UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

      

FORM 10-Q

      

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended September 30, 2013

Commission file number 1-31763

      

KRONOS WORLDWIDE, INC.

(Exact name of Registrant as specified in its charter)

      

   

 

Registrant’s telephone number, including area code: (972) 233-1700

      

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨    Smaller reporting company  ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

Number of shares of the Registrant’s common stock outstanding on October 31, 2013: 115,864,598.

      

   

   

   

   

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KRONOS WORLDWIDE, INC. AND SUBSIDIARIES

INDEX

   

 

Items 3, 4 and 5 of Part II are omitted because there is no information to report.

   

   

   

 

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KRONOS WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

   

 

   

 

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KRONOS WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In millions)

   

 

Commitments and contingencies (Notes 8 and 12)

   

   

   

   

   

   

   

   

   

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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KRONOS WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

   

 

   

   

   

   

   

   

   

   

   

   

   

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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KRONOS WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

   

 

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

See accompanying Notes to Condensed Consolidated Financial Statements.

   

 

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KRONOS WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Nine months ended September 30, 2013

(In millions)

   

 

   

   

   

   

   

   

   

   

   

   

See accompanying Notes to Condensed Consolidated Financial Statements.

   

   

 

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KRONOS WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

   

 

   

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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KRONOS WORLDWIDE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013

(unaudited)

   

Note 1—Organization and basis of presentation:

Organization—We are a majority-owned subsidiary of Valhi, Inc. (NYSE: VHI).  At September 30, 2013, Valhi held approximately 50% of our outstanding common stock and NL Industries, Inc. (NYSE: NL) held an additional 30% of our common stock. Valhi owns approximately 83% of NL’s outstanding common stock. Approximately 94% of Valhi’s outstanding common stock is held by Contran Corporation and its subsidiaries.  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 directly by Mr. Simmons or other persons or entities related to Mr. Simmons. Consequently, Mr. Simmons may be deemed to control Contran, Valhi and us.

Basis of presentation—The unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report have been prepared on the same basis as the audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2012 that we filed with the Securities and Exchange Commission (SEC) on March 12, 2013 (2012 Annual Report).  In our opinion, we have made all necessary adjustments (which include only normal recurring adjustments) in order to state fairly, in all material respects, our consolidated financial position, results of operations and cash flows as of the dates and for the periods presented.  We have condensed the Consolidated Balance Sheet and Statement of Stockholders’ Equity at December 31, 2012 contained in this Quarterly Report as compared to our audited Consolidated Financial Statements at that date, and we have omitted certain information and footnote disclosures (including those related to the Consolidated Balance Sheet at December 31, 2012) normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).  Our results of operations for the interim periods ended September 30, 2013 may not be indicative of our operating results for the full year.  The Condensed Consolidated Financial Statements contained in this Quarterly Report should be read in conjunction with our 2012 Consolidated Financial Statements contained in our 2012 Annual Report.

Unless otherwise indicated, references in this report to “we,” “us” or “our” refer to Kronos Worldwide, Inc. and its subsidiaries (NYSE: KRO) taken as a whole.

   

Note 2—Accounts and other receivables:

   

   

 

 

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Note 3—Inventories, net:

   

   

 

   

Note 4—Marketable securities:

Our marketable securities consist of investments in the publicly-traded shares of related parties: Valhi, NL and CompX International Inc.  NL owns a majority of CompX’s outstanding common stock.  All of our marketable securities are accounted for as available-for-sale securities, which are carried at fair value using quoted market prices in active markets for each marketable security, and represent a Level 1 input within the fair value hierarchy.  See Note 13.  Because we have classified all of our marketable securities as available-for-sale, any unrealized gains or losses on the securities are recognized through other comprehensive income, net of deferred income taxes.

   

   

 

At December 31, 2012 and September 30, 2013, we held approximately 1.7 million shares of Valhi’s common stock with a quoted per share market price of $12.50 and $19.96, respectively.  We also held a nominal number of shares of CompX and NL common stocks.

The Valhi, CompX and NL common stocks we own are subject to the restrictions on resale pursuant to certain provisions of SEC Rule 144.  In addition, as a majority-owned subsidiary of Valhi we cannot vote our shares of Valhi common stock under Delaware Corporation Law, but we do receive dividends from Valhi on these shares, when declared and paid.

   

 

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Note 5—Other noncurrent assets:

   

   

 

   

Note 6—Accounts payable and accrued liabilities:

   

   

 

   

The accrued legal settlement is discussed in Note 12.

Note 7—Long-term debt:

   

   

 

Term loan—In February 2013, we voluntarily prepaid an aggregate $290 million principal amount of our term loan.  We recognized a non-cash pre-tax interest charge of $6.6 million in the first quarter of 2013 related to this prepayment consisting of the write-off of the unamortized original issue discount costs and deferred financing costs associated with such prepayment.  Funds for such prepayment were provided by $100 million of our cash on hand as well as borrowings of $190 million under a new loan from Contran as described below.  In July 2013, we voluntarily prepaid the remaining $100 million principal amount outstanding under our term loan, using $50 million of our cash on hand and borrowings of $50 million under our revolving North American credit facility.  We recognized a non-cash pre-tax interest charge of $2.3 million in the third quarter of 2013 related to this prepayment consisting of

 

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the write-off of the unamortized original issue discount costs and deferred financing costs associated with such prepayment. The average interest rate on the term loan for the year-to-date period ended July 30, 2013 (the payoff date) was 6.8%.

