Attached files
file | filename |
---|---|
EX-31.2 - KRONOS INTERNATIONAL 10-K/A2 EXHIBIT 31.2 - KRONOS INTERNATIONAL INC | kii10ka24q08exhibit31_2.htm |
EX-12.1 - KRONOS INTERNATIONAL 10-K/A2 EXHIBIT 12.1 - KRONOS INTERNATIONAL INC | kii10ka24q08exhibit12_1.htm |
EX-31.1 - KRONOS INTERNATIONAL 10-K/A2 EXHIBIT 31.1 - KRONOS INTERNATIONAL INC | kii10ka24q08exhibit31_1.htm |
EX-32.1 - KRONOS INTERNATIONAL 10-K/A2 EXHIBIT 32.1 - KRONOS INTERNATIONAL INC | kii10ka24q08exhibit32_1.htm |
UNITED
STATES
|
|
SECURITIES
AND EXCHANGE COMMISSION
|
|
Washington,
D.C. 20549
|
|
FORM
10-K/A
(Amendment
No. 2)
|
|
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,
2008
|
|
Commission
file number
333-100047
|
|
KRONOS INTERNATIONAL,
INC
|
|
(Exact
name of Registrant as specified in its charter)
|
|
DELAWARE
|
22-2949593
|
(State
or other jurisdiction of
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
|
No
securities are registered pursuant to Section 12(b) of the Act.
No
securities are registered pursuant to Section 12(g) of the Act.
Indicate
by check mark:
If
the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes No
X
If
the Registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. Yes No
X
Whether
the Registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and
(2) has been subject to such filing requirements for the past 90
days. Yes X No
Whether
the Registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2
of the Act). Large accelerated filer
Accelerated filer Non-accelerated
filer X Smaller
reporting company
Whether the Registrant is a shell
company (as defined in Rule 12b-2 of the Act). Yes No X
No
common stock was held by nonaffiliates of the Registrant as of June 30, 2008
(the last business day of the Registrant's most recently-completed second fiscal
quarter).
As
of February 27, 2009, 2,968 shares of the Registrant's common stock were
outstanding.
The
Registrant is a wholly-owned subsidiary of Kronos Worldwide, Inc. (File No.
1-31763) and meets the conditions set forth in General Instructions I(1) (a) and
(b) and is therefore filing this Form 10-K/A (Amendment No. 2) with the reduced
disclosure format.
Documents incorporated by
reference
None.
Explanatory
Note Regarding Amendment No. 2
We are filing this Amendment No. 2 on
Form 10-K/A ("Form 10-K/A") to amend our Annual Report on Form 10-K for the year
ended December 31, 2008, as filed with the Securities and Exchange Commission
("SEC") on March 12, 2009 ("Original Form 10-K"). This amendment is
being filed solely to (i) amend the certifications by our Principal Executive
Officer and Principal Financial Officer provided pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 to correct a typographical error whereby an incorrect
date was inadvertently provided on the certification, (ii) correct certain
typographical errors in the certifications of our Principal Executive Officer
and Principal Financial Officer provided pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 and (iii) correctly indicate that certain exhibits
included in Item 15(b) are incorporated by reference from other
filings. This Form 10-K/A includes (i) Part I, Part II, and Part III
of our Original Form 10-K, without any changes, (ii) Part IV of our Original
Form 10-K, without any changes other than as indicated above and (iii) new
certifications by our Principal Executive Officer and Principal Financial
Officer provided pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of
2002, filed as Exhibits 31.1, 31.2 and 32.1 hereto. Each
certification as corrected was true and correct as of the date of the filing of
the Original Form 10-K.
Except as described above, we have
not modified or updated other disclosures contained in the Original Form
10-K. Accordingly, this Form 10-K/A (Amendment No. 2) with the
exception of the foregoing does not reflect events occurring after the date of
filing of the Original Form 10-K or modify or update those disclosures affected
by subsequent events. Consequently, all other information not
affected by the corrections described above is unchanged and reflects the
disclosures made at the date of the filing of the Original Form 10-K and should
be read in conjunction with our filings with the SEC subsequent to the filing of
the Original Form 10-K, including amendments to those filings, if
any.
TABLE
OF CONTENTS
Part
I
|
Page
|
|
Item
1.
|
Business
|
5
|
Item
1A.
|
Risk
Factors
|
11
|
Item
1B.
|
Unresolved
Staff Comments
|
13
|
Item
2.
|
Properties
|
13
|
Item
3.
|
Legal
Proceedings
|
14
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders*
|
14
|
Part
II
|
||
Item
5.
|
Market
for our Common Equity and Related Stockholder Matters
|
14
|
Item
6.
|
Selected
Financial Data
|
15
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
|
16
|
Item
7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
33
|
Item
8.
|
Financial
Statements and Supplementary Data
|
34
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosures
|
34
|
Item
9A.
|
Controls
and Procedures
|
34
|
Item
9B.
|
Other
Information
|
36
|
Part
III
|
||
Item
10.
|
Directors,
Executive Officers and Corporate Governance
|
36
|
Item
11.
|
Executive
Compensation*
|
36
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management*
|
36
|
Item
13.
|
Certain
Relationships and related transactions*
|
37
|
Item
14.
|
Principal
Accounting Fees and Services
|
37
|
Part
IV
|
||
Item
15.
|
Exhibits
and Financial Statement Schedules
|
37
|
Signatures
|
||
* We
meet the conditions set forth in the General Instructions I (1)(a) and (b)
and have therefore omitted these items.
|
Forward-Looking
Information
This report includes forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Any statement in this report that is not a statement of
historical fact may be deemed to be a forward-looking
statement. Because these forward-looking statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by these forward-looking statements. We do not intend to
assume any duty to update or revise any forward-looking statements for new
information, future events or otherwise.
Forward-looking
statements can be identified by the use of words such as "believes," "intends,"
"may," "should," "could," "anticipates," "expected" or comparable terminology,
or by discussions of strategies or trends. Although we believe the
expectations reflected in such forward-looking statements are reasonable, we
cannot give assurances that these expectations will prove to be
correct. Forward-looking statements involve substantial risks and
uncertainties which could significantly impact expected results, and actual
results could differ materially from those described. It is not
possible to identify all of the risks and uncertainties we face that could cause
actual results to differ materially from those described in this
report. But, we have included discussion on the following most
significant risk factors in Item 1A of this document:
·
|
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 titanium dioxide pigments (“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
kroner)
|
·
|
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 or refinance 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 statements whether as a result of changes in information,
future events or otherwise.
PART
I
ITEM
1.
|
BUSINESS
|
General
Kronos
International, Inc., a Delaware corporation, is registered in the Commercial
Register of the Federal Republic of Germany. We are a wholly-owned
subsidiary of Kronos Worldwide, Inc. (NYSE: KRO; “Kronos”). At
December 31, 2008, (i) Valhi, Inc. (NYSE: VHI) held approximately 59% of Kronos’
common stock and NL Industries, Inc. (NYSE: NL) held an additional 36% of
Kronos’ common stock, (ii) Valhi held 83% of NL’s outstanding common stock and
(iii) Subsidiaries of Contran Corporation held approximately 94% of Valhi’s
outstanding common stock. Substantially all of Contran’s outstanding
voting stock is held by trusts established for the benefit of certain
descendants of Harold C. Simmons (of which Mr. Simmons is trustee), or is held
by persons or other entities related to Mr. Simmons. Consequently,
Mr. Simmons may be deemed to control all of these companies.
Our
principal place of business is in Leverkusen, Germany. We
conduct Kronos’ European value-added TiO2 pigment
operations. We, along with our distributors and agents sell our
products to over 3,000 customers in approximately 100 countries with the
majority of sales in Europe. Our chemical businesses have operated in
the European markets before the 1920’s. We have considerable
expertise and efficiency in the manufacture, sale, shipment and service of our
products.
TiO2 is an
inorganic pigment used to impart whiteness, brightness and opacity for products
such as coatings, plastics, paper, fibers, food, ceramics and
cosmetics. TiO2 is
considered a “quality-of-life” product with demand and growth affected by gross
domestic product and overall economic conditions in our markets in various parts
of the world. TiO2 derives
its value from its whitening properties and hiding power (opacity), which is the
ability to cover or mask other materials effectively and
efficiently. TiO2 is the
largest commercially used whitening pigment because it has a high refractive
rating giving it more hiding power than any other commercially produced white
pigment. In addition, TiO2 has
excellent resistance to interaction with other chemicals, good thermal stability
and resistance to ultraviolet degradation. We ship TiO2 to our
customers in either a powder form or a slurry form via rail, truck and ocean
carrier. Including our predecessors, we have produced and marketed
TiO2
in Europe, North America and other parts of the world for over 80
years.
Per
capita utilization of TiO2 in the
United States and Western Europe far exceeds that of other areas of the
world. We expect these markets to continue to be the largest
consumers of TiO2 for the
foreseeable future. More significant markets are emerging in Eastern
Europe and the Far East as the economies in these regions develop to the point
that quality-of-life products, including TiO2,
experience greater demand. In addition, China has developed into a
significant market and as its economy continues to develop it is probable that
quality-of-life products, including TiO2 will
experience greater demand in that country.
Sales of
TiO2
were about 84% of our net sales in 2008. The remaining 16% of net
sales is made up of other product lines that are complementary to TiO2. These
other products are described as follows:
·
|
We
own and operate an ilmenite mine in Norway pursuant to a governmental
concession with an unlimited term, and we are currently excavating a
second mine located near the first mine. Ilmenite is a raw
material used directly as a feedstock by some sulfate-process TiO2
plants, including all of our sulfate-process plants. We also
sell ilmenite ore to third-parties some of whom are our
competitors. The mines have estimated aggregate reserves that
are expected to last for at least another 60
years.
|
·
|
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 used primarily as treatment and
conditioning agents for industrial effluents and municipal wastewater as
well as in the manufacture of iron pigments, cement and agricultural
products.
|
·
|
We
manufacture and sell titanium oxychloride and titanyl sulfate, which are
side-stream products from the production of TiO2. Titanium
oxychloride is used in specialty applications in the formulation of
pearlescent pigments, production of electroceramic capacitors for cell
phones and other electronic devices. Titanyl sulfate products
are used primarily in pearlescent
pigments.
|
Manufacturing
and operation
We
currently produce over 40 different TiO2 grades
under the KronosTM
trademark which provide a variety of performance properties to meet customers’
specific requirements. Our major customers include domestic and
international paint, plastics and paper manufacturers.
Extenders,
such as kaolin clays, calcium carbonate and polymeric opacifiers, are used in a
number of the same end-use markets as white pigments. However, the opacity in
these products is not able to duplicate the performance characteristics of
TiO2,
therefore we believe these products are not effective substitutes for TiO2.
We
produce TiO2
in two crystalline forms: rutile and anatase. Rutile TiO2 is
manufactured using both a chloride production process and a sulfate production
process, whereas anatase TiO2 is only
produced using a sulfate production process. Chloride process rutile
is preferred for the majority of customer applications. From a
technical standpoint, chloride process rutile has a bluer undertone and higher
durability than sulfate process rutile. Although many end-use
applications can use either form, chloride process rutile is the preferred form
for use in coatings and plastics, the two largest end-use
markets. Sulfate process anatase represents a much smaller percentage
of annual global TiO2 production
and is preferred for use in selected paper, ceramics, rubber tires, man-made
fibers, food and cosmetics.
Chloride production
process. Approximately
two-thirds of our current production capacity is based on the chloride
process. The chloride process is a continuous process in which
chlorine is used to extract rutile TiO2. The
chloride process typically has lower manufacturing costs than the sulfate
process due to newer technology, higher yield, less waste, lower energy
requirements and lower labor costs. The chloride process produces less waste
than the sulfate process because much of the chlorine is recycled and feedstock
bearing a higher titanium content is used.
Sulfate production
process. The sulfate process is a batch chemical process that
uses sulfuric acid to extract both rutile and anatase TiO2.
Once an
intermediate TiO2 pigment
has been produced by either the chloride or sulfate process, it is “finished”
into products with specific performance characteristics for particular end-use
applications through proprietary processes involving various chemical surface
treatments and intensive micronizing (milling). Due to environmental
factors and customer considerations, the proportion of TiO2 industry
sales represented by chloride process pigments has increased relative to sulfate
process pigments and, in 2008 chloride process production facilities represented
approximately 60% of industry capacity.
We
produced slightly over 350,000 metric tons of TiO2 in 2008,
compared to 350,000 metric tons in 2007 and 348,000 metric tons in
2006. Our average production capacity utilization rates were near or
at full capacity in 2006, 2007 and 2008. Our production capacity has
increased by approximately 30% over the past ten years due to debottlenecking
programs, with only moderate capital expenditures. We believe our
annual attainable production capacity for 2009 is approximately 362,000 metric
tons; however, we do expect our production volumes in 2009 will be significantly
lower than our attainable capacity. See Outlook in Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
Raw
materials
The
primary raw materials used in chloride process TiO2 are
titanium-containing feedstock (natural rutile ore or purchased slag), chlorine
and coke. Chlorine and coke are available from a number of
suppliers. Titanium-containing feedstock suitable for use in the
chloride process is available from a limited but increasing number of suppliers
principally in Australia, South Africa, Canada, India and the United
States. Through Kronos (US), Inc., a wholly-owned subsidiary of
Kronos, we purchase chloride process grade slag from Rio Tinto Iron and Titanium
under a long-term supply contract that expires at the end of 2011. We
purchase natural rutile ore primarily from Iluka Resources, Limited under a
long-term supply contract that expires at the end of 2009. We expect
to be successful in obtaining long-term extensions to these and other existing
supply contracts prior to their expiration. We expect the raw
materials purchased under these contracts to meet our chloride process feedstock
requirements over the next several years.
The
primary raw materials used in sulfate process TiO2 are
titanium-containing feedstock (primarily ilmenite from our Norwegian mine or
purchased slag) and sulfuric acid. Sulfuric acid is available from a number of
suppliers. Titanium-containing feedstock suitable for use in the
sulfate process is available from a limited number of suppliers principally in
Norway, Canada, Australia, India and South Africa. As one of the few
vertically integrated producers of sulfate process TiO2, we own
and operate a rock ilmenite mine in Norway which provided all of the feedstock
for our European sulfate process TiO2 plants in
2008. We expect ilmenite production from our mine to meet our sulfate
process feedstock requirements for the foreseeable future and any remaining will
be sold to third parties.
Many of
our raw material contracts contain fixed quantities we are required to purchase,
although these contracts allow for an upward or downward adjustment in the
quantity purchased. The pricing under these agreements is generally
negotiated annually.
The
following table summarizes our raw materials procured or mined in
2008.
Production Process/Raw
Material
|
Quantities
of Raw Materials
Procured or
Mined
|
(In
thousands of metric tons)
|
|
Chloride
process plants -
|
|
purchased
slag or natural rutile ore
|
273
|
Sulfate
process plants -
|
|
raw
ilmenite ore mined internally
|
305
|
Competition
The
TiO2
industry is highly competitive. Our principal competitors are E.I. du
Pont de Nemours & Co.; Millennium Inorganic Chemicals, Inc. (a subsidiary of
National Titanium Dioxide Company Ltd. (Cristal)); Tronox Incorporated; Huntsman
Corporation (Huntsman); and Ishihara Sangyo Kaisha, Ltd. These
competitors have estimated individual shares of TiO2 production
capacity ranging from 4% (for Ishihara) to 22% (for DuPont), and an estimated
aggregate share of worldwide TiO2 production
volume in excess of 60%. Tronox filed for Chapter 11 bankruptcy
protection in January 2009, and it is unclear how and to what extent Tronox or a
successor will compete in the TiO2 industry
at the conclusion of Tronox’s bankruptcy proceedings.
We
compete primarily on the basis of price, product quality and technical service
and the availability of high-performance pigment grades. Although
certain TiO2 grades are
considered specialty pigments, the majority of our grades and substantially all
of our production are considered commodity pigments with price generally being
the most significant competitive factor. We believe that we are the
leading seller of TiO2 in Germany
and are among the leading marketers in the Benelux and Scandinavian
markets. We had an estimated 9% share of worldwide TiO2 sales
volume in 2008. Overall, we are Europe’s second largest producer of
TiO2.
Over the
past ten years, we and our competitors have increased industry capacity through
debottlenecking projects. Given the current economic environment and
reduced industry demand, we do not expect any significant efforts will be
undertaken by us or our competitors to further increase capacity through such
projects for the foreseeable future. In addition, Huntsman announced
the closure of one of its European facilities. We believe further
shutdowns or closures in the industry are possible. Even with these
reductions in industry capacity, capacity utilization rates by us and our
competitors are expected to be lower in 2009 as compared to 2008 as a response
to a reduction in industry-wide demand, which in turn will result in downward
pressure on average TiO2 selling
prices. Once the economic environment improves and industry-wide
demand increases, the expected reduction in industry-wide capacity through plant
shutdowns should have a favorable impact on production capacity utilization,
selling prices and profitability. However, the volatility of the near
term economic environment makes it difficult to forecast future
demand. If actual developments differ from our expectations, ours and
the TiO2 industry's
performances could continue to be unfavorably affected longer than
expected.
Worldwide
capacity additions in the TiO2 market
resulting from construction of new plants require significant capital
expenditures and substantial lead time (typically three to five years in our
experience). We are not aware of any TiO2 plants
currently under construction, and we believe it is not likely that any new
plants will be constructed in the foreseeable future.
Research
and development
Our
research and development activities are directed primarily at improving the
chloride and sulfate production processes, improving product quality and
strengthening our competitive position by developing new pigment applications.
Our research and development activities are conducted at our Leverkusen, Germany
facility. Our expenditures for research and development and certain
technical support programs were approximately
$11 million in
2006, and $12 million in each of 2007 and 2008. We plan to scale back
our research and development activities in 2009 to the extent possible due to
the current adverse economic environment; consequently our research and
development expenditures in 2009 are expected to be lower as compared to recent
history.
We
continually seek to improve the quality of our grades, and have been successful
at developing new grades for existing and new applications to meet the needs of
customers and increase product life cycle. Since 2002, we have added
over 15 new grades for plastics, coatings, fibers and paper laminate
applications.
Patents
and trademarks
We
believe that our patents held for products and production processes are
important to us and our continuing business activities. We seek
patent protection for our technical developments, principally in the United
States, Canada and Europe, and from time to time we enter into licensing
arrangements with third parties. Our existing patents generally have
terms of 20 years from the date of filing, and have remaining terms ranging from
1 to 19 years. We seek to protect our intellectual property rights,
including our patent rights, and from time to time are engaged in disputes
relating to the protection and use of intellectual property relating to our
products.
Our
trademarks, including Kronos, are protected by
registration in the United States and elsewhere with respect to those products
we manufacture and sell. We also rely on unpatented proprietary
knowledge and continuing technological innovation, and other trade secrets to
develop and maintain our competitive position. Our proprietary
chloride production process is an important part of our technology, and our
business could be harmed if we fail to maintain confidentiality of our trade
secrets used in this technology.
Major
customers
We sell
to a diverse customer base, and no single customer made up more than 10% of our
sales for 2008. Our largest ten customers, excluding sales to Kronos
and affiliates accounted for approximately 20% of sales in 2008.
Seasonality
Neither
our business as a whole nor that of any of our principal product groups is
seasonal to any significant extent. However, TiO2 sales are
generally higher in the first half of the year. This is due in part
to the increase in paint production in the spring to meet demand during the
spring and summer painting season.
Employees
As of
December 31, 2008, we employed approximately 2,000 persons. Hourly
employees in our production facilities are represented by a variety of labor
unions, with labor agreements having various expiration dates. Our
union employees are covered by master collective bargaining agreements in the
chemicals industry that are generally renewed annually. We believe
our labor relations are good.
Regulatory
and environmental matters
Our
operations are governed by various environmental laws and
regulations. Certain of our operations are, or have been, engaged in
the handling, manufacture or use of substances or compounds that may be
considered toxic or hazardous within the meaning of applicable environmental
laws and regulations. As with other companies engaged in similar
businesses, certain of our past and current operations and products have the
potential to cause environmental or other damage. We have implemented
and continue to implement various policies and programs in an effort to minimize
these risks. Our policy is to maintain compliance with applicable
environmental laws and regulations at all of our facilities and to strive to
improve our environmental performance. It is possible that future
developments, such as stricter requirements in environmental laws and
enforcement policies, could adversely affect our production, handling, use,
storage, transportation, sale or disposal of such substances and could adversely
affect our consolidated financial position and results of operations or
liquidity.
While the
laws regulating operations of industrial facilities in Europe vary from country
to country, a common regulatory framework is provided by the European Union
(“EU”). Germany and Belgium are members of the EU and follow its
initiatives. Norway is not a member but generally patterns its
environmental regulatory actions after the EU. We believe that we
have obtained all required permits and are in substantial compliance with
applicable environmental requirements for our facilities.
At our
sulfate plant facilities in Germany, we recycle weak sulfuric acid either
through contracts with third parties or at our own facilities. In
addition, at our German locations we have a contract with a third party to treat
certain sulfate-process effluents. At our Norwegian plant, we ship
spent acid to a third party location where it is used as a neutralization
agent. These contracts may be terminated by either party after giving
three or four years advance notice, depending on the contract.
From time
to time, our facilities may be subject to environmental regulatory enforcement
under U.S. and non-U.S. statutes. Typically we establish compliance
programs to resolve these matters. Occasionally, we may pay
penalties. To date such penalties have not involved amounts having a
material adverse effect on our consolidated financial position, results of
operations or liquidity. We believe that all of our facilities are in
substantial compliance with applicable environmental laws.
In
December 2006, the EU approved Registration, Evaluation and Authorization of
Chemicals (“REACH”), which took effect on June 1, 2007 and will be phased in
over 11 years. Under REACH, companies that manufacture or import more
than one ton of a chemical substance per year will be required to register such
chemical substances in a central data base. REACH affects our
European operations by imposing a testing, evaluation and registration program
for many of the chemicals we use or produce in Europe. We have
established a REACH team that is working to identify and list all substances
purchased, manufactured or imported by or for us in the EU. We spent
$.4 million in 2007 and $.5 million in 2008 on REACH compliance, and we do not
anticipate that future compliance costs will be material to us.
Capital
expenditures in 2008 related to ongoing environmental compliance, protection and
improvement programs were $11.8 million, and are currently expected to be
approximately $1 million in 2009.
Website
and other available information
Our
fiscal year ends December 31. Our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments
to those reports are available on Kronos’ website at www.kronosww.com, as
we do not maintain our own website. These reports are available on
the website, without charge, as soon as is reasonably practicable after we file
or furnish them electronically with the Securities and Exchange
Commission. Information contained on this website is not part of this
report. We will also provide free copies of such documents upon
written request. Such requests should be directed to the Corporate
Secretary at our address on the cover page of this Form 10-K/A (Amendment No.
2).
The
public may read and copy any materials we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The
public may obtain information about the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. We are an electronic filer, and
the SEC maintains an internet website that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC at www.sec.gov.
ITEM
1A. RISK FACTORS
Below are certain risk factors
associated with our business. In addition to the potential effect of
these risk factors discussed below, any risk factor which could result in
reduced earnings or operating losses, or reduced liquidity, could in turn
adversely affect our ability to service our liabilities or pay dividends on our
common stock or adversely affect the quoted market prices for our
securities.
Demand
for, and prices of, certain of our products are influenced by changing market
conditions and we are currently operating in a depressed
worldwide market for our products, which may result in reduced
earnings or operating losses.
Approximately
84% of our revenues are attributable to sales of TiO2. Pricing
within the global TiO2 industry
over the long term is cyclical, and changes in economic conditions, especially
in Western industrialized nations, can significantly impact our earnings and
operating cash flows. The current world-wide economic downturn has
depressed sales volumes in the fourth quarter of 2008, and we are unable to
predict with a high degree of certainty when demand will return to the levels
experienced prior to the fourth quarter of 2008. This may result in
reduced earnings or operating losses.
Historically,
the markets for many of our products have experienced alternating periods of
increasing and decreasing demand. Relative changes in the selling
prices for our products are one of the main factors that affect the level of our
profitability. In periods of increasing demand, our selling prices
and profit margins generally will tend to increase, while in periods of
decreasing demand our selling prices and profit margins generally tend to
decrease. Huntsman announced the closure of one if its European
facilities, and we believe further shutdowns or closures in the industry are
possible. The closures may not be sufficient to alleviate the current
excess industry capacity and such conditions may be further aggravated by
anticipated or unanticipated capacity additions or other events.
The
demand for TiO2 during a
given year is also subject to annual seasonal fluctuations. TiO2 sales are
generally higher in the first half of the year. This is due in part
to the increase in paint production in the spring to meet demand during the
spring and summer painting season. See Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” for
further discussion on production and price changes.
We sell several of our products in
mature and highly-competitive industries and face price pressures in the markets
in which we operate, which may result in reduced earnings or operating
losses.
The
global markets in which we operate our business are highly
competitive. Competition is based on a number of factors, such as
price, product quality and service. Some of our competitors may be
able to drive down prices for our products because their costs are lower than
our costs. In addition, some of our competitors' financial,
technological and other resources may be greater than our resources, and such
competitors may be better able to withstand changes in market
conditions. Our competitors may be able to respond more quickly than
we can to new or emerging technologies and changes in customer
requirements. Further, consolidation of our competitors or customers
may result in reduced demand for our products or make it more difficult for us
to compete with our competitors. New competitors could emerge by
modifying their existing production facilities so they could manufacture
products that compete with our products. The occurrence of any of
these events could result in reduced earnings or operating losses.
Higher
costs or limited availability of our raw materials may reduce our earnings and
decrease our liquidity.
The
number of sources for and availability of, certain raw materials is specific to
the particular geographical region in which a facility is
located. For example, titanium-containing feedstocks suitable for use
in our TiO2 facilities
are available from a limited number of suppliers around the
world. Political and economic instability in the countries from which
we purchase our raw material supplies could adversely affect their
availability. If our worldwide vendors were unable to meet their
contractual obligations and we were unable to obtain necessary raw materials, we
could incur higher costs for raw materials or may be required to reduce
production levels. We may not always be able to increase our selling
prices to offset the impact of any higher costs or reduced production levels,
which could reduce our earnings and decrease our liquidity.
Negative
global economic conditions increase the risk that we could suffer unrecoverable
losses on our customers’ accounts receivable which would adversely affect our
financial results.
We extend credit and payment terms to
our customers. Although we have an ongoing process of evaluating
customers’ financial condition, we could suffer significant losses if a customer
fails and is unable to pay. A significant loss of an accounts
receivable would have a negative impact on our results of operations, financial
condition and liquidity.
Our
leverage may impair our financial condition or limit our ability to operate our
businesses.
We
currently have a significant amount of debt. As of December 31, 2008,
our total consolidated debt was approximately $605.6 million, which relates to
our 6.5% Senior Secured Notes and our revolving credit facility. Our
level of debt could have important consequences to our stockholders and
creditors, including:
·
|
making
it more difficult for us to satisfy our obligations with respect to our
liabilities;
|
·
|
increasing
our vulnerability to adverse general economic and industry
conditions;
|
·
|
requiring
that a portion of our cash flows from operations be used for the payment
of interest on our debt, which reduces our ability to use our cash flow to
fund working capital, capital expenditures, dividends on our common stock,
acquisitions or general corporate
requirements;
|
·
|
limiting
our ability to obtain additional financing to fund future working capital,
capital expenditures, acquisitions or general corporate
requirements;
|
·
|
limiting
our flexibility in planning for, or reacting to, changes in our business
and the industry in which we operate;
and
|
·
|
placing
us at a competitive disadvantage relative to other less leveraged
competitors.
|
In addition to our indebtedness, we are
party to various lease and other agreements pursuant to which, along with our
indebtedness, we are committed to pay approximately $109.2 million in
2009. Our ability to make payments on and refinance our debt, and to
fund planned capital expenditures, depends on our future ability to generate
cash flow. To some extent, this is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond our control. In addition, our ability to borrow funds under
our subsidiaries’ credit facilities in the future will, in some instances,
depend in part on these subsidiaries’ ability to maintain specified financial
ratios and satisfy certain financial covenants contained in the applicable
credit agreement. In this regard, we currently believe it is probable
that one of our required financial ratios associated with our European credit
facility will not be maintained at some point during 2009, most likely
commencing at March 31, 2009. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Liquidity –
Outstanding Debt Obligations and Borrowing Availability.”
Our
business may not generate cash flows from operating activities sufficient to
enable us to pay our debts when they become due and to fund our other liquidity
needs. As a result, we may need to refinance all or a portion of our
debt before maturity. We may not be able to refinance any of our debt
in a timely manner on favorable terms, if at all in the current credit
markets. Any inability to generate sufficient cash flows or to
refinance our debt on favorable terms could have a material adverse effect on
our financial condition.
ITEM
1B. UNRESOLVED
STAFF COMMENTS
None.
ITEM
2. PROPERTIES
We
currently operate four TiO2
facilities, and an ilmenite mine at the following locations. We own
all such facilities, unless otherwise indicated.
Location
|
Description
|
Leverkusen,
Germany (1)
|
TiO2
production, chloride and sulfate
process, co-products
|
Nordenham,
Germany
|
TiO2
production, sulfate process, co-products
|
Langerbrugge,
Belgium
|
TiO2
production, chloride process, co-products, titanium chemicals
products
|
Fredrikstad,
Norway (2)
|
TiO2
production, sulfate process, co-products
|
Hauge
i Dalane, Norway (3)
|
Ilmenite
mine
|
|
(1)
|
The
Leverkusen facility is located within an extensive manufacturing complex
owned by Bayer AG. We own the Leverkusen facility, which represents about
one-half of our current Ti02
production capacity, but we lease the land under the facility from Bayer
AG 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 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 2013, with
an option to extend the lease for an additional 50
years.
|
|
(3)
|
We
are currently excavating a second mine located near our current mine in
Norway.
|
Our
corporate headquarters is located in Dallas, Texas. We have under lease various
corporate and administrative offices located in the U.S. and various sales
offices located in France, the Netherlands and the U.K. The roads
leading to our facilities are generally maintained by the applicable local
government and are adequate for our purposes.
Information
on our properties is incorporated by reference to Item 1: Business,
Manufacturing and Operations above. See Note 12 to our Consolidated
Financial Statements for information on our leases.
ITEM 3. LEGAL
PROCEEDINGS
We are
involved in various environmental, contractual, intellectual property, product
liability and other claims and disputes incidental to our
business. Information called for by this Item is incorporated by
reference to Note 12 to our Consolidated Financial Statements.
ITEM 4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to the General
Instruction I of Form 10-K.
PART
II
ITEM 5.
|
MARKET
FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
|
All of
our common stock is held by Kronos. There is no established public
trading market for our common stock. The indenture governing our 6.5%
Senior Secured Notes Due 2013 limits our ability to pay dividends or make other
restricted payments, as defined. The aggregate amount of dividends
and other restricted payments since June 2002 may not exceed 75% of the
aggregate consolidated net income, as defined in the indenture, plus $25
million. At December 31, 2008, there was no availability for
dividends or other restricted payments, as defined, therefore we currently do
not expect to pay dividends or make other restricted payments as permitted by
the indenture. Declaration and payment of future dividends is
discretionary and the amount thereof is dependent upon our results of
operations, financial condition, contractual limitations, cash requirements for
our businesses and other factors deemed relevant by our Board of
Directors. See Note 6 to our Consolidated Financial
Statements.
We paid $50.2 million of dividends to
Kronos in 2006, $34.2 million in 2007, and $34.9 million in
2008.
ITEM
6.
|
SELECTED
FINANCIAL DATA
|
The
following selected financial data should be read in conjunction with our
Consolidated Financial Statements and Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
Years ended December 31,
|
||||||||||||||||||||
2004
|
2005
|
2006(2)
|
2007
|
2008
|
||||||||||||||||
(In
millions, except ratios)
|
||||||||||||||||||||
STATEMENTS
OF OPERATIONS DATA:
|
||||||||||||||||||||
Net
sales
|
$ | 808.0 | $ | 850.9 | $ | 914.2 | $ | 946.1 | $ | 952.9 | ||||||||||
Gross
margin
|
197.8 | 238.4 | 223.0 | 196.4 | 170.4 | |||||||||||||||
Income
from operations
|
96.9 | 138.2 | 107.4 | 78.7 | 45.1 | |||||||||||||||
Net
income (loss)
|
325.6 | 60.3 | 73.7 | (58.8 | ) | 21.3 | ||||||||||||||
BALANCE
SHEET DATA (at year end):
|
||||||||||||||||||||
Total
assets
|
$ | 985.2 | $ | 955.3 | $ | 1,080.6 | $ | 1,103.1 | $ | 1,053.5 | ||||||||||
Long-term
debt including current maturities
|
533.2 | 453.8 | 529.8 | 590.8 | 605.6 | |||||||||||||||
Stockholder’s
equity
|
207.7 | 183.3 | 211.5 | 181.4 | 137.3 | |||||||||||||||
STATEMENTS
OF CASH FLOW DATA:
|
||||||||||||||||||||
Net
cash provided (used) by:
|
||||||||||||||||||||
Operating
activities
|
$ | 142.3 | $ | 92.7 | $ | 62.5 | $ | 84.9 | $ | 1.0 | ||||||||||
Investing
activities
|
(34.2 | ) | (35.8 | ) | (47.1 | ) | (42.5 | ) | (61.7 | ) | ||||||||||
Financing
activities
|
(129.9 | ) | (8.5 | ) | (31.1 | ) | (34.0 | ) | 7.2 | |||||||||||
TiO2 OPERATING
STATISTICS:
|
||||||||||||||||||||
Sales
volume*
|
336 | 326 | 353 | 348 | 317 | |||||||||||||||
Production
volume*
|
328 | 335 | 348 | 350 | 350 | |||||||||||||||
Production
rate as a percentage of capacity
|
Full
|
Full
|
Full
|
98 | % | 97 | % | |||||||||||||
OTHER FINANCIAL
DATA:
|
||||||||||||||||||||
Ratio
of earnings to
fixed
charges (unaudited) (1)
|
2.6 | 3.6 | 2.0 | 2.6 | 1.5 |
__________________________________
*
|
Metric
tons in thousands
|
(1)
|
Fixed
charges represents, as applicable, the sum of (i) total interest expense
and (ii) the interest component of rent expense (calculated as one-third
of rent expense). Earnings represents, as applicable, the sum
of (i) fixed charges, (ii) income before income taxes and (iii)
amortization of capitalized
interest.
|
(2)
|
We
adopted Statement of Financial Accounting Standards No. 158 effective
December 31, 2006. See Note 8 to our Consolidated Financial
Statements.
|
ITEM 7.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Business
overview
We are a
leading global producer and marketer of value-added TiO2. TiO2 is used
for a variety of manufacturing applications, including plastics, paints, paper
and other industrial products. For 2008, approximately 80% of our
sales volumes was sold 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
consider TiO2 to be a
“quality-of-life” product, with demand affected by gross domestic product and
overall economic conditions in our markets located in various regions of the
world. Over the long-term, we expect demand for TiO2 to grow by
2% to 3% per year. This is consistent with our expectations for the
long-term growth in gross domestic product. However, demand for
TiO2
in any interim or annual period may not change in the same proportion as the
change in GDP even if we and our competitors maintain consistent shares of the
worldwide market. This is due in part to relative changes in the
TiO2
inventory levels of our customers. We believe that our customers’
inventory levels are partly influenced by their expectation for future changes
in the market TiO2 selling
prices.
The
factors having the most impact on our reported income from operations
are:
·
|
TiO2
selling prices,
|
·
|
currency
exchange rates (particularly the exchange rate for the U.S. dollar
relative to the euro) and the Norwegian krone to the
euro,
|
·
|
our
TiO2
sales and production volumes, and
|
·
|
manufacturing
costs, particularly maintenance and energy-related
expenses.
|
Our key
performance indicators are our TiO2 average
selling prices, and our level of TiO2 sales and
production volumes. TiO2 selling
prices generally follow industry trends and prices will increase or decrease
generally as a result of competitive market pressures.
In addition, our effective income tax
rate in 2006, 2007 and 2008 has been impacted by certain favorable and
unfavorable developments.
Executive
summary
We reported net income of $21.3 million
in 2008 compared to net loss of $58.8 million in 2007. The $80.1
million increase in net income from 2007 to 2008 is due primarily to the net
effect of (i) an income tax benefit we recognized in 2008, (ii) lower income
from operations in 2008 resulting principally from lower sales volumes and
higher raw material and energy costs and (iii) an income tax charge we
recognized in 2007 associated with the adjustment of certain German income tax
attributes.
We
reported a net loss of $58.8 million in 2007 compared to net income of $73.7
million in 2006. The $132.5 million decrease in net income from 2006
to 2007 is due primarily to the net effect of (i) lower income from operations
in 2007, (ii) the unfavorable effect of certain provisions for income taxes
recognized in 2007, (iii) the favorable effect of certain income tax benefits
recognized in 2006 and (iv) a charge in 2006 from the redemption of our 8.875%
Senior Secured Notes.
Net
income for 2008 includes a $7.2 million 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.
Net
income for 2007 includes (i) a non-cash charge of $90.8 million relating to a
decrease in our net deferred income tax asset in Germany resulting from the
reduction in their income tax rates, (ii) a non-cash charge of $8.7 million
related to the adjustment of certain German income tax attributes and (iii) a
$.7 million income tax benefit resulting from a net reduction in our reserve for
uncertain tax positions.
Net
income for 2006 includes (i) a charge related to the prepayment of our 8.875%
Senior Secured Notes of $22.3 million ($14.5 million, net of tax benefit) and
(ii) a net income tax benefit of $33.8 million related to the net effect of the
withdrawal of certain income tax assessments previously made by the Belgian and
Norwegian tax authorities and the resolution of certain income tax issues
related to our German and Belgian operations.
Each of
these items is more fully discussed below and/or in the Notes to our
Consolidated Financial Statements.
We
currently expect income from operations will be lower in 2009 compared to 2008
primarily as a result of higher production costs due in part to significantly
reduced production volumes and the resulting unabsorbed fixed production costs
and unfavorable currency effects. We currently 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.
Critical
accounting policies and estimates
The
accompanying "Management's Discussion and Analysis of Financial Condition and
Results of Operations" is based upon our Consolidated Financial Statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP"). The preparation of
these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amount of revenues and expenses during the reported
period. On an on-going basis, we evaluate our estimates, including
those related to the recoverability of long-lived assets, pension benefit
obligations and the underlying actuarial assumptions related thereto, the
realization of deferred income tax assets and accruals for, litigation, income
tax and other contingencies. We base our estimates on historical
experience and on various other assumptions which we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the reported amounts of assets, liabilities, revenues and
expenses. Actual results may differ significantly from
previously-estimated amounts under different assumptions or
conditions.
The
following critical accounting policies affect our more significant judgments and
estimates used in the preparation of our Consolidated Financial
Statements:
·
|
Long-lived
assets. We recognize an impairment charge associated
with our long-lived assets, including property and equipment, whenever we
determine that recovery of such long-lived asset is not
probable. Such determination is made in accordance with the
applicable GAAP requirements of SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, 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 SFAS No. 144 are present. We did not
evaluate any long-lived assets for impairment during 2008 because no such
impairment indicators were present.
|
·
|
Pension
plans. We maintain various defined benefit pension
plans. The amounts recognized as defined benefit pension
expenses, and the reported amounts of pension asset and accrued pension
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 obligations, pension expenses and funding
requirements. These assumptions are more fully described below
under “Defined Benefit Pension
Plans.”
|
·
|
Income
taxes. Deferred taxes are recognized for future tax
effects of temporary differences between financial and income tax
reporting in accordance with the recognition criteria of SFAS No. 109,
Accounting for Income
Taxes. We record a valuation allowance to reduce our
deferred income tax assets to the amount that is believed to be realized
under the more-likely-than-not recognition criteria. While we
have considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for a valuation allowance, it is
possible that in the future we may change our estimate of the amount of
the deferred income tax assets that would more-likely-than-not be realized
in the future, resulting in an adjustment to the deferred income tax asset
valuation allowance that would either increase or decrease, as applicable,
reported net income in the period such change in estimate was
made. For example, we have substantial net operating loss
carryforwards in Germany (the equivalent of $817 million for German
corporate purposes and $229 million for German trade tax purposes at
December 31, 2008). At December 31, 2008, 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 carry forwards have an indefinite carryforward period, (ii) we have
generated cumulative income in Germany over the most recent three-year
period and consequently utilized a portion of such carryforwards during
that period and (iii) we currently expect to utilized the remainder of
such carryforwards over the long term. However, prior to the
complete utilization of such carryforwards, particularly if the current
economic downturn continues and we were to generate operating 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.
|
We record
a reserve for uncertain tax positions in accordance with Financial Accounting
Standards Board Interpretation No. 48, Accounting for Uncertain Tax
Positions, for tax positions where we believe it is more-likely-than-not
our position will not prevail with the applicable tax authorities. It
is possible that in the future we may change our assessment regarding the
probability that our tax positions will prevail that would require an adjustment
to the amount of our reserve for uncertain tax positions that could either
increase or decrease, as applicable, reported net income in the period the
change in assessment was made.
In
addition, we make an evaluation at the end of each reporting period as to
whether or not some or all of the undistributed earnings of our non-U.S.
subsidiaries are permanently reinvested (as that term is defined in
GAAP). While we may have concluded in the past that some of such
undistributed earnings are permanently reinvested, facts and circumstances can
change in the future, and it is possible that a change in facts and
circumstances, such as a change in the expectation regarding the capital needs
of our non-U.S. subsidiaries, could result in a conclusion that some or all of
such undistributed earnings are no longer permanently reinvested. In
such an event, we would be required to recognize a deferred income tax liability
in an amount equal to the estimated incremental U.S. income tax and withholding
tax liability that would be generated if all of such previously-considered
permanently reinvested undistributed earnings were distributed to the
U.S.
·
|
Contingencies. We
record accruals for legal and other contingencies when estimated future
expenditures associated with such contingencies and commitments become
probable and the amounts can be reasonably estimated. However,
new information may become available, or circumstances (such as applicable
laws and regulations) may change, thereby resulting in an increase or
decrease in the amount required to be accrued for such matters (and
therefore a decrease or increase in reported net income in the period of
such change).
|
Income
from operations is impacted by certain of these significant judgments and
estimates, such as allowance for doubtful accounts, reserves for obsolete or
unmarketable inventories, impairment of equity method investees and long-lived
assets, defined benefit pension plans and loss accruals. In addition,
net income (loss) is impacted by the significant judgments and estimates for
deferred income tax asset valuation allowances and loss accruals.
Comparison
of 2008 to 2007 Results of Operations
Year ended December 31,
|
||||||||||||||||
2007
|
2008
|
|||||||||||||||
(Dollars
in millions)
|
||||||||||||||||
Net
sales
|
$ | 946.1 | 100 | % | $ | 952.9 | 100 | % | ||||||||
Cost
of sales
|
749.7 | 79 | % | 782.5 | 82 | % | ||||||||||
Gross
margin
|
196.4 | 21 | % | 170.4 | 18 | % | ||||||||||
Other
operating income and expenses, net
|
117.7 | 13 | % | 125.3 | 13 | % | ||||||||||
Income
from operations
|
$ | 78.7 | 8 | % | $ | 45.1 | 5 | % | ||||||||
Percent
|
||||||||||||||||
Change
|
||||||||||||||||
TiO2
operating statistics:
|
||||||||||||||||
Sales
volumes*
|
348 | 317 | (9 | )% | ||||||||||||
Production
volumes*
|
350 | 350 | - | |||||||||||||
Percent
change in net sales:
|
||||||||||||||||
TiO2
product pricing
|
1 | % | ||||||||||||||
TiO2
sales volumes
|
(9 | )% | ||||||||||||||
TiO2
product mix
|
2 | % | ||||||||||||||
Changes
in currency exchange rates
|
7 | % | ||||||||||||||
Total
|
1 | % |
______________________________
* Thousands
of metric tons
Net sales – Net sales
increased 1% or $6.8 million for 2008 compared to 2007, primarily due to
favorable currency exchange rates, which we estimate increased our net sales for
2008 by approximately $62 million, or 7%, compared to the same period in
2007. Variations in grades of products sold favorably impacted net
sales by 2%, along with a 1% increase in average TiO2 selling
prices. TiO2 selling
prices generally follow industry trends and prices will increase or decrease
generally as a result of competitive market pressures. During the
second and third quarters of 2008, we and our competitors announced various
price increases and surcharges in response to higher operating
costs. A portion of these increase announcements were implemented
during the second, third and fourth quarters of 2008. The positive impact
of currency, product mix and pricing in 2008 were partially offset by a 9%
decrease in sales volumes.
Our 9%
decrease in sales volumes in 2008 is primarily due to lower sales volumes in all
markets as a result of a global weakening of demand due to poor overall economic
conditions.
Cost of sales - Cost of sales
increased 4% or $32.8 million for 2008, compared to 2007, due to the impact of a
20% or approximately $22 million increase in utility costs (primarily energy
costs), an 11% or approximately $32 million increase in raw material costs and
currency fluctuations (primarily the euro). The cost of sales as a
percentage of net sales increased to 82% in the year ended December 31, 2008
compared to 79% in the same period of 2007 primarily due to the net effects of
higher operating costs and slightly higher average selling prices.
Income from operations –
Income from operations in 2008 declined by 43% to $45.1 million compared
to 2007; income from operations as a percentage of net sales decreased to 5% in
2008 from 8% for 2007. The decline in income from operations is
driven by the decline in gross margin, which decreased to 18% in 2008 compared
to 21% in 2007. While our average TiO2 selling
prices were higher in 2008, our gross margin decreased primarily because of
lower sales volumes and higher manufacturing costs, which more than offset the
impact of higher sales prices and the positive effect of changes in currency
rates. We estimate the positive effect of changes in currency
exchange rates increased income from operations by approximately $8 million when
comparing 2008 to 2007.
As a
percentage of net sales, selling, general and administrative expenses were
relatively consistent at approximately 13% for both 2008 and 2007.
Other non-operating income and
expense, net – Interest expense increased $2.9 million from $37.8 million
for 2007 to $40.7 million for 2008 due to unfavorable changes in currency
exchange rates in 2008 compared to 2007 and increased borrowings in 2008
(primarily under our revolving credit facility). The interest expense we
recognize will vary with fluctuations in the euro exchange rate.
Provision (benefit) for income taxes
– Our income tax provision was $1.4 million for 2008 compared to $122.4
million for 2007. See Note 7 to our Consolidated Financial Statements for
a tabular reconciliation of our statutory income tax expense to our actual tax
expense. Some of the more significant items impacting this
reconciliation are summarized below.
Our
income tax expense for 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.
|
Our
income tax expense for 2007 includes:
·
|
a
non-cash charge of $90.8 million relating to a decrease in our net
deferred income tax asset in Germany resulting from the reduction in its
income tax rates;
|
·
|
a
non-cash charge of $8.7 million relating to the adjustment of certain
German income tax attributes; and
|
·
|
a
non-cash income tax benefit of $.7 million resulting from a net reduction
in our reserve for uncertain tax
positions.
|
Comparison
of 2007 to 2006 Results of Operations
Year ended December 31,
|
||||||||||||||||
2006
|
2007
|
|||||||||||||||
(Dollars
in millions)
|
||||||||||||||||
Net
sales
|
$ | 914.2 | 100 | % | $ | 946.1 | 100 | % | ||||||||
Cost
of sales
|
691.2 | 76 | % | 749.7 | 79 | % | ||||||||||
Gross
margin
|
223.0 | 24 | % | 196.4 | 21 | % | ||||||||||
Other
operating income and expenses, net
|
115.6 | 13 | % | 117.7 | 13 | % | ||||||||||
Income
from operations
|
$ | 107.4 | 11 | % | $ | 78.7 |
__8 %
|
|||||||||
Percent
|
||||||||||||||||
Change
|
||||||||||||||||
TiO2
operating statistics:
|
||||||||||||||||
Sales
volumes*
|
353 | 348 | (1 | )% | ||||||||||||
Production
volumes*
|
348 | 350 | 1 | % | ||||||||||||
Percent
change in net sales:
|
||||||||||||||||
TiO2
product pricing
|
(3 | )% | ||||||||||||||
TiO2
sales volumes
|
(1 | )% | ||||||||||||||
TiO2
product mix
|
1 | % | ||||||||||||||
Changes
in currency exchange rates
|
7 | % | ||||||||||||||
Total
|
4 | % |
___________________________
* Thousands
of metric tons
Net sales – Net sales
increased 4% or $31.9 million for 2007 compared to 2006, primarily due to
favorable currency exchange rates offset somewhat by a 1% decrease in TiO2 sales
volumes and a 3% decrease in average TiO2 selling
prices. TiO2 selling
prices generally follow industry trends and prices will increase or decrease
generally as a result of competitive market pressures. We
estimate the favorable effect of changes in currency exchange rates increased
our net sales for 2007 by approximately $63 million, or 7%, compared to the same
period in 2006.
Our 1%
decrease in sales volumes for 2007 is primarily due to lower sales volumes in
North America.
Cost of sales - Cost of sales
increased 8% or $58.5 million for 2007, compared to 2006, due to lower sales
volumes, higher production volumes, and a 2% increase in raw materials costs
(approximately $5 million). The cost of sales as a percentage of net
sales increased to 79% in the year ended December 31, 2007, compared to 76% in
the same period of 2006 primarily due to the net effects of lower average
selling prices, higher other manufacturing costs (including maintenance) of
approximately $2 million, lower utility costs of approximately $3 million and
slightly higher production volumes.
The
negative impact of the increase in maintenance costs and raw materials was
somewhat offset by record production levels. TiO2 production
volumes increased 1% for 2007 compared to 2006, which favorably impacted our
income from operations comparisons. Our operating rates were near
full capacity in both periods. Our TiO2 production
volume in 2007 was a record for us for the fifth consecutive
year. The increase in production volumes for 2007 was aided by
enhancing our processes and our continued debottlenecking
activities.
Income from operations –
Income from operations in 2007 declined by 27% to $78.7 million compared
to 2006; income from operations as a percentage of net sales decreased to 8% in
2007 from 11% for 2006. The decline in income from operations is
driven by the decline in gross margin, which decreased to 21% in 2007 compared
to 24% in 2006. Our gross margin decreased primarily because of lower
average TiO2 selling
prices, lower sales volumes and higher manufacturing costs, which more than
offset the impact of higher production volumes.
As a
percentage of net sales, selling, general and administrative expenses were
relatively consistent at approximately 13% for 2007 and 2006.
Other non-operating income and
expense, net – In 2006, we issued our euro 400 million principal amount
of 6.5% Senior Secured Notes, and used the proceeds to redeem our euro 375
million principal amount of 8.875% Senior Secured Notes. As a result
of our prepayment of the 8.875% Senior Secured Notes, we recognized a $22.3
million pre-tax interest charge ($14.5 million net of income tax benefit) in
2006 for the prepayment of the notes, representing (1) the call premium on the
notes, (2) the write-off of deferred financing costs and (3) the write off of
the existing unamortized premium on the notes. See Note 6 to our
Consolidated Financial Statements.
Interest
expense decreased $3.1 million from $40.9 million for 2006 to $37.8 million for
2007 due to the issuance of the 6.5% Senior Secured Notes during 2006, which was
partially offset by unfavorable changes in currency exchange rates in 2007
compared to 2006. The interest expense we recognize will vary with fluctuations
in the euro exchange rate.
Provision (benefit) for income taxes
– Our income tax provision was $122.4 million for 2007 compared to an
income tax benefit of $7.7 million for 2006. See Note 7 to our
Consolidated Financial Statements for a tabular reconciliation of the statutory
tax expense to our actual tax expense. Some of the more significant
items impacting this reconciliation are summarized below.
Our
income tax expense for 2007 includes:
·
|
a
non-cash charge of $90.8 million relating to a decrease in our net
deferred income tax asset in Germany resulting from the reduction in its
income tax rates;
|
·
|
a
non-cash charge of $8.7 million relating to the adjustment of certain
German income tax attributes; and
|
·
|
a
non-cash income tax benefit of $.7 million resulting from a net reduction
in our reserve for uncertain tax
positions.
|
Our
income tax benefit in 2006 includes:
·
|
an
income tax benefit of $21.7 million resulting from a favorable resolution
of certain income tax audits in Germany that resulted in an increase in
the amount of our German trade tax net operating loss
carryforward;
|
·
|
an
income tax benefit of $10.7 million resulting from the reduction in our
income tax contingency reserves related to favorable developments with
income tax audits in Belgium, Norway and Germany;
and
|
·
|
an
income tax benefit of $1.4 million relating to the favorable resolution of
certain income tax audit issues in Germany and
Belgium.
|
Effects
of currency exchange rates
All of
our operations and assets are located outside the United States (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 are denominated in the U.S. dollar. Certain raw materials
used worldwide, primarily titanium-containing feedstocks, are purchased in U.S.
dollars, while labor and other production costs are purchased primarily in local
currencies. Consequently, the translated U.S. dollar value of our
sales and operating results are subject to currency exchange rate fluctuations
which may favorably or unfavorably impact reported earnings and may affect the
comparability of period-to-period operating results. Overall,
fluctuations in currency exchange rates had the following effects on our sales
and income from operations for the periods indicated.
Year
ended December 31,
|
||||||||
2007 vs.
2006
|
2007 vs.
2008
|
|||||||
Increase
(decrease), in millions
|
||||||||
Impact
on:
|
||||||||
Net
sales
|
$ | 63 | $ | 62 | ||||
Income
from operations
|
- | 8 |
Outlook
We
currently expect income from operations will be lower in 2009 compared to 2008
primarily from higher production costs resulting in part from significantly
reduced production volumes and the resulting unabsorbed fixed production costs
and unfavorable currency effects. We currently 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.
In
response to the worldwide economic slowdown and weak consumer confidence, we are
significantly reducing our production volumes in 2009 in order to reduce our
finished goods inventory and improve our liquidity. While overall
industry pigment demand is expected to be lower in 2009 as compared to 2008 as a
result of worldwide economic conditions, we currently expect our sales volumes
in 2009 will be slightly higher as compared to 2008 as we expect to gain market
share following anticipated reductions in industry capacity due to competitors’
permanent plant shutdowns. We believe average selling prices in 2009
will decline from year-end levels during the first half of the year but will
rise during the second half of 2009 which should result in slightly higher
average worldwide TiO2 selling
prices for the year. To mitigate the negative impact of our
significantly reduced production volumes, we are reducing our operating costs
where possible, such as; reducing maintenance expenditures, research and
development expenditures and personnel costs.
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. We currently expect
we will operate at 75% to 85% of our attainable production capacity in 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
flows from operating activities provided $1.0 million for 2008, compared to
$84.9 million for 2007. This decrease was due primarily to the net
effects of the following items:
·
|
lower
income from operations in 2008 of $33.6
million;
|
·
|
lower
cash paid for income taxes in 2008 of $8.9 million, in part due to lower
taxable income and the receipt of tax
refunds;
|
·
|
higher
cash paid for interest in 2008 of $3.4 million, as a result of increased
borrowing and the effects of currency exchange rates on the annual
interest payments on our 6.5% senior secured notes;
and
|
·
|
a
lower amount of net cash used from relative changes in our inventories,
receivables, payables and accruals of $40.2 million in 2008 due primarily
to relative changes in our inventory levels, as discussed below;
and
|
·
|
higher
depreciation expense of $4.6 million in 2008, primarily as a result of the
effects of currency exchange rates.
|
Our cash
flows from operating activities provided $84.9 million for 2007, compared to
$62.5 million for 2006. This increase was due primarily to the net
effects of the following items:
·
|
lower
income from operations in 2007 of $28.7
million;
|
·
|
lower
cash paid for income taxes in 2007 of $15.6 million, in part due to the
net payment of $19.2 million in 2006 associated with the settlement of
prior year income tax audits;
|
·
|
higher
cash paid for interest in 2007 of $4.7 million, primarily as a result of
the effects of foreign currency exchange rates on the semi annual interest
payments on our 6.5% Senior Secured
Notes;
|
·
|
payment
of the $20.9 million call premium in 2006 as a result of the prepayment of
our 8.875% Senior Secured Notes, which is required to be included in cash
flows from operating activities;
|
·
|
a
lower amount of net cash used from relative changes in our inventories,
receivables, payables and accruals of $6.5 million in 2007 due primarily
to relative changes in our inventory levels, as discussed below;
and
|
·
|
higher
depreciation expense of $4.3 million in 2007, primarily as a result of the
effects of foreign currency exchange
rates.
|
Changes
in working capital are affected by accounts receivable and inventory
changes. Our average days sales outstanding (“DSO”) increased to 68
days at December 31, 2008 from 65 days at December 31, 2007 due to the timing of
collection on higher accounts receivable balances at the end of
2008. For comparative purposes, our average DSO increased to 65 days
at December 31, 2007 from 61 days at December 31, 2006 due to the timing of
collections. Our average days sales in inventory (“DSI”) increased
from 55 days at December 31, 2007, to 123 days at December 31, 2008, as our
sales volumes decreased in 2008 (mostly in the fourth quarter)and our TiO2 production
volumes exceeded our TiO2 sales
volumes during the last half of 2008. For comparative purposes, our
average DSI was at 55 days at December 31, 2006.
Investing
activities
Our
capital expenditures were $61.7 million in 2008, $42.4 million in 2007 and $47.1
million in 2006. Capital expenditures are primarily for improvements
and upgrades to existing facilities. Our capital expenditures during
the past three years include an aggregate of approximately $21.2 million ($11.8
million in 2008) for our ongoing environmental protection and compliance
programs.
Financing
activities
During
2008, we:
·
|
made
net borrowings of $44.4 million on our European credit
facility.
|
During
2006, we:
·
|
issued
euro 400 million principal amount of 6.5% Notes at 99.306% ($498.5 million
when issued); and
|
·
|
redeemed
our euro 375 million principal amount of 8.875% Senior Secured Notes
($470.5 million when redeemed) using the proceeds from the issuance of the
6.5% Notes.
|
We paid
dividends of $34.9 million in 2008, $34.2 million in 2007 and $50.2 million in
2006. The declaration and payment of future dividends is
discretionary, and the amount, if any, will be dependent upon our results of
operations, financial condition, contractual restrictions and other factors
deemed relevant by our Board of Directors.
Outstanding
debt obligations and borrowing availability
At
December 31, 2008, our consolidated debt was comprised of:
·
|
euro
400 million principal amount of our 6.5% Senior Secured
Notes ($560.0 million) due in
2013;
|
·
|
euro
30.0 million ($42.2 million) under our revolving credit facility which
matures in May 2011; and
|
·
|
Approximately
$3.4 million of other indebtedness.
|
Certain
of our credit agreements contain provisions which could result in the
acceleration of indebtedness prior to its stated maturity for reasons other than
defaults for failure to comply with applicable covenants. For
example, certain credit agreements allow the lender to accelerate the maturity
of the indebtedness upon a change of control (as defined in the agreement) of
the borrower. In addition, certain credit agreements could result in
the acceleration of all or a portion of the indebtedness following a sale of
assets outside the ordinary course of business. None of our credit
agreements contain provisions that link the debt payment rates or schedules or
borrowing availability to our credit rating. We are in compliance
with all of our debt covenants at December 31, 2008. During the
second quarter of 2008, we amended our revolving bank credit facility to extend
the maturity date by three years to May 2011. See Note 6 to the
Condensed Consolidated Financial Statements.
Certain
of our credit facilities require us to maintain specified financial ratios and
satisfy certain financial covenants contained in the applicable credit
agreement. While we were in compliance with all of our debt covenants
at December 31, 2008, we currently believe it is probable that one of our
required financial ratios associated with our European credit facility (the
ratio of net secured debt to earnings before income taxes, interest and
depreciation, as defined) will not be maintained at some point during 2009, most
likely commencing at March 31, 2009. In 2009, we have begun to reduce
our production levels in response to the current economic environment, which we
anticipate will favorably impact our liquidity and cash flows by reducing our
inventory levels. However, the reduced capacity utilization levels
will negatively impact our 2009 results of operations due to the resulting
unabsorbed fixed production costs that will be charged to expense as
incurred. As a result, we may not be able to maintain the required
financial ratio throughout 2009.
We have
begun discussions with the lenders to amend the terms of the existing European
credit facility to eliminate the requirement to maintain this financial ratio
until at least March 31, 2010. While we believe it is possible we can
obtain such an amendment to eliminate this financial ratio through at least
March 31, 2010, there is no assurance that such amendment will be obtained, or
if obtained that the requirement to maintain the financial ratio will be
eliminated (or waived, in the event the lenders would only agree to a waiver and
not an amendment to eliminate the covenant itself) through at least March 31,
2010. Any such amendment or waiver which we might obtain could
increase our future borrowing costs, either from a requirement that we pay a
higher rate of interest on outstanding borrowings or pay a fee to the lenders as
part of agreeing to such amendment or waiver.
In the
event we would not be successful in obtaining the amendment or waiver of the
existing European credit facility to eliminate the requirement to maintain the
financial ratio, we would seek to refinance such facility with a new group of
lenders with terms that did not include such financial covenant or, if required,
we will use our existing liquidity resources (which could include funds provided
by our affiliates). While there is no assurance that we would
be able to refinance the existing European credit facility with a new group of
lenders, we believe these other sources of liquidity available to us would allow
us to refinance the existing European credit facility. If required,
we believe by undertaking one or more of these steps we will be successful in
maintaining sufficient liquidity to meet our future obligations including
operations, capital expenditures and debt service for the next 12
months.
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 December 31, 2008, the
maximum amount of dividends and other restricted payments that we could make
(the “Restricted Payment Basket”) was approximately $52 million. However,
the indenture currently prohibits us from utilizing such Restricted Payment
Basket because we have not met a specified financial ratio; such prohibition
will continue until such time as we meet the specified financial
ratio.
Liquidity
Our
primary source of liquidity on an ongoing basis is cash flows from operating
activities which is generally used to (i) fund working capital expenditures,
(ii) repay any short-term indebtedness incurred for working capital purposes and
(iii) provide for the payment of dividends. From time-to-time we will
incur indebtedness, generally to (i) fund short-term working capital needs, (ii)
refinance existing indebtedness or (iii) fund major capital expenditures or the
acquisition of other assets outside the ordinary course of
business. We will also from time-to-time sell assets outside the
ordinary course of business, and use the proceeds to (i) repay existing
indebtedness, (ii) make investments in marketable and other securities, (iii)
fund major capital expenditures or the acquisition of other assets outside the
ordinary course of business or (iv) pay dividends.
Pricing
within the TiO2 industry
is cyclical, and changes in industry economic conditions significantly impact
earnings and operating cash flows. Changes in TiO2 pricing,
production volumes and customer demand, among other things, could significantly
affect our liquidity.
We
routinely evaluate our liquidity requirements, alternative uses of capital,
capital needs and availability of resources in view of, among other things, our
dividend policy, our debt service and capital expenditure requirements and
estimated future operating cash flows. As a result of this process,
we have in the past and may in the future seek to reduce, refinance, repurchase
or restructure indebtedness, raise additional capital, repurchase shares of our
common stock, modify our dividend policy, restructure ownership interests, sell
interests in our subsidiaries or other assets, or take a combination of these
steps or other steps to manage our liquidity and capital
resources. Such activities have in the past and may in the future
involve related companies. In the normal course of our business, we
may investigate, evaluate, discuss and engage in acquisition, joint venture,
strategic relationship and other business combination opportunities in the
TiO2
industry. In the event of any future acquisition or joint
venture opportunity, we may consider using then-available liquidity, issuing our
equity securities or incurring additional indebtedness.
At
December 31, 2008, we had credit available under all of our existing credit
facilities of approximately $70.3 million. 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
borrowing availability.” If actual developments differ from
our expectations, our liquidity could be adversely affected.
Capital
expenditures
We intend
to spend approximately $24 million to maintain and improve our existing
facilities during 2009, including approximately $1 million in the area of
environmental protection and compliance. The majority of our
expenditures in 2009 will be to maintain our facilities. We have
lowered our planned capital expenditures in 2009 in response to the current
economic conditions. Capital spending for 2009 is expected to be
funded through cash on hand or borrowing on existing credit
facilities.
Off-balance
sheet financing
Other
than operating lease commitments disclosed in Note 12 to our Consolidated
Financial Statements, we are not party to any material off-balance sheet
financing arrangements.
Cash,
cash equivalents, restricted cash and restricted marketable debt
securities
At
December 31, 2008, we had current cash and cash equivalents aggregating $10.8
million, had current restricted cash equivalents of $1.5 million and noncurrent
restricted marketable debt securities of $3.5 million.
Related
party transactions
We are
party to certain transactions with related parties. See Note 11 to
our Consolidated Financial Statements. It is our policy to engage in
transactions with related parties on terms, in our opinion, no less favorable to
us than could be obtained from unrelated parties.
Commitments
and contingencies
See
Notes 7 and 12 to our Consolidated Financial Statements for a description of
certain income tax examinations currently underway and certain legal
proceedings.
Recent
accounting pronouncements
See
Note 14 to our Consolidated Financial Statements.
Debt
and other contractual commitments
As more fully described in the Notes to
the Consolidated Financial Statements, we are a party to various debt, lease and
other agreements which contractually and unconditionally commit us to pay
certain amounts in the future. See Notes 6, 12 and 14 to our
Consolidated Financial Statements. The timing and amount shown for
our commitments in the table below are based upon the contractual payment amount
and the contractual payment date for such commitments. The following
table summarizes such contractual commitments of ours and our consolidated
subsidiaries as of December 31, 2008 by the type and date of
payment.
Payment due date
|
||||||||||||||||||||
Contractual commitment
|
2009
|
2010/2011 | 2012/2013 |
2014
and
after
|
Total
|
|||||||||||||||
(In
millions)
|
||||||||||||||||||||
Indebtedness
(1)
|
$ | .8 | $ | 43.9 | $ | 560.9 | $ | - | $ | 605.6 | ||||||||||
Interest
on indebtedness (2)
|
38.6 | 75.9 | 48.8 | - | 163.3 | |||||||||||||||
Operating
leases
|
3.9 | 5.0 | 3.2 | 18.9 | 31.0 | |||||||||||||||
Long-term
service and
other
supply contracts (3)
|
44.7 | 48.2 | 10.0 | 1.8 | 104.7 | |||||||||||||||
Fixed
asset acquisitions
|
17.6 | - | - | - | 17.6 | |||||||||||||||
Estimated
tax obligations (4)
|
3.6 | - | - | - | 3.6 | |||||||||||||||
$ | 109.2 | $ | 173.0 | $ | 622.9 | $ | 20.7 | $ | 925.8 |
(1)
|
A
significant portion of the amount shown for indebtedness relates to our
6.5% Senior Secured Notes ($560.0 million at December 31,
2008). Such indebtedness is denominated in euro. See
Item 7A – “Quantitative and Qualitative Disclosures About Market Risk” and
Note 8 to the Consolidated Financial Statements. With respect
to the revolving credit facilities the amounts shown for indebtedness are
based upon the actual amount outstanding at December 31,
2008.
|
(2)
|
The
amounts shown for interest for any outstanding variable-rate indebtedness
is based upon the December 31, 2008 interest rates and assumes that such
variable-rate indebtedness remains outstanding until
maturity.
|
(3)
|
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, 2008 exchange
rates.
|
(4)
|
The
amount shown for estimated tax obligations is the consolidated amount of
income taxes payable at December 31, 2008, which is assumed to be paid
during 2009.
|
The above
table does not reflect:
·
|
Any
amounts that we might pay to fund our defined benefit pension 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 and interest rate assumptions. We
expect to be required to contribute approximately $14 million to our
defined benefit pension plans during 2009. Our defined benefit
pension plans are discussed below in greater detail. See Note 8
to our Consolidated Financial
Statements.
|
·
|
Any
amounts that we might pay related to our asset retirement obligations as
the terms and amounts of such future fundings are unknown;
and
|
·
|
Any
amounts that we might pay to settle any of our uncertain tax positions, as
the timing and amount of any such future settlements are unknown and
dependent on, among other things, the timing of tax audits. See
Notes 7 and 14 to our Consolidated Financial
Statements.
|
We
occasionally enter into raw material supply arrangements to mitigate the
short-term impact of future increases in raw material costs. While
these arrangements do not necessarily commit us to a minimum volume of
purchases, they generally provide for stated unit prices based upon achievement
of specified volume purchase levels. This allows us to stabilize raw
material purchase prices to a certain extent, provided the specified minimum
monthly purchase quantities are met.
Defined
benefit pension plans
We
maintain various defined benefit pension plans in Europe. See Note 8
to our Consolidated Financial Statements.
We
account for our defined benefit pension plans using SFAS No. 87, Employer’s Accounting for
Pensions, as amended. Under SFAS No. 87, defined benefit
pension plan expense and prepaid and accrued pension costs are each recognized
based on certain actuarial assumptions, principally the assumed discount rate,
the assumed long-term rate of return on plan assets and the assumed increase in
future compensation levels.
In
September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans. SFAS No. 158 requires
the recognition of an asset or liability for the over or under funded status of
each of our individual defined benefit pension plans on our Consolidated Balance
Sheets. This standard does not change the existing recognition and
measurement requirements that determine the amount of periodic benefit cost we
recognize in net income. We adopted the asset and liability
recognition and disclosure requirements of this standard effective December 31,
2006 on a prospective basis, in which we recognized through accumulated other
comprehensive income all of our prior unrecognized gains and losses and prior
service costs or credits, net of tax, as of December 31, 2006.
We
recognized consolidated defined benefit pension plan expense of $17.7 million in
2006, $20.0 million in 2007 and $6.9 million in 2008. In the fourth
quarter of 2008 we recognized a $6.9 million pension adjustment in connection
with the correction of our pension expense previously recognized for 2006 and
2007. See Note 8 to our Consolidated Financial
Statements. The amount of funding requirements for these defined
benefit pension plans is generally based upon applicable regulations (such as
ERISA in the U.S.), and will generally differ from pension expense recognized
under SFAS No. 87 for financial reporting purposes. Our contributions
to all of our plans aggregated $18.5 million in 2006, $17.4 million in 2007 and
$15.4 million in 2008.
The
discount rates we use for determining defined benefit pension expense and the
related pension obligations are based on current interest rates earned on
long-term bonds that receive one of the two highest ratings given by recognized
rating agencies in the applicable country where the defined benefit pension
benefits are being paid. In addition, we receive advice about
appropriate discount rates from our third-party actuaries, who may in some cases
use their own market indices. The discount rates are adjusted as of
each measurement date to reflect then-current interest rates on such long-term
bonds. Such discount rates are used to determine the actuarial
present value of the pension obligations as of the measurement date, and such
discount rates are also used to determine the interest component of defined
benefit pension expense for the following year. Prior to December 31,
2007, we used a September 30 measurement date. Effective December 31,
2007, we began using a December 31 measurement date, concurrent with our
adoption of the measurement date requirements of SFAS No. 158 effective December
31, 2007. See Note 8 to our Consolidated Financial
Statements.
At
December 31, 2008, approximately 80% and 16% of the projected benefit
obligations related to our plans in Germany and Norway,
respectively. We use several different discount rate assumptions in
determining our consolidated defined benefit pension plan obligation and
expense. This is because we maintain defined benefit pension plans in
several different countries in Europe and the interest rate environment differs
from country to country.
We used
the following discount rates for our defined benefit pension plans:
Discount
rates used for:
|
|||||
Obligations
at
December
31, 2006 and expense in 2007
|
Obligations
at
December
31, 2007 and expense in 2008
|
Obligations
at
December
31, 2008 and expense in 2009
|
|||
Germany
|
4.5%
|
5.5%
|
5.8%
|
||
Norway
|
4.8%
|
5.5%
|
5.8%
|
The
assumed long-term rate of return on plan assets represents the estimated average
rate of earnings expected to be earned on the funds invested or to be invested
in the plans’ assets provided to fund the benefit payments inherent in the
projected benefit obligations. Defined benefit pension expense each
year is based upon the assumed long-term rate of return on plan assets for each
plan and the actual fair value of the plan assets as of the beginning of the
year. Differences between the expected return on plan assets for a
given year and the actual return are deferred and amortized over future periods
based either upon the expected average remaining service life of the active plan
participants (for plans for which benefits are still being earned by active
employees) or the average remaining life expectancy of the inactive participants
(for plans for which benefits are not still being earned by active
employees).
At
December 31, 2008, approximately 74% and 22% of the plan assets related to our
plans in Germany and Norway, respectively. We use several different
long-term rates of return on plan asset assumptions in determining our
consolidated defined benefit pension plan expense. This is because we
maintain defined benefit pension plans in several different countries in Europe
and the plan assets in different countries are invested in a different mix of
investments and the long-term rates of return for different investments differ
from country to country.
In
determining the expected long-term rate of return on plan asset assumptions, we
consider the long-term asset mix (e.g. equity vs. fixed income) for the assets
for each of our plans and the expected long-term rates of return for such asset
components. In addition, we receive advice about appropriate
long-term rates of return from our third-party actuaries. Such
assumed asset mixes are summarized below:
·
|
In
Germany, the composition of our plan assets is established to satisfy the
requirements of the German insurance
commissioner.
|
·
|
In
Norway, we currently have a plan asset target allocation of 14% to equity
securities, 64% to fixed income securities and the remainder primarily to
cash and liquid investments such as money markets. The expected
long-term rate of return for such investments is approximately 9%, 5.0%
and 4%, respectively.
|
Our
pension plan weighted average asset allocations by asset category were as
follows:
December 31, 2007
|
December 31, 2008
|
|||||||||||||||
Germany
|
Norway
|
Germany
|
Norway
|
|||||||||||||
Equity
securities and limited
partnerships
|
23 | % | 18 | % | 24 | % | 14 | % | ||||||||
Fixed
income securities
|
48 | 68 | 52 | 83 | ||||||||||||
Real
estate
|
14 | - | 12 | - | ||||||||||||
Cash,
cash equivalents and other
|
15 | 14 | 12 | 3 | ||||||||||||
Total
|
100 | % | 100 | % | 100 | % | 100 | % |
We
regularly review our actual asset allocation for each of our plans and will
periodically rebalance the investments in each plan to more accurately reflect
the targeted allocation when considered appropriate.
Our
assumed long-term rates of return on plan assets for 2006, 2007 and 2008 were as
follows:
2006
|
2007
|
2008
|
||||
Germany
|
5.3%
|
5.8%
|
5.3%
|
|||
Norway
|
6.5%
|
5.5%
|
6.1%
|
We
currently expect to use the same long-term rate of return on plan asset
assumptions in 2009 as we used in 2008 for purposes of determining the 2009
defined benefit pension plan expense.
To the
extent that a plan’s particular pension benefit formula calculates the pension
benefit in whole or in part based upon future compensation levels, the projected
benefit obligations and the pension expense will be based in part upon expected
increases in future compensation levels. For all of our plans for
which the benefit formula is so calculated, we generally base the assumed
expected increase in future compensation levels upon average long-term inflation
rates for the applicable country.
In
addition to the actuarial assumptions discussed above, because we maintain our
defined benefit pension plans outside the U.S., the amount of recognized defined
benefit pension expense and the amount of net pension liability will vary based
upon relative changes in currency exchange rates.
A
reduction in the assumed discount rate generally results in an actuarial loss,
as the actuarially-determined present value of estimated future benefit payments
will increase. Conversely, an increase in the assumed discount rate
generally results in an actuarial gain. In addition, an actual return on
plan assets for a given year that is greater than the assumed return on plan
assets results in an actuarial gain, while an actual return on plan assets that
is less than the assumed return results in an actuarial loss. Other actual
outcomes that differ from previous assumptions, such as individuals living
longer or shorter than assumed in mortality tables which are also used to
determine the actuarially-determined present value of estimated future benefit
payments, changes in such mortality table themselves or plan amendments, will
also result in actuarial losses or gains. Accordingly under GAAP, we do
not recognize all of such actuarial gains and losses in earnings currently;
instead these amounts are deferred and amortized into income in the future as
part of net periodic defined benefit pension cost. However, upon
adoption of SFAS No. 158 effective December 31, 2006, these amounts are
recognized in Other comprehensive income (loss). In addition, any
actuarial gains generated in future periods would reduce the negative
amortization effect of any cumulative unrecognized actuarial losses, while any
actuarial losses generated in future periods would reduce the favorable
amortization effect of any cumulative unrecognized actuarial
gains.
During
2008, all of our defined benefit pension plans generated a combined net
actuarial loss of approximately $.9 million. This actuarial loss
resulted primarily from the general overall increase in the assumed discount
rates, offset in part by an assumed rate of return on plan assets in excess of
the actual rate of return.
Based on
the actuarial assumptions described above and our current expectation for what
actual average currency exchange rates will be during 2009, we expect our
defined benefit pension expense will approximate $13 million in
2009. In comparison, we expect to be required to contribute
approximately $14 million to such plans during 2009.
As noted
above, defined benefit pension expense and the amounts recognized as accrued
pension costs are based upon the actuarial assumptions discussed
above. We believe all of the actuarial assumptions used are
reasonable and appropriate. However, if we had lowered the assumed
discount rate by 25 basis points for all of our plans as of December 31, 2008,
our aggregate projected benefit obligations would have increased by
approximately $10 million at that date, and our defined benefit pension expense
would be expected to increase by approximately $.1 million during
2009. Similarly, if we lowered the assumed long-term rate of return
on plan assets by 25 basis points for all of our plans, our defined benefit
pension expense would be expected to increase by approximately $.5 million
during 2009.
Operations
outside the United States
As
discussed above, our operations are located outside the United States for which
the functional currency is not the U.S. dollar. As a result, our
reported amount for assets and liabilities related to our operations, and
therefore our consolidated net assets, will fluctuate based upon changes in
currency exchange rates. At December 31, 2008, we had substantial net
assets denominated in the euro, Norwegian krone and United Kingdom pound
sterling.
ITEM
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
We are exposed to market risk from
changes in interest rates, currency exchange rates and raw materials
prices.
Interest
rates
We are
exposed to market risk from changes in interest rates, primarily related to our
indebtedness. At December 31, 2007 and 2008, most of our aggregate
indebtedness was comprised of fixed-rate instruments. The large
percentage of fixed-rate debt instruments minimizes earnings volatility that
would result from changes in interest rates. The following table
presents principal amounts and weighted average interest rates for our aggregate
outstanding indebtedness at December 31, 2008. Information shown
below for such non-U.S. dollar denominated indebtedness is presented in its U.S.
dollar equivalent at December 31, 2008 using exchange rates of 1.4061 U.S.
dollars per euro and .1428 U.S. dollars per Norwegian krone. Certain
Norwegian krone denominated capital leases totaling $3.4 million in 2008 have
been excluded from the table below.
Amount
|
||||||||||||||||
Indebtedness
|
Carrying
value
|
Fair
value
|
Interest
rate
|
Maturity
date
|
||||||||||||
(In
millions)
|
||||||||||||||||
Fixed-rate
indebtedness –
euro-denominated
Senior
Secured Notes
|
$ | 560.0 | $ | 129.4 | 6.5 | % | 2013 | |||||||||
Variable
rate indebtedness - euro-denominated
European
Credit facility
|
$ | 42.2 | $ | 42.2 | 4.5 | % | 2011 |
At
December 31, 2007, euro-denominated fixed rate indebtedness, consisting solely
of the 6.5% Senior Secured Notes, aggregated $585.5 million (fair value - $507.7
million) with a weighted-average interest rate of 6.5%. We did not
have variable rate indebtedness at December 31, 2007.
Currency
exchange rates
We are
exposed to market risk arising from changes in foreign currency exchange rates
as a result of manufacturing and selling our products
worldwide. Earnings are primarily affected by fluctuations in the
value of the U.S. dollar relative to the euro, the Norwegian krone and the
United Kingdom pound sterling.
As described above, at December 31,
2008, we had the equivalent of $602.2 million of outstanding euro-denominated
indebtedness (2007 – the equivalent of $585.5 million of euro-denominated
indebtedness). The potential increase in the U.S. dollar equivalent
of the principal amount outstanding resulting from a hypothetical 10% adverse
change in exchange rates at such date would be approximately $60.5 million at
December 31, 2008 (2007 - $58.9 million).
Certain
of our sales generated by our non-U.S. operations are denominated in U.S.
dollars. We periodically use currency forward contracts to manage a very
nominal portion of 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. In the fourth quarter of 2008 we entered into a
series of currency forward contracts and at December 31, 2008 we had currency
forward contracts to exchange:
·
|
an
aggregate $57 million for an equivalent value of Norwegian kroner at
exchange rates ranging from kroner 6.91 to kroner 7.18 per U.S.
dollar. These contracts with DnB Nor Bank ASA mature from January
2009 through December 2009 at a rate of $.5 million to $2.5 million per
month. At December 31, 2008, the actual exchange rate was
kroner 7.0 per U.S. dollar.
|
·
|
an
aggregate euro 16.4 million for an equivalent value of Norwegian kroner at
exchange rates ranging from kroner 8.64 to kroner 9.23 per euro.
These contracts with DnB Nor Bank ASA mature from January 2009 through
December 2009 at a rate of euro .5 million to euro .7 million per
month. At December 31, 2008, the actual exchange rate was
kroner 9.7 per euro.
|
The
estimated fair value of such foreign currency forward contracts at December 31,
2008 was a $2.6 million net liability, of which $.3 million is recognized as
part of Prepaid Expense and $2.9 million is recognized as part of Accounts
Payable and Accrued Liabilities in our Consolidated Balance Sheet and a
corresponding $2.6 million foreign currency transaction loss in our Consolidated
Statement of Operations. To the extent we held such contracts
during 2007, we did not use hedge accounting for any of our contracts, and we
are not using hedge accounting for any of the contracts we entered into in
2008.
Other
We
believe there may be a certain amount of incompleteness in the sensitivity
analyses presented above. For example, the hypothetical effect of
changes in exchange rates discussed above ignores the potential effect on other
variables which affect our results of operations and cash flows, such as demand
for our products, sales volumes and selling prices and operating
expenses. Accordingly, the amounts presented above are not
necessarily an accurate reflection of the potential losses we would incur
assuming the hypothetical changes in exchange rates were actually to
occur.
The above discussion and estimated
sensitivity analysis amounts include forward-looking statements of market risk
which assume hypothetical changes in currency exchange rates. Actual
future market conditions will likely differ materially from such
assumptions. Accordingly, such forward-looking statements should not
be considered to be projections by us of future events, gains or
losses.
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item
is contained in a separate section of this Annual Report. See "Index
of Financial Statements and Schedules" (page F-1).
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
ITEM 9A. CONTROLS
AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
We
maintain a system of disclosure controls and procedures. The term
"disclosure controls and procedures," as defined by Exchange Act Rule 13a-15(e),
means controls and other procedures that are designed to ensure that information
required to be disclosed in the reports that we file or submit to the SEC under
the Securities Exchange Act of 1934, as amended (the "Act"), is recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
we are required to disclose in the reports we file or submit to the SEC under
the Act is accumulated and communicated to our management, including our
principal executive officer and our principal financial officer, or persons
performing similar functions, as appropriate to allow timely decisions to be
made regarding required disclosure. Each of Steven L. Watson, our
Chief Executive Officer, and Gregory M. Swalwell, our Vice President, Finance
and Chief Financial Officer, have evaluated the design and effectiveness of our
disclosure controls and procedures as of December 31, 2008. Based
upon their evaluation, these executive officers have concluded that our
disclosure controls and procedures are effective as of December 31,
2008.
Internal
Control Over Financial Reporting
We also
maintain internal control over financial reporting. The term
“internal control over financial reporting,” as defined by Exchange Act Rule
13a-15(f) means a process designed by, or under the supervision of, our
principal executive and principal financial officers, or persons performing
similar functions, and effected by the board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with GAAP, and includes those policies and procedures
that:
·
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our
assets,
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that
receipts and expenditures are being made only in accordance with
authorizations of management and directors,
and
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of an
unauthorized acquisition, use or disposition of assets that could have a
material effect on our Condensed Consolidated Financial
Statements.
|
Section
404 of the Sarbanes-Oxley Act of 2002 requires us to report on internal control
over financial reporting in this Annual Report on Form 10-K/A (Amendment No. 2)
for the year ended December 31, 2008. Our independent registered
public accounting firm is also required to audit our internal control over
financial reporting as of December 31, 2008. In addition, the SEC’s
rules do not require our independent registered public accounting firm to issue
its attestation until our Annual Report on Form 10-K for the year ended December
31, 2009.
As
permitted by the SEC, our assessment of internal control over financial
reporting excludes (i) internal control over financial reporting of equity
method investees and (ii) internal control over the preparation of our financial
statement schedules required by Article 12 of Regulation
S-X. However, our assessment of internal control over financial
reporting with respect to equity method investees did include controls over the
recording of amounts related to our investment that are recorded in the
consolidated financial statements, including controls over the selection of
accounting methods for our investments, the recognition of equity method
earnings and losses and the determination, valuation and recording of our
investment account balances.
Changes
in Internal Control Over Financial Reporting
There has
been no change to our internal control over financial reporting during the
quarter ended December 31, 2008 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Our evaluation of the effectiveness of
internal control over financial reporting is based upon the criteria established
in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (commonly referred to as the “COSO”
framework). Based on our evaluation under that framework, we have
concluded that our internal control over financial reporting was effective as of
December 31, 2008.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the SEC that
permit us to provide only management’s report in this annual
report.
Changes
in Internal Control Over Financial Reporting
There has been no change to our
internal control over financial reporting during the quarter ended December 31,
2008 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
Certifications
Our chief
executive officer and chief financial officer are also required to, among other
things, quarterly file certifications with the SEC regarding the quality of our
public disclosures, as required by Section 302 of the Sarbanes-Oxley Act of
2002. The certifications for the quarter ended December 31, 2008 have
been filed as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K/A
(Amendment No. 2).
ITEM 9B. OTHER
INFORMATION
Not
applicable
PART
III
ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Omitted pursuant to the General
Instruction I of Form 10-K.
ITEM 11. EXECUTIVE
COMPENSATION
Omitted pursuant to the General
Instruction I of Form 10-K.
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Omitted pursuant to the General
Instruction I of Form 10-K.
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to the General
Instruction I of Form 10-K.
ITEM 14. PRINCIPAL
ACCOUNTING FEES AND SERVICES
The
following table shows the aggregate fees PricewaterhouseCoopers LLP, our
independent registered public accounting firm (“PwC”), has billed or is expected
to bill to us and our subsidiaries for services rendered for 2007 and
2008. No fees were billed or are expected to be billed by PwC to us
for services performed in 2007 and 2008 for financial information systems design
and implementation.
December 31,
|
||||||||
2007
|
2008
|
|||||||
(In
thousands)
|
||||||||
Audit(1)
|
$ | 1,386 | $ | 1,346 | ||||
Audit
related(2)
|
10 | 1 | ||||||
Tax(3)
|
19 | 236 | ||||||
Total
|
$ | 1,415 | $ | 1,583 |
1)
|
Fees
for the following services:
|
a)
|
audits
of our consolidated year-end financials statements for each
year;
|
b)
|
reviews
of the unaudited quarterly financial statements appearing in our Form
10-Q’s for each of the first three quarters of each
year;
|
c)
|
consents
and assistance with registration statements filed with the
Commission;
|
d)
|
normally
provided statutory or regulatory filings or engagements for each year;
and
|
e)
|
the
estimated out-of-pocket costs PwC incurred in providing all of such
services for which we reimburse
PwC.
|
2)
|
Fees
for assurance and related services reasonably related to the audit or
review of our financial statements for each year. These
services included employee benefit plan audits, accounting consultations
and attest services concerning financial accounting and reporting
standards and advice concerning internal
controls.
|
3)
|
Fees
for tax compliance, tax advice and tax planning
services.
|
PART
IV
ITEM
15. EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
(a)
and (c)
|
Financial
Statements and Schedules
|
The
Registrant
The
consolidated financial statements and schedules of the Registrant listed on the
accompanying Index of Financial Statements and Schedules (see page F-1) are
filed as part of this Annual Report on Form 10-K/A (Amendment No.
2).
Financial
Statements of Guarantors
The
consolidated financial statements of Kronos Titan GmbH and Kronos Denmark ApS
listed on the accompanying Index of Financial Statements and Schedules (see
page F-1) are filed as part of this Annual Report on Form 10K/A
(Amendment No. 2) pursuant to Rule 3-16 of Regulation S-X. The
Registrant is not required to provide any other financial statements pursuant to
Rule 3-16 of Regulation S-X.
(b) Exhibits
Included
as exhibits are the items listed in the Exhibit Index. We will
furnish a copy of any of the exhibits listed below upon payment of $4.00 per
exhibit to cover our costs to furnish the exhibits. Pursuant to Item
601(b)(4)(iii) of Regulation S-K, any instrument defining the rights of holders
of long-term debt issues and other agreements related to indebtedness which do
not exceed 10% of consolidated total assets as of December 31, 2008 will be
furnished to the Commission upon request.
Item
No. Exhibit
Index
3.1
|
Certificate
of Incorporation of the Registrant – incorporated by reference to Exhibit
3.1 to the Registrant’s Registration Statement on Form S-4 (File No.
333-100047).
|
3.2
|
Certificate
of Amendment to Certificate of Incorporation of the Registrant, dated
March 15, 1989 – incorporated by reference to Exhibit 3.2 to the
Registrant’s Registration Statement on Form S-4 (File No.
333-100047).
|
3.3
|
Certificate
of Amendment to Certificate of Incorporation of the Registrant, dated
January 1, 1999 – incorporated by reference to Exhibit 3.3 to the
Registrant’s Registration Statement on Form S-4 (File No.
333-100047).
|
3.4
|
Certificate
of Amendment to Certificate of Incorporation of the Registrant, dated
February 8, 1999 – incorporated by reference to Exhibit 3.4 to the
Registrant’s Registration Statement on Form S-4 (File No.
333-100047).
|
3.5
|
Certificate
of Amendment to Certificate of Incorporation of the Registrant, dated
December 15, 1999 – incorporated by reference to Exhibit 3.5 to the
Registrant’s Registration Statement on Form S-4 (File No.
333-100047).
|
3.6
|
Amended
and Restated Bylaws of the Registrant – incorporated by reference to
Exhibit 3.6 to the Registrant’s Registration Statement on Form S-4 (File
No. 333-100047).
|
4.1
|
Indenture
governing the 6.5% Senior Secured Notes due 2013, dated as
of April 11, 2006, between Kronos International, Inc. and The
Bank of New York, as
|
|
trustee
(incorporated by reference to Exhibit 4.1 to the Registrant’s Current
Report on Form 8-K (File No. 333-100047) that was filed with the U.S.
Securities and Exchange Commission on April 11,
2006).
|
4.2
|
Form
of certificate of Series A 6.5% Senior Secured Note due
2013 (incorporated by reference to Exhibit 4.2 to the
Registrant’s Current Report on Form 8-K (File No. 333-100047) that was
filed with the U.S. Securities and Exchange Commission on April
11, 2006).
|
4.3
|
Form
of certificate of Series B 6.5% Senior Secured Note due
2013 (incorporated by reference to Exhibit 4.3 to the
Registrant’s Current Report on Form 8-K (File No. 333-100047) that was
filed with the U.S. Securities and Exchange Commission on April 11,
2006).
|
4.4
|
Purchase
Agreement dated April 5, 2006 between
Kronos International, Inc. and Deutsche Bank AG London
(incorporated by reference to
Exhibit 4.1 to the Registrant’s
Current Report on Form 8-K (File No. 333-100047) that was filed
with the U.S. Securities and Exchange Commission on April 11,
2006).
|
4.5
|
Registration
Rights Agreement dated as of April 11, 2006
between Kronos International, Inc. and Deutsche Bank AG
London (incorporated by reference to Exhibit
4.5 to the Registrant’s Current Report on Form 8-K (File No.
333-100047) that was filed with the U.S. Securities and
Exchange Commission on April 11,
2006)
|
4.6
|
Collateral
Agency Agreement, dated April 11, 2006, among The Bank of
New York, U.S. Bank, N.A. and Kronos International,
Inc. (incorporated by reference to Exhibit 4.6 to the
Registrant’s Current Report on Form 8-K (File No. 333-100047)
that was filed with the U.S. Securities and Exchange Commission on April
11, 2006).
|
4.7
|
Security
Over Shares Agreement, dated April 11, 2006, between Kronos International,
Inc. and The Bank of New York (incorporated by reference
to Exhibit 4.7 to the Registrant’s Current Report on Form 8-K
(File No. 333-100047) that was filed with the
U.S. Securities and Exchange Commission on April
11, 2006).
|
4.8
|
Pledge
of Shares (shares in Kronos Denmark ApS), dated April
11, 2006, between Kronos International, Inc. and U.S.
Bank, N.A. (incorporated by reference to Exhibit 4.8 to
the Registrant’s Current Report on Form 8-K (File No.
333-100047) that was filed with the U.S. Securities and Exchange
Commission on April 11, 2006).
|
4.9
|
Pledge
Agreement (shares in Societe Industrielle du Titane
S.A.), dated April 11, 2006, between Kronos
International, Inc. and U.S. Bank, N.A. (incorporated by
reference to Exhibit 4.9 to the Registrant’s Current
Report on Form 8-K (File No. 333-100047) that was filed with the U.S.
Securities and Exchange Commission on April 11,
2006)
|
4.10
|
Share
Pledge Agreement (shares in Kronos Titan GmbH), dated
April 11, 2006, between Kronos International, Inc. and
U.S. Bank, N.A. (incorporated by reference to Exhibit
4.10 to the Registrant’s Current Report on Form 8-K (File No. 333-100047)
that was filed with the U.S. Securities and Exchange Commission on April
11, 2006).
|
10.1
|
Euro
80,000,000 Facility Agreement, dated June 25, 2002, among Kronos Titan
GmbH & Co. OHG, Kronos Europe S.A./N.V., Kronos Titan A/S and Titania
A/S, as borrowers, Kronos Titan GmbH & Co. OHG, Kronos Europe
S.A./N.V. and Kronos Norge AS, as guarantors, Kronos Denmark ApS, as
security provider, Deutsche Bank AG, as mandated lead arranger, Deutsche
Bank Luxembourg S.A., as agent and security agent, and KBC Bank NV, as
fronting bank, and the financial institutions listed in Schedule 1
thereto, as lenders – incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-Q of NL Industries, Inc. for the quarter ended
June 30, 2002.
|
10.2
|
First
Amendment Agreement, dated September 3, 2004, Relating to a Facility
Agreement dated June 25, 2002 among Kronos Titan GmbH, Kronos Europe
S.A./N.V., Kronos Titan AS and Titania A/S, as borrowers, Kronos Titan
GmbH, Kronos Europe S.A./N.V. and Kronos Norge AS, as guarantors, Kronos
Denmark ApS, as security provider, with Deutsche Bank Luxembourg S.A.,
acting as agent – incorporated by reference to Exhibit 10.1 of the Current
Report on on Form 8-K of Kronos Worldwide, Inc. dated November 17, 2004
(File No. 333-119639).
|
10.3
|
Second
Amendment Agreement Relating to a Facility Agreement dated June 25, 2002
executed as of June 14, 2005 by and among Deutsche Bank AG, as mandated
lead arranger, Deutsche Bank Luxembourg S.A. as agent, the participating
lenders, Kronos Titan GmbH, Kronos Europe S.A./N.V, Kronos Titan AS,
Kronos Norge AS, Titania AS and Kronos Denmark ApS – incorporated by
reference to Exhibit 10.1 of the Registrant’s Form 8-K dated June 14,
2005. Certain schedules, exhibits, annexes and similar
attachments to this Exhibit 10.3 have not been filed; upon request, the
Reporting Persons will furnish supplementally to the Commission a copy of
any omitted exhibit, annex or
attachment.
|
10.4
|
Third
Amendment Agreement Relating to a Facility Agreement dated June 25, 2002
executed as of May 26, 2008 by and among Deutsche Bank AG, as mandated
lead arranger, Deutsche Bank Luxembourg S.A., as agent, the participating
lenders, Kronos Titan GmbH, Kronos Europe S.A.,/N.V, Kronos Titan AS,
Kronos Norge AS, Titania AS and Kronos Denmark ApS – incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K of Kronos
International, Inc. (File No. 333-100047) dated May 26,
2008. Certain schedules, exhibits, annexes and similar
attachments to this Exhibit 10.1 have not been files; upon request, the
registrant will furnish supplementally to the Commission a copy of any
omitted exhibit, annex or
attachment.
|
10.5
|
Lease
Contract, dated June 21, 1952, between Farbenfabriken Bayer
Aktiengesellschaft and Titangesellschaft mit beschrankter Haftung (German
language version and English translation thereof) – incorporated by
reference to Exhibit 10.14 to the Annual Report on Form 10-K of NL
Industries, Inc. for the year ended December 31,
1985.
|
10.6
|
Master
Technology Exchange Agreement, dated as of October 18, 1993, among Kronos,
Inc., Kronos Louisiana, Inc., the Registrant, Tioxide Group Limited and
Tioxide Group Services Limited – incorporated by reference to Exhibit 10.8
to the Quarterly Report on Form 10-Q of NL Industries, Inc. for the
quarter ended September 30, 1993.
|
10.7
|
Intercorporate
Services Agreement, dated as of January 1, 2005, among Kronos Worldwide,
Inc., Kronos (US), Inc., Kronos International, Inc. and Kronos Canada,
Inc. - incorporated by reference to Exhibit 10.7 to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
2004.
|
10.8
|
Tax
Agreement, dated as of May 28, 2002, between Kronos, Inc. and the
Registrant – incorporated by reference to Exhibit 10.7 to the Registrant’s
Registration Statement on Form S-4 (File No.
333-100047).
|
10.9
|
Services
Agreement, dated as of January 1, 2004, among Kronos International, Inc.,
Kronos Europe S.A./N.V., Kronos (US), Inc., Kronos Titan GmbH, Kronos
Denmark ApS, Kronos Canada, Inc., Kronos Limited, Societe Industrielle Du
Titane, S.A., Kronos B.V., Kronos Titan AS and Titania AS. - incorporated
by reference to Exhibit 10.9 to the Registrant's Annual Report on Form
10-K for the year ended December 31,
2004.
|
10.10
|
Form
of Assignment and Assumption Agreement, dated as of January 1, 1999,
between Kronos, Inc. (formerly known as Kronos (USA), Inc.) and the
Registrant – incorporated by reference to Exhibit 10.9 to the Registrant’s
Registration Statement on Form S-4 (File No.
333-100047).
|
10.11
|
Form
of Cross License Agreement, effective as of January 1, 1999, between
Kronos Inc. (formerly known as Kronos (USA), Inc.) and the Registrant –
incorporated by reference to Exhibit 10.10 to the Registrant’s
Registration Statement on Form S-4 (File No.
333-100047).
|
10.12*
|
NL
Industries, Inc. 1998 Long-Term Incentive Plan – incorporated by reference
to Appendix A to the Proxy Statement on Schedule 14A of NL Industries,
Inc. for the annual meeting of shareholders held on May 6,
1998.
|
10.13*
|
Form
of Kronos Worldwide, Inc. Long-Term Incentive Plan – incorporated by
reference to Exhibit 10.4 of Kronos Worldwide, Inc.’s Registration
Statement on Form 10 (File No.
001-31763).
|
10.14*
|
Form
of Indemnity Agreement between the Registrant and the officers and
directors of the Registrant – incorporated by reference to Exhibit 10.12
to the Registrant’s Registration Statement on Form S-4 (File No.
333-100047).
|
10.15*
|
Summary
of Consulting arrangement beginning on August 1, 2003, as amended January
14, 2008 between Lawrence A. Wigdor and Kronos Worldwide, inc. –
incorporated by reference to Item 1.01 to the Kronos Worldwide, Inc.
Current Report on Form 8-K filed with the U.S. Securities and Exchange
commission on January 18, 2008.
|
10.16
|
Agency
Agreement, dated as of January 1, 2004, among Kronos International, Inc.,
Kronos Titan GmbH, Kronos Europe S.A./N.V., Kronos Canada, Inc., Kronos
Titan AS and Societe Indutrielle Du Titane, S.A. - incorporated by
reference to Exhibit 10.24 to the Registrant's Annual Report on Form 10-K
for the year ended December 31,
2004.
|
10.17
|
Titanium
Dioxide Products and Titanium Chemicals Distribution Agreement, dated as
of January 1, 2005, among Kronos Titan GmbH, Kronos Europe S.A./N.V.,
Kronos Canada, Inc., Kronos Titan AS, Kronos (US), Inc., Kronos Denmark
ApS, Kronos Titan GmbH, Kronos Limited, Societe Industrielle Du Titane,
S.A. and Kronos B.V. - incorporated by reference to Exhibit 10.25 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
2004.
|
10.18
|
Raw
Material Purchase and Sale Agreement, dated as of January 1, 2004, among
Kronos (US), Inc., Kronos Titan GmbH, Kronos Europe S.A./N.V. and Kronos
Canada, Inc. - incorporated by reference to Exhibit 10.26 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
2004.
|
10.19
|
Promissory
note in the amount of euro 65,000,000, dated as of October 12, 2004
between the Registrant and Kronos Worldwide, Inc. - incorporated by
reference to Exhibit 10.27 to the Registrant's Annual Report on Form 10-K
for the year ended December 31,
2004.
|
10.20
|
Promissory
note in the amount of euro 98,094,875, dated as of November 26, 2004
between the Registrant and Kronos Worldwide, Inc. - incorporated by
reference to Exhibit 10.28 to the Registrant's Annual Report on Form 10-K
for the year ended December 31,
2004.
|
12.1**
|
Statements
of Computation of Ratio of Earnings to Fixed
Charges
|
31.1**
|
Certification.
|
31.2**
|
Certification.
|
32.1**
|
Certification.
|
___________________________________
* Management
contract, compensatory plan or arrangement
** Filed
herewith.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereto duly authorized.
Kronos International,
Inc.
(Registrant)
By:/s/ Steven L.
Watson
Steven L.
Watson
|
November
20, 2009
|
|
(Chief
Executive Officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
/s/ Andrew
Kasprowiak
|
/s/ Gregory M. Swalwell
|
|
Andrew
Kasprowiak, November 20, 2009
|
Gregory
M. Swalwell, November 20, 2009
|
|
(Director)
|
(Vice
President, Finance; Principal Financial Officer)
|
|
/s/ Dr. Ulfert
Fiand
|
/s/ Klemens
Schlueter
|
|
Dr.
Ulfert Fiand, November 20, 2009
|
Klemens
Schlueter, November 20, 2009
|
|
(Director)
|
(Director)
|
|
/s/ Tim C.
Hafer
|
||
Tim
C. Hafer, November 20, 2009
|
||
(Vice
President, Controller, Principal Accounting
Officer)
|
KRONOS
INTERNATIONAL, INC.
|
|
Annual
Report on Form 10-K/A (Amendment No. 2)
|
|
Items
8, 15(a) and 15(c)
|
|
Index
of Financial Statements and Schedules
|
|
Financial
Statements
|
Page
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Balance Sheets -
|
|
December
31, 2007 and 2008
|
F-3
|
Consolidated
Statements of Operations -
|
|
Years
ended December 31, 2006, 2007 and 2008
|
F-5
|
Consolidated
Statements of Comprehensive Income (Loss) -
|
|
Years
ended December 31, 2006, 2007 and 2008
|
F-6
|
Consolidated
Statements of Stockholder’s Equity -
|
|
Years
ended December 31, 2006, 2007 and 2008
|
F-7
|
Consolidated
Statements of Cash Flows -
|
|
Years
ended December 31, 2006, 2007 and 2008
|
F-8
|
Notes
to Consolidated Financial Statements
|
F-10
|
Financial
Statement Schedule
|
|
Schedule
I – Condensed Financial Information of Registrant
|
S-1
|
Schedules
II, III and IV are omitted either because they are not applicable or the
required amounts are either not material, or are presented in the Notes to
our Consolidated Financial Statements.
|
|
Other
Financial Statements filed pursuant to Rule 3-16 of Regulation
S-X
|
|
Financial
Statements of Kronos Titan GmbH
|
FA-1
|
Financial
Statements of Kronos Denmark ApS
|
FB-1
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Stockholder and Board of Directors of Kronos International, Inc.:
In our
opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of comprehensive income (loss), of
changes in stockholder’s equity and of cash flows present fairly, in all
material respects, the financial position of Kronos International, Inc. and its
subsidiaries at December 31, 2007 and 2008 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2008 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our
audits. We conducted our audits of these statements in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
As
discussed in Notes 8 and 14 to the Consolidated Financial Statements, the
Company changed the manner in which it accounts for pension benefit obligations
in 2006 and the manner in which it accounts for uncertain tax positions in
2007.
PricewaterhouseCoopers
LLP
Dallas,
Texas
March 11,
2009
KRONOS
INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
millions, except share data)
ASSETS
|
December 31,
|
|||||||
2007
|
2008
|
|||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 67.0 | $ | 10.8 | ||||
Restricted
cash
|
1.8 | 1.5 | ||||||
Accounts
and other receivables
|
168.2 | 130.9 | ||||||
Receivable
from affiliates
|
1.5 | 1.2 | ||||||
Inventories
|
228.9 | 303.9 | ||||||
Prepaid
expenses
|
3.6 | 3.0 | ||||||
Total
current assets
|
471.0 | 451.3 | ||||||
Other
assets:
|
||||||||
Deferred
financing costs, net
|
8.1 | 6.8 | ||||||
Restricted
marketable debt securities
|
3.2 | 3.5 | ||||||
Deferred
income taxes
|
168.7 | 166.4 | ||||||
Other
|
.8 | 1.1 | ||||||
Total
other assets
|
180.8 | 177.8 | ||||||
Property
and equipment:
|
||||||||
Land
|
38.1 | 35.9 | ||||||
Buildings
|
177.6 | 171.9 | ||||||
Equipment
|
839.5 | 807.8 | ||||||
Mining
properties
|
89.7 | 73.9 | ||||||
Construction
in progress
|
40.2 | 37.9 | ||||||
Total
property and equipment
|
1,185.1 | 1,127.4 | ||||||
Less
accumulated depreciation and amortization
|
733.8 | 703.0 | ||||||
Net
property and equipment
|
451.3 | 424.4 | ||||||
Total
assets
|
$ | 1,103.1 | $ | 1,053.5 | ||||
KRONOS
INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS (CONTINUED)
(In
millions, except share data)
LIABILITIES AND STOCKHOLDER’S
EQUITY
|
December 31,
|
|||||||
2007
|
2008
|
|||||||
Current
liabilities:
|
||||||||
Current
maturities of long-term debt
|
$ | .8 | $ | .8 | ||||
Accounts
payable and accrued liabilities
|
138.2 | 134.5 | ||||||
Payable
to affiliates
|
5.6 | 13.3 | ||||||
Income
taxes
|
9.3 | 3.6 | ||||||
Deferred
income taxes
|
3.3 | 4.6 | ||||||
Total
current liabilities
|
157.2 | 156.8 | ||||||
Noncurrent
liabilities:
|
||||||||
Long-term
debt
|
590.0 | 604.8 | ||||||
Deferred
income taxes
|
16.4 | 13.0 | ||||||
Accrued
pension cost
|
128.0 | 114.0 | ||||||
Other
|
30.1 | 27.6 | ||||||
Total
noncurrent liabilities
|
764.5 | 759.4 | ||||||
Stockholder’s
equity:
|
||||||||
Common
stock, $100 par value; 100,000 shares authorized; 2,968 shares
issued
|
.3 | .3 | ||||||
Additional
paid-in capital
|
1,944.2 | 1,947.6 | ||||||
Retained
deficit
|
(1,411.5 | ) | (1,425.1 | ) | ||||
Notes
receivable from affiliate
|
(209.5 | ) | (214.5 | ) | ||||
Accumulated
other comprehensive loss:
|
||||||||
Currency
translation
|
(80.3 | ) | (107.9 | ) | ||||
Defined
benefit pension plans
|
(61.8 | ) | (63.1 | ) | ||||
Total
stockholder’s equity
|
181.4 | 137.3 | ||||||
Total
liabilities and stockholder’s equity
|
$ | 1,103.1 | $ | 1,053.5 | ||||
Commitments
and contingencies (Notes 7 and 12)
See
accompanying Notes to Consolidated Financial Statements.
KRONOS
INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
millions)
Years ended December 31,
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
Net
sales
|
$ | 914.2 | $ | 946.1 | $ | 952.9 | ||||||
Cost
of sales
|
691.2 | 749.7 | 782.5 | |||||||||
Gross
margin
|
223.0 | 196.4 | 170.4 | |||||||||
Selling,
general and administrative expense
|
116.8 | 123.3 | 130.4 | |||||||||
Other
operating income (expense):
|
||||||||||||
Currency
transaction losses, net
|
(4.5 | ) | (3.9 | ) | (.8 | ) | ||||||
Disposition
of property and equipment
|
(1.8 | ) | (.6 | ) | (.9 | ) | ||||||
Royalty
income
|
7.2 | 7.2 | 6.5 | |||||||||
Other
income
|
.4 | 3.0 | .4 | |||||||||
Other
expense
|
(.1 | ) | (.1 | ) | (.1 | ) | ||||||
Income
from operations
|
107.4 | 78.7 | 45.1 | |||||||||
Other
income (expense):
|
||||||||||||
Interest
income from affiliates
|
18.8 | 20.6 | 17.3 | |||||||||
Trade
interest income
|
2.2 | 2.1 | 1.0 | |||||||||
Other
interest income
|
.8 | - | - | |||||||||
Loss
on prepayment of debt
|
(22.3 | ) | - | - | ||||||||
Interest
expense
|
(40.9 | ) | (37.8 | ) | (40.7 | ) | ||||||
Income
before income taxes
|
66.0 | 63.6 | 22.7 | |||||||||
Provision
(benefit) for income taxes
|
(7.7 | ) | 122.4 | 1.4 | ||||||||
Net
income (loss)
|
$ | 73.7 | $ | (58.8 | ) | $ | 21.3 | |||||
See
accompanying Notes to Consolidated Financial Statements.
KRONOS
INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
(In
millions)
Years ended December
31,
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
Net
income (loss)
|
$ | 73.7 | $ | (58.8 | ) | $ | 21.3 | |||||
Other
comprehensive (loss) income, net of tax:
|
||||||||||||
Currency
translation
|
30.5 | 19.0 | (27.6 | ) | ||||||||
Pension
plans:
|
||||||||||||
Amortization
of prior service cost and net losses included in periodic pension
cost
|
- | 5.1 | (.5 | ) | ||||||||
Net
actuarial gain arising during year
|
- | 41.3 | (.8 | ) | ||||||||
Minimum
pension liability change
|
8.2 | - | - | |||||||||
8.2 | 46.4 | (1.3 | ) | |||||||||
Total
other comprehensive income (loss)
|
38.7 | 65.4 | (28.9 | ) | ||||||||
Comprehensive
income (loss)
|
$ | 112.4 | $ | 6.6 | $ | (7.6 | ) | |||||
See
accompanying Notes to Consolidated Financial Statements.
KRONOS
INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDER’S EQUITY
Years
ended December 31, 2006, 2007 and 2008
(In
millions)
Accumulated
other
|
||||||||||||||||||||||||||||
Notes
|
comprehensive
|
|||||||||||||||||||||||||||
Additional
|
receivable
|
_____income (loss)_____
|
Total
|
|||||||||||||||||||||||||
Common
|
paid-in
|
Retained
|
from
|
Currency
|
Pension
|
stockholder’s
|
||||||||||||||||||||||
stock
|
capital
|
(deficit)
|
affiliates
|
translation
|
plans
|
equity
|
||||||||||||||||||||||
Balance
at December 31, 2005
|
$ | .3 | $ | 1,944.2 | $ | (1,338.1 | ) | $ | (209.5 | ) | $ | (129.8 | ) | $ | (83.7 | ) | $ | 183.4 | ||||||||||
Net
income
|
- | - | 73.7 | - | - | - | 73.7 | |||||||||||||||||||||
Other
comprehensive loss, net of tax
|
- | - | - | - | 30.5 | 8.2 | 38.7 | |||||||||||||||||||||
Cash
dividends
|
- | - | (50.2 | ) | - | - | - | (50.2 | ) | |||||||||||||||||||
Change
in accounting – asset and liability recognition provisions of SFAS No.
158
|
- | - | - | - | - | (34.1 | ) | (34.1 | ) | |||||||||||||||||||
Balance
at December 31, 2006
|
.3 | 1,944.2 | (1,314.6 | ) | (209.5 | ) | (99.3 | ) | (109.6 | ) | 211.5 | |||||||||||||||||
Net
loss
|
- | - | (58.8 | ) | - | - | - | (58.8 | ) | |||||||||||||||||||
Other
comprehensive loss, net of tax
|
- | - | - | - | 19.0 | 46.4 | 65.4 | |||||||||||||||||||||
Cash
dividends
|
- | - | (34.2 | ) | - | - | - | (34.2 | ) | |||||||||||||||||||
Change
in accounting:
|
||||||||||||||||||||||||||||
FIN
48
|
- | - | (.5 | ) | - | - | - | (.5 | ) | |||||||||||||||||||
SFAS
No. 158 – measurement date provisions
|
- | - | (3.4 | ) | - | - | 1.4 | (2.0 | ) | |||||||||||||||||||
Balance
at December 31, 2007
|
.3 | 1,944.2 | (1,411.5 | ) | (209.5 | ) | (80.3 | ) | (61.8 | ) | 181.4 | |||||||||||||||||
Net
income
|
- | - | 21.3 | - | - | - | 21.3 | |||||||||||||||||||||
Other
comprehensive income, net of tax
|
- | - | - | (27.6 | ) | (1.3 | ) | (28.9 | ) | |||||||||||||||||||
Cash
dividends
|
- | - | (34.9 | ) | - | - | - | (34.9 | ) | |||||||||||||||||||
Intercompany
interest Kronos Worldwide, Inc.
|
- | 3.4 | - | (5.0 | ) | - | - | (1.6 | ) | |||||||||||||||||||
Balance
at December 31, 2008
|
$ | .3 | $ | 1,947.6 | $ | (1,425.1 | ) | $ | (214.5 | ) | $ | (107.9 | ) | $ | (63.1 | ) | $ | 137.3 | ||||||||||
See
accompanying Notes to Consolidated Financial Statements.
KRONOS
INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
millions)
Years ended December 31,
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
income (loss)
|
$ | 73.7 | $ | (58.8 | ) | $ | 21.3 | |||||
Depreciation
and amortization
|
36.7 | 41.0 | 45.6 | |||||||||
Loss
on prepayment of debt
|
22.3 | - | - | |||||||||
Call
premium paid
|
(20.9 | ) | - | - | ||||||||
Deferred
income taxes
|
(27.9 | ) | 107.9 | (6.7 | ) | |||||||
Defined
benefit pension plan expense greater (less) than cash
funding
|
3.2 | 6.9 | (12.3 | ) | ||||||||
Other,
net
|
2.7 | 3.8 | 4.7 | |||||||||
Change
in assets and liabilities:
|
||||||||||||
Accounts
and other receivables
|
(14.3 | ) | 5.4 | 16.7 | ||||||||
Inventories
|
11.4 | (11.1 | ) | (89.1 | ) | |||||||
Prepaid
expenses
|
(1.1 | ) | .8 | .1 | ||||||||
Accounts
payable and accrued liabilities
|
(.1 | ) | (.4 | ) | 12.8 | |||||||
Income
taxes
|
(15.7 | ) | (3.6 | ) | (1.9 | ) | ||||||
Accounts
with affiliates
|
(5.8 | ) | (4.3 | ) | 9.3 | |||||||
Other
noncurrent assets
|
.2 | .3 | (2.3 | ) | ||||||||
Other
noncurrent liabilities
|
(1.9 | ) | (3.0 | ) | 2.8 | |||||||
Net
cash provided by operating activities
|
62.5 | 84.9 | 1.0 | |||||||||
Cash
flows from investing activities:
|
||||||||||||
Capital
expenditures
|
(47.1 | ) | (42.4 | ) | (61.7 | ) | ||||||
Change
in restricted cash equivalents
|
- | (.1 | ) | - | ||||||||
Net
cash used in investing activities
|
(47.1 | ) | (42.5 | ) | (61.7 | ) |
KRONOS
INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
(In
millions)
Years ended December 31,
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
Cash
flows from financing activities:
|
||||||||||||
Indebtedness:
|
||||||||||||
Borrowings
|
$ | 498.6 | $ | .6 | $ | 57.6 | ||||||
Principal
payments
|
(470.6 | ) | (.4 | ) | (14.6 | ) | ||||||
Deferred
financing fees
|
(8.9 | ) | - | (.9 | ) | |||||||
Dividends
paid
|
(50.2 | ) | (34.2 | ) | (34.9 | ) | ||||||
Net
cash (used in) provided by financing activities
|
(31.1 | ) | (34.0 | ) | 7.2 | |||||||
Cash
and cash equivalents - net change from:
|
||||||||||||
Operating,
investing and financing activities
|
(15.7 | ) | 8.4 | (53.5 | ) | |||||||
Currency
translation
|
5.2 | 5.8 | (2.7 | ) | ||||||||
(10.5 | ) | 14.2 | (56.2 | ) | ||||||||
Balance
at beginning of year
|
63.3 | 52.8 | 67.0 | |||||||||
Balance
at end of year
|
$ | 52.8 | $ | 67.0 | $ | 10.8 | ||||||
Supplemental
disclosures –
Cash
paid for:
|
||||||||||||
Interest
|
$ | 32.0 | $ | 36.7 | $ | 40.1 | ||||||
Income
taxes
|
34.5 | 18.9 | 10.0 | |||||||||
Accrual
for capital expenditures
|
- | 8.6 | 6.2 | |||||||||
See
accompanying Notes to Consolidated Financial Statements.
KRONOS
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1
- Summary
of significant accounting policies:
Organization and
basis of presentation.
We are a Delaware corporation that is a wholly-owned subsidiary of Kronos
Worldwide, Inc. (“Kronos”) At December 31, 2008, (i) Valhi, Inc. held
approximately 59% of Kronos’ outstanding common stock and NL Industries, Inc.
(NYSE: NL) held an additional 36% of Kronos’ common stock, (ii) Valhi owned
approximately 83% of NL’s outstanding common stock and (iii) subsidiaries of
Contran Corporation held approximately 94% of Valhi's outstanding common
stock. Substantially all of Contran's outstanding voting stock is
held by trusts established for the benefit of certain children and grandchildren
of Harold C. Simmons (for which Mr. Simmons is the sole trustee), or is held by
Mr. Simmons or other persons or related companies to Mr.
Simmons. Consequently, Mr. Simmons may be deemed to control each of
such companies.
Unless
otherwise indicated, references in this report to “we,” “us” or “our” refers to
Kronos International, Inc. and its subsidiaries, taken as a whole.
Management’s
estimates. In preparing our
financial statements in conformity with accounting principles generally accepted
in the United States of America (“GAAP”) we are required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the
reporting period. Actual results may differ significantly from
previously-estimated amounts under different assumptions or
conditions.
Principles of
consolidation. Our consolidated financial statements include
our accounts and those of our wholly owned and majority-owned
subsidiaries. We have eliminated all material intercompany accounts
and balances.
Translation of
foreign currencies. We translate the assets and liabilities of
our subsidiaries whose functional currency is other than the U.S. dollar at
year-end rates of exchange, while we translate our revenues and expenses at
average exchange rates prevailing during the year. We accumulate the
resulting translation adjustments in stockholder’s equity as part of accumulated
other comprehensive income (loss), net of related deferred income
taxes. We recognize currency transaction gains and losses in income
currently.
Derivatives and
hedging activities. We recognize derivatives as either assets
or liabilities measured at fair value in accordance with Statement of Financial
Accounting Standard (“SFAS”) No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended and
interpreted. We recognize the effect of changes in the fair value of
derivatives either in net income (loss) or other comprehensive income (loss),
depending on the intended use of the derivative.
Cash and cash
equivalents. We classify bank time deposits and U.S. Treasury
securities purchased under short-term agreements to resell with original
maturities of three months or less as cash equivalents.
Restricted
marketable debt securities. We classify
marketable debt securities that have been segregated or otherwise limited in use
as restricted. Restricted marketable debt securities are primarily
invested in corporate debt securities and include amounts restricted in
accordance with applicable Norwegian law regarding certain requirements of our
Norwegian defined benefit pension plans ($3.2 million and $3.5 million at
December 31, 2007 and 2008, respectively). The restricted marketable debt
securities are generally classified as either a current or noncurrent asset
depending upon the maturity date of each such debt security and are carried at
market which approximates cost. The fair value of these securities is
generally determined using Level 1 inputs as defined in SFAS No. 157 because
these securities are actively traded and the year end valuation is based on the
last trade of the respective year. See Fair Value of Financial
instruments below.
Fair value of
financial instruments. We adopted SFAS No. 157,
Fair Value
Measurements, which establishes a framework for measuring fair value on
January 1, 2008. The statement requires fair value measurements to be
classified and disclosed in one of the following three categories:
|
·
|
Level
1 – Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or
liabilities;
|
|
·
|
Level
2 – Quoted prices in markets that are not active, or inputs which are
observable, either directly or indirectly, for substantially the full term
of the assets or liability; and
|
|
·
|
Level
3 – Prices or valuation techniques that require inputs that are both
significant to the fair value measurement and
unobservable.
|
See Notes
13 and 14.
Accounts
receivable. We provide an allowance for doubtful accounts for
known and estimated potential losses arising from sales to customers based on a
periodic review of these accounts.
Property and
equipment and depreciation. We state property and equipment at
cost including capitalized interest on borrowings during the actual construction
period of major capital projects. Capitalized interest costs were nil
in 2006, $.7 million in 2007, and $2.1 million in 2008. We compute
depreciation of property and equipment for financial reporting purposes
(including mining properties) principally by the straight-line method over the
estimated useful lives of ten to 40 years for buildings and three to 20 years
for equipment. We use accelerated depreciation methods for income tax
purposes, as permitted. Upon the sale or retirement of an asset, we
remove the related cost and accumulated depreciation from the accounts and
recognize any gain or loss in income currently.
We
expense costs incurred for maintenance, repairs and minor renewals (including
planned major maintenance) while we capitalize expenditures for major
improvements.
We have a
governmental concession with an unlimited term to operate an ilmenite mine in
Norway. Mining properties consist of buildings and equipment used in
our Norwegian ilmenite mining operations. While we own the land and
ilmenite reserves associated with the mining operations, such land and reserves
were acquired for nominal value and we have no material asset recognized
for the land and reserves related to such mining operations.
We
perform impairment tests when events or changes in circumstances indicate the
carrying value may not be recoverable. We consider all relevant
factors. We perform the impairment test by comparing the estimated
future undiscounted cash flows (exclusive of interest expense) associated with
the asset to the asset's net carrying value to determine if a write-down to
market value or discounted cash flow value is required. We assess
impairment of property and equipment in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.
Long-term
debt. We state long-term debt net of any unamortized original
issue premium or discount. We classify amortization of deferred
financing costs and any premium or discount associated with the issuance of
indebtedness as interest expense and compute such amortization by the interest
method over the term of the applicable issue.
Employee benefit
plans. Accounting and funding policies for our retirement
plans are described in Note 8.
Income
taxes. We, Kronos and Valhi are members of Contran’s
consolidated U.S. federal income tax group (the "Contran Tax Group") and we also
file consolidated income tax returns with Contran in various U.S. state
jurisdictions. As a member of the Contran Tax Group, we are jointly
and severally liable for the federal income tax liability of Contran and the
other companies included in the Contran Tax Group for all periods in which we
are included in the Contran Tax Group. See Note 7. As a
member of the Contran Tax Group, we are a party to a tax sharing agreement which
provides that we compute our provision for U.S. income taxes on a
separate-company basis using the tax elections made by
Contran. Pursuant to the tax sharing agreement, we make payments to
or receive payments from Kronos using the tax elections made by Contran, in
amounts we would have paid to or received from the U.S. Internal Revenue Service
had we not been a member of the Contran Tax Group. We made no
payments to Kronos for income taxes during 2006, 2007 or 2008.
We
recognize deferred income tax assets and liabilities for the expected future tax
consequences of temporary differences between the income tax and financial
reporting carrying amounts of assets and liabilities, including investments in
our subsidiaries and affiliates who are not members of the Contran Tax Group and
undistributed earnings of foreign subsidiaries which are not deemed to be
permanently reinvested. The earnings of foreign subsidiaries subject
to permanent reinvestment plans aggregated $714 million at December 31, 2007 and
$700 million at December 31, 2008. It is not practical for us to
determine the amount of the unrecognized deferred income tax liability related
to such earnings due to the complexities associated with the U.S. taxation on
earnings of foreign subsidiaries repatriated to the U.S. We
periodically evaluate our deferred tax assets in the various taxing
jurisdictions in which we operate and adjust any related valuation allowance
based on the estimate of the amount of such deferred tax assets that we believe
does not meet the more-likely-than-not recognition criteria.
Prior to
2007, we provided a reserve for uncertain income tax positions when we believed
the benefit associated with a tax position was not probable of prevailing with
the applicable tax authority and the amount of the lost benefit associated with
such tax position was reasonably estimable. Beginning in 2007, we
record a reserve for uncertain tax positions in accordance with Financial
Accounting Standards Board Interpretation No. (“FIN”) 48, Accounting for Uncertain Tax
Positions for tax positions where we believe it is more-likely-than-not
our position will not prevail with the applicable tax
authorities. See Note 15.
Net
sales. We record sales when products are shipped and title and
other risks and rewards of ownership have passed to the customer, or when
services are performed. Shipping terms of products shipped are
generally FOB shipping point, although in some instances shipping terms are FOB
destination point (for which we do not recognize sales until the product is
received by the customer). We state sales net of price, early payment
and distributor discounts and volume rebates. We report any tax
assessed by a governmental authority that we collect from our customers that is
both imposed on and concurrent with our revenue-producing activities (such as
sales, use, value added and excise taxes) on a net basis (meaning we do not
recognize these taxes either in our revenues or in our costs and
expenses).
Inventories and
cost of sales. We state inventories at the lower of cost
(principally average cost) or market, net of allowance for slow-moving
inventories. Unallocated overhead costs resulting from periods with
abnormally low production levels are charged to expense in the period
incurred. We
remove amounts from inventories at average cost. Cost of sales
includes costs for materials, packing and finishing, utilities, salary and
benefits, maintenance and depreciation.
Selling, general and administrative
expense; shipping and handling costs. Selling, general and
administrative expense includes costs related to marketing, sales, distribution,
shipping and handling, research and development, legal and administrative
functions such as accounting, treasury and finance, and includes costs for
salaries and benefits, travel and entertainment, promotional materials and
professional fees. We include shipping and handling costs in selling,
general and administrative expense and these costs were $55 million in 2006 and
$57 million in 2007 and $67 million in 2008. We expense advertising
costs as incurred and these costs were approximately $1 million in each of 2006,
2007 and 2008. We expense research, development and certain sales
technical support costs as incurred and these costs approximated $11 million in
2006 and $12 million in 2007 and 2008.
Note
2
- Geographic
information:
Our
operations are associated with the production and sale of titanium dioxide
(“TiO2”). TiO2 pigments
are used to impart whiteness, brightness and opacity to a wide variety of
products, including paints, plastics, paper, fibers and ceramics. All
of our net assets are located in Europe.
For
geographic information, we attribute net sales to the place of manufacture
(point of origin) and to the location of the customer (point of destination); we
attribute property and equipment to their physical location.
Years ended December
31, __
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
(In
millions)
|
||||||||||||
Geographic
areas
|
||||||||||||
Net
sales – point of origin:
|
||||||||||||
Germany
|
$ | 672.0 | $ | 700.6 | $ | 694.8 | ||||||
Belgium
|
192.8 | 209.8 | 207.7 | |||||||||
Norway
|
173.5 | 184.3 | 194.3 | |||||||||
Eliminations
|
(124.1 | ) | (148.6 | ) | (143.9 | ) | ||||||
Total
|
$ | 914.2 | $ | 946.1 | $ | 952.9 |
Years ended December
31, __
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
(In
millions)
|
||||||||||||
Net
sales – point of destination:
|
||||||||||||
Europe
|
$ | 728.6 | $ | 807.4 | $ | 809.8 | ||||||
North
America
|
54.4 | 20.9 | 15.5 | |||||||||
Other
|
131.2 | 117.8 | 127.6 | |||||||||
|
||||||||||||
Total
|
$ | 914.2 | $ | 946.1 | $ | 952.9 |
December 31,
|
||||||||
2007
|
2008
|
|||||||
(In
millions)
|
||||||||
Identifiable
assets - net property and equipment:
|
||||||||
Germany
|
$ | 291.0 | $ | 273.5 | ||||
Belgium
|
70.5 | 64.5 | ||||||
Norway
|
89.0 | 83.5 | ||||||
Other
|
.8 | 2.9 | ||||||
Total
|
$ | 451.3 | $ | 424.4 |
Note
3
- Accounts
and other receivables:
December 31,
|
||||||||
2007
|
2008
|
|||||||
(In
millions)
|
||||||||
Trade
receivables
|
$ | 144.0 | $ | 113.5 | ||||
Recoverable
VAT and other receivables
|
23.5 | 18.5 | ||||||
Refundable
income taxes
|
2.4 | .7 | ||||||
Allowance
for doubtful accounts
|
(1.7 | ) | (1.8 | ) | ||||
Total
|
$ | 168.2 | $ | 130.9 |
Note
4
- Inventories
December 31,
|
||||||||
2007
|
2008
|
|||||||
(In
millions)
|
||||||||
Raw
materials
|
$ | 51.4 | $ | 58.7 | ||||
Work
in process
|
16.2 | 16.1 | ||||||
Finished
products
|
116.3 | 183.2 | ||||||
Supplies
|
45.0 | 45.9 | ||||||
Total
|
$ | 228.9 | $ | 303.9 |
Note
5
- Accounts
payable and accrued liabilities:
December 31,
|
||||||||
2007
|
2008
|
|||||||
(In
millions)
|
||||||||
Accounts
payable
|
$ | 77.8 | $ | 81.8 | ||||
Employee
benefits
|
17.3 | 16.0 | ||||||
Accrued
sales discounts and rebates
|
12.6 | 11.6 | ||||||
Accrued
interest
|
8.1 | 7.7 | ||||||
Other
|
22.4 | 17.4 | ||||||
Total
|
$ | 138.2 | $ | 134.5 |
Note
6
- Long-term
debt:
December 31,
|
||||||||
2007
|
2008
|
|||||||
(In
millions)
|
||||||||
Long-term
debt:
|
||||||||
6.5%
Senior Secured Notes
|
$ | 585.5 | $ | 560.0 | ||||
Revolving
credit facility
|
-
|
42.2 | ||||||
Other
|
5.3 | 3.4 | ||||||
Total
debt
|
590.8 | 605.6 | ||||||
Less
current maturities
|
.8 | .8 | ||||||
Total
long-term debt
|
$ | 590.0 | $ | 604.8 |
Senior
Secured Notes. On
April 11, 2006, we issued an aggregate of euro 400 million principal amount of
new 6.5% Senior Secured Notes due April 2013, at 99.306% of their principal
amount ($498.5 million when issued) to yield an effective interest rate of
7.1%. These Senior Secured Notes are collateralized by a pledge of
65% of the common stock or other ownership interests of certain of our
first-tier operating subsidiaries. Such operating subsidiaries are
Kronos Titan GmbH, Kronos Denmark ApS, Kronos Limited and Societe Industrielle
Du Titane, S.A. We issued the 6.5% Notes pursuant to an indenture
which contains a number of covenants and restrictions which, among other things,
restricts our ability and that of our subsidiaries to incur debt, incur liens,
pay dividends or merge or consolidate with, or sell or transfer all or
substantially all of the assets of these subsidiaries to another
entity. At our option, we may redeem the 6.5% Notes on or after
October 15, 2009 at redemption prices ranging from 103.25% of the principal
amount, declining to 100% on or after October 15, 2012. In addition,
on or before April 15, 2009, we may redeem up to 35% of the 6.5% Notes with the
net proceeds of a qualified public equity offering at 106.5% of the principal
amount. In the event of a change of control, as defined, we would be
required to make an offer to purchase the 6.5% Notes at 101% of the principal
amount. We would also be required to make an offer to purchase a
specified portion of the 6.5% Notes at par value in the event we generate a
certain amount of net proceeds from the sale of assets outside the ordinary
course of business, and such net proceeds are not otherwise used for specified
purposes within a specified time period. The indenture also contains
certain cross-default provisions, as discussed below. At December 31,
2008, the carrying amount of the Notes includes euro 1.7 million ($2.4 million)
of unamortized original issue discount (2007 – euro 2.1 million, or $3.1
million).
We used
the proceeds from the 6.5% Notes to fund the May 2006 redemption of our 8.875%
Senior Secured Notes at 104.437% of the aggregate principal amount of euro 375
million for an aggregate of $491.4 million, including the $20.9 million call
premium. We recognized a $22.3 million pre-tax interest charge in the
second quarter of 2006 related to the prepayment of the 8.875% Notes, consisting
of the call premium on the 8.875% Notes and the write-off of deferred financing
costs and unamortized premium related to the notes.
Revolving Credit
Facility. Our
operating subsidiaries in Germany, Belgium, Norway and Denmark have a euro 80
million secured revolving bank credit facility that matures in May
2011. We may denominate borrowings in euro, Norwegian kroner or U.S.
dollars. Outstanding borrowings bear interest at the applicable
interbank market rate plus 1.75% (4.49% at December 31, 2008). We may
also issue up to euro 5 million of letters of credit under the
facility. The credit facility is collateralized by the accounts
receivable and inventories of the borrowers, plus a limited pledge of all of the
other assets of the Belgian borrower. The credit facility contains
certain restrictive covenants which, among other things, restricts the ability
of the borrowers to incur debt, incur liens, pay dividends or merge or
consolidate with, or sell or transfer all or substantially all of their assets
to another entity. In addition, the credit facility contains
customary cross-default provisions with respect to other debt and obligations of
the borrowers, us and our other subsidiaries. At December 31, 2008,
we had borrowed a net euro 30.0 million under the credit facility and the
equivalent of $70.3 million was available for additional borrowing by the
subsidiaries, subject to being in compliance with financial covenants or
obtaining a waiver or amendment to the credit facility, as more fully described
in Restrictions and
Other.
Under the
cross-default provisions of the 6.5% 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 the we or the borrowers default
under any other indebtedness in excess of euro 5 million due to a failure to pay
such other indebtedness at its due date (including any due date that arises
prior to the stated maturity as a result of a default under such other
indebtedness). 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, of the applicable borrower. In the
event the cross-default provisions or change of control provisions of either the
6.5% Notes or the credit facility become applicable, and such indebtedness is
accelerated, we would be required to repay such indebtedness prior to their
stated maturity.
Aggregate
maturities of long-term debt at December 31, 2008 are shown in the table
below.
Years ending December 31,
|
Amount
|
|||
(In
millions)
|
||||
2009
|
$ | .8 | ||
2010
|
.8 | |||
2011
|
43.1 | |||
2012
|
.9 | |||
2013
|
560.0 | |||
Total
|
$ | 605.6 |
Restrictions and
other. Certain of the
credit facilities described above require the respective borrower to maintain
minimum levels of equity, require the maintenance of certain financial ratios,
limit dividends and additional indebtedness and contain other provisions and
restrictive covenants customary in lending transactions of this
type. While we were in compliance with all of our debt covenants at
December 31, 2008, we currently believe it is probable that one of our required
financial ratios associated with our European credit facility (the ratio of net
secured debt to earnings before income taxes, interest and depreciation, as
defined) will not be maintained at some point during 2009, most likely
commencing at March 31, 2009. In 2009, we have begun to reduce our
production levels in response to the current economic environment, which we
anticipate will favorably impact our liquidity and cash flows by reducing our
inventory levels. However, the reduced capacity utilization levels
will negatively impact our 2009 results of operations due to the resulting
unabsorbed fixed production costs that will be charged to expense as
incurred. As a result, we may not be able to maintain the required
financial ratio throughout 2009.
We have
begun discussions with the lenders to amend the terms of the existing European
credit facility to eliminate the requirement to maintain this financial ratio
until at least March 31, 2010. While we believe it is possible we can
obtain such an amendment to eliminate this financial ratio through at least
March 31, 2010, there is no assurance that such amendment will be obtained, or
if obtained that the requirement to maintain the financial ratio will be
eliminated (or waived, in the event the lenders would only agree to a waiver and
not an amendment to eliminate the covenant itself) through at least March 31,
2010. Any such amendment or waiver which we might obtain could
increase our future borrowing costs, either from a requirement that we pay a
higher rate of interest on outstanding borrowings or pay a fee to the lenders as
part of agreeing to such amendment or waiver.
In the
event we would not be successful in obtaining the amendment or waiver of the
existing European credit facility to eliminate the requirement to maintain the
financial ratio, we would seek to refinance such facility with a new group of
lenders with terms that did not include such financial covenant or, if required,
we will use our existing liquidity resources (which could include funds provided
by our affiliates). While there is no assurance that we would
be able to refinance the existing European credit facility with a new group of
lenders, we believe these other sources of liquidity available to us would allow
us to refinance the existing European credit facility. If required,
we believe by undertaking one or more of these steps we will be successful in
maintaining sufficient liquidity to meet our future obligations including
operations, capital expenditures and debt service for the next 12
months.
At
December 31, 2008, our restricted net assets approximated $90
million. The terms of the indenture governing the Senior Secured
Notes limits our ability to pay dividends and make other restricted
payments. At December 31, 2008, the maximum amount of dividends and
other restricted payments that we could make (the “Restricted Payment Basket”)
was approximately $52 million. However, the indenture currently
prohibits us from utilizing such Restricted Payment Basket because we have not
met a specified financial ratio; such prohibition will continue until such time
as we meet the specified financial ratio.
Note
7 - Income taxes:
Years ended December 31,
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
(In
millions)
|
||||||||||||
Pre-tax
income:
|
||||||||||||
Germany
|
$ | 18.5 | $ | 31.7 | $ | (5.5 | ) | |||||
Other
non-U.S.
|
47.5 | 31.9 | 28.2 | |||||||||
Total
|
$ | 66.0 | $ | 63.6 | $ | 22.7 | ||||||
Expected
tax expense (benefit), at U.S. federal statutory income tax rate of
35%
|
$ | 23.1 | $ | 22.2 | $ | 7.9 | ||||||
Non-U.S.
tax rates
|
(1.5 | ) | (.4 | ) | (1.0 | ) | ||||||
Incremental
tax and rate differences on equity in earnings of non-tax group
companies
|
.5 | .5 | .3 | |||||||||
Adjustment
of German tax attribute
|
(21.7 | ) | 8.7 | (7.2 | ) | |||||||
Nondeductible
expenses
|
4.2 | 2.8 | 2.2 | |||||||||
Tax
contingency reserve adjustment, net
|
(10.7 | ) | (.7 | ) | - | |||||||
Assessment
(refund) of prior year income taxes
|
(1.4 | ) | (.9 | ) | .3 | |||||||
Nontaxable
income
|
(.5 | ) | (.5 | ) | (.9 | ) | ||||||
German
tax rate change
|
- | 90.8 | - | |||||||||
Other,
net
|
.3 | (.1 | ) | (.2 | ) | |||||||
Provision
(benefit) for income taxes
|
$ | (7.7 | ) | $ | 122.4 | $ | 1.4 | |||||
Components
of income tax expense (benefit):
|
||||||||||||
Currently
payable:
|
||||||||||||
Germany
|
$ | 5.0 | $ | 1.4 | $ | .8 | ||||||
Other
non – U.S.
|
15.2 | 12.8 | 7.3 | |||||||||
20.2 | 14.2 | 8.1 | ||||||||||
Deferred
income taxes (benefit):
|
||||||||||||
Germany
|
(23.5 | ) | 111.6 | (7.7 | ) | |||||||
Other
non - U.S.
|
(4.4 | ) | (3.4 | ) | 1.0 | |||||||
(27.9 | ) | 108.2 | (6.7 | ) | ||||||||
Provision
(benefit) for income taxes
|
$ | (7.7 | ) | $ | 122.4 | $ | 1.4 |
Years ended December 31,
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
(In
millions)
|
||||||||||||
Comprehensive
provision for income taxes allocable to (benefit):
|
||||||||||||
Net
income
|
$ | (7.7 | ) | $ | 122.4 | $ | 1.4 | |||||
Other
comprehensive income –
Pension
plans
|
6.7 | 28.0 | (.4 | ) | ||||||||
|
||||||||||||
Adoption
of SFAS No. 158 –
Pension
plans
|
(18.6 | ) | (1.2 | ) | - | |||||||
|
||||||||||||
Total
|
$ | (19.6 | ) | $ | 149.2 | $ | 1.0 |
The
components of our net deferred income taxes at December 31, 2007 and 2008, are
summarized in the following table.
December 31,
|
||||||||||||||||
2007
|
2008
|
|||||||||||||||
Assets
|
Liabilities
|
Assets
|
Liabilities
|
|||||||||||||
(In
millions)
|
||||||||||||||||
Tax
effect of temporary differences related to:
|
||||||||||||||||
Inventories
|
$ | 1.5 | $ | (4.5 | ) | $ | - | $ | (4.2 | ) | ||||||
Property
and equipment
|
- | (26.0 | ) | - | (27.9 | ) | ||||||||||
Accrued
pension cost
|
5.3 | - | 2.2 | - | ||||||||||||
Other
accrued liabilities and deductible differences
|
21.8 | - | 19.9 | - | ||||||||||||
Other
taxable differences
|
- | (4.5 | ) | - | (4.5 | ) | ||||||||||
Tax
loss and tax credit carryforwards
|
155.4 | - | 163.3 | - | ||||||||||||
Adjusted
gross deferred tax assets (liabilities)
|
184.0 | (35.0 | ) | 185.4 | (36.6 | ) | ||||||||||
Netting
of items by tax jurisdiction
|
(15.3 | ) | 15.3 | (19.0 | ) | 19.0 | ||||||||||
168.7 | (19.7 | ) | 166.4 | (17.6 | ) | |||||||||||
Less
net current deferred tax asset (liability)
|
- | (3.3 | ) | - | (4.6 | ) | ||||||||||
Net
noncurrent deferred tax asset (liability)
|
$ | 168.7 | $ | (16.4 | ) | $ | 166.4 | $ | (13.0 | ) |
Tax authorities are examining certain
of our tax returns and have or may propose tax deficiencies, including penalties
and interest. Because of the inherent uncertainties involved in the
settlement of the potential exposure, if any, the final outcome is also
uncertain. We believe that we have provided adequate
reserves.
During the second quarter of 2008,
we recognized a $7.2 million non-cash deferred 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.
Following
a European Union Court of Justice decision and subsequent proceedings which
concluded in the second quarter of 2007 that we believe may favorably impact us,
we initiated a new tax planning strategy. If we are successful, we
would generate a substantial cash tax benefit in the form of refunds of income
taxes we have previously paid in Europe which we currently do not expect would
affect our future earnings when received. It may be a number of years
before we know if our implementation of this tax planning strategy will be
successful, and accordingly we have not currently recognized any refundable
income taxes that we might ultimately receive. Partially as a result
of and consistent with our initiation of this tax planning strategy, in the
second quarter of 2007 we amended prior-year income tax returns in
Germany. As a consequence of amending our tax returns, our German
corporate and trade tax net operating loss carryforwards were reduced by an
aggregate of euro 13.4 million and euro 22.6 million, respectively, and,
accordingly, we recognized an $8.7 million provision for deferred income taxes
in the second quarter of 2007 related to the adjustment of our German tax
attributes.
In August
2007, Germany enacted certain changes in their income tax laws. The
most significant change is the reduction of the German corporate and trade
income tax rates. We have a significant net deferred income tax asset
in Germany, primarily related to the benefit associated with our corporate and
trade tax net operating loss carryforwards. We measure our net
deferred taxes using the applicable enacted tax rates, and the effect of any
change in the applicable enacted tax rate is recognized in the period of
enactment. Accordingly, we reported a decrease in our net deferred
tax asset in Germany of $90.8 million in the third quarter of 2007, which is
recognized as a component of our provision for income taxes.
Principally
as a result of the withdrawal of certain Belgian and Norwegian assessments and
the resolution of our ongoing income tax audits in Germany, we recognized a
$10.7 million income tax benefit in 2006 related to the total reduction in our
income tax contingency reserve.
Due to the favorable resolution of
certain income tax audits related to our German and Belgian operations during
2006, we recognized a net $1.4 million income tax benefit related to adjustments
of prior year income taxes.
Due to the resolution of certain income
tax audits in Germany, we also recognized a $21.7 million income tax benefit in
2006 primarily related to an increase in the amount of our German trade tax net
operating loss carryforward. The increase resulted from a
reallocation of expenses between our German units related to periods in which
such units did not file on a consolidated basis for German trade tax purposes,
with the net result that the amount of our German trade tax carryforward
recognized by the German tax authorities has increased.
Income tax examinations related to our
operations continue, and we cannot guarantee that these tax matters will be
resolved in our favor due to the inherent uncertainties involved in settlement
initiatives and court and tax proceedings. We believe we have
adequate accruals for additional taxes and related interest expense which could
ultimately result from tax examinations. We believe the ultimate
disposition of tax examinations should not have a material adverse effect on our
consolidated financial position, results of operations or
liquidity.
At
December 31, 2008, we had the equivalent of $817 million and $229 million of net
operating loss carryforwards for German corporate and trade tax purposes,
respectively, all of which have no expiration date.
Note
8 - Employee benefit plans:
Defined
contribution plans. We maintain
various defined contribution pension plans with our contributions based on
matching or other formulas. Defined contribution plan expense was not
material in 2006, 2007 or 2008.
Changes in
Accounting - defined benefit plans. In September
2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans. SFAS No. 158
requires us to recognize an asset or liability for the over or under funded
status of each of our individual defined benefit pension and postretirement
benefit plans on our Consolidated Balance Sheets. This standard does not
change the existing recognition and measurement requirements that determine the
amount of periodic benefit cost we recognize in net income.
We
adopted the asset and liability recognition and disclosure requirements of SFAS
No. 158 effective December 31, 2006 on a prospective basis, in which we
recognized through other comprehensive income all of our prior unrecognized
gains and losses and prior service costs or credits, net of tax, as of December
31, 2006. The effect of adopting the asset and liability recognition
requirements of this standard resulted in a $34.1 million net decrease in our
accumulated other comprehensive income (loss), consisting of our loss related to
our defined benefit pension plans. Starting January 1, 2007, we
recognize all changes in the funded status of these plans through comprehensive
income (loss), net of tax. Any future changes will be recognized
either in net income (loss), to the extent they are reflected in periodic
benefit cost, or through other comprehensive income (loss).
Prior to December 31, 2007 we used
September 30 as a measurement date for our defined benefit pension plans. In
accordance with the measurement date requirements of SFAS No. 158, effective
December 31, 2007 we commenced to use a December 31 measurement date for all of
our defined benefit pension plans using a 15 month net periodic benefit cost
based on the September 30, 2006 actuarial valuations. Accordingly,
four-fifths of the net periodic benefit cost for such 15-month period has been
included in the determination of our net income for 2007, and one-fifth of the
net periodic benefit cost for such 15-month period, net of income taxes, has
been allocated as a direct adjustment to our retained deficit in accordance with
the transition provisions of the standard to reflect the change in measurement
dates. To the extent the net periodic benefit cost included
amortization of unrecognized actuarial losses, prior service cost and net
transition obligations, which were previously recognized as a component of
accumulated other comprehensive income at December 31, 2006, the effect on
retained earnings, net of income taxes, was offset by a change in our
accumulated other comprehensive income.
Defined benefit
plans. We maintain
various defined benefit pension plans. Employees are covered by plans
in their respective countries.
We expect
to contribute the equivalent of approximately $14 million to all of our defined
benefit pension plans during 2009. Benefit payments to plan
participants out of plan assets are expected to be the equivalent
of:
Years ending December 31,
|
Amount
|
|||
(In
millions)
|
||||
2009
|
$ | 17.5 | ||
2010
|
17.4 | |||
2011
|
17.4 | |||
2012
|
19.1 | |||
2013
|
17.0 | |||
Next
5 years
|
89.7 |
The
funded status of our defined benefit pension plans is presented in the table
below.
Years ended December 31,
|
||||||||
2007
|
2008
|
|||||||
(In
millions)
|
||||||||
Change
in projected benefit obligations (“PBO”):
|
||||||||
Benefit
obligations at beginning of the year
|
$ | 380.9 | $ | 358.3 | ||||
Change
in measurement date, net
|
5.6 | - | ||||||
Service
cost
|
5.6 | 7.0 | ||||||
Interest
cost
|
17.7 | 13.9 | ||||||
Participant
contributions
|
2.0 | 1.8 | ||||||
Actuarial
gains
|
(67.5 | ) | (12.5 | ) | ||||
Change
in foreign currency exchange rates
|
40.2 | (30.0 | ) | |||||
Benefits
paid
|
(26.2 | ) | (21.4 | ) | ||||
Benefit
obligations at end of the year
|
358.3 | 317.1 | ||||||
Change
in plan assets:
|
||||||||
Fair
value of plan assets at beginning of the year
|
208.1 | 230.3 | ||||||
Change
in measurement date, net
|
(1.0 | ) | - | |||||
Actual
return on plan assets
|
5.3 | (1.8 | ) | |||||
Employer
contributions
|
17.4 | 15.4 | ||||||
Participant
contributions
|
2.0 | 1.8 | ||||||
Change
in foreign currency exchange rates
|
24.7 | (21.2 | ) | |||||
Benefits
paid
|
(26.2 | ) | (21.4 | ) | ||||
Fair
value of plan assets at end of year
|
230.3 | 203.1 | ||||||
Funded
status
|
$ | (128.0 | ) | $ | (114.0 | ) | ||
Amounts
recognized in the balance sheet:
|
||||||||
Accrued
pension costs:
|
||||||||
Current
|
$ | - | $ | - | ||||
Noncurrent
|
(128.0 | ) | (114.0 | ) | ||||
Total
|
$ | (128.0 | ) | $ | (114.0 | ) | ||
Accumulated
other comprehensive loss:
|
||||||||
Actuarial
losses
|
$ | 94.6 | $ | 96.8 | ||||
Prior
service cost
|
5.0 | 4.4 | ||||||
Net
transition obligations
|
.5 | .4 | ||||||
Total
|
$ | 100.1 | $ | 101.6 | ||||
Accumulated
benefit obligations (“ABO”)
|
$ | 296.8 | $ | 285.8 |
The
amounts shown in the table above for actuarial losses, prior service cost and
net transition obligations at December 31, 2007 and 2008 have not yet been
recognized as components of our periodic defined benefit pension cost as of
those dates. These amounts will be recognized as components of our
periodic defined benefit cost in future years. In accordance with
SFAS No. 158, these amounts, net of deferred income taxes, are recognized in our
accumulated other comprehensive income (loss) at December 2007 and
2008. We expect approximately $4.2 million, $.5 million and $.1
million of the unrecognized actuarial losses, prior service costs and net
transition obligations, respectively, as of December 31, 2008 will be recognized
as components of our net periodic defined benefit pension cost in
2009.
The table
below details the changes in plan assets and benefit obligations recognized in
accumulated other comprehensive income (loss) during 2007 and 2008.
Years Ended December 31,
|
||||||||
2007
|
2008
|
|||||||
(In
millions)
|
||||||||
Changes
in plan assets and benefit obligations
recognized
in other comprehensive income (loss):
|
||||||||
Current
year:
|
||||||||
Net
actuarial gain (loss)
|
$ | 66.4 | $ | (.9 | ) | |||
Amortization
of unrecognized:
|
||||||||
Prior service cost
|
.5 | .6 | ||||||
Net transition obligations
|
.2 | .2 | ||||||
Net
actuarial losses (gain)
|
7.5 | (1.4 | ) | |||||
Change
in measurement date:
|
||||||||
Prior
service costs
|
.1 | - | ||||||
Net
actuarial loss
|
2.0 | - | ||||||
Total
|
$ | 76.7 | $ | (1.5 | ) |
The
components of our net periodic defined benefit pension cost are presented in the
table below. In the fourth quarter of 2008 we recognized a $6.9
million adjustment in connection with the correction of our pension expense
previously recognized for 2006 and 2007. The $6.9 million adjustment
consisted of $2.0 million of service cost, $4.1 million of interest cost credit
and $4.8 million of recognized actuarial gains. The amounts shown
below for the amortization of prior service cost, net transition obligations and
recognized actuarial losses for 2007 and 2008 were recognized as components of
our accumulated other comprehensive income (loss) at December 31, 2006 and 2007,
respectively, net of deferred income taxes.
Years ended December 31,
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
(In
millions)
|
||||||||||||
Net
periodic pension cost:
|
||||||||||||
Service
cost benefits
|
$ | 5.5 | $ | 5.6 | $ | 7.0 | ||||||
Interest
cost on PBO
|
15.0 | 17.7 | 13.9 | |||||||||
Expected
return on plan assets
|
(11.2 | ) | (11.5 | ) | (13.4 | ) | ||||||
Amortization
of prior service cost
|
.5 | .5 | .6 | |||||||||
Amortization
of net transition obligations
|
.1 | .2 | .2 | |||||||||
Recognized
actuarial losses (gain)
|
7.8 | 7.5 | (1.4 | ) | ||||||||
Total
|
$ | 17.7 | $ | 20.0 | $ | 6.9 |
The
weighted-average rate assumptions used in determining the actuarial present
value of benefit obligations as of December 31, 2007 and 2008 are presented in
the table below. Such weighted-average rates were determined using
the projected benefit obligations at each date.
December 31,
|
||||||||
Rate
|
2007
|
2008
|
||||||
Discount
rate
|
5.5 | % | 5.8 | % | ||||
Increase
in future compensation levels
|
3.0 | % | 3.2 | % |
The
weighted-average rate assumptions used in determining the net periodic pension
cost for 2006, 2007 and 2008 are presented in the table below. The
weighted-average discount rate and the weighted-average increase in future
compensation levels were determined using the projected benefit obligations as
of the beginning of each year, and the weighted-average long-term return on plan
assets was determined using the fair value of plan assets as of the beginning of
each year.
Years ended December
31,
|
||||||||||||
Rate
|
2006
|
2007
|
2008
|
|||||||||
Discount
rate
|
4.1 | % | 4.6 | % | 5.5 | % | ||||||
Increase
in future compensation levels
|
2.8 | % | 3.0 | % | 3.0 | % | ||||||
Long-term
return on plan assets
|
5.5 | % | 5.7 | % | 5.7 | % |
Variances
from actuarially assumed rates will result in increases or decreases in
accumulated pension obligations, pension expense and funding requirements in
future periods.
In
determining the expected long-term rate of return on plan asset assumptions, we
consider the long-term asset mix (e.g. equity vs. fixed income) for the assets
for each of our plans and the expected long-term rates of return for such asset
components. In addition, we receive advice about appropriate
long-term rates of return from our third-party actuaries. Such
assumed asset mixes are summarized below:
·
|
In
Germany, the composition of our plan assets is established to satisfy the
requirements of the German insurance
commissioner.
|
·
|
In
Norway, we currently have a plan asset target allocation of 14% to equity
securities, 64% to fixed income securities and the remainder primarily to
liquid investments such as money markets. The expected
long-term rate of return for such investments is approximately 9.0%, 5.0%
and 4.0%, respectively.
|
Our
pension plan weighted average asset allocations by asset category were as
follows:
December 31, 2007
|
December 31, 2008
|
|||||||||||||||
Germany
|
Norway
|
Germany
|
Norway
|
|||||||||||||
Equity
securities and limited
partnerships
|
28 | % | 18 | % | 24 | % | 14 | % | ||||||||
Fixed
income securities
|
49 | 68 | 52 | 83 | ||||||||||||
Real
estate
|
12 | - | 12 | - | ||||||||||||
Cash,
cash equivalents and other
|
11 | 14 | 12 | 3 | ||||||||||||
Total
|
100 | % | 100 | % | 100 | % | 100 | % |
We
regularly review our actual asset allocation for each of our plans, and
periodically rebalance the investments in each plan to more accurately reflect
the targeted allocation when we consider it appropriate.
Note
9 – Other noncurrent liabilities:
December 31,
|
||||||||
2007
|
2008
|
|||||||
(In
millions)
|
||||||||
Reserve
for uncertain tax positions
|
$ | 14.9 | $ | 13.1 | ||||
Employee
benefits
|
8.2 | 8.8 | ||||||
Insurance
claims and expenses
|
1.9 | 1.5 | ||||||
Other
|
5.1 | 4.2 | ||||||
Total
|
$ | 30.1 | $ | 27.6 |
Note
10 – Common stock and notes receivable from affiliates:
NL common stock
options held by employees of the Company. At December 31,
2008, our employees held options to purchase approximately 45,000 shares of NL
common stock. These options are exercisable at various dates through
2011 and 13,000 have exercise prices ranging from $2.66 to $5.63 per share and
32,000 have an exercise price of $11.49 per share. Such options
generally vest over five years, and vesting ceases at the date the employee
separates from service with us (including retirement). No options
were granted in 2006, 2007 or 2008.
Common stock
dividends. We paid cash
dividends to Kronos of $50.2 million in 2006, and $34.2 million in 2007 and
$34.9 million in 2008.
Notes receivable
from affiliates – contra equity. Prior to 2005, we
loaned an aggregate euro 163.1 million ($209.5 million) to Kronos in return for
two promissory notes instead of making a cash dividend
distribution. The notes bear interest at a rate of 9.25%. The
original notes provided for a December 31, 2010 maturity date and required
interest to be paid quarterly. Effective October 1, 2008, the terms
of these notes were modified to extend the maturity date to December 31, 2013
and to provide that all interest accrued on or after October 1, 2008 is also not
due until the December 31, 2013 maturity date. Interest on these
notes was paid quarterly through September 30, 2008. The notes are
unsecured, contain no financial covenants and provide for default only upon
Kronos’ failure to pay any amount when due (subject to a short grace
period). Due to the long-term investment nature of these
notes, settlement of the principal balance and accrued but unpaid interest of
the notes is not contemplated within the foreseeable future. We
currently expect that settlement of the principal and accrued interest will
occur through a capital transaction (i.e. a non-cash dividend to Kronos in the
form of distributing such notes receivable and interest to
Kronos). Accordingly, we have classified these notes and the related
accrued interest receivable as a separate component of stockholder’s equity in
accordance with GAAP. Through September 30, 2008, we recognized
interest income on the notes since it was expected to, and was, paid
quarterly.
Note
11 - Related party transactions:
We may be
deemed to be controlled by Harold C. Simmons. See
Note 1. Corporations that may be deemed to be controlled by or
affiliated with Mr. Simmons sometimes engage in (a) intercorporate transactions
such as guarantees, management and expense sharing arrangements, shared fee
arrangements, joint ventures, partnerships, loans, options, advances of funds on
open account, and sales, leases and exchanges of assets, including securities
issued by both related and unrelated parties and (b) common investment and
acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases, and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties and
have included transactions which resulted in the acquisition by one related
party of a publicly-held minority equity interest in another related
party. While no transactions of the type described above are planned
or proposed with respect to us other than as set forth in these financial
statements, we continuously consider, review and evaluate, and understand that
Contran and related entities consider, review and evaluate such
transactions. Depending upon the business, tax and other objectives
then relevant, it is possible that we might be a party to one or more such
transactions in the future.
Current
receivables from and payables to affiliates are summarized in the table
below.
December
31,
|
||||||||
2007
|
2008
|
|||||||
(In
millions)
|
||||||||
Current
receivables from affiliates:
|
||||||||
Kronos
Canada Inc. (“KC”)
|
$ | 1.4 | $ | 1.2 | ||||
Other
|
.1 | - | ||||||
Total
|
$ | 1.5 | $ | 1.2 | ||||
Current
payables to affiliate:
|
||||||||
Kronos
(US), Inc. (“KUS”)
|
$ | 5.6 | $ | 13.3 |
Interest
income on all loans to related parties, consisting of the interest income earned
on our notes receivable from Kronos discussed in Note 10, was $18.8 million in
2006 and $20.6 million in 2007 and $17.3 million in 2008.
Net
amounts between us and KUS were generally related to product sales and purchases
and raw material purchases. Net amounts between us and KC were
generally related to product sales and purchases and royalties. KUS
and KC are both subsidiaries of Kronos.
Sales of
TiO2
to KUS and KC aggregated $65.9 million in 2006 and $21.9 million in 2007 and
$15.3 million in 2008.
KUS
purchases the rutile and slag feedstock used as a raw material in all of our
chloride process TiO2
facilities. We purchase such feedstock from KUS for use in our
facilities for an amount equal to the amount paid by KUS to the third-party
supplier plus a 2.5% administrative fee. Such feedstock purchases
were $119.1 million in 2006 and $143.5 million in 2007 and $150.5 million in
2008.
Purchases
of TiO2 from KUS
were $.2 million in 2006, $1.7 million in 2007 and $.1 million in
2008. Purchases of TiO2 from KC
were $1.1 million in 2006, $1.2 million in 2007 and $1.4 million in
2008.
Royalty
income received from KC for use of certain of our intellectual property was $7.2
million in 2006 and in 2007 and $6.5 million in 2008.
Under the
terms of various intercorporate services agreements ("ISAs") entered into
between us and various related parties, including Contran, employees of one
company will provide certain management, tax planning, financial and
administrative services to the other company on a fee basis. Such
charges are based upon estimates of the time devoted by the employees of the
provider of the services to the affairs of the recipient, and the compensation
and associated expenses of such persons. Because of the large number
of companies affiliated with Contran, Kronos Worldwide and NL, we believe we
benefit from cost savings and economies of scale gained by not having certain
management, financial and administrative staffs duplicated at each entity, thus
allowing certain individuals to provide services to multiple companies but only
be compensated by one entity. These ISA agreements are reviewed and
approved by the applicable independent directors of the companies that are
parties to the agreements. The net ISA fee charged to us included in
selling, general and administrative expense was $3.5 million in 2006, $3.8
million in 2007 and $3.5 million in 2008.
Tall
Pines Insurance Company, and EWI RE, Inc. provide for or broker certain
insurance policies for Contran and certain of its subsidiaries and affiliates,
including ourselves. Tall Pines and EWI are subsidiaries of
Valhi. Consistent with insurance industry practices, Tall Pines and
EWI receive commissions from insurance and reinsurance underwriters and/or
assess fees for the policies that they provide or broker. The
aggregate premiums paid to Tall Pines and EWI by us were $6.7 million in 2006,
$5.3 million in 2007, and $5.0 million in 2008. These amounts
principally included payments for insurance and reinsurance premiums paid to
third parties, but also included commissions paid to Tall Pines and
EWI. Tall Pines purchases reinsurance for substantially all of the
risks it underwrites. We expect that these relationships with Tall
Pines and EWI will continue in 2009.
We
recognized a gain of $1.6 million in the fourth quarter of 2007 in connection
with the sale of manufacturing technology to Louisiana Pigment Company, L.P. a
50% owned joint venture of Kronos. This gain is included in other
income.
Contran
and certain of its subsidiaries and affiliates, including us, purchase certain
of their insurance policies as a group, with the costs of the jointly-owned
policies being apportioned among the participating companies. With
respect to certain of such policies, it is possible that unusually large losses
incurred by one or more insureds during a given policy period could leave the
other participating companies without adequate coverage under that policy for
the balance of the policy period. As a result, Contran and certain of
its subsidiaries and its affiliates, including us, have entered into a loss
sharing agreement under which any uninsured loss is shared by those entities who
have submitted claims under the relevant policy. We believe the
benefits in the form of reduced premiums and broader coverage associated with
the group coverage for such policies justifies the risk associated with the
potential for uninsured loss.
Note
12 - Commitments and contingencies:
Environmental
matters. Our operations are governed by various environmental
laws and regulations. Certain of our operations are and have been
engaged in the handling, manufacture or use of substances or compounds that may
be considered toxic or hazardous within the meaning of applicable environmental
laws and regulations. As with other companies engaged in similar
businesses, certain of our past and current operations and products have the
potential to cause environmental or other damage. We have implemented
and continue to implement various policies and programs in an effort to minimize
these risks. Our policy is to maintain compliance with applicable
environmental laws and regulations at all of our facilities and to strive to
improve our environmental performance. From time to time, we may be
subject to environmental regulatory enforcement under various statutes,
resolution of which typically involves the establishment of compliance
programs. It is possible that future developments, such as stricter
requirements of environmental laws and enforcement policies thereunder, could
adversely affect our production, handling, use, storage, transportation, sale or
disposal of such substances. We believe all of our plants are in
substantial compliance with applicable environmental laws.
Litigation
matters. We are involved in various other environmental,
contractual, product liability, patent (or intellectual property), employment
and other claims and disputes incidental to our business. We
currently believe the disposition of all claims and disputes, individually or in
the aggregate, should not have a material adverse effect on our consolidated
financial condition, results of operations or liquidity.
Concentrations of
credit risk. Sales of TiO2 accounted
for about 84% of our sales during each of the past three years. The
remaining sales result from the mining and sale of ilmenite ore (a raw material
used in the sulfate pigment production process), and the manufacture and sale of
iron-based water treatment chemicals and certain titanium chemical products
(derived from co-products of the TiO2 production
processes). TiO2 is
generally sold to the paint, plastics and paper industries. Such
markets are generally considered “quality-of-life” markets whose demand for
TiO2
is influenced by the relative economic well-being of the various geographic
regions. We sell TiO2 to over
3,000 customers, with the top ten customers (excluding sales to KC and KUS)
approximating 20%, 19%, and 20% of net sales in 2006, 2007 and 2008,
respectively. We did not have sales to a single customer of over 10%
in any of the previous three years. Approximately 77% of our TiO2 sales by
volume were to Europe in 2006 and approximately 80% were to Europe in each of
2007 and 2008. Approximately 9% of sales by volume were attributable
to North America in 2006, 3% attributable to North America in 2007 and 2%
attributable to North America in 2008.
Long-term
contracts. KUS has long-term supply contracts that provide for
certain of its affiliates’ TiO2 feedstock
requirements through 2011 including ours. The agreements require KUS
to purchase certain minimum quantities of feedstock with minimum annual purchase
commitments aggregating approximately $505 million at December 31,
2008. The agreements require that we and certain of our affiliates
purchase chloride process feedstock underlying these long-term supply contracts
from KUS. In addition, we have other long-term supply and service
contracts that provide for various raw materials and services through
2014. These agreements require us to purchase certain minimum
quantities or services with minimum purchase commitments aggregating
approximately $105 million at December 31, 2008.
Operating
leases. Our principal German operating subsidiary leases the
land under its Leverkusen TiO2 production
facility pursuant to a lease with Bayer AG that expires in 2050. The
Leverkusen facility itself, which we own and which represents approximately
one-half of our current TiO2 production
capacity, is located within Bayer’s extensive manufacturing
complex. We periodically establish the amount of rent for the land
lease associated with the Leverkusen facility by agreement with Bayer for
periods of at least two years at a time. The lease agreement provides
for no formula, index or other mechanism to determine changes in the rent for
such land lease; rather, any change in the rent is subject solely to periodic
negotiation between Bayer and ourselves. We recognize any change in
the rent based on such negotiations as part of lease expense starting from the
time such change is agreed upon by both parties, as any such change in the rent
is deemed “contingent rentals” under GAAP. Under a separate supplies
and services agreement expiring in 2011, the lessor provides some raw materials,
including chlorine, auxiliary and operating materials, utilities and services
necessary to operate the Leverkusen facility.
We also
lease various other manufacturing facilities and equipment. Some of
the leases contain purchase and/or various term renewal options at fair market
and fair rental values, respectively. In most cases we expect that,
in the normal course of business, such leases will be renewed or replaced by
other leases. Net rent expense approximated $9 million in each of
2006 and 2007 and $10 million in 2008. At December 31, 2008, future
minimum payments under noncancellable operating leases having an initial or
remaining term of more than one year were as follows:
Years ending December 31,
|
Amount
|
|||
(In
millions)
|
||||
2009
|
$ | 3.9 | ||
2010
|
2.9 | |||
2011
|
2.1 | |||
2012
|
1.7 | |||
2013
|
1.5 | |||
2014
and thereafter
|
18.9 | |||
Total
|
$ | 31.0 |
Approximately
$22 million of the $31 million aggregate future minimum rental commitments at
December 31, 2008 relates to our Leverkusen facility lease discussed
above. The minimum commitment amounts for such lease included in the
table above for each year through the 2050 expiration of the lease are based
upon the current annual rental rate as of December 31, 2008. As
discussed above, any change in the rent is based solely on negotiations between
Bayer and ourselves, and any such change in the rent is deemed “contingent
rentals” under GAAP which is excluded from the future minimum lease payments
disclosed above.
Income taxes. We
and Kronos have agreed to a policy providing for the allocation of tax
liabilities and tax payments as described in Note 1. Under applicable
law, we, along with every other member of the Contran Tax Group, are each
jointly and severally liable for the aggregate federal income tax liability of
Contran and the other companies included in the Contran Tax Group for all
periods in which we are included in the Contran Tax Group. Kronos has
agreed, however, to indemnify us for any liability for income taxes of the
Contran Tax Group in excess of our tax liability previously computed and paid by
us in accordance with the tax allocation policy.
Note
13 - Financial instruments:
We
adopted SFAS No. 157 effective January 1, 2008 for financial assets
and liabilities measured on a recurring basis. SFAS No. 157
applies to all financial assets and financial liabilities that are being
measured and reported on a fair value basis. SFAS No. 157 establishes a
framework for measuring fair value and expands disclosure about fair value
measurements. The statement requires fair value measurements to be
classified and disclosed in one of three categories, see Note 1.
There was
no impact for the adoption of SFAS No. 157 to the Consolidated Financial
Statements. The following table summarizes the valuation our short-term
investments and financial instruments by the above SFAS No. 157 categories
as of December 31, 2008:
Fair Value Measurements at December 31,
2008
|
||||||||||||||||
Total
|
Quoted
Prices in Active Markets (Level
1)
|
Significant
Other Observable Inputs (Level
2)
|
Significant
Unobservable Inputs (Level
3)
|
|||||||||||||
(in
millions)
|
||||||||||||||||
Marketable
securities
|
$ | 3.5 | $ | 3.5 | $ | - | $ | - | ||||||||
Currency
forward contracts
|
(2.6 | ) | (2.6 | ) | - | - | ||||||||||
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 receivables
denominated in a currency other than the holder's functional currency or similar
exchange rate risk associated with future sales. We have not entered
into these contracts for trading or speculative purposes in the past, nor do we
currently anticipate entering into such contracts for trading or speculative
purposes in the future. Derivatives used to hedge forecasted
transactions and specific cash flows associated with foreign currency
denominated financial assets and liabilities which meet the criteria for hedge
accounting are designated as cash flow hedges. Consequently, the
effective portion of gains and losses is deferred as a component of accumulated
other comprehensive income and is recognized in earnings at the time the hedged
item affects earnings. Contracts that do not meet the criteria for
hedge accounting are marked-to-market at each balance sheet date with any
resulting gain or loss recognized in income currently as part of net currency
transactions. During 2007 and 2008, we have not used hedge accounting
for any of our contracts. We held no such currency forward contracts
at December 31, 2007 and held no other significant derivative contracts at
December 31, 2007 or 2008. In the fourth quarter of 2008 we entered
into a series of currency forward contracts. The fair value of the
currency forward contracts is determined using Level 1 inputs as defined in SFAS
No. 157 based on the foreign currency spot forward rates quoted by
banks. At December 31, 2008 we had currency forward contracts to
exchange:
·
|
an
aggregate $57 million for an equivalent value of Norwegian kroner at
exchange rates ranging from kroner 6.91 to kroner 7.18. These
contracts with DnB Nor Bank ASA mature from January 2009 through December
2009 at a rate of $.5 million to $2.5 million per month. At
December 31, 2008, the actual exchange rate was kroner 7.0 per U.S.
dollar.
|
·
|
an
aggregate euro 16.4 million for an equivalent value of Norwegian kroner at
exchange rates ranging from kroner 8.64 to kroner 9.23. These
contracts with DnB Nor Bank ASA mature from January 2009 through December
2009 at a rate of euro .5 million to euro .7 million per
month. At December 31, 2008, the actual exchange rate was
kroner 9.7 per euro.
|
The
estimated fair value of such foreign currency forward contracts at December 31,
2008 was a $2.6 million net liability, of which $.3 million is recognized as
part of Prepaid Expenses and $2.9 million is recognized as part of Accounts
Payable and Accrued Liabilities in our Consolidated Balance Sheet and a
corresponding $2.6 million foreign currency transaction loss in our Consolidated
Statement of Operations.
The
following table presents the financial instruments that are not carried at fair
value but which require fair value disclosure as of December 31, 2007 and
2008.
December
31,
|
December
31,
|
|||||||||||||||
2007
|
2008
|
|||||||||||||||
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|||||||||||||
(In
millions)
|
||||||||||||||||
Cash,
cash equivalents, restricted cash
|
$ | 68.8 | $ | 68.8 | $ | 12.3 | $ | 12.3 | ||||||||
Notes
payable and long-term debt:
|
||||||||||||||||
Fixed
rate with market quotes -
|
||||||||||||||||
6.5%
Senior Secured Notes
|
$ | 585.5 | $ | 507.7 | $ | 560.0 | $ | 129.4 | ||||||||
European credit
facility
|
- | - | 42.2 | 42.2 |
At December 31, 2007 and 2008, the
estimated market price of the 6.5% Notes was approximately euro 860 and euro 230
per euro 1,000 principal amount, respectively.
Fair
value of our 6.5% Notes is based upon quoted market prices at each balance sheet
date; these quoted market prices represent Level 2 inputs as defined by SFAS No.
157, because the markets in which the Notes trade are not active. See
Notes 1 and 14.
Note
14 – Recent accounting pronouncements:
Fair Value
Measurements. In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, Fair Value
Measurements, which became effective for us on January 1,
2008. SFAS No. 157 generally provides a consistent, single fair value
definition and measurement techniques for GAAP pronouncements. SFAS
No. 157 also establishes a fair value hierarchy for different measurement
techniques based on the objective nature of the inputs in various valuation
methods. In February 2008, the FASB issued FSP No. FAS 157-2, Effective Date of FASB Statement No.
157 which delays the provisions of SFAS No. 157 until January 1, 2009 for
all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). Beginning with our first quarter 2008
filing, all of our fair value measurements are in compliance with SFAS No. 157,
except for such nonfinancial assets and liabilities for which we will be
required to be in compliance with SFAS No. 157 prospectively beginning in the
first quarter of 2009. The adoption of this standard did not have a
material effect on our Consolidated Financial Statements.
Fair Value
Option. In the first quarter of 2007 the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. SFAS No. 159 permits companies to
choose, at specified election dates, to measure eligible items at fair value,
with unrealized gains and losses included in the determination of net
income. The decision to elect the fair value option is generally applied
on an instrument-by-instrument basis, is irrevocable unless a new election date
occurs, and is applied to the entire instrument and not only to specified risks
or cash flows or a portion of the instrument. Items eligible for the fair
value option include recognized financial assets and liabilities, other than an
investment in a consolidated subsidiary, defined benefit pension plans, OPEB
plans, leases and financial instruments classified in equity. An
investment accounted for by the equity method is an eligible item. The
specified election dates include the date the company first recognizes the
eligible item, the date the company enters into an eligible commitment, the date
an investment first becomes eligible to be accounted for by the equity method
and the date SFAS No. 159 first becomes effective for us. SFAS No. 159
became effective for us on January 1, 2008. We did not elect to
measure any eligible items at fair value in accordance with this new standard
either, at the date we adopted the new standard or subsequently during 2008;
therefore the adoption of this standard will not have a material effect on our
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. 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 will become 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. Because our prior disclosures regarding
these forward contracts have substantially met all of the applicable disclosure
requirements of the new standard, we do not believe the enhanced disclosure
requirements of this new standard will have a significant effect on our
Consolidated Financial Statements. See Note 13.
Uncertain Tax
Positions. On
January 1, 2007, we adopted FIN 48, Accounting for Uncertain Tax
Positions. FIN 48 clarifies when and how much of a benefit we
can recognize in our consolidated financial statements for certain positions
taken in our income tax returns under Statement of Financial Accounting
Standards No. 109, Accounting
for Income Taxes, and enhances the disclosure requirements for our income
tax policies and reserves. Among other things, FIN 48 prohibits us
from recognizing the benefits of a tax position unless we believe it is
more-likely-than-not our position will prevail with the applicable tax
authorities and limits the amount of the benefit to the largest amount for which
we believe the likelihood of realization is greater than 50%. FIN 48
also requires companies to accrue penalties and interest on the difference
between tax positions taken on their tax returns and the amount of benefit
recognized for financial reporting purposes under the new
standard. We are required to classify any future reserves for
uncertain tax positions in a separate current or noncurrent liability, depending
on the nature of the tax position.
Upon
adoption of FIN 48 on January 1, 2007, we increased our existing reserve for
uncertain tax positions, which we previously classified as part of our deferred
income taxes, from $14.1 million to $14.6 million and accounted for such $.5
million increase as a reduction of retained earnings in accordance with the
transition provisions of the new standard.
We accrue
interest and penalties on our uncertain tax positions as a component of our
provision for income taxes. The amount of interest and penalties we
accrued during 2007 and 2008 was not material, and at December 31, 2007 and 2008
we had $3.0 million and $2.7 million, respectively, accrued for interest and
penalties for our uncertain tax positions.
The
following table shows the changes in the amount of our uncertain tax positions
(exclusive of the effect of interest and penalties) during 2007 and
2008:
Year Ended December 31,
|
||||||||
2007
|
2008
|
|||||||
(In
millions)
|
||||||||
Changes
in unrecognized tax benefits:
|
||||||||
Unrecognized
tax benefits at beginning ofyear
|
$ | 10.9 | $ | 11.9 | ||||
Net
increase (decrease):
|
||||||||
Tax
positions taken in prior periods
|
(1.9 | ) | (1.1 | ) | ||||
Tax
positions taken in current period
|
1.9 | 1.8 | ||||||
Settlements
with taxing authorities –
cash paid
|
- | (.1 | ) | |||||
Lapse
of applicable statute of limitations
|
- | (.7 | ) | |||||
Change
in foreign currency exchange rates
|
1.0 | (1.4 | ) | |||||
Unrecognized
tax benefits at end of year
|
$ | 11.9 | $ | 10.4 |
If our
uncertain tax positions were recognized, a benefit of
$14.9 million and $13.1 million would affect our effective
income tax rates from continuing operations for 2007 and 2008,
respectively. We currently estimate that our unrecognized tax
benefits will not change materially during the next twelve months.
We file
income tax returns in various U.S. federal, state and local jurisdictions.
We also file income tax returns in various foreign jurisdictions, principally in
Germany, Belgium and Norway. Our non U.S. income tax returns are generally
considered closed to examination for years prior to 2004 for Germany; 2003 for
Belgium and 1999 for Norway.
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 amends SFAS No. 87, 88 and 106 to
require expanded disclosures about employers’ pension plan
assets. FSP 132 (R)-1 will be effective for us beginning with our
2009 annual report, and we will provide the expanded disclosures about our
pension plan assets at that time.
Note
15
- Quarterly
results of operations (unaudited):
Quarter ended
|
||||||||||||||||
March 31
|
June 30
|
Sept. 30
|
Dec. 31
|
|||||||||||||
(In
millions)
|
||||||||||||||||
Year
ended December 31, 2007
|
||||||||||||||||
Net
sales
|
$ | 227.4 | $ | 241.8 | $ | 246.0 | $ | 230.9 | ||||||||
Gross
margin
|
54.6 | 49.8 | 52.2 | 39.8 | ||||||||||||
Net
income (loss)
|
13.5 | 1.7 | (81.0 | ) | 7.0 | |||||||||||
Year
ended December 31, 2008
|
||||||||||||||||
Net
sales
|
$ | 239.6 | $ | 291.5 | $ | 249.7 | $ | 172.1 | ||||||||
Gross
margin
|
45.1 | 50.1 | 37.8 | 37.4 | ||||||||||||
Net
income
|
3.8 | 12.9 | 1.7 | 2.9 |
In
the third quarter of 2007, we recognized a $91.0 million tax charge for a change
in the German tax rates, see Note 7. In the fourth quarter of 2007 we
determined that a liability established in 1992 was no longer
necessary. Therefore, net income for the fourth quarter of 2007
includes $.8 million ($.5 million net of income tax) related to the reversal of
this non current liability).
In the
second quarter of 2008, we recognized a $7.2 million income tax benefit related
to a favorable resolution of certain income tax issues in
Germany. See Note 7. In the fourth quarter of 2008, we
recognized a $6.9 million adjustment ($4.8 million, net of income taxes) in
connection with the correction of our pension expense previously recognized for
2006 and 2007. See Note 8.
KRONOS
INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE
I – CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed
Balance Sheets
(In
millions)
December 31,
|
||||||||
2007
|
2008
|
|||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 9.0 | $ | 4.9 | ||||
Receivable
from affiliates
|
58.7 | 49.4 | ||||||
Accounts
and notes receivable
|
10.1 | 11.1 | ||||||
Other
|
.2 | .3 | ||||||
Total
current assets
|
78.0 | 65.7 | ||||||
Other
assets:
|
||||||||
Investment
in subsidiaries
|
572.9 | 514.8 | ||||||
Deferred
income taxes
|
164.9 | 171.6 | ||||||
Other
|
8.1 | 6.3 | ||||||
Property
and equipment, net
|
7.7 | 7.2 | ||||||
Total
other assets
|
753.6 | 699.9 | ||||||
Total
assets
|
$ | 831.6 | $ | 765.6 | ||||
Current
liabilities:
|
||||||||
Accounts
payable and accrued liabilities
|
$ | 15.4 | $ | 14.5 | ||||
Payable
to affiliates
|
9.5 | 15.5 | ||||||
Income
taxes
|
24.8 | 22.9 | ||||||
Deferred income
taxes
|
_____-
|
_____.2
|
||||||
Total
current liabilities
|
49.7 | 53.1 | ||||||
Noncurrent
liabilities:
|
||||||||
Long-term
debt
|
585.5 | 560.0 | ||||||
Other
|
15.0 | 15.2 | ||||||
Total
noncurrent liabilities
|
600.5 | 575.2 | ||||||
Stockholder’s
equity
|
181.4 | 137.3 | ||||||
|
||||||||
Total
liabilities and stockholder’s equity
|
$ | 831.6 | $ | 765.6 | ||||
The accompanying Notes
are an integral part of the Financial Statements.
KRONOS
INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE
I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Condensed
Statements of Operations
(In
millions)
Years ended December 31,
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
Revenues
and other income:
|
||||||||||||
Net
sales
|
$ | 50.6 | $ | 56.4 | $ | 67.2 | ||||||
Equity
in earnings of subsidiaries
|
55.0 | 33.3 | 27.7 | |||||||||
Interest
income from affiliates
|
19.6 | 20.6 | 19.1 | |||||||||
Royalty
income
|
20.1 | 20.7 | 19.9 | |||||||||
Currency
translation gains (losses), net
|
(.1 | ) | .2 | (.8 | ) | |||||||
Other
income, net
|
.1 | 1.7 | .1 | |||||||||
145.3 | 132.9 | 133.2 | ||||||||||
Costs
and expenses:
|
||||||||||||
Cost
of sales
|
28.5 | 33.8 | 38.2 | |||||||||
General
and administrative
|
34.2 | 37.5 | 41.4 | |||||||||
Loss
on prepayment of debt
|
22.3 | - | - | |||||||||
Interest
expense
|
39.7 | 37.5 | 40.4 | |||||||||
Interest
expense to affiliates
|
3.9 | 1.2 | 1.5 | |||||||||
128.6 | 110.0 | 121.5 | ||||||||||
Income
before income taxes
|
16.7 | 22.9 | 11.7 | |||||||||
Provision
(benefit) for income taxes
|
(57.0 | ) | 81.7 | (9.6 | ) | |||||||
Net
income (loss)
|
$ | 73.7 | $ | (58.8 | ) | $ | 21.3 | |||||
The
accompanying Notes
are an integral part of the Financial Statements.
KRONOS
INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE
I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Condensed
Statements of Cash Flows
(In
millions)
Years ended December 31,
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
income (loss)
|
$ | 73.7 | $ | (58.8 | ) | $ | 21.3 | |||||
Cash
distributions from subsidiaries
|
50.6 | 40.9 | 37.5 | |||||||||
Loss
on prepayment of debt
|
22.3 | - | - | |||||||||
Call
premium paid
|
(20.9 | ) | - | - | ||||||||
Noncash
interest expense
|
1.6 | 1.9 | 1.5 | |||||||||
Deferred
income taxes
|
(28.7 | ) | 84.2 | (15.6 | ) | |||||||
Equity
in earnings of subsidiaries
|
(55.0 | ) | (33.3 | ) | (27.7 | ) | ||||||
Other,
net
|
3.3 | 6.1 | 2.2 | |||||||||
Net
change in assets and liabilities
|
(20.7 | ) | .7 | 13.3 | ||||||||
Net
cash provided by operating activities
|
26.2 | 41.7 | 32.5 | |||||||||
Cash
flows used in investing activities -
|
||||||||||||
capital
expenditures
|
(1.9 | ) | (1.8 | ) | (1.8 | ) | ||||||
Cash
flows from financing activities:
|
||||||||||||
Indebtedness:
|
||||||||||||
Borrowings
|
498.6 | - | - | |||||||||
Principal
payments
|
(470.5 | ) | - | - | ||||||||
Loans
to affiliates
|
(8.9 | ) | - | - | ||||||||
Dividends
paid
|
(50.2 | ) | (34.2 | ) | (34.9 | ) | ||||||
Net
cash used in financing activities
|
(31.0 | ) | (34.2 | ) | (34.9 | ) | ||||||
Net
change during the year from operating investing and financing
activities
|
(6.7 | ) | 5.7 | (4.2 | ) | |||||||
Currency
translation
|
.4 | - | .1 | |||||||||
Balance
at beginning of year
|
9.6 | 3.3 | 9.0 | |||||||||
Balance
at end of year
|
$ | 3.3 | $ | 9.0 | $ | 4.9 |
The
accompanying Notes
are an integral part of the Financial Statements.
KRONOS
INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE
I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Notes
to Condensed Financial Information
Note
1
- Basis
of presentation:
The
accompanying financial statements of Kronos International, Inc. reflect our
investment in subsidiaries on the equity method. The Consolidated
Financial Statements of Kronos International, Inc. and the related Notes to
Consolidated Financial Statements are incorporated herein by
reference.
Note
2 – Investment in and advances to subsidiaries:
December 31,
|
||||||||
2007
|
2008
|
|||||||
(In
millions)
|
||||||||
Current:
|
||||||||
Receivable
from:
|
||||||||
Kronos
Titan GmbH (“TG”) – income taxes
|
$ | 52.6 | $ | 45.0 | ||||
Kronos
Europe S.A./N.V
|
2.0 | 1.6 | ||||||
Kronos
Canada
|
1.6 | 1.2 | ||||||
Kronos
Titan A/S
|
1.9 | 1.1 | ||||||
Titania
A/S
|
.6 | .5 | ||||||
$ | 58.7 | $ | 49.4 | |||||
Payable
to:
|
||||||||
TG
|
2.7 | 15.4 | ||||||
KCH
|
6.5 | - | ||||||
Societe
Industrielle du Titane, S.A.
|
.3 | .1 | ||||||
$ | 9.5 | $ | 15.5 |
December 31,
|
||||||||
2007
|
2008
|
|||||||
(In
millions)
|
||||||||
Investment
in:
|
||||||||
TG
|
$ | 328.5 | $ | 308.3 | ||||
Kronos
Denmark ApS (“KDK”)
|
208.1 | 177.2 | ||||||
Other
|
36.3 | 29.3 | ||||||
$ | 572.9 | $ | 514.8 |
_Years ended December 31,_
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
(In
millions)
|
||||||||||||
Equity
in income from continuing operations of subsidiaries:
|
||||||||||||
TG
|
$ | 17.2 | $ | 7.6 | $ | 8.0 | ||||||
KDK
|
33.7 | 19.5 | 15.2 | |||||||||
Other
|
4.1 | 6.2 | 4.5 | |||||||||
$ | 55.0 | $ | 33.3 | $ | 27.7 |
Note
3
- Long-term
debt:
December 31,
|
||||||||
2007
|
2008
|
|||||||
(In
millions)
|
||||||||
6.5%
Senior Secured Notes due 2013
|
$ | 585.5 | $ | 560.0 |
Senior Secured Notes – On April 11, 2006,
we issued an aggregate of euro 400 million principal amount of 6.5% Senior
Secured Notes due April 2013, at 99.306% of their principal amount ($498.5
million when issued) to yield an effective rate of 7.1%. These Senior
Secured Notes are collateralized by a pledge of 65% of the common stock or other
ownership interests of certain of our first-tier operating
subsidiaries. Such operating subsidiaries are Kronos Titan GmbH,
Kronos Denmark ApS, Kronos Limited and Societe Industrielle Du Titane,
S.A. We issued the 6.5% Notes pursuant to an indenture which contains
a number of covenants and restrictions which, among other things, restricts our
ability and that of our subsidiaries to incur debt, incur liens, pay dividends
or merge or consolidate with, or sell or transfer all or substantially all of
the assets of these subsidiaries to another entity. At our option, we
may redeem the 6.5% notes on or after October 15, 2009 at redemption prices
ranging from 103.25% of the principal amount, declining to 100% on or after
October 15, 2012. In addition, on or before April 15, 2009, we may
redeem up to 35% of the 6.5% Notes with the net proceeds of a qualified public
equity offering at 106.5% of the principal amount. In the event of a
change of control, as defined, we would be required to make an offer to purchase
the 6.5% Notes at 101% of the principal amount. We would also be
required to make an offer to purchase a specified portion of the 6.5% Notes at
par value in the event we generate a certain amount of net proceeds from the
sale of assets outside the ordinary course of business, and such net proceeds
are not otherwise used for specified purposes within a specified time
period. At December 31, 2007 and 2008, the estimated market price of
the 6.5% Notes was approximately euro 860 and euro 230 per euro 1,000 principal
amount, respectively. At December 31, 2008, the carrying amount of
the 6.5% Notes includes euro 1.7 million ($2.4 million) of unamortized original
issue discount (2007 – euro 2.1 million, or $3.1 million).
We used
the proceeds from the 6.5% Notes to fund the May 2006 redemption of our 8.875%
Senior Secured Notes at 104.437% of the aggregate principal amount of euro 375
million for an aggregate of $491.4 million, including the $20.9 million call
premium. We recognized a $22.3 million pre-tax interest charge in the
second quarter of 2006 related to the prepayment of the 8.875% Notes, consisting
of the call premium on the 8.875% Notes and the write-off of deferred financing
costs and unamortized premium related to the notes.
KRONOS
TITAN GMBH AND SUBSIDIARIES
|
|
Index of Consolidated Financial
Statements
|
|
Financial Statements
|
Pages
|
Report
of Independent Registered Public Accounting Firm
|
FA-2
|
Consolidated
Balance Sheets –
|
|
December
31, 2007 and December 31, 2008
|
FA-3
|
Consolidated
Statements of Income –
|
|
Year
ended December 31, 2006, 2007 and 2008
|
FA-5
|
Consolidated
Statements of Comprehensive Income (Loss) -
|
|
Year
ended December 31, 2006, 2007 and 2008
|
FA-6
|
Consolidated
Statements of Owner’s Equity –
|
|
Year
ended December 31, 2006, 2007 and 2008
|
FA-7
|
Consolidated
Statements of Cash Flows –
|
|
Year
ended December 31, 2006, 2007 and 2008
|
FA-8
|
Notes
to Consolidated Financial Statements
|
FA-9
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Owner of Kronos Titan GmbH:
In our
opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of comprehensive income (loss), of changes in
owner’s equity and of cash flows present fairly, in all material respects, the
financial position of Kronos Titan GmbH and its subsidiaries at December 31,
2007 and 2008 and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our
audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
As
discussed in Notes 7 and 13 to the Consolidated Financial Statements, the
Company changed the manner in which it accounts for pension benefit obligations
in 2006 and the manner in which it accounts for uncertain tax positions in
2007.
PricewaterhouseCoopers
LLP
Dallas,
Texas
March 11,
2009
KRONOS
TITAN GMBH AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
millions)
December 31,
|
||||||||
ASSETS
|
2007
|
2008
|
||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 50.6 | $ | 2.8 | ||||
Accounts
and notes receivable
|
114.5 | 86.1 | ||||||
Receivable
from affiliates
|
10.1 | 23.0 | ||||||
Refundable
income taxes
|
26.0 | 23.5 | ||||||
Inventories
|
136.7 | 199.4 | ||||||
Prepaid
expenses
|
1.8 | 1.5 | ||||||
Total
current assets
|
339.7 | 336.3 | ||||||
Other
assets:
|
||||||||
Deferred
income taxes
|
4.1 | - | ||||||
Other
|
.5 | 1.1 | ||||||
Total
other assets
|
4.6 | 1.1 | ||||||
Property
and equipment:
|
||||||||
Land
|
17.1 | 16.4 | ||||||
Buildings
|
129.0 | 129.5 | ||||||
Machinery
and equipment
|
564.7 | 561.4 | ||||||
Construction
in progress
|
19.1 | 4.8 | ||||||
729.9 | 712.1 | |||||||
Less
accumulated depreciation and amortization
|
450.0 | 447.4 | ||||||
Net
property and equipment
|
279.9 | 264.7 | ||||||
Total
assets
|
$ | 624.2 | $ | 602.1 |
KRONOS
TITAN GMBH AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS (CONTINUED)
(In
millions)
December 31,
|
||||||||
LIABILITIES
AND OWNER’S EQUITY
|
2007
|
2008
|
||||||
Current
liabilities:
|
||||||||
Accounts
payable and accrued liabilities
|
$ | 64.9 | $ | 71.5 | ||||
Payables
to affiliates
|
94.7 | 84.4 | ||||||
Deferred
income taxes
|
2.8 | 3.9 | ||||||
|
||||||||
Total
current liabilities
|
162.4 | 159.8 | ||||||
|
||||||||
Noncurrent
liabilities:
|
||||||||
Accrued
pension cost
|
121.7 | 103.6 | ||||||
Long-term
debt
|
- | 16.9 | ||||||
Deferred
income taxes
|
- | 4.4 | ||||||
Other
|
11.6 | 9.1 | ||||||
Total
noncurrent liabilities
|
133.3 | 134.0 | ||||||
Owner’s
equity:
|
||||||||
Subscribed
capital
|
12.5 | 12.5 | ||||||
Paid
in capital
|
196.0 | 200.1 | ||||||
Retained
earnings
|
25.2 | 13.3 | ||||||
Accumulated
other comprehensive income (loss):
|
||||||||
Currency
translation
|
146.9 | 132.3 | ||||||
Defined
benefit pension plans
|
(52.1 | ) | (49.9 | ) | ||||
Total
owner’s equity
|
328.5 | 308.3 | ||||||
Total
liabilities and owner’s equity
|
$ | 624.2 | $ | 602.1 | ||||
Commitments
and contingencies (Notes 5, 6 and 11)
|
See
accompanying Notes to Consolidated Financial Statements.
KRONOS
TITAN GMBH AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
(In
millions)
Years ended December 31,
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
Net
sales
|
$ | 641.2 | $ | 668.8 | $ | 662.3 | ||||||
Cost
of sales
|
535.4 | 573.6 | 596.5 | |||||||||
Gross
margin
|
105.8 | 95.2 | 65.8 | |||||||||
Selling,
general and administrative expense
|
52.7 | 54.1 | 56.8 | |||||||||
Other
operating income (expense):
|
||||||||||||
Currency
transaction gains (losses), net
|
(3.7 | ) | (4.2 | ) | .5 | |||||||
Disposition
of property and equipment
|
(1.5 | ) | (.3 | ) | (.4 | ) | ||||||
Income
from operations
|
47.9 | 36.6 | 9.1 | |||||||||
Other
income (expense):
|
||||||||||||
Trade
interest income
|
1.9 | 1.7 | .6 | |||||||||
Interest
and other income from affiliates
|
6.7 | 4.2 | 5.4 | |||||||||
Interest
and other expense to affiliates
|
(1.4 | ) | (1.3 | ) | (3.5 | ) | ||||||
Interest
expense
|
(.3 | ) | (.3 | ) | (1.0 | ) | ||||||
Income
before income taxes
|
54.8 | 40.9 | 10.6 | |||||||||
Provision
for income taxes
|
37.6 | 33.3 | 2.6 | |||||||||
Net
income
|
$ | 17.2 | $ | 7.6 | $ | 8.0 | ||||||
See
accompanying Notes to Consolidated Financial Statements.
KRONOS
TITAN GMBH AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In
millions)
Years ended December 31,
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
Net
income
|
$ | 17.2 | $ | 7.6 | $ | 8.0 | ||||||
Other
comprehensive income (loss), net of tax:
|
||||||||||||
Currency
translation adjustment
|
41.4 | 36.4 | (14.6 | ) | ||||||||
Pension
plans:
|
||||||||||||
Amortization
of prior service cost and net losses included in periodic pension
cost
|
- | 3.8 | (1.1 | ) | ||||||||
Net
actuarial gain arising during year
|
- | 32.2 | 3.3 | |||||||||
Minimum
pension liability change
|
3.3 | - | - | |||||||||
3.3 | 36.0 | 2.2 | ||||||||||
Total
other comprehensive income (loss)
|
44.7 | 72.4 | (12.4 | ) | ||||||||
Comprehensive
income (loss)
|
$ | 61.9 | $ | 80.0 | $ | (4.4 | ) |
See
accompanying Notes to Consolidated Financial Statements.
KRONOS
TITAN GMBH AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OWNER’S EQUITY
Years
ended December 31, 2006, 2007 and 2008
(In
millions)
Accumulated
other
|
||||||||||||
comprehensive
|
||||||||||||
Owner’s
Equity
|
Retained
|
income (loss)
|
||||||||||
Subscribed
|
Paid-in
|
earnings
|
Currency
|
Pension
|
||||||||
capital
|
capital
|
(deficit)
|
translation
|
plans
|
Total
|
|||||||
Balance
at December 31, 2005
|
$ 12.5
|
$ 227.0
|
$ 43.0
|
$ 69.1
|
$ (72.8)
|
$ 278.8
|
||||||
Net
income
|
-
|
-
|
17.2
|
-
|
-
|
17.2
|
||||||
Dividends
paid
|
-
|
-
|
(23.1)
|
-
|
-
|
(23.1)
|
||||||
Noncash
capital transaction
|
-
|
1.6
|
-
|
-
|
-
|
1.6
|
||||||
Other
comprehensive income, net of tax
|
-
|
-
|
-
|
41.4
|
3.3
|
44.7
|
||||||
Change
in accounting – asset and liability recognition provisions of SFAS No.
158
|
-
|
-
|
-
|
-
|
(19.6)
|
(19.6)
|
||||||
Balance
at December 31, 2006
|
12.5
|
228.6
|
37.1
|
110.5
|
(89.1)
|
299.6
|
||||||
Net
income
|
-
|
-
|
7.6
|
-
|
-
|
7.6
|
||||||
Dividends
paid
|
-
|
-
|
(17.0)
|
-
|
-
|
(17.0)
|
||||||
Noncash
capital transaction
|
-
|
(32.6)
|
-
|
-
|
-
|
(32.6)
|
||||||
Other
comprehensive income, net of tax
|
-
|
-
|
-
|
36.4
|
36.0
|
72.4
|
||||||
Change
in accounting - SFAS No. 158
|
|
|||||||||||
measurement
date provisions
|
-
|
-
|
(2.5)
|
-
|
1.0
|
(1.5)
|
||||||
|
|
|||||||||||
Balance
at December 31, 2007
|
12.5
|
196.0
|
25.2
|
146.9
|
(52.1)
|
328.5
|
||||||
|
||||||||||||
Net
income
|
-
|
-
|
8.0
|
-
|
-
|
8.0
|
||||||
Dividends
paid
|
-
|
-
|
(19.9)
|
-
|
-
|
(19.9)
|
||||||
Other
comprehensive income (loss), net of tax
|
-
|
-
|
-
|
(14.6)
|
2.2
|
(12.4)
|
||||||
Noncash
capital transaction
|
-
|
4.1
|
-
|
-
|
-
|
4.1
|
||||||
|
||||||||||||
Balance
at December 31, 2008
|
$ 12.5
|
$ 200.1
|
$ 13.3
|
$ 132.3
|
$ (49.9)
|
$ 308.3
|
||||||
See
accompanying Notes to Consolidated Financial Statements.
KRONOS
TITAN GMBH AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
millions)
Years ended December 31,
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
income
|
$ | 17.2 | $ | 7.6 | $ | 8.0 | ||||||
Depreciation,
depletion and amortization
|
20.6 | 22.4 | 24.7 | |||||||||
Deferred
income taxes
|
5.1 | 29.6 | 8.0 | |||||||||
Pension,
net
|
(.3 | ) | .3 | (8.2 | ) | |||||||
Other,
net
|
1.2 | (.4 | ) | .8 | ||||||||
Change
in assets and liabilities:
|
(8.1 | ) | ||||||||||
Accounts
and notes receivable
|
(8.1 | ) | (7.3 | ) | 17.8 | |||||||
Inventories
|
7.9 | (5.3 | ) | (65.5 | ) | |||||||
Prepaid
expenses
|
(.1 | ) | .7 | (.1 | ) | |||||||
Accounts
payable and accrued liabilities
|
(7.8 | ) | (2.3 | ) | 10.4 | |||||||
Income
taxes
|
(11.3 | ) | (.1 | ) | 1.4 | |||||||
Accounts
with affiliates
|
24.7 | (5.3 | ) | (19.0 | ) | |||||||
Other
noncurrent assets
|
- | .2 | (.7 | ) | ||||||||
Other
noncurrent liabilities
|
(4.3 | ) | (1.2 | ) | (1.4 | ) | ||||||
Net
cash (used in) provided by operating activities
|
44.8 | 38.9 | (23.8 | ) | ||||||||
Cash
flows used by investing activities –
capital
expenditures
|
(22.2 | ) | (20.1 | ) | (20.4 | ) | ||||||
Cash
flows from financing activities:
|
||||||||||||
Loans
from affiliates:
|
||||||||||||
Loans
|
- | - | 27.2 | |||||||||
Repayments
|
(10.9 | ) | - | (8.6 | ) | |||||||
Dividends
paid
|
(23.1 | ) | (17.0 | ) | (19.9 | ) | ||||||
Deferred
financing fees
|
-
|
-
|
(.3 | ) | ||||||||
Net
cash (used in) provided by financing activities
|
(34.0 | ) | (17.0 | ) | (1.6 | ) | ||||||
Cash
and cash equivalents - net change from:
|
||||||||||||
Operating,
investing and financing activities
|
(11.4 | ) | 1.8 | (45.8 | ) | |||||||
Currency
translation
|
4.4 | 5.0 | (2.0 | ) | ||||||||
Balance
at beginning of year
|
50.8 | 43.8 | 50.6 | |||||||||
Balance
at end of year
|
$ | 43.8 | $ | 50.6 | $ | 2.8 | ||||||
Supplemental
disclosures-
|
||||||||||||
Cash
paid for:
|
||||||||||||
Interest
|
$ | .1 | $ | .1 | $ | .9 | ||||||
Income
taxes
|
25.4 | 4.8 | - | |||||||||
Accrual
for capital expenditures
|
- | 2.5 | 2.5 |
See
accompanying Notes to Consolidated Financial Statements.
KRONOS
TITAN GMBH AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 - Summary of significant accounting policies:
Organization and basis of
presentation. Kronos Titan GmbH is a wholly-owned subsidiary
of Kronos International, Inc. (“KII”). KII is a wholly-owned
subsidiary of Kronos Worldwide, Inc. (“Kronos”). At December 31,
2008, (i) Valhi, Inc. held approximately 59% of Kronos’ common stock and NL
Industries, Inc. (NYSE: NL) held an additional 36% of Kronos’ common stock, (ii)
Valhi held 83% of NL’s outstanding common stock and (iii) subsidiaries of
Contran Corporation held approximately 94% of Valhi’s outstanding common
stock. Substantially all of Contran’s outstanding voting stock is
held by trusts established for the benefit of certain children and grandchildren
of Harold C. Simmons (for which Mr. Simmons is the sole trustee), or is held by
Mr. Simmons or persons or other entities related to Mr.
Simmons. Consequently, Mr. Simmons may be deemed to control each of
such companies.
Unless
otherwise indicated, references in this report to “we”, “us” or “our” refer to
Kronos Titan GmbH and its subsidiaries, taken as a whole.
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
(“GAAP”), with the U.S. dollar as the reporting currency. We also
prepare financial statements on other bases, as required in
Germany.
In 2006,
KII made a capital contribution to us in the form of shares of Kronos World
Services (“KWS”) common stock. At the date of contribution, the net
assets of KWS were approximately $1.6 million. In 2007, we forgave a
$32.6 million receivable from KII which is reflected as a noncash capital
transaction in the accompanying Consolidated Statements of Owner’s
Equity. In 2008, Kronos Chemie GmbH (“KCH”) a wholly owned subsidiary
of KII, was merged with us. At the date of the merger, the net assets
of KCH were $4.1 million. All of these transactions are reflected as
a noncash capital transaction in the accompanying Consolidated Statements of
Owner’s Equity.
We are
not a registrant with the U.S. Securities and Exchange Commission and therefore
are not subject to the SEC’s periodic reporting requirements, except as may be
required by Rule 3-16 of Regulation S-X.
Management’s
estimates. In preparing our
financial statements in conformity with GAAP we are required to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the
reporting period. Actual results may differ from previously-estimated
amounts under different assumptions or conditions.
Principles of
consolidation. Our consolidated financial statements include our accounts
and those of our wholly-owned subsidiaries. We have eliminated all
material intercompany accounts and balances.
Translation of
foreign currencies. Our functional
currency is the euro. We translate our assets and liabilities to U.S.
dollars at year-end rates of exchange, while we translate revenues and expenses
at weighted average exchange rates prevailing during the
year. Resulting translation adjustments are accumulated in owner’s
equity as part of accumulated other comprehensive income (loss), net of related
deferred income taxes. Currency transaction gains and losses are
recognized in income currently.
Derivatives and
hedging activities. We recognize
derivatives as either assets or liabilities measured at fair value in accordance
with SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities,” as amended an
interpreted. We recognize the changes in fair value of derivatives
either in net income (loss) or other comprehensive income (loss), depending on
the intended use of the derivative.
Cash
equivalents. We classify bank
deposits with original maturities of three months or less as cash
equivalents.
Fair value of
financial instruments. We adopted SFAS No. 157,
Fair Value
Measurements, which establishes a framework for measuring fair value on
January 1, 2008. The statement requires fair value measurements to be
classified and disclosed in one of the following three categories:
|
·
|
Level
1 – Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or
liabilities;
|
|
·
|
Level
2 – Quoted prices in markets that are not active, or inputs which are
observable, either directly or indirectly, for substantially the full term
of the assets or liability; and
|
|
·
|
Level
3 – Prices or valuation techniques that require inputs that are both
significant to the fair value measurement and
unobservable.
|
See Notes
12 and 13.
Accounts
receivable. We provide an
allowance for doubtful accounts for known and estimated potential losses arising
from sales to customers based on a periodic review of these
accounts.
Property and
equipment and depreciation. We state property and equipment at
cost including capitalized interest on borrowings during the actual construction
period of major capital projects. Capitalized interest costs were nil
in 2006 and 2007, and $.1 million in 2008. We compute depreciation of
property and equipment for financial reporting purposes principally by the
straight-line method over the estimated useful lives of ten to 40 years for
buildings and three to 20 years for equipment. We use accelerated
depreciation methods for income tax purposes, as permitted. Upon sale
or retirement of an asset, we remove cost and accumulated depreciation from the
accounts and recognize any gain or loss in income currently.
We
expense expenditures for maintenance, repairs and minor renewals (including
planned major maintenance), while we capitalize expenditures for major
improvements.
We
perform impairment tests when events or changes in circumstances indicate the
carrying value may not be recoverable. We consider all relevant
factors. We perform the impairment test by comparing the estimated
future undiscounted cash flows (exclusive of interest expense) associated with
the asset to the asset's net carrying value to determine if a write-down to
market value or discounted cash flow value is required. We assess
impairment of property and equipment in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.
Long-term
debt. We state
long-term debt net of any unamortized original issue premium or
discount. We classify amortization of deferred financing costs and
any premiums or discount associated with the issuance of indebtedness as,
interest expense, and compute such amortization by the interest method over the
term of the applicable issue.
Employee benefit
plans. Accounting and
funding policies for retirement plans are described in Note 7 and
13.
Income
taxes. In August 2007,
Germany enacted certain changes in their income tax laws which included a
reduction of the German corporate and trade income tax
rates. Effective January 1, 2008, the German corporate tax rate was
reduced from 25% to 15%. The solidarity surcharge of 5.5% of
corporate income tax and trade income taxes remains unchanged. We
periodically evaluate our deferred tax assets in the various taxing
jurisdictions in which we operate and adjust any related valuation allowance
based on the estimate of the amount of such deferred tax assets that we believe
does not meet the more-likely-than-not recognition criteria. See Note
6. We are included in KII’s Organschaft.
Prior to
2007, we provided a reserve for uncertain income tax positions when we believed
the benefit associated with a tax position was not probable of prevailing with
the applicable tax authority and the amount of the lost benefit associated with
such tax position was reasonably estimable. Beginning in 2007, we
record a reserve for uncertain tax positions in accordance with Financial
Accounting Standards Board Interpretation No. (“FIN”) 48, Accounting for Uncertain Tax
Positions for tax position where we believe it is more-likely-than-not
our position will not prevail with the applicable tax
authorities. See Note 13.
Net
sales. We record sales
when products are shipped and title and other risks and rewards of ownership
have passed to the customer, or when services are performed. Shipping
terms of products shipped are generally FOB shipping point. We state
sales net of price, early payment and distributor discounts and volume
rebates. We report any tax assessed by a governmental authority that
we collect from our customers that is both imposed on and concurrent with our
revenue-producing activities (such as sales, use, value added and excise taxes)
on a net basis (meaning we do not recognize these taxes either in our revenues
or in our costs and expenses).
Inventories and
cost of sales. We state inventories at the lower of cost
(principally average cost) or market, net of allowance for slow-moving
inventories. Unallocated overhead costs resulting from periods with
abnormally low production levels are charged to expense in the period
incurred. We remove amounts from inventories at average
cost. Cost of sales includes costs for materials, packaging and
finishing, utilities, salary and benefits, maintenance and depreciation.
Selling, general
and administrative expense; shipping and handling costs. Selling, general and
administrative expense includes costs related to marketing, sales, distribution,
shipping and handling, research and development and legal and administrative
functions such as accounting, treasury and finance, and includes costs for
salary and benefits, travel and entertainment, promotional materials and
professional fees. We include shipping and
handling costs in selling, general and administrative expense and these costs
were $25.8 million in 2006, $27.5 million in 2007 and $30.9 million in
2008. We expense advertising costs as incurred and these costs were
approximately $.3 million in 2006, $.5 million in 2007 and $.3 million in
2008.
Note
2 – Accounts and notes receivable:
December 31,
|
||||||||
2007
|
2008
|
|||||||
(In
millions)
|
||||||||
Trade
receivables
|
$ | 97.7 | $ | 75.0 | ||||
Recoverable
VAT and other receivables
|
18.3 | 12.5 | ||||||
Allowance
for doubtful accounts
|
(1.5 | ) | (1.4 | ) | ||||
Total
|
$ | 114.5 | $ | 86.1 |
Note
3 – Inventories:
December 31,
|
||||||||
2007
|
2008
|
|||||||
(In
millions)
|
||||||||
Raw
materials
|
$ | 22.8 | $ | 30.7 | ||||
Work
in process
|
11.6 | 11.5 | ||||||
Finished
products
|
80.8 | 135.8 | ||||||
Supplies
|
21.5 | 21.4 | ||||||
Total
|
$ | 136.7 | $ | 199.4 |
Note
4 – Accounts payable and accrued liabilities:
December 31,
|
||||||||
2007
|
2008
|
|||||||
(In
millions)
|
||||||||
Accounts
payable
|
$ | 43.9 | $ | 50.8 | ||||
Accrued
liabilities:
|
||||||||
Employee
benefits
|
4.6 | 4.4 | ||||||
Sales
discounts and rebates
|
5.1 | 7.7 | ||||||
Waste
acid recovery
|
8.1 | 5.1 | ||||||
Other
|
3.2 | 3.5 | ||||||
Total
|
$ | 64.9 | $ | 71.5 |
Note
5 – Long-term debt:
Credit
Facility. We and certain of KII’s
subsidiaries in Belgium, Norway and Denmark (Kronos Europe S.A./N.V.-“KEU”,
Kronos Titan A/S - “TAS,” Titania A/S - “TIA,” Kronos Norge A/S, the
parent company of TAS and TIA and Kronos Denmark ApS “KDK,” the parent company
of Kronos Norge and KEU), have a euro 80 million secured revolving credit
facility that matures in May 2011. We may denominate borrowings in
euro, Norwegian kroner or U.S. dollars. Outstanding borrowings bear
interest at the applicable interbank market rate plus 1.75% (4.49% at December
31, 2008). We may also issue up to euro 5 million letters of credit
under the facility. The facility is collateralized by the accounts
receivable and inventories of the borrowers, plus a limited pledge of all of the
other assets of the Belgian borrower. This facility contains certain
restrictive covenants which, among other things, restrict the ability of the
borrowers to incur debt, incur liens, pay dividends or merge or consolidate
with, or sell or transfer all or substantially all of their assets to another
entity. In addition, the credit facility contains customary
cross-default provisions with respect to other debt and obligations of ours and
our other subsidiaries. At December 31, 2008, KII borrowed a net euro
30.0 million ($42.2 million) under the credit facility and the equivalent of
$70.3 million was available for additional borrowing, subject to being in
compliance with financial covenants or obtaining a waiver or amendment to the
credit facility, as more fully described in Restrictions and
Other. Of the net euro 30.0 million KII borrowings at December
31, 2008, we had borrowed a net euro 12.0 million ($16.9 million) at December
31, 2008.
Senior Secured
Notes. On
April 11, 2006, KII (our parent company) issued an aggregate of euro 400 million
principal amount of 6.5% Senior Secured Notes due April 2013, at 99.306% of
their principal amount ($498.5 million when issued) to yield an effective
interest rate of 7.1%. These 6.5% Notes are collateralized by a
pledge of 65% of the common stock or other ownership interests of certain of
KII’s first-tier operating subsidiaries. Such operating subsidiaries
are us, KDK, Kronos Limited and Societe Industrielle Du Titane,
S.A. KII issued the 6.5% Notes pursuant to an indenture which
contains a number of covenants and restrictions which, among other things,
restricts our ability and that of our subsidiaries to incur debt, incur liens,
pay dividends or merge or consolidate with, or sell or transfer all or
substantially all of our assets or those or our subsidiaries to another
entity. At KII’s option, they may redeem the 6.5% Notes on or after
October 15, 2009 at redemption prices ranging from 103.25% of the principal
amount, declining to 100% on or after October 15, 2012. In addition,
on or before April 15, 2009, KII may redeem up to 35% of the Notes with the net
proceeds of a qualified public equity offering at 106.5% of the principal
amount. In the event of a change of control, as defined, KII would be
required to make an offer to purchase the 6.5% Notes at 101% of the principal
amount. KII would also be required to make an offer to purchase a
specified portion of the 6.5% Notes at par value in the event KII generates a
certain amount of net proceeds from the sale of assets outside the ordinary
course of business, and such net proceeds are not otherwise used for specified
purposes within a specified time period. The indenture also contains
certain cross-default provisions, as discussed below. At December 31,
2008, the carrying amount of the Notes includes euro 1.7 million ($2.4 million)
of unamortized original issue discount (2007 – euro 2.1 million, or $3.1
million).
Under the
cross-default provisions of the 6.5% Notes, the 6.5% Notes may be accelerated
prior to their stated maturity if KII, us 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 this facility may be accelerated
prior to its stated maturity if the we or any borrowers default under any other
indebtedness in excess of euro 5 million due to a failure to pay such other
indebtedness at its due date (including any due date that arises prior to the
stated maturity as a result of a default under such other
indebtedness). 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, of the applicable borrower. In the
event the cross-default provisions of either the 6.5% Notes or the credit
facility become applicable, and such indebtedness is accelerated, we would be
required to repay such indebtedness prior to their stated maturity.
All of
our $16.9 million long-term debt at December 31, 2008 matures in
2011.
Restrictions and
other. The credit
facility described above requires the respective borrower 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. While we were in compliance with all of our debt covenants at
December 31, 2008, we currently believe it is probable that one of our required
financial ratios associated with our European credit facility (the ratio of net
secured debt to earnings before income taxes, interest and depreciation, as
defined) will not be maintained at some point during 2009, most likely
commencing at March 31, 2009. In 2009, we have begun to reduce our
production levels in response to the current economic environment, which we
anticipate will favorably impact our liquidity and cash flows by reducing our
inventory levels. However, the reduced capacity utilization levels
will negatively impact our 2009 results of operations due to the resulting
unabsorbed fixed production costs that will be charged to expense as
incurred. As a result, we may not be able to maintain the required
financial ratio throughout 2009.
We have
begun discussions with the lenders to amend the terms of the existing European
credit facility to eliminate the requirement to maintain this financial ratio
until at least March 31, 2010. While we believe it is possible we can
obtain such an amendment to eliminate this financial ratio through at least
March 31, 2010, there is no assurance that such amendment will be obtained, or
if obtained that the requirement to maintain the financial ratio will be
eliminated (or waived, in the event the lenders would only agree to a waiver and
not an amendment to eliminate the covenant itself) through at least March 31,
2010. Any such amendment or waiver which we might obtain could
increase our future borrowing costs, either from a requirement that we pay a
higher rate of interest on outstanding borrowings or pay a fee to the lenders as
part of agreeing to such amendment or waiver.
In the
event we would not be successful in obtaining the amendment or waiver of the
existing European credit facility to eliminate the requirement to maintain the
financial ratio, we would seek to refinance such facility with a new group of
lenders with terms that did not include such financial covenant or, if required,
we will use our existing liquidity resources (which could include funds provided
by our affiliates). While there is no assurance that we would
be able to refinance the existing European credit facility with a new group of
lenders, we believe these other sources of liquidity available to us would allow
us to refinance the existing European credit facility. If required,
we believe by undertaking one or more of these steps we will be successful in
maintaining sufficient liquidity to meet our future obligations including
operations, capital expenditures and debt service for the next 12
months.
Note
6 - Income taxes:
Years ended December 31,
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
(In
millions)
|
||||||||||||
Pretax
income
|
$ | 54.8 | $ | 40.9 | $ | 10.6 | ||||||
Expected
tax expense
|
$ | 14.5 | $ | 10.8 | $ | 1.7 | ||||||
Trade
income tax
|
7.0 | 5.3 | 1.6 | |||||||||
Impact
of rate change
|
- | 15.8 | - | |||||||||
Assessment
of prior year income taxes
|
15.5 | - | .3 | |||||||||
Tax
contingency reserve adjustment, net
|
.1 | (.2 | ) | (1.1 | ) | |||||||
Other,
net
|
.5 | 1.6 | .1 | |||||||||
Income
tax expense
|
$ | 37.6 | $ | 33.3 | $ | 2.6 | ||||||
Provision
for income taxes:
|
||||||||||||
Current
income tax expense (benefit)
|
$ | 32.5 | $ | 3.8 | $ | (4.2 | ) | |||||
Deferred
income tax expense
|
5.1 | 29.5 | 6.8 | |||||||||
$ | 37.6 | $ | 33.3 | $ | 2.6 | |||||||
Comprehensive
provision (benefit) for income taxes allocable to:
|
||||||||||||
Pretax
income
|
$ | 37.6 | $ | 33.3 | $ | 2.6 | ||||||
Other
comprehensive loss –
Pension
plans
|
4.2 | 22.4 | 1.0 | |||||||||
Adoption
of SFAS No. 158 –
Pension
plans
|
(12.7 | ) | (.1 | ) | - | |||||||
$ | 29.1 | $ | 55.6 | $ | 3.6 |
The
components of our net deferred income taxes are summarized below.
December 31,
|
||||||||||||||||
2007
|
2008
|
|||||||||||||||
Assets
|
Liabilities
|
Assets
|
Liabilities
|
|||||||||||||
(In
millions)
|
||||||||||||||||
Tax
effect of temporary differences
relating
to:
|
||||||||||||||||
Inventories
|
$ | - | $ | (2.6 | ) | $ | - | $ | (3.2 | ) | ||||||
Property
and equipment
|
- | (4.5 | ) | - | (9.3 | ) | ||||||||||
Accrued
pension cost
|
9.3 | - | 5.3 | - | ||||||||||||
Other
taxable differences
|
- |
___ (.9)
|
- | (1.1 | ) | |||||||||||
Gross
deferred tax assets (liabilities)
|
9.3 | (8.0 | ) | 5.3 | (13.6 | ) | ||||||||||
Reclassification,
principally netting by tax jurisdiction
|
(5.2 | ) | 5.2 | (5.3 | ) | 5.3 | ||||||||||
Net
total deferred tax liabilities
|
4.1 | (2.8 | ) | - | (8.3 | ) | ||||||||||
Net
current deferred tax liabilities
|
- | (2.8 | ) | - | (3.9 | ) | ||||||||||
Net
noncurrent deferred tax liability
|
$ | 4.1 | $ | - | $ | - | $ | (4.4 | ) |
We have
no deferred income tax valuation allowance as of December 31, 2006, 2007 and
2008.
In August
2007, Germany enacted certain changes in their income tax laws. The
most significant change was the reduction of the German corporate and trade
income tax rates. We measure our net deferred taxes using the applicable enacted
tax rates, and the effect of any change in the applicable enacted tax rate is
recognized in the period of enactment. Accordingly, we reported a
decrease in our net deferred tax asset in Germany of $15.8 million, which is
recognized as a component of our 2007 provision for income taxes.
Tax
authorities are examining certain of our income tax returns. Due to
an unfavorable resolution of certain income tax audits, we recognized a $15.5
million provision for income taxes in 2006 related to adjustments to prior year
income taxes. Other income tax examinations may occur, and we cannot
guarantee that any tax matters will be resolved in our favor in view of the
inherent uncertainties involved in settlement initiatives and court and tax
proceedings. We believe that we have provided adequate accruals for
additional taxes and related interest expense which may ultimately result from
all such examinations and believe that the ultimate disposition of such
examinations should not have a material adverse effect on our consolidated
financial position, results of operations or liquidity.
Note
7 - Employee benefit plans:
Changes in
Accounting - defined benefit plans. In September
2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans. SFAS No. 158
requires us to recognize an asset or liability for the over or under funded
status of each of our individual defined benefit pension and postretirement
benefit plans on our Consolidated Balance Sheets. This standard does not
change the existing recognition and measurement requirements that determine the
amount of periodic benefit cost we recognize in net income.
We
adopted the asset and liability recognition and disclosure requirements of SFAS
No. 158 effective December 31, 2006 on a prospective basis, in which we
recognized through other comprehensive income all of our prior unrecognized
gains and losses and prior service costs or credits, net of tax, as of December
31, 2006. The effect of adopting the asset and liability recognition
requirements of this standard resulted in a $19.6 million net decrease in our
accumulated other comprehensive income (loss), consisting of our loss related to
our defined benefit pension plans. Starting January 1, 2007, we
recognize all changes in the funded status of these plans through comprehensive
income (loss), net of tax. Any future changes will be recognized
either in net income, to the extent they are reflected in periodic benefit cost,
or through other comprehensive income (loss).
Prior to December 31, 2007 we used
September 30 as a measurement date for our defined benefit pension plans. In
accordance with the measurement date requirements of SFAS No. 158, effective
December 31, 2007 we commenced to use a December 31 measurement date for all of
our defined benefit pension plans using a 15 month net periodic benefit cost
based on the September 30, 2006 actuarial valuations. Accordingly,
four-fifths of the net periodic benefit cost for such 15-month period has been
included in the determination of our net income for 2007, and one-fifth of the
net periodic benefit cost for such 15-month period, net of income taxes, has
been allocated as a direct adjustment to our retained deficit in accordance with
the transition provisions of the standard to reflect the change in measurement
dates. To the extent the net periodic benefit cost included
amortization of unrecognized actuarial losses, prior service cost and net
transition obligations, which were previously recognized as a component of
accumulated other comprehensive income at December 31, 2006, the effect on
retained earnings, net of income taxes, was offset by a change in our
accumulated other comprehensive income.
Defined benefit
plans. We maintain
various defined benefit pension plans. We expect to contribute the
equivalent of approximately $11 million to all of our defined benefit pension
plans during 2009. Benefit payments to plan participants out of plan
assets are expected to be the equivalent of:
Years ending December 31,
|
Amount
|
|||
(In
millions)
|
||||
2009
|
$ | 14.5 | ||
2010
|
14.3 | |||
2011
|
14.1 | |||
2012
|
13.9 | |||
2013
|
14.0 | |||
Next
5 years
|
71.9 |
The
funded status of our defined benefit pension plan is presented in the table
below.
December 31,
|
||||||||
2007
|
2008
|
|||||||
(In
millions)
|
||||||||
Change
in projected benefit obligations (“PBO”):
|
||||||||
Benefit
obligations at beginning of year
|
$ | 302.9 | $ | 283.5 | ||||
Change
in measurement date, net
|
4.1 | - | ||||||
Service
cost
|
3.3 | 5.2 | ||||||
Interest
cost
|
14.0 | 9.9 | ||||||
Participant
contributions
|
1.8 | 1.6 | ||||||
Actuarial
gains
|
(53.2 | ) | (15.6 | ) | ||||
Benefits
paid
|
(20.3 | ) | (16.1 | ) | ||||
Change
in currency exchange rates
|
30.9
|
(14.5)
|
||||||
Benefit
obligations at end of year
|
283.5 | 254.0 | ||||||
Change
in fair value of plan assets:
|
||||||||
Fair
value of plan assets at beginning of year
|
145.3 | 161.8 | ||||||
Change
in measurement date, net
|
(1.2 | ) | - | |||||
Actual
return on plan assets
|
4.4 | (2.1 | ) | |||||
Employer
contributions
|
15.0 | 12.6 | ||||||
Participant
contributions
|
1.8 | 1.6 | ||||||
Change
in currency exchange rates
|
16.8 | (7.4 | ) | |||||
Benefits
paid
|
(20.3)
|
(16.1 | ) | |||||
Fair
value of plan assets at end of year
|
$ | 161.8 | $ | 150.4 | ||||
Funded
status
|
$ | (121.7 | ) | $ | (103.6 | ) | ||
December 31,
|
||||||||
2007
|
2008
|
|||||||
(In
millions)
|
||||||||
Amounts
recognized in the balance sheet:
|
||||||||
Accrued
pension cost:
|
||||||||
Current
|
$ | - | $ | - | ||||
Noncurrent
|
(121.7 | ) | (103.6 | ) | ||||
Total
|
$ | (121.7 | ) | $ | (103.6 | ) | ||
Accumulated
other comprehensive loss:
|
||||||||
Actuarial
losses
|
$ | 83.4 | $ | 80.2 | ||||
Prior
service cost
|
2.9 | 2.6 | ||||||
Total
|
$ | 86.3 | $ | 82.8 | ||||
Accumulated
benefit obligations (“ABO”)
|
$ | 236.7 | $ | 235.6 |
The
amounts shown in the table above for actuarial losses and prior service cost at
December 31, 2007 and 2008 have not yet been recognized as components of our
periodic defined benefit pension cost as of those dates. These
amounts will be recognized as components of our periodic defined benefit cost in
future years. In accordance with SFAS No. 158, these amounts, net of
deferred income taxes, are recognized in our accumulated other comprehensive
income (loss) at December 31, 2007 and 2008. We expect approximately
$3.3 million and $.2 million of the net actuarial losses and prior service
costs, respectively, as of December 31, 2008 will be recognized as components of
our net periodic pension cost in 2009.
The table
below details the changes in plan assets and benefit obligations recognized in
accumulated other comprehensive income (loss) during 2007 and 2008.
Years Ended December 31,
|
||||||||
2007
|
2008
|
|||||||
(In
millions)
|
||||||||
Changes
in plan assets and benefit obligations
recognized
in other comprehensive income (loss):
|
||||||||
Current
year:
|
||||||||
Net
actuarial gain
|
$ | 53.6 | $ | 5.2 | ||||
Amortization
of unrecognized:
|
||||||||
Prior service cost
|
.2 | .2 | ||||||
Net
actuarial losses (gain)
|
6.1 | (1.9 | ) | |||||
Change
in measurement date:
|
||||||||
Prior service cost
|
.1 | - | ||||||
Net
actuarial losses
|
1.6 | - | ||||||
Total
|
$ | 61.6 | $ | 3.5 |
The
components of our net periodic defined benefit pension cost are presented in the
table below. In the fourth quarter of 2008 we recognized a $6.9
million adjustment in connection with the correction of our pension expense
previously recognized for 2006 and 2007. The $6.9 million adjustment
consisted of $2.0 million of service cost, $4.1 million of interest cost credit
and $4.8 million of recognized actuarial gains. The amounts shown
below for the amortization of prior service cost, net transition obligations and
recognized actuarial losses for 2007 and 2008 were recognized as components of
our accumulated other comprehensive income (loss) at December 31, 2006 and 2007,
respectively, net of deferred income taxes.
Years ended December 31,
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
(In
millions)
|
||||||||||||
Net
periodic pension cost:
|
||||||||||||
Service
cost benefits
|
$ | 3.1 | $ | 3.4 | $ | 5.2 | ||||||
Interest
cost on PBO
|
11.7 | 14.0 | 9.9 | |||||||||
Expected
return on plan assets
|
(8.0 | ) | (8.3 | ) | (9.7 | ) | ||||||
Amortization
of prior service cost
|
.2 | .2 | .2 | |||||||||
Recognized
actuarial losses (gain)
|
6.2 | 6.1 | (1.9 | ) | ||||||||
Total
|
$ | 13.2 | $ | 15.4 | $ | 3.7 |
The
weighted-average rate assumptions used in determining the actuarial present
value of benefit obligations as of December 31, 2007 and 2008 are presented in
the table below. Such weighted-average rates were determined using
the projected benefit obligations at each date.
December 31,
|
||||||||
Rate
|
2007
|
2008
|
||||||
Discount
rate
|
5.5 | % | 5.8 | % | ||||
Increase
in future compensation levels
|
3.0 | % | 3.0 | % |
The
weighted-average rate assumptions used in determining the net periodic pension
cost for 2006, 2007 and 2008 are presented in the table below. The
weighted-average discount rate and the weighted-average increase in future
compensation levels were determined using the projected benefit obligations at
the beginning of each year, and the weighted-average long-term return on plan
assets was determined using the fair value of plan assets at the beginning of
each year.
Years ended December 31,
|
||||||||||||
Rate
|
2006
|
2007
|
2008
|
|||||||||
Discount
rate
|
4.0 | % | 4.5 | % | 5.5 | % | ||||||
Increase
in future compensation levels
|
2.8 | % | 3.0 | % | 3.0 | % | ||||||
Long-term
return on plan assets
|
5.5 | % | 5.3 | % | 5.8 | % |
Variances
from actuarially assumed rates will change the actuarial valuation of accrued
pension liabilities, pension expense and funding requirements in future
periods.
In
determining the expected long-term rate of return on plan asset assumptions, we
consider the long-term asset mix (e.g. equity vs. fixed income) for the assets
for each of our plans and the expected long-term rates of return for such asset
components. In addition, we receive advice about appropriate
long-term rates of return from third-party actuaries. The composition
of our plan assets is established to satisfy the requirements of the German
insurance commissioner. The plan asset allocation at December 31,
2008 was 24% to equity securities and limited partnerships, 52% to fixed income
securities, 12% to real estate and 12% to cash, cash equivalents and other (2007
– 28%, 49%, 12% and 11%, respectively).
We
regularly review our actual asset allocation for each of our plans, and will
periodically rebalance the investments in each plan to more accurately reflect
the targeted allocation when considered appropriate.
Note
8 - Other noncurrent liabilities:
December 31,
|
||||||||
2007
|
2008
|
|||||||
(In
millions)
|
||||||||
Reserve
for uncertain tax positions
|
$ | 1.3 | $ | - | ||||
Employee
benefits
|
4.6 | 4.7 | ||||||
Insurance
claims expense
|
1.9 | 1.3 | ||||||
Other
|
3.8 | 3.1 | ||||||
Total
|
$ | 11.6 | $ | 9.1 |
Note
9 - Related party transactions:
We may be
deemed to be controlled by Harold C. Simmons. See Note
1. Corporations that may be deemed to be controlled by or
affiliated with Mr. Simmons sometimes engage in (a) intercorporate transactions
such as guarantees, management and expense sharing arrangements, shared fee
arrangements, tax sharing agreements, joint ventures, partnerships, loans,
options, advances of funds on open account, and sales, leases and exchanges of
assets, including securities issued by both related and unrelated parties and
(b) common investment and acquisition strategies, business combinations,
reorganizations, recapitalizations, securities repurchases, and purchases and
sales (and other acquisitions and dispositions) of subsidiaries, divisions or
other business units, which transactions have involved both related and
unrelated parties and have included transactions which resulted in the
acquisition by one related party of a publicly held minority equity interest in
another related party. While no transactions of the type described
above are planned or proposed with respect to us other than as set forth in
these financial statements, we from time to time consider, review and evaluate
such transactions and understand that Contran and related entities consider,
review and evaluate such transactions. Depending upon the business,
tax and other objectives then relevant, it is possible that we might be a party
to one or more such transactions in the future.
We are
party to services and cost sharing agreements among several of our affiliates,
whereby Kronos, KII and other affiliates provide certain management, financial,
insurance and administrative services to us on a fee basis. Our
expense was approximately $6.3 million in 2006, $5.5 million in 2007 and $5.1
million in 2008 related to these services and costs.
We charge
affiliates for certain management, financial and administrative services costs,
which totaled approximately $4.5 million in 2006, $6.3 million in 2007 and $3.3
million in 2008. These charges to affiliates were reflected primarily
as a reduction of selling, general and administrative expense.
Tall
Pines Insurance Company and EWI RE, Inc. provide for or broker certain insurance
policies for Contran and certain of its subsidiaries and affiliates, including
us. Tall Pines and EWI are subsidiaries of
Valhi. Consistent with insurance industry practices, Tall Pines and
EWI receive commissions from insurance and reinsurance underwriters and/or
assess fees for the policies that they provide or broker. The
aggregated premiums we paid to Tall Pines and EWI were $3.5 million, $2.9
million and $3.0 million in 2006, 2007 and 2008, respectively. These
amounts principally included payments for insurance, but also included
commissions paid to Tall Pines and EWI. Tall Pines purchases
reinsurance for substantially all of the risks it underwrites. We
expect that these relationships with Tall Pines and EWI will continue in
2009.
Contran
and certain of its subsidiaries and affiliates, including us, purchase certain
of their insurance policies as a group, with the costs of the jointly-owned
policies being apportioned among the participating companies. With
respect to certain of such policies, it is possible that unusually large losses
incurred by one or more insureds during a given policy period could leave the
other participating companies without adequate coverage under that policy for
the balance of the policy period. As a result, Contran and certain of
its subsidiaries and its affiliates, including Kronos, KII and us, have entered
into a loss sharing agreement under which any uninsured loss is shared by those
entities who have submitted claims under the relevant policy. We
believe the benefits in the form of reduced premiums and broader coverage
associated with the group coverage for such policies justifies the risk
associated with the potential for uninsured loss.
We
purchase from and sell to our affiliates a significant amount of titanium
dioxide pigments (“TiO2”). Sales
of TiO2
to our affiliates were $167.6 million in 2006, $148.3 million in 2007 and
$127.8 million in 2008. Purchases of TiO2 from our
affiliates were $68.1 million in 2006, $81.4 million in 2007 and $87.0 million
in 2008.
Kronos
(US), Inc. (KUS) purchases the rutile and slag feedstock used as a raw material
in our chloride process TiO2
facility. We purchase such feedstock from KUS for an amount equal to
the amount paid by KUS to the third-party supplier plus a 2.5% administrative
fee. Such feedstock purchases were $72.2 million in 2006, $87.8
million in 2007 and $91.3 million in 2008.
We purchase ilmenite (sulfate
feedstock) from our Norwegian affiliate on a year-to-year basis. Such
feedstock purchases were $21.8 million in 2006, $21.3 million in 2007 and $25.2
million in 2008.
We sell
water treatment chemicals (derived from co-products of the TiO2 production
processes) to KII. Such water treatment chemical sales were $19.9
million in 2006, $24.6 million in 2007 and $31.7 million in 2008.
We are
party to an accounts receivable factoring agreement with certain European
affiliates of ours pursuant to which these affiliates factored their export
accounts receivable without recourse to us for a fee ranging from 0.85% to
1.2%. Upon non-recourse transfer from these affiliates, we assume all
risk pertaining to the factored receivables, including, but not limited to,
exchange control risks, risks pertaining to the bankruptcy of a customer and
risks related to late payments. Export receivables purchased by us
during 2006, 2007, and 2008 aggregated $125 million, $142 million and $166
million respectively.
Net
amounts currently receivable from (payable to) affiliates are summarized in the
following table.
December 31,
|
||||||||
2007
|
2008
|
|||||||
(In
millions)
|
||||||||
Current
receivable from:
|
||||||||
KII
|
$ | 2.7 | $ | 15.4 | ||||
TAS
|
- | 7.2 | ||||||
Other
affiliates
|
7.4 | .4 | ||||||
Total
|
$ | 10.1 | $ | 23.0 | ||||
Current
payable to:
|
||||||||
KII
– income taxes
|
$ | 50.6 | $ | 45.0 | ||||
TIA
|
23.1 | - | ||||||
Other
affiliates
|
21.0 | 39.4 | ||||||
Total
|
$ | 94.7 | $ | 84.4 |
Our
current receivable from affiliates generally relate to product sales and
services rendered. Our current payable to affiliates generally relate
to raw material purchases, accounts receivable factoring and services
received.
In 2006,
we repaid $10.9 million of our note payable to with KDK. The
remaining $.3 million was reclassified to payable to affiliates.
Included
in other affiliate income and other affiliate expense was other affiliate
interest income/expense, factoring fees and service fees.
Note
10 – NL common stock options held by our employees:
At
December 31, 2008, our employees held options to purchase approximately 9,000
shares of NL common stock, which are exercisable at various dates through 2010
(approximately 4,000) at an exercise of $5.63 per share, and exercisable at
various dates through 2011 (approximately 5,000) at an exercise price of $11.49
per share.
Note
11 - Commitments and contingencies:
Environmental
matters. Our operations are governed by various environmental
laws and regulations. Certain of our operations are and have been
engaged in the handling, manufacture or use of substances or compounds that may
be considered toxic or hazardous within the meaning of applicable environmental
laws. As with other companies engaged in similar businesses, certain
past and current operations and products of ours have the potential to cause
environmental or other damage. We have implemented and continue to
implement various policies and programs in an effort to minimize these
risks. Our policy is to maintain compliance with applicable
environmental laws and regulations at all of our facilities and to strive to
improve our environmental performance. From time to time, we may be
subject to environmental regulatory enforcement under various statutes,
resolution of which typically involves the establishment of compliance
programs. It is possible that future developments, such as stricter
requirements of environmental laws and enforcement policies thereunder, could
adversely affect our production, handling, use, storage, transportation, sale or
disposal of such substances. We believe all of our plants are in
substantial compliance with applicable environmental laws.
Litigation
matters. We are involved in various other environmental,
contractual, product liability, patent (or intellectual property), employment
and other claims and disputes incidental to our business. We
currently believe the disposition of all claims and disputes, individually or in
the aggregate, should not have a material adverse effect on our consolidated
financial condition, results of operations or liquidity.
Concentrations of
credit risk. Sales of TiO2 accounted
for approximately 96% of our sales during each of 2006, 2007 and
2008. The remaining sales result from the manufacture and sale of
iron-based water treatment chemicals (derived from co-products of the TiO2 production
processes). TiO2 is
generally sold to the paint, plastics and paper, as well as fibers, rubber,
ceramics, inks and cosmetics markets. Such markets are generally
considered "quality-of-life" markets whose demand for TiO2 is
influenced by the relative economic well-being of the various geographic
regions. We sell TiO2 to over
1,000 customers, with the top ten external customers approximating 20% of net
sales in 2006 and 2007 and 22% in 2008. We did not have sales to a
single customer of over 10% in any of the previous three
years. Approximately 79% of our TiO2 sales by
volume were to Europe in 2006 and 81% in each of 2007 and
2008. Approximately 7% in 2006 and 1% in 2007 and 2008 of sales by
volume were to North America.
Long-term
contracts. KUS has
long-term supply contracts that provide for certain of its affiliates’ TiO2 feedstock
requirements through 2011 including ours. The agreements require KUS
to purchase certain minimum quantities of feedstock with minimum annual purchase
commitments aggregating approximately $505 million at December 31,
2008. The agreements require that we and certain of our affiliates
purchase chloride process feedstock underlying these long-term supply contracts
from KUS. In addition, we have other long-term supply and service
contracts that provide for various raw materials and services through
2014. These agreements require us to purchase certain minimum
quantities or services with minimum purchase commitments aggregating
approximately $103 million at December 31, 2008.
Operating
leases. We lease various
manufacturing facilities and equipment pursuant to operating
leases. Most of the leases contain purchase and/or various term
renewal options at fair market and fair rental values,
respectively. In most cases management expects that, in the normal
course of business, leases will be renewed or replaced by other
leases.
We lease
the land under our Leverkusen TiO2 production
facility pursuant to a lease with Bayer AG that expires in 2050. The
Leverkusen facility itself, which we own and which represents approximately
two-thirds of our current TiO2 production
capacity, is located within the lessor's extensive manufacturing
complex. We periodically establish the amount of rent for the land
lease associated with the Leverkusen facility by agreement with Bayer for
periods of at least two years at a time. The lease agreement provides
for no formula, index or other mechanism to determine changes in the rent for
such land lease; rather, any change in the rent is subject solely to periodic
negotiation between us and Bayer. We recognize any change in the rent
based on such negotiations as part of lease expense starting from the time such
change is agreed upon by both parties, as any such change in the rent is deemed
“contingent rentals” under GAAP. Under a separate supplies and
services agreement expiring in 2011, the lessor provides some raw materials,
including chlorine, auxiliary and operating materials, utilities and services
necessary to operate the Leverkusen facility.
Net rent
expense aggregated $4 million in 2006, $5 million in 2007 and $6 million in
2008. At December 31, 2008, minimum rental commitments under the
terms of noncancellable operating leases were as follows:
Amount
|
||||
(in
millions)
|
||||
Years ending December 31,
|
||||
2009
|
$ | 2.6 | ||
2010
|
1.8 | |||
2011
|
1.2 | |||
2012
|
1.1 | |||
2013
|
1.1 | |||
2014
and thereafter
|
18.8 | |||
Total
|
$ | 26.6 |
Approximately
$22 million of the $26.6 million aggregate future minimum rental commitments at
December 31, 2008 relates to our Leverkusen facility lease discussed
above. The minimum commitment amounts for such lease included in the
table above for each year through the 2050 expiration of the lease are based
upon the current annual rental rate as of December 31, 2008. As
discussed above, any change in the rent is based solely on negotiations between
us and Bayer, and any such change in the rent is deemed “contingent rentals”
under GAAP which is excluded from the future minimum lease payments disclosed
above.
Note
12 - Financial instruments:
We
adopted SFAS No. 157 effective January 1, 2008 for financial assets
and liabilities measured on a recurring basis. SFAS No. 157
applies to all financial assets and financial liabilities that are being
measured and reported on a fair value basis. SFAS No. 157 establishes a
framework for measuring fair value and expands disclosure about fair value
measurements. The statement requires fair value measurements to be
classified and disclosed in one of three categories, see Note 1.
There was
no impact for the adoption of SFAS No. 157 to the Consolidated Financial
Statements.
The
following table presents the financial instruments that are not carried at fair
value but which require fair value disclosure as of December 31, 2007 and
2008.
December 31,
|
||||||||||||||||
2007
|
2008
|
|||||||||||||||
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
amount
|
value
|
amount
|
value
|
|||||||||||||
(In
millions)
|
||||||||||||||||
Cash
and cash equivalents
|
$ | 50.6 | $ | 50.6 | $ | 2.8 | $ | 2.8 | ||||||||
Long-term
debt:
Revolving
credit facility
|
- | - | 16.9 | 16.9 |
At
December 31, 2007 and 2008, the estimated market price of the 6.5% Notes was
approximately euro 860 and euro 230 per euro 1,000 principal amount,
respectively.
We
periodically use interest rate swaps, currency swaps and other types of
contracts to manage interest rate and foreign exchange risk with respect to
financial assets or liabilities. We have not entered into these
contracts for trading or speculative purposes in the past, nor do we currently
anticipate doing so in the future. We were not a party to any such
contracts during 2006, 2007 and 2008.
Other
than as described above, we were not a party to any material derivative
financial instruments during 2006, 2007 and 2008.
Note
13 – Recent accounting pronouncements:
Fair Value
Measurements. In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, Fair Value
Measurements, which became effective for us on January 1, 2008.
SFAS No. 157 generally provides a consistent, single fair value definition and
measurement techniques for GAAP pronouncements. SFAS No. 157 also
establishes a fair value hierarchy for different measurement techniques based on
the objective nature of the inputs in various valuation methods. In
February 2008, the FASB issued FSP No. FAS 157-2, Effective Date of FASB Statement No.
157 which delays the provisions of SFAS No. 157 until January 1, 2009 for
all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). Beginning with our first quarter 2008 filing,
all of our fair value measurements are in compliance with SFAS No. 157, except
for such nonfinancial assets and liabilities for which we will be required to be
in compliance with SFAS No. 157 prospectively beginning in the first quarter of
2009. The adoption of this standard did not have a material effect on our
Consolidated Financial Statements.
Fair Value
Option. In the first quarter of 2007 the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. SFAS No. 159 permits companies to
choose, at specified election dates, to measure eligible items at fair value,
with unrealized gains and losses included in the determination of net
income. The decision to elect the fair value option is generally applied
on an instrument-by-instrument basis, is irrevocable unless a new election date
occurs, and is applied to the entire instrument and not only to specified risks
or cash flows or a portion of the instrument. Items eligible for the fair
value option include recognized financial assets and liabilities, other than an
investment in a consolidated subsidiary, defined benefit pension plans, OPEB
plans, leases and financial instruments classified in equity. An
investment accounted for by the equity method is an eligible item. The
specified election dates include the date the company first recognizes the
eligible item, the date the company enters into an eligible commitment, the date
an investment first becomes eligible to be accounted for by the equity method
and the date SFAS No. 159 first becomes effective for us. SFAS No. 159
became effective for us on January 1, 2008. We did not elect to measure
any eligible items at fair value in accordance with this new standard either at
the date we adopted the new standard or subsequently during 2008; therefore the
adoption of this standard did not have a material effect on our 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. 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 will become 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. Because our prior disclosures regarding
these forward contracts have substantially met all of the applicable disclosure
requirements of the new standard, we do not believe the enhanced disclosure
requirements of this new standard will have a significant effect on our
Consolidated Financial Statements. See Note 12.
Uncertain Tax
Positions. On
January 1, 2007, we adopted FIN 48, Accounting for Uncertain Tax
Positions. FIN 48 clarifies when and how much of a benefit we
can recognize in our consolidated financial statements for certain positions
taken in our income tax returns under Statement of Financial Accounting
Standards No. 109, Accounting
for Income Taxes, and enhances the disclosure requirements for our income
tax policies and reserves. Among other things, FIN 48 prohibits us
from recognizing the benefits of a tax position unless we believe it is
more-likely-than-not our position will prevail with the applicable tax
authorities and limits the amount of the benefit to the largest amount for which
we believe the likelihood of realization is greater than 50%. FIN 48
also requires companies to accrue penalties and interest on the difference
between tax positions taken on their tax returns and the amount of benefit
recognized for financial reporting purposes under the new
standard. We are required to classify any future reserves for
uncertain tax positions in a separate current or noncurrent liability, depending
on the nature of the tax position.
Upon
adoption of FIN 48 on January 1, 2007, we reclassified $1.4 million from
deferred taxes, which we previously classified as part of our deferred income
taxes, to our reserve for uncertain tax positions.
We accrue
interest and penalties on our uncertain tax positions as a component of our
provision for income taxes. The amount of interest and penalties we
accrued during 2007 and 2008 was not material, and at December 31, 2007 and 2008
we had $.1 million and nil, respectively, accrued for interest and penalties for
our uncertain tax positions.
The
following table shows the changes in the amount of our uncertain tax positions
(exclusive of the effect of interest and penalties) during 2007 and
2008:
Year Ended December 31,
|
||||||||
2007
|
2008
|
|||||||
(In
millions)
|
||||||||
Changes
in unrecognized tax benefits:
|
||||||||
Unrecognized
tax benefits at beginning of year
|
$ | 1.3 | $ | 1.3 | ||||
Net
increase (decrease):
|
||||||||
Tax
positions taken in prior periods
|
.2 | (1.1 | ) | |||||
Tax
positions taken in current period
|
- | .1 | ||||||
Settlements
with taxing authorities –
cash paid
|
- | (.1 | ) | |||||
Lapse
of applicable statute of limitations
|
- | - | ||||||
Change
in foreign currency exchange rates
|
(.2 | ) | (.2 | ) | ||||
Unrecognized
tax benefits at end of year
|
$ | 1.3 | $ | - |
If our
uncertain tax positions were recognized, a benefit of $1.3 million would have
affected our effective income tax rate from continuing operations in 2007 and
nil in 2008. We currently estimate that there will be no material
change to our unrecognized tax benefits during the next twelve
months.
We also
file income tax returns in Germany. Our income tax returns are generally
considered closed to examination for years prior to 2004.
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 amends SFAS No. 87, 88 and 106 to require expanded disclosures about
employers’ pension plan assets. FSP 132 (R)-1 will be effective for
us beginning with our 2009 annual report, and we will provide the expanded
disclosures about our pension plan assets at that time.
KRONOS
DENMARK APS AND SUBSIDIARIES
|
|
Index of Consolidated Financial
Statements
|
|
Financial Statements
|
|
Report
of Independent Registered Public Accounting Firm
|
FB-2
|
Consolidated
Balance Sheets –
|
|
December
31, 2007 and 2008
|
FB-3
|
Consolidated
Statements of Income –
|
|
Year
ended December 31, 2006, 2007 and 2008
|
FB-5
|
Consolidated
Statements of Comprehensive Income (Loss) -
|
|
Year
ended December 31, 2006, 2007 and 2008
|
FB-6
|
Consolidated
Statements of Stockholder’s Equity –
|
|
Year
ended December 31, 2006, 2007 and 2008
|
FB-7
|
Consolidated
Statements of Cash Flows –
|
|
Year
ended December 31, 2006, 2007 and 2008
|
FB-8
|
Notes
to Consolidated Financial Statements
|
FB-9
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholder of Kronos Denmark ApS:
In our
opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of comprehensive income (loss), of changes in
stockholder’s equity and of cash flows present fairly, in all material respects,
the financial position of Kronos Denmark ApS and its subsidiaries at December
31, 2007 and 2008 and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the
company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our
audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
As
discussed in Notes 8 and 13 to the Consolidated Financial Statements, the
Company changed the manner in which it accounts for pension benefit obligations
in 2006 and the manner in which it accounts for uncertain tax positions in
2007.
PricewaterhouseCoopers
LLP
Dallas,
Texas
March 11,
2009
KRONOS
DENMARK APS AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
millions, except share data)
December 31,
|
||||||||
ASSETS
|
2007
|
2008
|
||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 4.7 | $ | 1.1 | ||||
Restricted
cash
|
1.8 | 1.5 | ||||||
Accounts
and notes receivable
|
16.1 | 14.7 | ||||||
Receivable
from affiliates
|
35.0 | 16.7 | ||||||
Refundable
income taxes
|
1.1 | - | ||||||
Inventories
|
90.7 | 104.7 | ||||||
Prepaid
expenses
|
1.6 | 1.2 | ||||||
Total
current assets
|
151.0 | 139.9 | ||||||
Other
assets
|
3.4 | 3.9 | ||||||
Property
and equipment:
|
||||||||
Land
|
21.0 | 19.6 | ||||||
Buildings
|
47.6 | 42.4 | ||||||
Machinery
and equipment
|
234.3 | 209.5 | ||||||
Mining
properties
|
89.6 | 73.9 | ||||||
Construction
in progress
|
20.1 | 29.9 | ||||||
412.6 | 375.3 | |||||||
Less
accumulated depreciation and amortization
|
253.2 | 227.3 | ||||||
Net
property and equipment
|
159.4 | 148.0 | ||||||
Total
assets
|
$ | 313.8 | $ | 291.8 |
KRONOS
DENMARK APS AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS (CONTINUED)
(In
millions, except share data)
December 31,
|
||||||||
LIABILITIES AND STOCKHOLDER’S
EQUITY
|
2007
|
2008
|
||||||
Current
liabilities:
|
||||||||
Current
maturities of long-term debt
|
$ | .8 | $ | .8 | ||||
Accounts
payable and accrued liabilities
|
52.9 | 44.9 | ||||||
Payable
to affiliates
|
10.6 | 9.7 | ||||||
Income
taxes
|
9.2 | 3.3 | ||||||
Deferred
income taxes
|
1.8 | 1.8 | ||||||
|
||||||||
Total
current liabilities
|
75.3 | 60.5 | ||||||
|
||||||||
Noncurrent
liabilities:
|
||||||||
Long-term
debt
|
4.5 | 27.9 | ||||||
Deferred
income taxes
|
16.4 | 12.9 | ||||||
Accrued
pension costs
|
6.0 | 10.1 | ||||||
Other
|
3.5 | 3.2 | ||||||
Total
noncurrent liabilities
|
30.4 | 54.1 | ||||||
Stockholder's
equity:
|
||||||||
Common
stock – 100 Danish kroner par value; 10,000 shares authorized; 10,000
shares issued and outstanding
|
.1 | .1 | ||||||
Additional
paid-in capital
|
217.0 | 217.0 | ||||||
Retained
deficit
|
(31.3 | ) | (33.1 | ) | ||||
Accumulated
other comprehensive income (loss):
|
||||||||
Currency
translation
|
31.0 | 5.2 | ||||||
Defined
benefit pension plans
|
(8.7 | ) | (12.0 | ) | ||||
Total
stockholder's equity
|
208.1 | 177.2 | ||||||
Total
liabilities and stockholder’s equity
|
$ | 313.8 | $ | 291.8 | ||||
Commitments
and contingencies (Notes 6, 7 and 11)
|
See
accompanying Notes to Consolidated Financial Statements.
KRONOS
DENMARK APS AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
(In
millions)
Years ended December 31,
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
Net
sales
|
$ | 384.4 | $ | 411.7 | $ | 415.5 | ||||||
Cost
of sales
|
312.2 | 355.6 | 361.6 | |||||||||
Gross
margin
|
72.2 | 56.1 | 53.9 | |||||||||
Selling,
general and administrative expense
|
25.5 | 26.1 | 27.5 | |||||||||
Other
operating income (expense):
|
||||||||||||
Currency
transaction losses, net
|
(.4 | ) | - | (1.4 | ) | |||||||
Disposition
of property and equipment
|
(.3 | ) | (.3 | ) | (.5 | ) | ||||||
Other,
net
|
.3 | .4 | .2 | |||||||||
Income
from operations
|
46.3 | 30.1 | 24.7 | |||||||||
Other
income (expense):
|
||||||||||||
Trade
interest income
|
.1 | .1 | .1 | |||||||||
Other
income from affiliates
|
.9 | .9 | .7 | |||||||||
Interest
and other expense to affiliates
|
(2.5 | ) | (2.9 | ) | (3.4 | ) | ||||||
Interest
expense
|
(.9 | ) | (.7 | ) | (1.3 | ) | ||||||
Income
before income taxes
|
43.9 | 27.5 | 20.8 | |||||||||
Provision
for income taxes
|
10.2 | 8.0 | 5.6 | |||||||||
Net
income
|
$ | 33.7 | $ | 19.5 | $ | 15.2 | ||||||
See
accompanying Notes to Consolidated Financial Statements.
KRONOS
DENMARK APS AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(In
millions)
Years ended December 31,
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
Net
income
|
$ | 33.7 | $ | 19.5 | $ | 15.2 | ||||||
Other
comprehensive income (loss), net of tax:
|
||||||||||||
Currency
translation
|
18.7 | 22.8 | (25.8 | ) | ||||||||
Pension
plans:
|
||||||||||||
Amortization
of prior service cost and net losses included in periodic pension
cost
|
- | 1.3 | .6 | |||||||||
Net
actuarial gain arising during year
|
- | 8.9 | (3.9 | ) | ||||||||
Minimum
pension liability change
|
5.1 | - | - | |||||||||
5.1 | 10.2 | (3.3 | ) | |||||||||
Total
other comprehensive income (loss)
|
23.8 | 33.0 | (29.1 | ) | ||||||||
Comprehensive
income (loss)
|
$ | 57.5 | $ | 52.5 | $ | (13.9 | ) |
See
accompanying Notes to Consolidated Financial Statements.
KRONOS
DENMARK APS AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDER'S EQUITY
Years
ended December 31, 2006, 2007 and 2008
(In
millions)
Accumulated
other
|
||||||||||||||||||||||||
comprehensive income (loss)
|
||||||||||||||||||||||||
Additional
|
||||||||||||||||||||||||
Common
|
paid-in
|
Retained
|
Currency
|
Pension
|
||||||||||||||||||||
stock
|
capital
|
deficit
|
translation
|
plans
|
Total
|
|||||||||||||||||||
Balance
at December 31, 2005
|
.1 | 217.0 | (33.5 | ) | (10.5 | ) | (9.9 | ) | 163.2 | |||||||||||||||
Net
income
|
- | - | 33.7 | - | - | 33.7 | ||||||||||||||||||
Other
comprehensive income, net of tax
|
- | - | - | 18.7 | 5.1 | 23.8 | ||||||||||||||||||
Dividends
|
- | - | (26.9 | ) | - | - | (26.9 | ) | ||||||||||||||||
Change
in accounting – asset and liability recognition provisions of SFAS No.
158
|
- | - | - | - | (14.4 | ) | (14.4 | ) | ||||||||||||||||
Balance
at December 31, 2006
|
.1 | 217.0 | (26.7 | ) | 8.2 | (19.2 | ) | 179.4 | ||||||||||||||||
Net
income
|
- | - | 19.5 | - | - | 19.5 | ||||||||||||||||||
Other
comprehensive income, net of tax
|
- | - | 22.8 | 10.2 | 33.0 | |||||||||||||||||||
Dividends
|
- | - | (23.3 | ) | - | - | (23.3 | ) | ||||||||||||||||
Change
in accounting - SFAS No. 158 - measurement date provision
|
- | - | (.8 | ) | - | .3 | (.5 | ) | ||||||||||||||||
Balance
at December 31, 2007
|
.1 | 217.0 | (31.3 | ) | 31.0 | (8.7 | ) | 208.1 | ||||||||||||||||
Net
income
|
- | - | 15.2 | - | - | 15.2 | ||||||||||||||||||
Other
comprehensive loss, net of tax
|
- | - | - | (25.8 | ) | (3.3 | ) | (29.1 | ) | |||||||||||||||
Dividends
|
- | - | (17.0 | ) | - | - | (17.0 | ) | ||||||||||||||||
Balance
at December 31, 2008
|
$ | .1 | $ | 217.0 | $ | (33.1 | ) | $ | 5.2 | $ | (12.0 | ) | $ | 177.2 | ||||||||||
See
accompanying Notes to Consolidated Financial Statements.
KRONOS
DENMARK APS AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
millions)
Years ended December 31,
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
income
|
$ | 33.7 | $ | 19.5 | $ | 15.2 | ||||||
Depreciation
and amortization
|
14.2 | 16.5 | 18.8 | |||||||||
Deferred
income taxes
|
(4.5 | ) | (3.6 | ) | (.1 | ) | ||||||
Pension,
net
|
1.3 | 3.0 | (3.0 | ) | ||||||||
Other
|
.5 | 1.3 | .9 | |||||||||
Change
in assets and liabilities:
|
||||||||||||
Accounts
and notes receivable
|
(.4 | ) | 6.6 | (1.1 | ) | |||||||
Inventories
|
1.9 | (6.0 | ) | (23.8 | ) | |||||||
Prepaid
expenses
|
(.9 | ) | .3 | .1 | ||||||||
Accounts
payable and accrued liabilities
|
(1.0 | ) | 2.8 | 2.1 | ||||||||
Income
taxes
|
.9 | (3.6 | ) | (3.4 | ) | |||||||
Accounts
with affiliates
|
(6.7 | ) | 8.0 | 20.0 | ||||||||
Other
noncurrent assets
|
- | - | (1.6 | ) | ||||||||
Other
noncurrent liabilities
|
2.4 | (.3 | ) | 3.2 | ||||||||
Net
cash provided by operating activities
|
41.4 | 44.5 | 27.3 | |||||||||
Cash
flows from investing activities:
|
||||||||||||
Capital
expenditures
|
(22.8 | ) | (20.7 | ) | (37.4 | ) | ||||||
Change
in restricted cash equivalents
|
- | (.1 | ) | - | ||||||||
Net
cash used in investing activities
|
(22.8 | ) | (20.8 | ) | (37.4 | ) | ||||||
Cash
flows from investing activities:
|
||||||||||||
Indebtedness:
|
||||||||||||
Borrowings
|
- | .5 | 30.4 | |||||||||
Principal
payments
|
(.2 | ) | (.2 | ) | (6.0 | ) | ||||||
Deferred
financing fees
|
- | - | (.6 | ) | ||||||||
Dividends
paid
|
(26.9 | ) | (23.3 | ) | (17.0 | ) | ||||||
Loans
to affiliates – repayments
|
10.9 | - | - | |||||||||
Net
cash provided by (used in) financing
activities
|
(16.2 | ) | (23.0 | ) | 6.8 | |||||||
Cash
and cash equivalents:
|
||||||||||||
Net
change during the year from:
|
||||||||||||
Operating,
investing and financing
activities
|
2.4 | .7 | (3.3 | ) | ||||||||
Currency
translation
|
.1 | .5 | (.3 | ) | ||||||||
Balance
at beginning of period
|
1.0 | 3.5 | 4.7 | |||||||||
Balance
at end of period
|
$ | 3.5 | $ | 4.7 | $ | 1.1 | ||||||
Supplemental
disclosures -
|
||||||||||||
Cash
paid for:
|
||||||||||||
Interest
|
$ | .4 | $ | .7 | $ | 1.2 | ||||||
Income
taxes
|
11.8 | 15.3 | 9.1 | |||||||||
Accrual
for capital expenditures
|
- | 5.8 | 3.4 |
See
accompanying Notes to Consolidated Financial Statements.
KRONOS
DENMARK APS AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 - Summary of significant accounting policies:
Organization and basis of
presentation. Kronos
Denmark ApS was incorporated in Denmark in October 1999 and is a wholly-owned
subsidiary of Kronos International, Inc. (“KII”). KII is a
wholly-owned subsidiary of Kronos Worldwide, Inc. (“Kronos”). At
December 31, 2008, (i) Valhi, Inc. owned approximately 59% of Kronos’ common
stock and NL Industries, Inc. held an additional 36% of the outstanding common
stock of Kronos, (ii) Valhi owned 83% of NL’s outstanding common stock and (iii)
subsidiaries of Contran Corporation held approximately 94% of Valhi’s
outstanding common stock. Substantially all of Contran’s outstanding
voting stock is held by trusts established for the benefit of certain children
and grandchildren of Harold C. Simmons (for which Mr. Simmons is the sole
trustee), or is held by Mr. Simmons or persons or other entities related to Mr.
Simmons. Consequently, Mr. Simmons may be deemed to control each of
such companies.
Unless
otherwise indicated, references in this report to “we”, “us” or “our” refer to
Kronos Denmark ApS and its subsidiaries, taken as a whole.
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
(“GAAP”) with the U.S. dollar as the reporting currency. We also
prepare financial statements on other bases, as required in countries in which
we are resident.
Our
current operations are conducted primarily through our Belgian and Norwegian
subsidiaries with a titanium dioxide pigments (“TiO2”) plant in
Belgium and a TiO2 plant and
ilmenite ore mining operation in Norway. We also operate TiO2 sales and
distribution facilities in Denmark and the Netherlands.
We are
not a registrant with the U.S. Securities and Exchange Commission and are not
subject to their periodic reporting requirements, except as may be required by
Rule 3-16 of Regulation S-X.
Management’s
estimates. In preparing our
financial statements in conformity with GAAP we are required to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the
reporting period. Actual results may differ from previously-estimated
amounts under different assumptions or conditions.
Principles of
consolidation. Our consolidated
financial statements include our accounts and those of our wholly-owned
subsidiaries. We have eliminated all material intercompany accounts
and balances.
Translation of
foreign currencies. Our functional
currencies include the Danish krone, the euro and the Norwegian
krone. We translate assets and liabilities of subsidiaries whose
functional currency is other than the U.S. dollar at year-end rates of exchange,
while we translate revenues and expenses at average exchange rates prevailing
during the year. Resulting translation adjustments are accumulated in
stockholder’s equity as part of accumulated other comprehensive income (loss),
net of related deferred income taxes. Currency transaction gains and
losses are recognized in income currently.
Derivatives and hedging
activities. We recognize
derivatives as either assets or liabilities measured at fair value in accordance
with SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities,” as amended and
interpreted. We recognize the changes in fair value of derivatives
either in net income or other comprehensive income (loss), depending on the
intended use of the derivative.
Cash and cash
equivalents. We classify bank
deposits with original maturities of three months or less as cash
equivalents.
Restricted
marketable debt securities. We classify marketable
debt securities that have been segregated or otherwise limited in use as
restricted. Restricted marketable debt securities are primarily
invested in corporate debt securities and include amounts restricted in
accordance with applicable Norwegian law regarding certain requirements of our
Norwegian defined benefit pension plans ($3.2 million and $3.5 million at
December 31, 2007 and 2008, respectively). The restricted marketable
debt securities are generally classified as either a current or noncurrent asset
depending upon the maturity date of each such debt security and are carried at
market, which approximates cost.
Fair value of
financial instruments. We adopted SFAS No. 157,
Fair Value
Measurements, which establishes a framework for measuring fair value on
January 1, 2008. The statement requires fair value measurements to be
classified and disclosed in one of the following three categories:
|
·
|
Level
1 – Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or
liabilities;
|
|
·
|
Level
2 – Quoted prices in markets that are not active, or inputs which are
observable, either directly or indirectly, for substantially the full term
of the assets or liability; and
|
|
·
|
Level
3 – Prices or valuation techniques that require inputs that are both
significant to the fair value measurement and
unobservable.
|
See Notes
12 and 13.
Accounts
receivable. We provide an
allowance for doubtful accounts for known and estimated potential losses arising
from sales to customers based on a periodic review of these
accounts.
Property and
equipment and depreciation. We state property and
equipment at cost including capitalized interest on borrowings during the actual
construction period of major capital projects. Capitalized interest
costs were nil in 2006, $.7 million in 2007 and $2.1 million in
2008. We compute depreciation of property and equipment for financial
reporting purposes (including mining properties) principally by the
straight-line method over the estimated useful lives of ten to 40 years for
buildings and three to 20 years for equipment. We use accelerated
depreciation methods for income tax purposes, as permitted. Upon sale
or retirement of an asset, we remove the related cost and accumulated
depreciation from the accounts and recognize any gain or loss in income
currently.
We
expense expenditures for maintenance, repairs and minor renewals (including
planned major maintenance), while we capitalize expenditures for major
improvements.
We have a
governmental concession with an unlimited term to operate an ilmenite mine in
Norway. Mining properties consist of buildings and equipment used in
our Norwegian ilmenite mining operations. While we own the land and
ilmenite reserves associated with the mining operations, such land and reserves
were acquired for nominal value and we have no material asset recognized
for the land and reserves related to such mining operations.
We
perform impairment tests when events or changes in circumstances indicate the
carrying value may not be recoverable. We consider all relevant
factors. We perform the impairment test by comparing the estimated
future undiscounted cash flows (exclusive of interest expense) associated with
the asset to the asset's net carrying value to determine if a write-down to
market value or discounted cash flow value is required. We assess
impairment of property and equipment in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.
Long-term
debt. We state
long-term debt net of any unamortized original issue premium or
discount. We classify amortization of deferred financing costs and
any premium or discount associated with the issuance of indebtedness as,
interest expense, and compute such amortization by the interest method over the
term of the applicable issue.
Employee benefit
plans. Accounting and funding policies for retirement plans
are described in Note 8.
Income
taxes. We recognize
deferred income tax assets and liabilities for the expected future tax
consequences of temporary differences between the income tax and financial
reporting carrying amounts of assets and liabilities, including investments in
our subsidiaries and affiliates who are not members of the Contran Tax Group and
undistributed earnings of non-U.S. subsidiaries which are not deemed to be
permanently reinvested. We periodically evaluate our deferred tax
assets in the various taxing jurisdictions in which we operate and adjust any
related valuation allowance based on the estimate of the amount of such deferred
tax assets that we believe do not meet the more-likely-than-not recognition
criteria.
Prior to
2007, we provided a reserve for uncertain income tax positions when we believed
the benefit associated with a tax position was not probable of prevailing with
the applicable tax authority and the amount of the lost benefit associated with
such tax position was reasonably estimable. Beginning in 2007, we
record a reserve for uncertain tax positions in accordance with Financial
Accounting Standards Board Interpretation No. (“FIN”) 48, Accounting for Uncertain Tax
Positions for tax position where we believe it is more-likely-than-not
our position will not prevail with the applicable tax
authorities. See Note 13.
Net
sales. We record sales when products are shipped and title and
other risks and rewards of ownership have passed to the customer, or when
services are performed. Shipping terms of products shipped are
generally FOB shipping point; although in some instances shipping terms are FOB
destination point (for which sales are not recognized until the product is
received by the customer). We state sales net of price, early payment
and distributor discounts and volume rebates. We report any tax
assessed by a governmental authority that we collect from our customers that is
both imposed on and concurrent with our revenue-producing activities (such as
sales, use, value added and excise taxes) on a net basis (meaning we do not
recognize these taxes either in our revenues or in our costs and
expenses).
Inventories and
cost of sales. We state
inventories at the lower of cost (principally average cost) or market, net of
allowance for slow-moving inventories. Unallocated overhead costs
resulting from periods with abnormally low production levels are charged to
expense in the period incurred. We remove amounts from inventories at
average cost. Unallocated overhead costs resulting from periods with
abnormally low production levels are charged to expense in the period
incurred. We
remove amounts from inventories at average cost. Cost of sales
includes costs for materials, packaging and finishing, utilities, salary and
benefits, maintenance and depreciation.
Selling, general
and administrative expense; shipping and handling costs. Selling, general and
administrative expense includes costs related to marketing, sales, distribution,
shipping and handling, research and development and legal and administrative
functions such as accounting, treasury and finance, and includes costs for
salaries and benefits, travel and entertainment, promotional materials and
professional fees. We include shipping and handling costs in selling,
general and administrative expense and these costs were $13.0 million in 2006,
$12.8 million in 2007 and $14.6 million in 2008. We expense
advertising costs as incurred and these costs were approximately $.1 million in
each of 2006 and 2007 and $.2 million in 2008. We expense research,
development and certain sales technical support costs as incurred and these
costs approximated $.4 million in each of 2006 and 2007 and $.6 million in
2008.
Note
2 – Accounts and notes receivable:
December 31,
|
||||||||
2007
|
2008
|
|||||||
(In
millions)
|
||||||||
Trade
receivables
|
$ | 12.6 | $ | 10.9 | ||||
Recoverable
VAT and other receivables
|
3.5 | 3.8 | ||||||
Allowance
for doubtful accounts
|
-
|
-
|
||||||
Total
|
$ | 16.1 | $ | 14.7 |
Note
3 – Inventories:
December 31,
|
||||||||
2007
|
2008
|
|||||||
(In
millions)
|
||||||||
Raw
materials
|
$ | 28.6 | $ | 28.0 | ||||
Work
in process
|
4.6 | 4.6 | ||||||
Finished
products
|
34.1 | 47.6 | ||||||
Supplies
|
23.4
|
24.5
|
||||||
Total
|
$ | 90.7 | $ | 104.7 |
Note
4 – Other noncurrent assets:
December 31,
|
||||||||
2007
|
2008
|
|||||||
(In
millions)
|
||||||||
Restricted
marketable debt securities
|
$ | 3.2 | $ | 3.5 | ||||
Deferred
financing costs, net
|
.1 | .4 | ||||||
Other
|
.1 | - | ||||||
Total
|
$ | 3.4 | $ | 3.9 |
Note
5 – Accounts payable and accrued liabilities:
December 31,
|
||||||||
2007
|
2008
|
|||||||
(In
millions)
|
||||||||
Accounts
payable
|
$ | 28.2 | $ | 27.1 | ||||
Accrued
liabilities:
|
||||||||
Employee
benefits
|
10.0 | 9.2 | ||||||
Other
|
14.7 | 8.6 | ||||||
Total
|
$ | 52.9 | $ | 44.9 |
Note
6 – Notes payable and long-term debt:
December 31,
|
||||||||
2007
|
2008
|
|||||||
(In
millions)
|
||||||||
Revolving
credit facility
|
$ | - | $ | 25.3 | ||||
Other
|
5.3 | 3.4 | ||||||
Total
debt
|
5.3 | 28.7 | ||||||
Less
current maturities
|
.8 | .8 | ||||||
Total
long-term debt
|
$ | 4.5 | $ | 27.9 |
Revolving Credit Facility. We and certain of KII’s
subsidiaries in Belgium, Norway and Germany (Kronos Europe S.A./N.V. - “KEU,”
Kronos Titan A/S - “TAS” Titania A/S - “TIA,” Kronos Norge A/S, the parent
company of TAS and TIA, and Kronos Denmark ApS, the parent company of Kronos
Norge and KEU), have a euro 80 million secured revolving credit facility that
matures in May 2011. We may denominate borrowings in euro, Norwegian
kroner or U.S. dollars. Outstanding borrowings bear interest at the
applicable interbank market rate plus 1.75% (4.49% at December 31,
2008). We may also issue up to euro 5 million letters of credit under
the facility. The facility is collateralized by the accounts
receivable and inventories of the borrowers, plus a limited pledge of all of the
other assets of the Belgian borrower. This facility contains certain
restrictive covenants which, among other things, restrict the ability of the
borrowers to incur debt, incur liens, pay dividends or merge or consolidate
with, or sell or transfer all or substantially all of their assets to another
entity. In addition, this facility contains customary cross-default
provisions with respect to other debt and obligations of ours and our other
subsidiaries. At December 31, 2008, KII borrowed a net euro 30.0
million ($42.2 million) under the credit facility and the equivalent of $70.3
million was available for additional borrowing, subject to being in compliance
with financial covenants or obtaining a waiver or amendment to the credit
facility, as more fully described in Restrictions and
Other. Of the net euro 30.0 million borrowings at December 31,
2008, we had borrowed a net euro 18.0 million ($25.3 million).
Senior Secured Notes. On April
11, 2006, KII issued an aggregate of euro 400 million principal amount of 6.5%
Senior Secured Notes due April 2013, at 99.306% of their principal amount
($498.5 million when issued) to yield an effective interest rate of
7.1%. These 6.5% Notes are collateralized by a pledge of 65% of the
common stock or other ownership interests of certain of KII’s first-tier
operating subsidiaries. Such operating subsidiaries are us, Kronos
Titan GmbH, Kronos Limited and Societe Industrielle Du Titane,
S.A. KII issued the 6.5% Notes pursuant to an indenture which
contains a number of covenants and restrictions which, among other things,
restricts our ability and that of our subsidiaries to incur debt, incur liens,
pay dividends or merge or consolidate with, or sell or transfer all or
substantially all of KII’s assets or those or our subsidiaries to another
entity. At KII’s option, KII may redeem the 6.5% Notes on or after
October 15, 2009 at redemption prices ranging from 103.25% of the principal
amount, declining to 100% on or after October 15, 2012. In addition,
on or before April 15, 2009, KII may redeem up to 35% of the 6.5% Notes with the
net proceeds of a qualified public equity offering at 106.5% of the principal
amount. In the event of a change of control, as defined, KII would be
required to make an offer to purchase the 6.5% Notes at 101% of the principal
amount. KII would also be required to make an offer to purchase a
specified portion of the 6.5% Notes at par value in the event KII generate a
certain amount of net proceeds from the sale of assets outside the ordinary
course of business, and such net proceeds are not otherwise used for specified
purposes within a specified time period. The indenture also contains
certain cross-default provisions, as discussed below. At December 31,
2008, the carrying amount of the 6.5% Notes includes euro 1.7 million ($2.4
million) of unamortized original issue discount (2007 – euro 2.1 million, or
$3.1 million).
Under the
cross-default provisions of the 6.5% Notes, the 6.5% Notes may be accelerated
prior to their stated maturity if us, KII or any of their 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 this facility may be accelerated
prior to its stated maturity if the we or any borrowers default under any other
indebtedness in excess of euro 5 million due to a failure to pay such other
indebtedness at its due date (including any due date that arises prior to the
stated maturity as a result of a default under such other
indebtedness). 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, of the applicable borrower. In the
event the cross-default provisions of either the 6.5% Notes or the credit
facility become applicable, and such indebtedness is accelerated, we would be
required to repay such indebtedness prior to their stated maturity.
The
aggregate maturities of long-term debt at December 31, 2008 are shown in the
table below.
Years ending December 31,
|
Amount
|
|||
(In
millions)
|
||||
2009
|
$ | .8 | ||
2010
|
.8 | |||
2011
|
26.2 | |||
2012
|
.9 | |||
Total
|
$ | 28.7 |
Restrictions and
other. The credit
facility described above requires the respective borrower 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. While we were in compliance with all of our debt covenants at
December 31, 2008, we currently believe it is probable that one of our required
financial ratios associated with our European credit facility (the ratio of net
secured debt to earnings before income taxes, interest and depreciation, as
defined) will not be maintained at some point during 2009, most likely
commencing at March 31, 2009. In 2009, we have begun to reduce our
production levels in response to the current economic environment, which we
anticipate will favorably impact our liquidity and cash flows by reducing our
inventory levels. However, the reduced capacity utilization levels
will negatively impact our 2009 results of operations due to the resulting
unabsorbed fixed production costs that will be charged to expense as
incurred. As a result, we may not be able to maintain the required
financial ratio throughout 2009.
We have
begun discussions with the lenders to amend the terms of the existing European
credit facility to eliminate the requirement to maintain this financial ratio
until at least March 31, 2010. While we believe it is possible we can
obtain such an amendment to eliminate this financial ratio through at least
March 31, 2010, there is no assurance that such amendment will be obtained, or
if obtained that the requirement to maintain the financial ratio will be
eliminated (or waived, in the event the lenders would only agree to a waiver and
not an amendment to eliminate the covenant itself) through at least March 31,
2010. Any such amendment or waiver which we might obtain could
increase our future borrowing costs, either from a requirement that we pay a
higher rate of interest on outstanding borrowings or pay a fee to the lenders as
part of agreeing to such amendment or waiver.
In the
event we would not be successful in obtaining the amendment or waiver of the
existing European credit facility to eliminate the requirement to maintain the
financial ratio, we would seek to refinance such facility with a new group of
lenders with terms that did not include such financial covenant or, if required,
we will use our existing liquidity resources (which could include funds provided
by our affiliates). While there is no assurance that we would
be able to refinance the existing European credit facility with a new group of
lenders, we believe these other sources of liquidity available to us would allow
us to refinance the existing European credit facility. If required,
we believe by undertaking one or more of these steps we will be successful in
maintaining sufficient liquidity to meet our future obligations including
operations, capital expenditures and debt service for the next 12
months.
Note
7 - Income taxes:
Years ended December 31,
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
(In
millions)
|
||||||||||||
Pretax
income:
|
||||||||||||
Denmark
|
$ | .6 | $ | .4 | $ | (.1 | ) | |||||
Non-Denmark
|
43.3
|
27.1
|
20.9
|
|||||||||
Total
|
$ | 43.9 | $ | 27.5 | $ | 20.8 | ||||||
Expected
tax expense
|
$ | 12.3 | $ | 6.9 | $ | 5.2 | ||||||
Non-Denmark
tax rates
|
.9 | 1.1 | .9 | |||||||||
Nondeductible
expenses
|
.3 | .3 | .4 | |||||||||
Tax
contingency reserve adjustment, net
|
(2.4 | ) | - | - | ||||||||
Nontaxable
income
|
(.5 | ) | (.5 | ) | (.9 | ) | ||||||
Other,
net
|
(.4 | ) | .2 | - | ||||||||
Total
income tax expense
|
$ | 10.2 | $ | 8.0 | $ | 5.6 | ||||||
Provision
for income taxes:
|
||||||||||||
Current
income tax expense:
|
||||||||||||
Denmark
|
$ | .2 | $ | .1 | $ | - | ||||||
Non-Denmark
|
14.5
|
11.5
|
5.7
|
|||||||||
14.7
|
11.6
|
5.7
|
||||||||||
Deferred
income tax expense (benefit):
|
||||||||||||
Denmark
|
(2.4 | ) | (.3 | ) | - | |||||||
Non-Denmark
|
(2.1)
|
(3.3)
|
(.1 | ) | ||||||||
(4.5)
|
(3.6)
|
(.1 | ) | |||||||||
Total
income tax expense
|
$ | 10.2 | $ | 8.0 | $ | 5.6 | ||||||
Comprehensive
provision for income taxes allocable to:
|
||||||||||||
Pretax
income
|
$ | 10.2 | $ | 8.0 | $ | 5.6 | ||||||
Other
comprehensive loss –
Pension
plans
|
2.5 | 3.9 | (1.3 | ) | ||||||||
Adoption
of SFAS No. 158 –
Pension
plans
|
(5.9)
|
-
|
-
|
|||||||||
Total
|
$ | 6.8 | $ | 11.9 | $ | 4.3 |
The
components of our net deferred income taxes are summarized below.
December 31,
|
||||||||||||||||
2007
|
2008
|
|||||||||||||||
Assets
|
Liabilities
|
Assets
|
Liabilities
|
|||||||||||||
(In
millions)
|
||||||||||||||||
Tax
effect of temporary differences relating to:
|
||||||||||||||||
Inventories
|
$ | .1 | $ | (1.9 | ) | $ | - | $ | (2.1 | ) | ||||||
Property
and equipment
|
- | (20.4 | ) | - | (17.2 | ) | ||||||||||
Accrued
pension cost
|
1.4 | - | 2.5 | - | ||||||||||||
Accrued
liabilities and other deductible differences
|
3.0 | - | 2.1 | - | ||||||||||||
Other
taxable differences
|
- | (.4 | ) | - | - | |||||||||||
Gross
deferred tax assets (liabilities)
|
4.5 | (22.7 | ) | 4.6 | (19.3 | ) | ||||||||||
Reclassification,
principally netting by tax jurisdiction
|
(4.5 | ) | 4.5 | (4.6 | ) | 4.6 | ||||||||||
Net
total deferred tax liabilities
|
- | (18.2 | ) | - | (14.7 | ) | ||||||||||
Net
current deferred tax liabilities
|
- | (1.8 | ) | - | (1.8 | ) | ||||||||||
Net
noncurrent deferred tax liabilities
|
$ | - | $ | (16.4 | ) | $ | - | $ | (12.9 | ) |
Principally
as a result of the withdrawal of certain Belgian and Norwegian assessments, we
recognized a $2.4 million income tax benefit in 2006 related to the total
reduction in our income tax contingency reserve.
Income tax examinations related to our
operations continue, and we cannot guarantee that these tax matters will be
resolved in our favor due to the inherent uncertainties involved in settlement
initiatives and court and tax proceedings. We believe we have
adequate accruals for additional taxes and related interest expense which could
ultimately result from tax examinations. We believe the ultimate
disposition of tax examinations should not have a material adverse effect on our
consolidated financial position, results of operations or
liquidity.
Note
8 - Employee benefit plans:
Defined
contribution plans. We maintain
various defined contribution pension plans with our contributions based on
matching or other formulas. Defined contribution plan expense was not
material in 2006, 2007 or 2008.
Changes in
Accounting - defined benefit plans. In September
2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans. SFAS No. 158
requires us to recognize an asset or liability for the over or under funded
status of each of our individual defined benefit pension and postretirement
benefit plans on our Consolidated Balance Sheets. This standard does not
change the existing recognition and measurement requirements that determine the
amount of periodic benefit cost we recognize in net income.
We
adopted the asset and liability recognition and disclosure requirements of SFAS
No. 158 effective December 31, 2006 on a prospective basis, in which we
recognized through other comprehensive income all of our prior unrecognized
gains and losses and prior service costs or credits, net of tax, as of December
31, 2006. The effect of adopting the asset and liability recognition
requirements of this standard resulted in a $14.4 million net decrease in our
accumulated other comprehensive income (loss), consisting of our loss related to
our defined benefit pension plans. Starting January 1, 2007, we
recognize all changes in the funded status of these plans through comprehensive
income (loss), net of tax. Any future changes will be recognized
either in net income (loss), to the extent they are reflected in periodic
benefit cost, or through other comprehensive income (loss).
Prior to December 31, 2007 we used
September 30 as a measurement date for our defined benefit pension plans. In
accordance with the measurement date requirements of SFAS No. 158, effective
December 31, 2007 we commenced to use a December 31 measurement date for all of
our defined benefit pension plans using a 15 month net periodic benefit cost
based on the September 30, 2006 actuarial valuations. Accordingly,
four-fifths of the net periodic benefit cost for such 15-month period has been
included in the determination of our net income for 2007, and one-fifth of the
net periodic benefit cost for such 15-month period, net of income taxes, has
been allocated as a direct adjustment to our retained deficit in accordance with
the transition provisions of the standard to reflect the change in measurement
dates. To the extent the net periodic benefit cost included
amortization of unrecognized actuarial losses, prior service cost and net
transition obligations, which were previously recognized as a component of
accumulated other comprehensive income at December 31, 2006, the effect on
retained earnings, net of income taxes, was offset by a change in our
accumulated other comprehensive income.
Defined benefit
plans. We maintain
various defined benefit pension plans. Employees are covered by plans
in their respective countries.
We expect
to contribute the equivalent of approximately $2.2 million to all of our defined
benefit pension plans during 2009. Benefit payments to plan
participants out of plan assets are expected to be the equivalent
of:
Years ending December 31,
|
Amount
|
|||
(In
millions)
|
||||
2009
|
$ | 2.9 | ||
2010
|
3.0 | |||
2011
|
3.2 | |||
2012
|
5.0 | |||
2013
|
2.9 | |||
Next
five years
|
17.1 |
The
funded status of our defined benefit pension plan is presented in the table
below.
December 31,
|
||||||||
2007
|
2008
|
|||||||
(In
millions)
|
||||||||
Change
in projected benefit obligations (“PBO”):
|
||||||||
Benefit
obligations at beginning of year
|
$ | 74.8 | $ | 71.7 | ||||
Change
in measurement date, net
|
1.3 | - | ||||||
Service
cost
|
2.2 | 1.7 | ||||||
Interest
cost
|
3.6 | 3.8 | ||||||
Participant
contributions
|
.2 | .1 | ||||||
Actuarial
(gains) losses
|
(13.9 | ) | 3.1 | |||||
Change
in currency exchange rates
|
9.3 | (14.4 | ) | |||||
Benefits
paid
|
(5.8 | ) | (5.1 | ) | ||||
Benefit
obligations at end of year
|
71.7 | 60.9 | ||||||
Change
in fair value of plan assets:
|
||||||||
Fair
value of plan assets at beginning of year
|
60.2 | 65.7 | ||||||
Actual
return on plan assets
|
.9 | .5 | ||||||
Employer
contributions
|
2.1 | 2.7 | ||||||
Participant
contributions
|
.2 | .1 | ||||||
Change
in currency exchange rates
|
8.1 | (13.1 | ) | |||||
Benefits
paid
|
(5.8 | ) | (5.1 | ) | ||||
Fair
value of plan assets at end of year
|
$ | 65.7 | $ | 50.8 | ||||
Funded
status
|
$ | (6.0 | ) | $ | (10.1 | ) | ||
Amounts
recognized in the balance sheet:
|
||||||||
Accrued
pension cost:
|
||||||||
Current
|
$ | - | $ | - | ||||
Non
current
|
(6.0 | ) | (10.1 | ) | ||||
Total
|
$ | (6.0 | ) | $ | (10.1 | ) | ||
Accumulated
other comprehensive loss:
|
||||||||
Actuarial
loss
|
$ | 10.1 | $ | 15.2 | ||||
Prior
service cost
|
2.1 | 1.8 | ||||||
Net
transition obligation
|
.5 | .4 | ||||||
Total
|
$ | 12.7 | $ | 17.4 | ||||
Accumulated
benefit obligations (“ABO”)
|
$ | 57.1 | $ | 48.0 |
The
amounts shown in the table above for actuarial losses, prior service cost and
net transition obligation at December 31, 2007 and 2008 have not yet been
recognized as components of our periodic defined benefit pension cost as of
those dates. These amounts will be recognized as components of our
periodic defined benefit cost in future years. In accordance with
SFAS No. 158, these amounts, net of deferred income taxes, are recognized in our
accumulated other comprehensive income (loss) at December 31, 2007 and
2008. We expect to recognize approximately $.4 million of the
actuarial loss, $.3 million of the prior service cost and $.2 million of the net
transition obligation, respectively, as of December 31, 2008, as components of
our net periodic pension cost in 2009.
The table
below details the changes in plan assets and benefit obligations recognized in
accumulated other comprehensive income (loss) during 2007 and 2008.
Years Ended December
31, 2008
|
||||||||
2007
|
2008
|
|||||||
(In
millions)
|
||||||||
Changes
in plan assets and benefit obligations
recognized
in other comprehensive income (loss):
|
||||||||
Current
year:
|
||||||||
Net
actuarial gain (loss)
|
$ | 12.4 | $ | (5.6 | ) | |||
Amortization
of unrecognized:
|
||||||||
Prior service cost
|
.3 | .3 | ||||||
Net transition obligations
|
.2 | .1 | ||||||
Net
actuarial losses
|
1.3 | .5 | ||||||
Change
in measurement date:
|
||||||||
Prior service cost
|
.1 | - | ||||||
Net
actuarial losses
|
.3 | - | ||||||
Total
|
$ | 14.6 | $ | (4.7 | ) |
The
components of our net periodic defined benefit pension cost are presented in the
table below. The amounts shown below for the amortization of prior
service cost, net transition obligations and recognized actuarial losses for
2007 and 2008 were recognized as components of our accumulated other
comprehensive income (loss) at December 31, 2006 and 2007, respectively, net of
deferred income taxes.
Years ended December 31,
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
(In
millions)
|
||||||||||||
Net
periodic pension cost:
|
||||||||||||
Service
cost benefits
|
$ | 2.3 | $ | 2.2 | $ | 1.7 | ||||||
Interest
cost on PBO
|
3.2 | 3.6 | 3.8 | |||||||||
Expected
return on plan assets
|
(3.1 | ) | (3.1 | ) | (3.6 | ) | ||||||
Amortization
of prior service cost
|
.3 | .3 | .3 | |||||||||
Amortization
of net transition obligations
|
.1 | .1 | .1 | |||||||||
Recognized
actuarial losses
|
1.5 | 1.3 | .5 | |||||||||
Total
|
$ | 4.3 | $ | 4.4 | $ | 2.8 |
The
weighted-average rate assumptions used in determining the actuarial present
value of benefit obligations as of December 31, 2007 and 2008 are presented in
the table below. Such weighted-average rates were determined using
the projected benefit obligations at each date.
December 31,
|
||||||||
Rate
|
2007
|
2008
|
||||||
Discount
rate
|
5.5 | % | 5.8 | % | ||||
Increase
in future compensation levels
|
3.0 | % | 3.0 | % |
The
weighted-average rate assumptions used in determining the net periodic pension
cost for 2006, 2007 and 2008 are presented in the table below. The
weighted-average discount rate and the weighted-average increase in future
compensation levels were determined using the projected benefit obligations as
of the beginning of each year, and the weighted-average long-term return on plan
assets was determined using the fair value of plan assets as of the beginning of
each year.
Years ended December 31,
|
||||||||||||
Rate
|
2006
|
2007
|
2008
|
|||||||||
Discount
rate
|
4.4 | % | 4.7 | % | 5.5 | % | ||||||
Increase
in future compensation levels
|
3.0 | % | 3.0 | % | 3.0 | % | ||||||
Long-term
return on plan assets
|
5.5 | % | 6.4 | % | 5.5 | % |
Variances
from actuarially assumed rates will result in increases or decreases in
accumulated pension obligations, pension expenses and funding requirements in
future periods.
In
determining the expected long-term rate of return on plan asset assumptions, we
consider the long-term asset mix (e.g. equity vs. fixed income) for the assets
for each of our plans and the expected long-term rates of return for such asset
components. In addition, we receive advice about appropriate
long-term rates of return from third-party actuaries. We currently
have a plan asset target allocation of 14% to equity securities, 64% to fixed
income securities and the remainder primarily to cash and liquid
investments. The expected long-term rate of return for such
investments is approximately 8.5%, 5.0% and 4.5%, respectively. The
plan asset allocation at December 31, 2008 was 14% to equity securities, 83% to
fixed income securities and the remainder invested primarily cash and liquid
investments (2007 – 18%, 68% and 14%, respectively).
We
regularly review our actual asset allocation for each of our plans, and will
periodically rebalance the investments in each plan to more accurately reflect
the targeted allocation when considered appropriate.
Note
9 - Related party transactions:
We may be
deemed to be controlled by Harold C. Simmons. See Note
1. Corporations that may be deemed to be controlled by or affiliated
with Mr. Simmons sometimes engage in (a) intercorporate transactions such as
guarantees, management and expense sharing arrangements, shared fee
arrangements, tax sharing agreements, joint ventures, partnerships, loans,
options, advances of funds on open account, and sales, leases and exchanges of
assets, including securities issued by both related and unrelated parties and
(b) common investment and acquisition strategies, business combinations,
reorganizations, recapitalizations, securities repurchases, and purchases and
sales (and other acquisitions and dispositions) of subsidiaries, divisions or
other business units, which transactions have involved both related and
unrelated parties and have included transactions which resulted in the
acquisition by one related party of a publicly held minority equity interest in
another related party. While no transactions of the type described
above are planned or proposed with respect to us other than as set forth in
these financial statements, we from time to time consider, review and evaluate
such transactions and understand that Contran and related entities consider,
review and evaluate such transactions. Depending upon the business,
tax and other objectives then relevant, it is possible that we might be a party
to one or more such transactions in the future.
We are
party to services and cost sharing agreements among several of our affiliates
whereby Kronos, KII and other affiliates provide certain management, financial,
insurance and administrative services to us on a fee basis. Our
expense was approximately $.9 million in 2006 and 2007 and $.7 million in 2008
related to these services and costs.
Tall
Pines Insurance Company and EWI RE, Inc. provide for or broker certain insurance
policies for Contran and certain of its subsidiaries and affiliates, including
ourselves. Tall Pines and EWI are subsidiaries of
Valhi. Consistent with insurance industry practices, Tall Pines and
EWI receive commissions from insurance and reinsurance underwriters and/or
assess fees for the policies that they provide or broker. The
aggregate premiums we paid to Tall Pines and EWI were $3.1 million in 2006 and
$2.3 million in each of 2007 and 2008. These amounts principally
included payments for insurance and reinsurance premiums paid to third parties,
but also included commissions paid to Tall Pines and EWI. Tall Pines
purchases reinsurance for substantially all of the risks it
underwrites. We expect that these relationships with Tall Pines and
EWI will continue in 2009.
Contran
and certain of its subsidiaries and affiliates, including us, purchase certain
of their insurance policies as a group, with the costs of the jointly-owned
policies being apportioned among the participating companies. With
respect to certain of such policies, it is possible that unusually large losses
incurred by one or more insureds during a given policy period could leave the
other participating companies without adequate coverage under that policy for
the balance of the policy period. As a result, Contran and certain of
its subsidiaries and its affiliates, including Kronos, KII and us have entered
into a loss sharing agreement under which any uninsured loss is shared by those
entities who have submitted claims under the relevant policy. We
believe the benefits in the form of reduced premiums and broader coverage
associated with the group coverage for such policies justifies the risk
associated with the potential for uninsured loss.
We purchase from and sell to our
affiliates a significant amount of TiO2. Sales
of TiO2
to our affiliates were $119.5 million in 2006, $124.3 million in 2007 and
$122.0 million in 2008. Purchases of TiO2 from our
affiliates were $62.9 million in 2006, $74.4 million in 2007 and $55.6 million
in 2008.
Sales of
ilmenite to our affiliate in Germany were $21.8 million in 2006, $21.3 million
in 2007 and $25.2 million in 2008.
Kronos
(US), Inc. (KUS) purchases the rutile and slag feedstock used as a raw material
in all of our chloride process TiO2
facilities. We purchase such feedstock from KUS for use in our
facilities for an amount equal to the amount paid by KUS to the third-party
supplier plus a 2.5% administrative fee. Such feedstock purchases
were $46.9 million in 2006, $55.7 million in 2007 and $59.2 million in
2008.
We pay
royalties to KII for use of certain of KII’s intellectual
property. These royalties totaled $12.9 million in 2006 and $13.4
million in each of 2007 and 2008, and are included as a component of cost of
sales.
During
2006, 2007 and 2008, we were party to an accounts receivable factoring agreement
with one or more of our affiliates whereby we factored our export accounts
receivable without recourse for a fee of 0.85% for our export receivables
related to our Belgian operations and 1.2% for export receivables related to our
Norwegian operations. Upon our non-recourse transfer, the affiliate
assumed all risk pertaining to the factored receivables, including, but not
limited to, exchange control risks, risks pertaining to the bankruptcy of a
customer and risks related to late payments. Our export receivables
sold pursuant to the factoring agreement during 2006, 2007 and 2008 aggregated
$124.9 million, $141.7 million and $165.5 million, respectively.
Receivables from affiliates at December
31, 2007 and 2008 relate primarily to amounts owed to us by our affiliate in
Germany, and payables to affiliates relate principally to KII and Kronos. These amounts generally
relate to product purchases and sales. The receivable from our German
affiliate also includes accounts receivable factoring fees.
Note
10 – NL common stock options held by our employees:
At
December 31, 2008, our employees held options to purchase approximately 10,000
shares of NL common stock, of which 5,000 are exercisable at various dates
through 2010 at an exercise price ranging from $5.63 to $11.49 per share and
5,000 are exercisable at various dates through 2011 at an exercise price of
$11.49 per share.
Note
11 - Commitments and contingencies:
Environmental
matters. Our operations are
governed by various environmental laws and regulations. Certain of
our businesses are, or have been engaged in the handling, manufacture or use of
substances or compounds that may be considered toxic or hazardous within the
meaning of applicable environmental laws and regulations. As with
other companies engaged in similar businesses, certain of our past and current
operations and products have the potential to cause environmental or other
damage. We have implemented and continue to implement various
policies and programs in an effort to minimize these risks. Our
policy is to maintain compliance with applicable environmental laws and
regulations at all our facilities and to strive to improve our environmental
performance. From time to time, we may be subject to environmental
regulatory enforcement under various statutes, resolution of which typically
involves the establishment of compliance programs. It is possible
that future developments, such as stricter requirements of environmental laws
and enforcement policies there under, could adversely affect our production,
handling, use, storage, transportation, sale or disposal of such
substances. We believe all of our plants are in substantial
compliance with applicable environmental laws.
Litigation
matters. We are involved in various other environmental,
contractual, product liability, patent (or intellectual property), employment
and other claims and disputes incidental to our business. We
currently believe the disposition of all claims and disputes, individually or in
the aggregate, should not have a material adverse effect on our consolidated
financial condition, results of operations or liquidity.
Concentrations of
credit risk. Sales of TiO2 accounted
for approximately 77%, 78% and 75% of our sales during 2006, 2007 and 2008,
respectively. The remaining sales result from the mining and sale of
ilmenite ore (a raw material used in the sulfate pigment production process) and
the manufacture and sale of certain titanium chemical products (derived from
co-products of the TiO2 production
process). We sell TiO2 to the
paint, plastics and paper industries. Such markets are generally
considered "quality-of-life" markets whose demand for TiO2 is
influenced by the relative economic well-being of the various geographic
regions. We sell TiO2 to over
1,000 customers, with the top ten external customers approximating 24% of net
sales in 2006 and 22% of net sales in each of 2007 and 2008. We did
not have sales to a single customer of over 10% in any of the previous three
years. Approximately 84% of our TiO2 sales by
volume were to Europe in 2006 and 86% in 2007 and 2008. Approximately
9% of sales by volume were to North America in 2006, 5% in 2007 and 4% in
2008.
Long-term
contracts. KUS has
long-term supply contracts that provide for certain of its affiliates’ TiO2 feedstock
requirements through 2011 including ours. The agreements require KUS
to purchase certain minimum quantities of feedstock with minimum annual purchase
commitments aggregating approximately $505 million at December 31,
2008. The agreements require that we and certain of our affiliates
purchase chloride process feedstock underlying these long-term supply contracts
from KUS. In addition, we have other long-term supply and service
contracts that provide for various raw materials and services through
2014. These agreements require us to purchase certain minimum
quantities or services with minimum purchase commitments aggregating
approximately $2 million at December 31, 2008.
Operating
leases. We
lease various manufacturing and office space and transportation equipment
pursuant to operating leases. Some of the leases contain purchase
and/or various term renewal options at fair market and fair rental values,
respectively. In most cases we expect that, in the normal course of
business, such leases will be renewed or replaced by other
leases. Net rent expense approximated $3 million in each of 2006,
2007 and 2008. At December 31, 2008, minimum rental commitments under
the terms of noncancellable operating leases were as follows:
Years ending December 31,
|
Amount
|
|||
(in
millions)
|
||||
2009
|
$ | .8 | ||
2010
|
.7 | |||
2011
|
.6 | |||
2012
|
.6 | |||
2013
|
.4 | |||
Total
|
$ | 3.1 |
Note
12 - Financial instruments:
We
adopted SFAS No. 157 effective January 1, 2008 for financial assets
and liabilities measured on a recurring basis. SFAS No. 157
applies to all financial assets and financial liabilities that are being
measured and reported on a fair value basis. SFAS No. 157 establishes a
framework for measuring fair value and expands disclosure about fair value
measurements. The statement requires fair value measurements to be
classified and disclosed in one of three categories, see Note 1.
There was
no impact for the adoption of SFAS No. 157 to the Consolidated Financial
Statements. The following table summarizes the valuation of our short-term
investments and financial instruments by the above SFAS No. 157 categories
as of December 31, 2008:
Fair Value Measurements at December 31,
2008
|
||||||||||||||||
Total
|
Quoted
Prices in Active Markets (Level
1)
|
Significant
Other Observable Inputs (Level
2)
|
Significant
Unobservable Inputs (Level
3)
|
|||||||||||||
(in
millions)
|
||||||||||||||||
Marketable
securities
|
$ | 3.5 | $ | 3.5 | $ | - | $ | - | ||||||||
Currency
forward contracts
|
(2.6 | ) | (2.6 | ) | - | - | ||||||||||
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 receivables denominated in a currency other than the
holder's functional currency or similar exchange rate risk associated with
future sales. We have not entered into these contracts for trading or
speculative purposes in the past, nor do we currently anticipate entering into
such contracts for trading or speculative purposes in the
future. Derivatives used to hedge forecasted transactions and
specific cash flows associated with non-functional currency denominated
financial assets and liabilities which meet the criteria for hedge accounting
are designated as cash flow hedges. Consequently, the effective
portion of gains and losses is deferred as a component of accumulated other
comprehensive income and is recognized in earnings at the time the hedged item
affects earnings. Contracts that do not meet the criteria for hedge
accounting are marked-to-market at each balance sheet date with any resulting
gain or loss recognized in income currently as part of net currency
transactions. During 2007 and 2008, we have not used hedge accounting
for any of our contracts. We held no such currency forward contracts
at December 31, 2007 and held no other significant derivative contracts at
December 31, 2007 or 2008. In the fourth quarter of 2008 we entered
into a series of currency forward contracts. The fair value of the
currency forward contracts is determined using Level 1 inputs as defined in SFAS
No. 157 based on the foreign currency spot forward rates quoted by
banks. At December 31, 2008 we had currency forward contracts to
exchange:
·
|
an
aggregate $57 million for an equivalent value of Norwegian kroner at
exchange rates ranging from kroner 6.91 to kroner 7.18. These
contracts with DnB Nor Bank ASA mature from January 2009 through December
2009 at a rate of $.5 million to $2.5 million per month. At
December 31, 2008, the actual exchange rate was kroner 7.0 per U.S.
dollar.
|
·
|
an
aggregate euro 16.4 million for an equivalent value of Norwegian kroner at
exchange rates ranging from kroner 8.64 to kroner 9.23. These
contracts with DnB Nor Bank ASA mature from January 2009 through December
2009 at a rate of euro .5 million to euro .7 million per
month. At December 31, 2008, the actual exchange rate was
kroner 9.7 per euro.
|
The
estimated fair value of such currency forward contracts at December 31, 2008 was
a $2.6 million net liability, of which $.3 million is recognized as part of
prepaid expenses and $2.9 million is recognized as part of accounts payable and
accrued liabilities in our Consolidated Balance Sheets and a corresponding $2.6
million foreign currency transaction loss in our Consolidated Statements of
Income.
The
following table presents the financial instruments that are not carried at fair
value but which require fair value disclosure as of December 31, 2007 and
2008.
December 31,
|
||||||||||||||||
2007
|
2008
|
|||||||||||||||
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
Amount
|
Value
|
Amount
|
Value
|
|||||||||||||
(In
millions)
|
||||||||||||||||
Cash,
cash equivalents and restricted cash
|
$ | 6.5 | $ | 6.5 | $ | 2.6 | $ | 2.6 | ||||||||
Long-term
debt:
|
||||||||||||||||
Revolving
credit facility
|
$ | - | $ | - | $ | 25.3 | $ | 25.3 | ||||||||
Other-primarily
capital leases
|
5.3 | 5.3 | 3.4 | 3.4 |
At
December 31, 200 and 2008, the estimated market price of the 6.5% Notes was
approximately euro 860 and euro 230 per euro 1,000 principal amount,
respectively.
Note
13 – Recent accounting pronouncements:
Fair Value Measurements. In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
which will become effective for us on January 1, 2008. SFAS No. 157
generally provides a consistent, single fair value definition and measurement
technique for GAAP pronouncements. SFAS No. 157 also establishes a
fair value hierarchy for different measurement techniques based on the objective
nature of the inputs in various valuation methods. In February 2008,
the FASB issued FSP No. FAS 157-2, Effective Date of FASB Statement No.
157 which will delay the provisions of SFAS No. 157 for one year for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). Beginning with our first quarter 2008
filing, all of our fair value measurements are in compliance with SFAS No. 157,
except for such nonfinancial assets and liabilities for which we will be
required to be in compliance with SFAS No. 157 prospectively beginning in the
first quarter of 2009. The adoption of this standard did not have a
material effect on our Consolidated Financial Statements.
Fair Value
Option. In the first quarter of 2007 the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. SFAS No. 159 permits companies to
chose, at specified election dates, to measure eligible items at fair value,
with unrealized gains and losses included in the determination of net
income. The decision to elect the fair value option is generally applied
on an instrument-by-instrument basis, is irrevocable unless a new election date
occurs, and is applied to the entire instrument and not to only specified risks
or cash flows or a portion of the instrument. Items eligible for the fair
value option include recognized financial assets and liabilities, other than an
investment in a consolidated subsidiary, defined benefit pension plans, OPEB
plans, leases and financial instruments classified in equity. An
investment accounted for by the equity method is an eligible item. The
specified election dates include the date the company first recognizes the
eligible item, the date the company enters into an eligible commitment, the date
an investment first becomes eligible to be accounted for by the equity method
and the date SFAS No. 159 first becomes effective for us. SFAS No. 159
became effective for us on January 1, 2008. We did not elect to
measure any eligible items at fair value in accordance with this new standard
either at the date we adopted the new standard or subsequently during 2008;
therefore the adoption of this standard did not have a material effect on our
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. 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 will become 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. Because our prior disclosures regarding
these forward contracts have substantially met all of the applicable disclosure
requirements of the new standard, we do not believe the enhanced disclosure
requirements of this new standard will have a significant effect on our
Consolidated Financial Statements. See Note 12.
Uncertain Tax Positions.
On January 1, 2007, we adopted FIN 48, Accounting for Uncertain Tax
Positions. FIN 48 clarifies when and how much of a benefit we
can recognize in our consolidated financial statements for certain positions
taken in our income tax returns under Statement of Financial Accounting
Standards No. 109, Accounting
for Income Taxes, and enhances the disclosure requirements for our income
tax policies and reserves. Among other things, FIN 48 prohibits us
from recognizing the benefits of a tax position unless we believe it is
more-likely-than-not our position will prevail with the applicable tax
authorities and limits the amount of the benefit to the largest amount for which
we believe the likelihood of realization is greater than 50%. FIN 48
also requires companies to accrue penalties and interest on the difference
between tax positions taken on their tax returns and the amount of benefit
recognized for financial reporting purposes under the new
standard. We are required to classify any future reserves for
uncertain tax positions in a separate current or noncurrent liability, depending
on the nature of the tax position. At December 31, 2007 and 2008 our
reserve for uncertain tax positions was nil.
We file
income tax returns in Belgium and Norway. Our non-U.S. income tax
returns are generally considered closed to examination for years prior to 2003
for Belgium and 1999 for Norway.
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 amends SFAS No. 87, 88 and 106 to require expanded disclosures about
employers’ pension plan assets. FSP 132 (R)-1 will be effective for
us beginning with our 2009 annual report, and we will provide the expanded
disclosures about our pension plan assets at that
time.