Kronos Worldwide
2013
ANNUAL REPORT
KRONOS WORLDWIDE, INC. CORPORATE AND OTHER INFORMATION
Product Information
Information about our products and
services is available online or by
contacting:
Kronos Worldwide, Inc.
5 Cedar Brook, Drive
Cranbury, NJ. 08512
Phone: (609) 860-6200
Customer Service: 1-800-866-5600.
Email: kronos.marketing@kronosww.com
Transfer Agent
Computershare acts as transfer agent,
registrar and dividend paying agent for the
Company’s common stock.
Communications regarding stockholder
accounts, dividends and change of
address should be directed to:
Computershare Trust Company, N.A.
P.O. Box 30170
College Station, Texas 77842-3170
Telephone: (877) 373-6374
Internet address:
http://www.computershare.com/investor
Visit us on the Web
http://www.kronosww.com
Board of Directors
Kieth R. Coogan (a)(b)
Private Investor
Loretta J. Feehan
Financial Consultant
C.H. Moore, Jr. (a)
Retired Partner
KPMG LLP
Bobby D. O’Brien
Vice Chairman, President and
Chief Executive Officer
Gen. Thomas P. Stafford (ret.) (a)(b)
United States Air Force (retired)
Dr. R. Gerald Turner (a)(b)
President
Southern Methodist University
Steven L. Watson
Chairman
Dr. C. Kern Wildenthal (a)(b)
President
Children’s Medical Center
Foundation
Board Committees
(a) Audit Committee
(b) Management Development and
Compensation Committee
Corporate and
Operating Management
Steven L. Watson
Chairman
Bobby D. O’Brien
Vice Chairman, President and
Chief Executive Officer
Gregory M. Swalwell
Executive Vice President and
Chief Financial Officer
Kelly D. Luttmer
Executive Vice President and
Global Tax Director
Robert D. Graham
Executive Vice President
Klemens T. Schlueter
President, Manufacturing and
Technology
Benjamin R. Corona
President, Global Sales
Management
H. Joseph Mass
President, Global Sales and
Marketing
Brian W. Christian
Vice President, Strategic Business
Development
Tim C. Hafer
Vice President and Controller
Janet G. Keckeisen
Vice President, Corporate Strategy
and Investor Relations
A. Andrew R. Louis
Vice President, Secretary
and Associate General Counsel
Andrew B. Nace
Vice President
John A. St. Wrba
Vice President and Treasurer
Annual Meeting
Form 10-K Report
The 2014 Annual Meeting of Stockholders will be held at the
office of the Company, Three Lincoln Centre, 5430 LBJ
Freeway, Suite 1700, Dallas, Texas 75240-2697, on the date
and time as set forth in the notice of the meeting, proxy
statement and form of proxy that will be mailed to stockholders in
advance of the meeting.
Stock Exchange
Kronos’ common shares are listed on the New York Stock
Exchange under the symbol “KRO.”
The Company’s Annual Report on Form 10-K for the year
ended December 31, 2013, as filed with the Securities and
Exchange Commission is printed as part of this Annual
Report. Additional copies are available without charge upon
written request to:
Janet G. Keckeisen
Vice President, Investor Relations
Kronos Worldwide, Inc.
Three Lincoln Centre
5430 LBJ Freeway, Suite 1700
Dallas, Texas 75240-2697
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(cid:95) Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934:
For the fiscal year ended December 31, 2013
Commission file number 1-31763
KRONOS WORLDWIDE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction
of incorporation or organization)
76-0294959
(IRS Employer
Identification No.)
5430 LBJ Freeway, Suite 1700
Dallas, Texas 75240-2697
(Address of principal executive offices)
Registrant’s telephone number, including area code: (972) 233-1700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common stock ($.01 par value)
Name of each exchange on which registered
New York Stock Exchange
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 (cid:133) No (cid:95)
If the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:133) No (cid:95)
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 (cid:95) No (cid:133)
Whether the Registrant has submitted electronically and posted on its corporate Website, 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 (cid:95) No (cid:133)
If disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. Yes (cid:133) No (cid:95)
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 (cid:133) Accelerated filer (cid:95) Non-accelerated filer (cid:133) Smaller reporting company (cid:133)
Whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:133) No (cid:95)
The aggregate market value of the 21.0 million shares of voting stock held by nonaffiliates of Kronos Worldwide, Inc. as of
June 30, 2013 (the last business day of the Registrant’s most recently-completed second fiscal quarter) approximated $341.5
million.
As of February 28, 2014, 115,864,598 shares of the Registrant’s common stock were outstanding.
Documents incorporated by reference
The information required by Part III is incorporated by reference from the Registrant’s definitive proxy statement to be filed
with the Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.