Note payable to Contran—As discussed above, in February 2013 we entered into a promissory note with Contran that allows us to borrow up to $290 million. This new loan from Contran contains terms and conditions similar to the terms and conditions of the term loan, except that the loan from Contran is unsecured and contains no financial maintenance covenant. The independent members of our board of directors approved the terms and conditions of the loan from Contran. The note requires quarterly principal payments of $5.0 million which commenced in March 2013, with any remaining outstanding principal due by June 2018. Voluntary principal prepayments are permitted at any time without penalty. The note bears interest at LIBOR (with LIBOR no less than 1%) plus 5.125%, or the base rate (as defined in the agreement) plus 4.125%. We are required to use the base rate method until such time as both (1) the term loan discussed above has been fully repaid and (2) the European credit facility has been amended on terms satisfactory to Contran, at which time we would have the option to use either the base rate or LIBOR rate methods.  The average interest rate on these borrowings as of and for the period from issuance to September 30, 2013 was 7.375%.

Revolving European credit facility—During the first nine months of 2013, we borrowed €10 million ($12.8 million when borrowed) and repaid the entire outstanding balance of €20 million ($26.5 million when repaid) in August under our European credit facility. The average interest rate on these borrowings for the year-to-date period ended August 31, 2013 when paid off was 2.02%.  At September 30, 2013, there were no outstanding borrowings under this facility.  Our European credit facility requires the maintenance of certain financial ratios.  At September 30, 2013, based on the current earnings before income tax, interest, depreciation and amortization expense of the borrowers, we would not have met the financial test if we had any net debt outstanding under this facility, and accordingly our effective available borrowing under this facility at September 30, 2013 is approximately $32.4 million, the aggregate amount of cash held by the borrowers, net of the borrowers’ other outstanding indebtedness.  We are in discussions with the lender to amend the facility to modify the covenant.  However, we do not currently anticipate the need to draw on this facility for the foreseeable future.

Revolving North American credit facility—During the first nine months of 2013, we borrowed $90.3 million and repaid an aggregate $44.1 million.  The average interest rate on these borrowings as of and for the period from borrowing to September 30, 2013 was 2.63% and 2.46%, respectively.  At September 30, 2013 we had approximately $56.6 million  available for borrowing under this revolving facility.

Canada—At September 30, 2013, an aggregate of Cdn. $7.5 million letters of credit were outstanding under our Canadian subsidiary’s loan agreement with the Bank of Montreal which exists solely for the issuance of up to Cdn. $10.0 million in letters of credit.

In January 2013, we borrowed Cdn. $1.8 million (USD $1.8 million) under our Canadian subsidiary’s agreement with an economic development agency of the Province of Quebec, Canada which was recorded net of Cdn. $.5 million (USD $.5 million) imputed interest.

Restrictions and other—Our European credit facility described above requires the borrowers to maintain minimum levels of equity, requires the maintenance of certain financial ratios, limits dividends and additional indebtedness and contains other provisions and restrictive covenants customary in lending transactions of this type.  Our North American revolving credit facility and note payable to Contran also contain restrictive covenants.  At September 30, 2013, there were no restrictions on our ability to pay dividends.

We are in compliance with all of our debt covenants at September 30, 2013.

   

 

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Note 8—Income taxes:

   

   

 

Our income tax benefit in the third quarter of 2012 includes an incremental tax benefit of $11.1 million as we determined in the third quarter 2012 that due to global changes in our business, we would not remit certain dividends from our non-U.S. jurisdictions.  As a result, certain tax attributes were available for carryback to offset prior year tax expense.

In the third quarter of 2012, France enacted certain changes in their income tax laws, including a 3% nondeductible surtax on all dividend distributions which tax is assessed at the time of the distribution against the company making such distribution.  Consequently, our French subsidiary will be required to pay an additional 3% tax on all future dividend distributions.  Our undistributed earnings in France are deemed to be permanently reinvested and such tax will be recognized as part of our income tax expense in the period during which the dividend is declared and will be remitted to the French government in accordance with the applicable tax law.  During the third quarter of 2012, our French subsidiary distributed a $1.8 million dividend.  Distributions from our French subsidiary in 2013 are nil.  At September 30, 2013, our French subsidiary has undistributed earnings of approximately $10.9 million that, if distributed, would be subject to the 3% surtax.

Tax authorities are examining certain of our U.S. and non-U.S. tax returns and have or may propose tax deficiencies, including penalties and interest.  Because of the inherent uncertainties involved in settlement initiatives and court and tax proceedings, we cannot guarantee that these matters will be resolved in our favor, and therefore our potential exposure, if any, is also uncertain.  In 2011 and 2012, we received notices of re-assessment from the Canadian federal and provincial tax authorities related to the years 2002 through 2004.  We object to the re-assessments and believe the position is without merit. Accordingly, we are appealing the re-assessments and in connection with such appeal we were required to post letters of credit aggregating Cdn. $7.5 million (see Note 7).  If the full amount of the proposed adjustment were ultimately to be assessed against us, the cash tax liability would be approximately $15.7 million.  We believe we have adequate accruals for additional taxes and related interest expense which could ultimately result from tax examinations.  We believe the ultimate disposition of tax examinations should not have a material adverse effect on our consolidated financial position, results of operations or liquidity.  We currently estimate that our unrecognized tax benefits may change by $3 million during the next twelve months related to certain adjustments to our prior year returns.

   

 

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Note 9—Employee benefit plans:

Defined benefit plans—The components of net periodic defined benefit pension cost are presented in the table below.

   

 

Postretirement benefits—The components of net periodic postretirement benefits other than pension (OPEB) cost are presented in the table below.

   

 

Contributions—We expect our 2013 contributions for our pension and other postretirement plans to be approximately $28 million.

   

Note 10—Other noncurrent liabilities: