
could be adjusted upwards or downwards to match changes in demand for our
product.
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.
Our cash provided by operating
activities was $58.0 million in the first nine months of 2009, compared to $20.7
million of cash provided by operating activities in the first nine months of
2008. This $37.3 million increase was primarily due to the net
effects of the following:
·
|
Lower
income from operations in 2009 of $71
million;
|
·
|
Lower
net cash used from relative changes in our inventories, receivables,
payables and accruals of $123.9 million in the first nine months of 2009
as compared to the first nine months of 2008, partially due to our
reducing inventory levels, as discussed below;
and
|
·
|
Lower
net cash paid for income taxes in 2009 of $5.3 million due to lower
earnings.
|
Changes
in working capital were affected by accounts receivable and inventory
changes. As shown below:
·
|
Our
average days sales outstanding (“DSO”) decreased from December 31, 2008 to
September 30, 2009 due to the timing of collection on higher accounts
receivable balances at the end of September;
and
|
·
|
Our
average days sales in inventory (“DSI”) decreased from December 31, 2008
to September 30, 2009, as our TiO2
sales volumes exceeded our TiO2
production volumes in the first nine months of
2009.
|
For
comparative purposes, we have also provided comparable prior years numbers
below:
December
31,
|
September 30,
|
December
31,
|
September 30,
|
|
2007
|
2008
|
2008
|
2009
|
|
DSO
|
65
days
|
67
days
|
68
days
|
65
days
|
DSI
|
55
days
|
59
days
|
123
days
|
44
days
|
Investing
activities
Our
capital expenditures of $49.5 million and $15.1 million in the nine months ended
September 30, 2008 and 2009, respectively, were primarily for maintenance to
existing facilities. Compared to 2008, we have lowered our planned
capital expenditures in 2009 in response to the current economic
conditions.
Financing
activities
During
the nine months ended September 30, 2009, we made net payments of euro 12.0
million ($18.2 million when borrowed/repaid) under our credit
facility.
We paid
quarterly dividends of $35.0 million to Kronos from available cash on hand in
the nine months ending September 30, 2008. We paid no dividends in
the nine months ending September 30, 2009.
Outstanding
debt obligations
At
September 30, 2009, our consolidated debt was comprised of:
·
|
euro
400 million principal amount of our 6.5% Senior Secured Notes ($582.2
million) due in 2013;
|
·
|
euro
18.0 million ($26.3 million) under our revolving credit facility which
matures in May 2011; and
|
·
|
Approximately
$6.9 million of other indebtedness.
|
The
revolving credit facility described above requires the respective borrowers to
maintain minimum levels of equity, requires the maintenance of certain financial
ratios, limits dividends and additional indebtedness and contains other
provisions and restrictive covenants customary in lending transactions of this
type. In this regard, in the first half of 2009 we reduced our
production levels in response to the current economic environment, which has
favorably impacted our liquidity and cash flows by reducing inventory
levels. The reduced capacity utilization levels negatively impacted
our 2009 results of operations due to the resulting unabsorbed fixed production
costs that are charged to expense as incurred. Furthermore, lower
sales negatively impacted our results of operations in the first half of
2009. As a result, we did not expect to maintain compliance under our
revolving credit facility with the required financial ratio of the borrowers’
net secured debt to earnings before income taxes, interest and depreciation, as
defined in the credit facility, for the 12-month period ending March 31,
2009. Beginning on March 20, 2009, the lenders associated with our
revolving credit facility agreed to a series of waivers for compliance with such
required financial ratio. On September 15, 2009 we and the lenders
entered into the Fourth Amendment to the credit facility. See Note 5
to our Condensed Consolidated Financial Statements. We are in
compliance with all of our debt covenants at September 30, 2009.
Our
assets consist primarily of investments in operating subsidiaries, and our
ability to service parent level 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 we have pledged 65% of the common
stock or other ownership interests of certain of our first-tier operating
subsidiaries as collateral of the Senior Secured Notes. The terms of
the indenture governing the Senior Secured Notes limits our ability to pay
dividends and make other restricted payments. At September 30, 2009, the
maximum amount of dividends and other restricted payments that we could make
(the “Restricted Payment Basket”) was $1.6 million. However, the
indenture currently prohibits us from utilizing such Restricted Payment Basket
because we have not met a specified financial ratio contained in the indenture;
such prohibition will continue until such time as we meet the specified
financial ratio.
Future
cash requirements
Liquidity
Our
primary source of liquidity on an ongoing basis is cash flows from operating
activities. 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, the
proceeds of which are generally used 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
September 30, 2009, unused credit available under our existing credit facility
was approximately $48.2 million, and we could borrow all of such amount without
violating any covenants in this 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 and debt service for the next 12-months. In this
regard, see the discussion above in “Outstanding debt obligations” and Note 5 to
our Condensed Consolidated Financial Statements. The borrowing
availability under our credit facility is currently limited to euro 51 million
($74.5 million) until we are in compliance with certain specified financial
covenants, and in any event, no earlier than March 31, 2010, and the $48.2
million amount of our unused credit available at September 30, 2009 is based on
this euro 51 million maximum borrowing availability. If actual
developments differ from our expectations, our liquidity could be adversely
affected.