Forward-Looking Information
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, as amended. Statements in this Annual Report that are not historical facts
are forward-looking in nature and represent management’s beliefs and assumptions based on currently available
information. In some cases, you can identify forward-looking statements by the use of words such as “believes,”
“intends,” “may,” “should,” “could,” “anticipates,” “expects” or comparable terminology, or by discussions of
strategies or trends. Although we believe that the expectations reflected in such forward-looking statements are
reasonable, we do not know if these expectations will be correct. Such statements by their nature involve substantial
risks and uncertainties that could significantly impact expected results. Actual future results could differ materially
from those predicted. The factors that could cause actual future results to differ materially from those described
herein are the risks and uncertainties discussed in this Annual Report and those described from time to time in our
other filings with the SEC include, but are not limited to, the following:
(cid:121) Future supply and demand for our products
(cid:121) The extent of the dependence of certain of our businesses on certain market sectors
(cid:121) The cyclicality of our business
(cid:121) Customer inventory levels
(cid:121) Unexpected or earlier-than-expected industry capacity expansion
(cid:121) Changes in raw material and other operating costs (such as energy and ore costs)
(cid:121) Changes in the availability of raw materials (such as ore)
(cid:121) 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)
(cid:121) Competitive products and substitute products
(cid:121) Customer and competitor strategies
(cid:121) Potential consolidation of our competitors
(cid:121) The impact of pricing and production decisions
(cid:121) Competitive technology positions
(cid:121) The introduction of trade barriers
(cid:121) Possible disruption of our business, or increases in our cost of doing business, resulting from terrorist
activities or global conflicts
(cid:121) Fluctuations in currency exchange rates (such as changes in the exchange rate between the U.S. dollar
and each of the euro, the Norwegian krone and the Canadian dollar), or possible disruptions to our
business resulting from potential instability resulting from uncertainties associated with the euro
(cid:121) Operating interruptions (including, but not limited to, labor disputes, leaks, natural disasters, fires,
explosions, unscheduled or unplanned downtime, transportation interruptions and cyber attacks)
(cid:121) Our ability to renew or refinance credit facilities
(cid:121) Our ability to maintain sufficient liquidity
(cid:121) The ultimate outcome of income tax audits, tax settlement initiatives or other tax matters
(cid:121) Our ability to utilize income tax attributes, the benefits of which have been recognized under the more-
likely-than-not recognition criteria
(cid:121) Environmental matters (such as those requiring compliance with emission and discharge standards for
existing and new facilities)
(cid:121) Government laws and regulations and possible changes therein
2
(cid:121) The ultimate resolution of pending litigation
(cid:121) 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.
3
ITEM 1.
General
BUSINESS
PART I
Kronos Worldwide, Inc. (NYSE: KRO) (Kronos), a Delaware corporation, is a leading global producer and
marketer of value-added titanium dioxide pigments, or TiO2, a base industrial product used in a wide range of
applications. We, along with our distributors and agents, sell and provide technical services for our products to over
4,000 customers in approximately 100 countries with the majority of sales in Europe and North America. We
believe we have developed considerable expertise and efficiency in the manufacture, sale, shipment and service of
our products in domestic and international markets.
TiO2 is a white inorganic pigment used in a wide range of products for its exceptional ability to impart
whiteness, brightness, opacity and durability. TiO2 is a critical component of everyday applications, such as
coatings, plastics and paper, as well as many specialty products such as inks, food and cosmetics. TiO2 is widely
considered to be superior to alternative white pigments in large part due to its hiding power (or opacity), which is the
ability to cover or mask other materials effectively and efficiently. TiO2 is designed, marketed and sold based on
specific end-use applications.
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. Although there
are other white pigments on the market, we believe there are no effective substitutes for TiO2 because no other white
pigment has the physical properties for achieving comparable opacity and brightness or can be incorporated in as
cost-effective a manner. Pigment extenders such as kaolin clays, calcium carbonate and polymeric opacifiers are
used together with TiO2 in a number of end-use markets. However, these products are not able to duplicate the
opacity performance characteristics of TiO2 and we believe these products are unlikely to have a significant impact
on the use of TiO2.
TiO2 is considered a “quality-of-life” product. Demand for TiO2 has generally been driven by worldwide
gross domestic product and has generally increased with rising standards of living in various regions of the world.
According to industry estimates, TiO2 consumption has grown at a compound annual growth rate of approximately
2.9% since 1990. Per capita consumption of TiO2 in Western Europe and the United States far exceeds that in other
areas of the world, and these regions are expected to continue to be the largest consumers of TiO2 on a per capita
basis. We believe that Western Europe and North America currently account for approximately 20% and 17% of
global TiO2 consumption, respectively. Markets for TiO2 are generally increasing in South America, Eastern
Europe, the Asia Pacific region and China and we believe these are significant markets where we expect continued
growth as economies in these regions continue to develop and quality-of-life products, including TiO2, experience
greater demand.
In recent years, global production capacity for TiO2 has increased primarily due to debottlenecking existing
production facilities in the western world and construction of new plants in China. However, during 2008 and 2009,
several TiO2 manufacturers permanently reduced capacity at high operating cost facilities in Europe, North America
and China, in part in connection with environmental-related issues. Decreased capacity, along with the decline in
customer inventories which occurred in the first half of 2009, led to industry-wide tightness in TiO2 inventories. As
a result of these factors, TiO2 selling prices began to increase in the second half of 2009 and continued to increase
throughout 2010 and 2011. As demand weakened in 2012 as a result of global economic weakness and uncertainty,
TiO2 selling prices decreased. Demand improved in 2013, particularly in Europe, and selling prices began to
stabilize. We expect that demand for TiO2 products will continue to increase as economic conditions improve in the
various regions of the world.
4
At December 31, 2013, approximately 50% of our common stock was owned by Valhi, Inc. (NYSE: VHI)
and approximately 30% was owned by NL Industries, Inc. (NYSE: NL). Valhi also owns approximately 83% of NL
Industries’ outstanding common stock. Contran Corporation and its subsidiaries held approximately 94% of Valhi’s
outstanding common stock. Substantially all of Contran’s outstanding voting stock is held by family trusts
established for the benefit of Lisa K. Simmons and Serena Simmons Connelly, daughters of Harold C. Simmons,
and their children (for which Ms. Lisa Simmons and Ms. Connelly are co-trustees) or is held directly by Ms. Lisa
Simmons and Ms. Connelly or persons or entities related to them, including their step-mother Annette C. Simmons,
the widow of Mr. Simmons. Prior to his death in December 2013, Mr. Simmons served as sole trustee of the family
trusts. Under a voting agreement entered into in February 2014 by all of the voting stockholders of Contran, the size
of the board of directors of Contran was fixed at five members, each of Ms. Lisa Simmons, Ms. Connelly and Ms.
Annette Simmons have the right to designate one of the five members of the Contran board and the other two
members of the Contran board must consist of members of Contran management. Ms. Lisa Simmons, Ms.
Connelly, and Ms. Annette Simmons each serve as members of the Contran board. The voting agreement expires in
February 2017 (unless Ms. Lisa Simmons, Ms. Connelly and Ms. Annette Simmons otherwise mutually agree), and
the ability of Ms. Lisa Simmons, Ms. Connelly, and Ms. Annette Simmons to each designate one member of the
Contran board is dependent upon each of their continued beneficial ownership of at least 5% of the combined voting
stock of Contran. Consequently, Ms. Lisa Simmons, Ms. Connelly and Ms. Annette Simmons may be deemed to
control Contran, Valhi, NL and us.
Products and end-use markets
Including our predecessors, we have produced and marketed TiO2 in North America and Europe, our
primary markets, for over 90 years. We believe that we are the largest producer of TiO2 in Europe with
approximately one-half of our sales volumes attributable to markets in Europe. The table below shows our market
share for our significant markets, Europe and North America, for the last three years.
Europe
North America
2011
2012
2013
19%
17%
19 %
19 %
18%
18%
We believe that we are the leading seller of TiO2 in several countries, including Germany, with an
estimated 9% share of worldwide TiO2 sales volume in 2013. Overall, we are one of the top five producers of TiO2
in the world.
We offer our customers a broad portfolio of products that include over 40 different TiO2 pigment grades
under the Kronos® trademark which provide a variety of performance properties to meet customers’ specific
requirements. Our major customers include domestic and international paint, plastics, decorative laminate and paper
manufacturers. We ship TiO2 to our customers in either a powder or slurry form via rail, truck and/or ocean carrier.
Sales of our core TiO2 pigments represented approximately 90% of our net sales in 2013. We and our agents and
distributors primarily sell and provide technical services for our products in three major end-use markets: coatings,
plastics and paper.
The following tables show our approximate sales volume by geographic region and end use for the year
ended December 31, 2013:
Sales volumes percentages
by geographic region
Sales volumes percentages
by end-use
Europe
North America
Asia Pacific
Rest of World
49%
33%
4%
14%
Coatings
Plastics
Other
Paper
54%
33%
8%
5%
5
Some of the principal applications for our products include the following.
TiO2 for coatings - Our TiO2 is used to provide opacity, durability, tinting strength and brightness in
industrial coatings, as well as coatings for home interiors and exteriors, automobiles, aircraft, machines, appliances,
traffic paint and other special purpose coatings. The amount of TiO2 used in coatings varies widely depending on
the opacity, color and quality desired. In general, the higher the opacity requirement of the coating, the greater the
TiO2 content.
TiO2 for plastics - We produce TiO2 pigments that improve the optical and physical properties in plastics,
including whiteness and opacity. TiO2 is used to provide opacity in items such as containers and packaging
materials, and vinyl products such as windows, door profiles and siding. TiO2 also generally provides hiding power,
neutral undertone, brightness and surface durability for housewares, appliances, toys, computer cases and food
packages. TiO2’s high brightness along with its opacity, is used in some engineering plastics to help mask their
undesirable natural color. TiO2 is also used in masterbatch, which is a concentrate of TiO2 and other additives and is
one of the largest uses for TiO2 in the plastics end-use market. In masterbatch, the TiO2 is dispersed at high
concentrations into a plastic resin and is then used by manufacturers of plastic containers, bottles, packaging and
agricultural films.
TiO2 for paper - Our TiO2 is used in the production of several types of paper, including laminate
(decorative) paper, filled paper and coated paper to provide whiteness, brightness, opacity and color stability.
Although we sell our TiO2 to all segments of the paper end-use market, our primary focus is on the TiO2 grades used
in paper laminates, where several layers of paper are laminated together using melamine resin under high
temperature and pressure. The top layer of paper contains TiO2 and plastic resin and is the layer that is printed with
decorative patterns. Paper laminates are used to replace materials such as wood and tile for such applications as
counter tops, furniture and wallboard. TiO2 is beneficial in these applications because it assists in preventing the
material from fading or changing color after prolonged exposure to sunlight and other weathering agents.
TiO2 for other applications - We produce TiO2 to improve the opacity and hiding power of printing inks.
TiO2 allows inks to achieve very high print quality while not interfering with the technical requirements of printing
machinery, including low abrasion, high printing speed and high temperatures. Our TiO2 is also used in textile
applications where TiO2 functions as an opacifying and delustering agent. In man-made fibers such as rayon and
polyester, TiO2 corrects an otherwise undesirable glossy and translucent appearance. Without the presence of TiO2,
these materials would be unsuitable for use in many textile applications.
We produce high purity sulfate process anatase TiO2 used to provide opacity, whiteness and brightness in a
variety of cosmetic and personal care products, such as skin cream, lipstick, eye shadow and toothpaste. Our TiO2 is
also found in food products, such as candy and confectionaries, and in pet foods where it is used to obtain
uniformity of color and appearance. In pharmaceuticals, our TiO2 is used commonly as a colorant in pill and capsule
coatings as well as in liquid medicines to provide uniformity of color and appearance. Kronos® purified anatase
grades meet the applicable requirements of the CTFA (Cosmetics, Toiletries and Fragrances Association), USP and
BP (United States Pharmacopoeia and British Pharmacopoeia) and the FDA (United States Food and Drug
Administration).
Our TiO2 business is enhanced by the following three complementary businesses, which comprised
approximately 10% of our net sales in 2013:
(cid:121) We own and operate two ilmenite mines in Norway pursuant to a governmental concession with an
unlimited term. Ilmenite is a raw material used directly as a feedstock by some sulfate-process TiO2
plants. We believe that we have a significant competitive advantage because our mines supply our
feedstock requirements for all of our European sulfate-process plants. We also sell ilmenite ore to
third-parties, some of whom are our competitors. The mines have estimated ilmenite reserves that are
expected to last at least 50 years.
6
(cid:121) We manufacture and sell iron-based chemicals, which are co-products and processed co-products of
the sulfate and chloride process TiO2 pigment production. These co-product chemicals are marketed
through our Ecochem division and are primarily used as treatment and conditioning agents for
industrial effluents and municipal wastewater as well as in the manufacture of iron pigments, cement
and agricultural products.
(cid:121) We manufacture and sell titanium oxychloride and titanyl sulfate, which are side-stream specialty
products from the production of TiO2. Titanium oxychloride is used in specialty applications in the
formulation of pearlescent pigments, production of electroceramic capacitors for cell phones and other
electronic devices. Titanyl sulfate productions are used in pearlescent pigments, natural gas pipe and
other specialty applications.
Manufacturing, operations and properties
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. Manufacturers of many end-use applications can use either form, especially during periods of
tight supply for TiO2. The chloride process is the preferred form for use in coatings and plastics, the two largest
end-use markets. 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 2013, chloride
process production facilities represented approximately 47% of industry capacity. The sulfate process is preferred
for use in selected paper products, ceramics, rubber tires, man-made fibers, food products and cosmetics. 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).
(cid:121) Chloride process - The chloride process is a continuous process in which chlorine is used to extract
rutile TiO2. The chloride process produces less waste than the sulfate process because much of the
chlorine is recycled and feedstock bearing higher titanium content is used. The chloride process also
has lower energy requirements and is less labor-intensive than the sulfate process, although the
chloride process requires a higher-skilled labor force. The chloride process produces an intermediate
base pigment with a wide range of properties.
(cid:121) Sulfate process - The Sulfate process is a batch process in which sulfuric acid is used to extract the
TiO2 from ilmenite or titanium slag. After separation from the impurities in the ore (mainly iron), the
TiO2 is precipitated and calcined to form an intermediate base pigment ready for sale or can be
upgraded through finishing treatments.
We produced 474,000 metric tons of TiO2 in 2013, up from the 469,000 metric tons we produced in 2012.
Our production amounts include our share of the output produced by our TiO2 manufacturing joint venture discussed
below in “TiO2 Manufacturing Joint Venture.” Our average production capacity utilization rates were near full
capacity in 2011, and approximately 85% and 86% of capacity in 2012 and 2013, respectively. Our production
utilization rates in 2013 were impacted by a labor lockout at our Canadian production facility that began in June
2013, as discussed below in “Employees.” We operated our Canadian plant at approximately 15% of the plant’s
capacity with non-union management employees during the lockout.
We operate four TiO2 plants in Europe (one in each of Leverkusen, Germany; Nordenham, Germany;
Langerbrugge, Belgium; and Fredrikstad, Norway). In North America, we have a TiO2 plant in Varennes, Quebec,
Canada and, through the manufacturing joint venture described below in “TiO2 Manufacturing Joint Venture,” a
50% interest in a TiO2 plant in Lake Charles, Louisiana.
Our production capacity in 2013 was 550,000 metric tons, approximately three-fourths of which was from
the chloride production process.
7
The following table presents the division of our expected 2014 manufacturing capacity by plant location
and type of manufacturing process:
Facility
Description
Leverkusen, Germany (1)
TiO2 production, chloride and sulfate
% of capacity by TiO2
manufacturing process
Chloride Sulfate
Nordenham, Germany
TiO2 production, sulfate process, co-
process, co-products
39 %
25%
Langerbrugge, Belgium
Fredrikstad, Norway (2)
Varennes, Canada
products
TiO2 production, chloride process, co-
products, titanium chemicals products
TiO2 production, sulfate process, co-
products
TiO2 production, chloride and sulfate
process, slurry facility, titanium
chemicals products
Lake Charles, LA, US (3)
TiO2 production, chloride process
Total
-
21
-
40
-
22
21
19
100 %
13
-
100%
(1) The Leverkusen facility is located within an extensive manufacturing complex owned by Bayer AG. We own
the Leverkusen facility, which represents about one-third of our current TiO2 production capacity, but we lease
the land under the facility from Bayer under a long-term agreement which expires in 2050. Lease payments
are periodically negotiated with Bayer for periods of at least two years at a time. A majority-owned subsidiary
of 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 2063.
(3) We operate the Lake Charles facility in a joint venture with Tioxide Americas LLC (Tioxide), a subsidiary of
Huntsman Corporation and the amount indicated in the table above represents the share of TiO2 produced by
the joint venture to which we are entitled. See Note 5 to our Consolidated Financial Statements and “TiO2
Manufacturing Joint Venture.”
We own the land underlying all of our principle production facilities unless otherwise indicated in the table
above.
Our production capacity has increased by approximately 17% over the past ten years due to
debottlenecking programs, with only moderate capital expenditures. We believe that our annual attainable
production capacity for 2014 is approximately 555,000 metric tons. While we expect our production capacity rate to
be higher in 2014 as compared to 2013, we expect that we will operate at less-than-full production capacity in 2014,
due principally to the ramp-up of operations at our Canadian facility following the end of the lockout in December
2013, when the terms of a new collective bargaining agreement were reached, as well as the implementation of
certain productivity-enhancing capital improvement projects at other facilities which will result in longer-than-
normal maintenance shutdowns in certain instances.
We also operate two ilmenite mines in Norway pursuant to a governmental concession with an unlimited
term. In addition, we operate a rutile slurry manufacturing plant in Lake Charles, Louisiana, which converts dry
pigment manufactured for us at the Lake Charles TiO2 facility into a slurry form that is then shipped to customers.
We have various corporate and administrative offices located in the U.S., Germany, Norway, Canada and
Belgium and various sales offices located in the U.S., Canada, Belgium, France, the Netherlands and the United
Kingdom.
8
TiO2 Manufacturing Joint Venture
Kronos Louisiana, Inc., one of our subsidiaries, and Tioxide each own a 50% interest in a manufacturing
joint venture, Louisiana Pigment Company, L.P., or LPC. LPC owns and operates a chloride-process TiO2 plant
located in Lake Charles, Louisiana. We and Huntsman share production from the plant equally pursuant to separate
offtake agreements.
A supervisory committee directs the business and affairs of the joint venture, including production and
output decisions. This committee is composed of four members, two of whom we appoint and two of whom
Huntsman appoints. Two general managers manage the operations of the joint venture acting under the direction of
the supervisory committee. We appoint one general manager and Huntsman appoints the other.
The joint venture is not consolidated in our financial statements, because we do not control it. We account
for our interest in the joint venture by the equity method. The joint venture operates on a break-even basis and
therefore we do not have any equity in earnings of the joint venture. We are required to purchase one half of the
TiO2 produced by the joint venture. All costs and capital expenditures are shared equally with Huntsman with the
exception of raw material and packaging costs for the pigment grades produced. Our share of net costs is reported
as cost of sales as the TiO2 is sold. See Notes 5 and 14 to our Consolidated Financial Statements.
Raw materials
The primary raw materials used in chloride process TiO2 are titanium-containing feedstock (purchased
natural rutile ore or slag), chlorine and coke. Chlorine is available from a number of suppliers, while petroleum
coke is available from a limited number of suppliers. Titanium-containing feedstock suitable for use in the chloride
process is available from a limited but increasing number of suppliers principally in Australia, South Africa, Canada,
India and the United States. We purchase chloride process grade slag from Rio Tinto Iron and Titanium under a
long-term supply contract that expires at the end of 2016 and from Tronox Mineral Sands (PTY) LTD under a
supply contract that expires in December 2015. We purchase upgraded slag from Q.I.T. Fer et Titane Inc. (a
subsidiary of Rio Tinto Iron and Titanium) under a long-term supply contract that expires at the end of 2015. We
purchase natural rutile ore under contracts primarily from Iluka Resources, Limited and Sierra Rutile Limited (under
a new supply contract entered into in January 2014) that expire in 2014. In the past we have been, and we expect
that we will continue to be, successful in obtaining short-term and long-term extensions to these and other existing
supply contracts prior to their expiration. We expect the raw materials purchased under these contracts, and
contracts that we may enter into in the near term, will 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 or purchased sulfate grade 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 operate two rock ilmenite mines in Norway, which provided all of the feedstock for our
European sulfate process TiO2 plants in 2013. We expect ilmenite production from our mines to meet our European
sulfate process feedstock requirements for the foreseeable future. For our Canadian sulfate process plant, we also
purchase sulfate grade slag primarily from Q.I.T. Fer et Titane Inc. (a subsidiary of Rio Tinto Iron and Titanium),
under a supply contract that expires at the end of 2014. We expect the raw materials purchased under these
contracts, and contracts that we may enter into in the near term, to meet our sulfate process feedstock requirements
over the next several years.
Many of our raw material contracts contain fixed quantities we are required to purchase, or specify a range
of quantities within which we are required to purchase. The pricing under these agreements is generally negotiated
quarterly.
9
The following table summarizes our raw materials purchased or mined in 2013.
Production process/raw material
Chloride process plants -
Purchased slag or rutile ore
Sulfate process plants:
Ilmenite ore mined and used internally
Purchased slag
Raw materials
procured or mined
(In thousands
of metric tons)
390
310
25
Sales and marketing
Our marketing strategy is aimed at developing and maintaining strong customer relationships with new and
existing accounts. Because TiO2 represents a significant raw material cost for our customers, the purchasing
decisions are often made by our customers’ senior management. We work to maintain close relationships with the
key decision makers, through in-depth and frequent in-person meetings. We endeavor to extend these commercial
and technical relationships to multiple levels within our customers’ organization using our direct sales force and
technical service group to accomplish this objective. We believe this has helped build customer loyalty to Kronos
and strengthened our competitive position. Close cooperation and strong customer relationships enable us to stay
closely attuned to trends in our customers’ businesses. Where appropriate, we work in conjunction with our
customers to solve formulation or application problems by modifying specific product properties or developing new
pigment grades. We also focus our sales and marketing efforts on those geographic and end-use market segments
where we believe we can realize higher selling prices. This focus includes continuously reviewing and optimizing
our customer and product portfolios.
Our marketing strategy is also aimed at working directly with customers to monitor the success of our
products in their end-use applications, evaluate the need for improvements in product and process technology and
identify opportunities to develop new product solutions for our customers. Our marketing staff closely coordinates
with our sales force and technical specialists to ensure that the needs of our customers are met, and to help develop
and commercialize new grades where appropriate.
We sell a majority of our products through our direct sales force operating from six sales offices in Europe
and one sales office in North America. We also utilize sales agents and distributors who are authorized to sell our
products in specific geographic areas. In Europe, our sales efforts are conducted primarily through our direct sales
force and our sales agents. Our agents do not sell any TiO2 products other than Kronos® brand products. In North
America, our sales are made primarily through our direct sales force and supported by a network of distributors. In
addition to our direct sales force and sales agents, many of our sales agents also act as distributors to service our
smaller customers in all regions. We offer the same high level of customer and technical service to the customers
who purchase our products through distributors as we offer to our larger customers serviced by our direct sales
force.
We sell to a diverse customer base with only one customer representing 10% or more of our sales in 2013
(Behr Process Corporation – 10%). Our largest ten customers accounted for approximately 34% of sales in 2013.
Neither our business as a whole nor any of our principal product groups is seasonal to any significant
extent. However, TiO2 sales are generally higher in the second and third quarters of the year, due in part to the
increase in paint production in the spring to meet demand during the spring and summer painting seasons. With
certain exceptions, we have historically operated our production facilities at near full capacity rates throughout the
entire year, which among other things helps to minimize our per-unit production costs. As a result, we normally will
build inventories during the first and fourth quarters of each year, in order to maximize our product availability
during the higher demand periods normally experienced in the second and third quarters.
10
Competition
The TiO2 industry is highly competitive. We compete primarily on the basis of price, product quality,
technical service and the availability of high performance pigment grades. Since TiO2 is not a traded commodity, its
pricing is largely a product of negotiation between suppliers and their respective customers. 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 and availability being the most significant competitive factors along
with quality and customer service. During 2013, we had an estimated 9% share of worldwide TiO2 sales volume,
and based on sales volumes, we believe we are the leading seller of TiO2 in several countries, including Germany.
Our principal competitors are E.I. du Pont de Nemours & Co., or Dupont; Millennium Inorganic
Chemicals, Inc. (a subsidiary of National Titanium Dioxide Company Ltd.), or Cristal; Huntsman Corporation;
Tronox Incorporated; and Sachtleben Chemie GmbH. The top six TiO2 producers account for approximately 60% of
the world’s production capacity. In September 2013, Huntsman announced its intent to purchase Sachtleben’s TiO2
business as well as certain other assets from Sachtleben’s parent company, which acquisition Huntsman has
indicated it expects to be completed by June 2014. Concurrently, Huntsman also announced its intent to spin-off the
consolidated TiO2 business within two years of the acquisition. In October 2013, DuPont announced its intent to
spin-off its TiO2 operations into a separate publicly traded company by April 2015.
The following chart shows our estimate of worldwide production capacity in 2013:
Worldwide production capacity - 2013
DuPont
Cristal
Kronos
Huntsman
Tronox
Sachtleben
Other
18%
11%
9%
9%
7%
5%
41%
DuPont has over one-half of total North American TiO2 production capacity and is our principal North
American competitor.
Over the past ten years, we and our competitors increased industry capacity through debottlenecking
projects, which in part compensated for the shut down of various TiO2 plants in France, the United States, the United
Kingdom and China. In addition, in May 2011, DuPont announced a comprehensive plan to add approximately
350,000 metric tons of global capacity in the next three years. Although overall industry demand is expected to be
generally higher in 2014 as compared to 2013 as a result of improving worldwide economic conditions, we do not
expect any other significant efforts will be undertaken by us or our competitors to further increase capacity for the
foreseeable future, other than through debottlenecking projects. If actual developments differ from our expectations,
the TiO2 industry’s performance and that of our own could be unfavorably affected.
The TiO2 industry is characterized by high barriers to entry consisting of high capital costs, proprietary
technology and significant lead times (typically three to five years in our experience) required to construct new
facilities or to expand existing capacity. In addition, we believe the suppliers of titanium-containing feedstock do
not currently have the ability to supply the raw materials that would be required to operate any such new TiO2
production capacity until they have invested in additional infrastructure required to expand their own production
capacity, which we believe will take a few years to complete. We believe it is unlikely any new TiO2 plants will be
constructed in Europe or North America in the foreseeable future.
11
Research and development
We employ scientists, chemists, process engineers and technicians who are engaged in research and
development, process technology and quality assurance activities in Leverkusen, Germany. These individuals have
the responsibility for improving our chloride and sulfate production processes, improving product quality and
strengthening our competitive position by developing new applications. Our expenditures for these activities were
approximately $20 million in 2011, $19 million in 2012 and $18 million in 2013. We expect to spend
approximately $21 million on research and development in 2014.
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 our customers and increase product life cycles. Since
2008, we have added four new grades for pigments and other applications.
Patents, trademarks, trade secrets and other intellectual property rights
We have a comprehensive intellectual property protection strategy that includes obtaining, maintaining and
enforcing our patents, primarily in the United States, Canada and Europe. We also protect our trademark and trade
secret rights and have entered into license agreements with third parties concerning various intellectual property
matters. We have also from time to time been involved in disputes over intellectual property.
Patents - We have obtained patents and have numerous patent applications pending that cover our products
and the technology used in the manufacture of our products. Our patent strategy is important to us and our
continuing business activities. In addition to maintaining our patent portfolio, we seek patent protection for our
technical developments, principally in the United States, Canada and Europe. U.S. Patents are generally in effect for
20 years from the date of filing. Our U.S. patent portfolio includes patents having remaining terms ranging from
one year to 18 years.
Trademarks and trade secrets - Our trademarks, including Kronos®, are covered by issued and/or pending
registrations, including in Canada and the United States. We protect the trademarks that we use in connection with
the products we manufacture and sell and have developed goodwill in connection with our long-term use of our
trademarks. We conduct research activities in secret and we protect the confidentiality of our trade secrets through
reasonable measures, including confidentiality agreements and security procedures. We rely upon 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.
Employees
As of December 31, 2013, we employed the following number of people:
Europe
Canada
United States (1)
Total
(1)
Excludes employees of our Louisiana joint venture.
2,065
335
50
2,450
12
Certain employees at each of our production facilities are organized by labor unions. In Europe, our union
employees are covered by master collective bargaining agreements for the chemical industry that are generally
renewed annually. Unionized employees in our Canadian production facility were covered by a collective
bargaining agreement that expired June 15, 2013. The union employees represented by the Confederation des
Syndicat National (CSN) rejected our revised global offer, and we declared a lockout of unionized employees upon
the expiration of the existing contract. Effective the end of November 2013, we reached an agreement on the terms
of a new collective bargaining agreement with the CSN and the unionized employees that expires in June 2018.
The unionized employees began to return to work in December 2013, and production resumed in February 2014.
Among other things, the new agreement provides for the reduction in our Canadian workforce and the freezing of
the defined benefit pension plan for hourly workers effective at the end of 2013 (which was replaced with a new
defined contribution benefit plan.) These and other provisions of the new agreement are intended to reduce the
operating costs of such facility going forward. At December 31, 2013, approximately 86% of our worldwide
workforce is organized under collective bargaining agreements. It is possible that there could be future work
stoppages or other labor disruptions that could materially and adversely affect our business, results of operations,
financial position or liquidity.
Regulatory and environmental matters
Our operations and properties are governed by various environmental laws and regulations, which are
complex, change frequently and have tended to become stricter over time. These environmental laws govern,
among other things, the generation, storage, handling, use and transportation of hazardous materials; the emission
and discharge of hazardous materials into the ground, air or water; and the health and safety of our employees.
Certain of our operations are, or have been, engaged in the generation, storage, 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 comply
with applicable environmental laws and regulations at all 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 operations, including production, handling, use, storage,
transportation, sale or disposal of hazardous or toxic substances or require us to make capital and other expenditures
to comply, and could adversely affect our consolidated financial position and results of operations or liquidity.
Our U.S. manufacturing operations are governed by federal, state and local environmental and worker
health and safety laws and regulations. These include the Resource Conservation and Recovery Act, or RCRA, the
Occupational Safety and Health Act, the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act, the
Toxic Substances Control Act and the Comprehensive Environmental Response, Compensation and Liability Act, as
amended by the Superfund Amendments and Reauthorization Act, or CERCLA, as well as the state counterparts of
these statutes. Some of these laws hold current or previous owners or operators of real property liable for the costs
of cleaning up contamination, even if these owners or operators did not know of, and were not responsible for, such
contamination. These laws also assess liability on any person who arranges for the disposal or treatment of
hazardous substances, regardless of whether the affected site is owned or operated by such person. Although we
have not incurred and do not currently anticipate any material liabilities in connection with such environmental laws,
we may be required to make expenditures for environmental remediation in the future.
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, or the 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.
At our sulfate plant facilities in Germany, we recycle spent 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.
13
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.
Our capital expenditures related to ongoing environmental compliance, protection and improvement
programs, including capital expenditures which are primarily focused on increased operating efficiency but also
result in improved environmental protection such as lower emissions from our manufacturing facilities, were $24.8
million in 2013 and are currently expected to be approximately $14 million in 2014.
Website and other available information
Our fiscal year ends December 31. Our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and any amendments to those reports are available on our website at
www.kronosww.com. These reports are available on the website, without charge, as soon as is reasonably
practicable after we file or furnish them electronically with the Securities and Exchange Commission, or SEC.
Additional information regarding us, including our Audit Committee charter, Code of Business Conduct and Ethics
and our Corporate Governance Guidelines, can also be found at this website. Information contained on our website
is not part of this report. We will also provide free copies of such documents upon written request. Such requests
should be directed to the Corporate Secretary at our address on the cover page of this Form 10-K.
The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at
100 F Street, N.E., Washington, D.C. 20549. The public may obtain information about the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. We are an electronic filer and the SEC maintains an
internet website that contains reports, proxy and information statements and other information regarding issuers that
file electronically with the SEC at www.sec.gov.
ITEM 1A.
RISK FACTORS
Below are certain risk factors associated with our business. In addition to the potential effect of these risk
factors discussed below, any risk factor which could result in reduced earnings or operating losses, or reduced
liquidity, could in turn adversely affect our ability to service our liabilities or pay dividends on our common stock or
adversely affect the quoted market prices for our securities.
Demand for, and prices of, certain of our products are influenced by changing market conditions for our
products, which may result in reduced earnings or in operating losses.
Approximately 90% of our revenues are attributable to sales of TiO2. Pricing within the global TiO2
industry over the long term is cyclical and changes in economic conditions, especially in Western industrialized
nations, can significantly impact our earnings and operating cash flows. 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. In addition, pricing may affect customer inventory
levels as customers may from time to time accelerate purchases of TiO2 in advance of anticipated price increases or
defer purchases of TiO2 in advance of anticipated price decreases. Our ability to further increase capacity without
additional investment in greenfield or brownfield capacity increases may be limited and as a result, our profitability
may become even more dependent upon the selling prices of our products.
The demand for TiO2 during a given year is also subject to annual seasonal fluctuations. TiO2 sales are
generally higher in the second and third quarters 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.
14
The TiO2 industry is concentrated and highly competitive and we face price pressures in the markets in which
we operate, which may result in reduced earnings or operating losses.
The global market in which we operate our business is concentrated with the top six TiO2 producers
accounting for 60% of the world’s production capacity and is 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 if 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. 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.
In addition, many of our raw material contracts contain fixed quantities we are required to purchase.
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
experienced significantly higher ore costs in 2012 which carried over into 2013. Although our purchase cost of
third-party feedstock ore has and continues to moderate, such reductions did not begin to be significantly reflected in
our cost of sales until the third quarter of 2013. We may also experience higher operating costs such as energy
costs, which could affect our profitability. 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.
We have long-term supply contracts that provide for our TiO2 feedstock requirements that currently expire
through 2016. While we believe we will be able to renew these contracts, there can be no assurance we will be
successful in renewing these contracts or in obtaining long-term extensions to these contracts prior to expiration.