Capital
expenditures
We intend
to spend approximately $21 million for maintenance to our existing facilities
during 2009, including the $15.1 million we have spent through September 30,
2009. Compared to 2008, we have lowered our planned capital
expenditures in 2009 in response to the current economic
conditions.
Off-balance
sheet financing
We do not
have any off-balance sheet financing agreements other than the operating leases
discussed in our 2008 Annual Report.
Commitments
and contingencies
See Notes
6 and 9 to the Condensed Consolidated Financial Statements for a description of
certain income tax examinations currently underway and legal
proceedings.
Recent
accounting pronouncements
See Note 11 to the Condensed
Consolidated Financial Statements.
Critical
accounting policies
For a discussion of our critical
accounting policies, refer to Part I, Item 7 - “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in our 2008 Annual
Report. There have been no changes in our critical accounting
policies during the first nine months of 2009.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
We are exposed to market risk,
including currency exchange rates, interest rates and security
prices. For a discussion of such market risk items, refer to Part I,
Item 7A. - “Quantitative and Qualitative Disclosure About Market Risk” in our
2008 Annual Report. There have been no material changes in these
market risks during the first nine months of 2009.
Our
operations are located outside the United States and our functional currency is
not the U.S. dollar. As a result, the reported amounts of our assets
and liabilities related to our operations, and therefore our consolidated net
assets, will fluctuate based upon changes in currency exchange
rates.
Certain
of our sales generated by our operations are denominated in U.S. dollars.
We periodically use currency forward contracts to manage a very nominal portion
of currency exchange rate risk associated with trade 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. See Note 10 to our Condensed Consolidated Financial
Statements.
ITEM
4. 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 "Exchange 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 Exchange 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 Steven L.
Watson, our Chief Executive Officer, and Gregory M. Swalwell, our Vice
President, Finance and Chief Financial Officer, have evaluated the design and
operating effectiveness of our disclosure controls and procedures as of
September 30, 2009. Based upon their evaluation, these executive
officers have concluded that our disclosure controls and procedures are
effective as of September 30, 2009.
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 our 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 our
receipts and expenditures are being made only in accordance with
authorizations of our management and directors,
and
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of an
unauthorized acquisition, use or disposition of our assets that could have
a material effect on our Condensed Consolidated Financial
Statements.
|
As
permitted by the SEC, our assessment of internal control over financial
reporting excludes (i) internal control over financial reporting of our equity
method investees and (ii) internal control over the preparation of our financial
statement schedules required by Article 12 of Regulation S-X.
Section
404 of the Sarbanes-Oxley Act of 2002 requires us to include an management
report on internal control over financial reporting in our Annual Reports on
Form 10-K. Our independent registered public accounting firm will
also be required to annually attest to the effectiveness of our internal control
over financial reporting, but under the recently-revised rules of the SEC this
attestation is now not required until our Annual Report on Form 10-K for the
year ending December 31, 2010.
Changes
in Internal Control over Financial Reporting
There has
been no change to our internal control over financial reporting during the
quarter ended September 30, 2009 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
Part
II. OTHER INFORMATION
Item
1. Legal
Proceedings
Refer to Note 9 of the Condensed
Consolidated Financial Statements and to our 2008 Annual Report for descriptions
of certain legal proceedings.
Item
1A. Risk
Factors
For a discussion of the risk factors
related to our businesses, refer to Part I, Item 1A., “Risk Factors,” in our
2008 Annual report. There have been no material changes to such risk
factors during the nine months ended September 30, 2009.
Item
6. Exhibits
10.1
|
-
Fourth Amendment Agreement Relating to a Facility Agreement dated
June 25, 2002 executed as of September 15, 2009 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. Certain schedules, exhibits, annexes and similar
attachments to this Exhibit 10.1 have not been filed; upon request, the
registrant will furnish supplementally to the Commission a copy of any
omitted schedule, exhibit, annex or
attachment.
|
31.1
- Certification
|
31.2
- Certification
|
32.1
- Certification
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
KRONOS
INTERNATIONAL, INC. (Registrant)
Date
November 2,
2009
|
/s/ Gregory M. Swalwell
|
|
Gregory
M. Swalwell
|
||
Vice
President, Finance and Chief Financial Officer (Principal Financial
Officer)
|
||
Date
November 2,
2009
|
/s/ Tim C.
Hafer
|
|
Tim
C. Hafer
|
||
Vice
President and Assistant Controller
(Principal
Accounting Officer)
|