Our current agreements (including those entered into in January 2014) require us to purchase certain minimum
quantities of feedstock with minimum purchase commitments aggregating approximately $820 million in years
subsequent to December 31, 2013. In addition, we have other long-term supply and service contracts that provide
for various raw materials and services. These agreements require us to purchase certain minimum quantities or
services with minimum purchase commitments aggregating approximately $123 million at December 31, 2013. Our
commitments under these contracts could adversely affect our financial results if we significantly reduce our
production and were unable to modify the contractual commitments.
Our leverage may impair our financial condition or limit our ability to operate our businesses.
As of December 31, 2013, our total consolidated debt was approximately $183.5 million, which relates
primarily to a note payable to Contran entered into in 2013 (after giving effect to our new term loan entered into in
February 2014, a portion of the proceeds of which were used to prepay such note payable to Contran, our
consolidated debt would have been approximately $363.5 million). Our level of debt could have important
consequences to our stockholders and creditors, including:
(cid:121) 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;
(cid:121)
(cid:121)
(cid:121)
(cid:121)
requiring that a portion of our cash flows from operations be used for the payment of interest on our
debt, which reduces our ability to use our cash flow to fund working capital, capital expenditures,
dividends on our common stock, acquisitions or general corporate requirements;
limiting the ability of our subsidiaries to pay dividends to us;
limiting our ability to obtain additional financing to fund future working capital, capital expenditures,
acquisitions or general corporate requirements;
15
(cid:121)
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which
we operate; and
(cid:121) placing us at a competitive disadvantage relative to other less leveraged competitors.
In addition to our indebtedness, at December 31, 2013 we are party to various lease and other agreements
(including feedstock ore purchase contracts as previously described) pursuant to which, along with our indebtedness,
we are committed to pay approximately $472 million in 2014. Such $472 million amount reflects the impact of a
new term loan we incurred in February 2014, and the application of the proceeds of such term loan, as discussed in
Note 9 to our Consolidated Financial Statements. 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 or our subsidiaries’ credit facilities in the future will, in
some instances, depend in part on our ability to maintain specified financial ratios and satisfy certain financial
covenants contained in the applicable credit agreement.
Our business may not generate cash flows from operating activities sufficient to enable us to pay our debts
when they become due and to fund our other liquidity needs. As a result, we may need to refinance all or a portion
of our debt before maturity. We may not be able to refinance any of our debt in a timely manner on favorable terms,
if at all, 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.
Global climate change legislation could negatively impact our financial results or limit our ability to operate
our businesses.
We operate production facilities in several countries. In many of the countries in which we operate,
legislation has been passed, or proposed legislation is being considered, to limit greenhouse gases through various
means, including emissions permits and/or energy taxes. In several of our production facilities, we consume large
amounts of energy, primarily electricity and natural gas. To date, the permit system in effect in the various countries
in which we operate has not had a material adverse effect on our financial results. However, if further greenhouse
gas legislation were to be enacted in one or more countries, it could negatively impact our future results from
operations through increased costs of production, particularly as it relates to our energy requirements or our need to
obtain emissions permits. If such increased costs of production were to materialize, we may be unable to pass price
increases onto our customers to compensate for increased production costs, which may decrease our liquidity,
operating income and results of operations.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None
ITEM 2.
PROPERTIES
Information on our properties is incorporated by reference to Item 1: Manufacturing, Operations and
Properties above. Our corporate headquarters is located in Dallas, Texas. See Note 15 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 15 to our Consolidated Financial Statements.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable
16
PART II
ITEM 5.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed and traded on the New York Stock Exchange (symbol: KRO). As of
February 28, 2014, there were approximately 2,440 holders of record of our common stock. The following table
sets forth the high and low closing per share sales price for our common stock for the periods indicated according to
Bloomberg and dividends paid during such periods. On February 28, 2014 the closing price of our common stock
was $15.28.
High
Low
Cash
dividends
paid
Year ended December 31, 2012
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year ended December 31, 2013
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
25.38 $
24.52
18.83
19.63
20.23 $
17.68
16.90
19.05
18.77 $
15.45
13.57
12.67
15.65 $
14.54
14.56
14.62
January 1, 2014 through February 28, 2014
$
18.80 $
14.74 $
.15
.15
.15
.15
.15
.15
.15
.15
-
In February 2014, our board of directors declared a first quarter 2014 regular quarterly dividend of $.15 per
share, payable on March 20, 2014 to stockholders of record as of March 10, 2014. The declaration and payment of
future dividends is discretionary, and the amount, if any, will be dependent upon our results of operations, financial
condition, cash requirements for our business, the current long-term outlook for our business and other factors
deemed relevant by our board. There are currently no restrictions on our ability to pay dividends, although
provisions in certain credit agreements to which we are a party could in the future limit or restrict our ability to pay
dividends.
In December 2010 our board of directors authorized the repurchase of up to 2.0 million shares of our
common stock in open market transactions, including block purchases, or in privately-negotiated transactions at
unspecified prices and over an unspecified period of time. In 2013 we repurchased 49,000 shares under the plan
and 1,951,000 shares are available for repurchase. See Note 13 to our Consolidated Financial Statements.
17
Performance graph
Set forth below is a table and line graph comparing the yearly change in our cumulative total stockholder
return on our common stock against the cumulative total return of the S&P Composite 500 Stock Index and the S&P
500 Diversified Chemicals Index. The graph shows the value at December 31 of each year, assuming an original
investment of $100 at December 31, 2008 and reinvestment of cash dividends and other distributions to
stockholders.
Kronos common stock
S&P 500 Composite Stock Index
S&P 500 Diversified Chemicals Index
$
100 $
100
100
139 $
126
161
367 $
146
228
326 $
149
213
365 $
172
258
369
228
369
2008
2009
2010
2011
2012
2013
$400
$350
$300
$250
$200
$150
$100
$50
$0
12/31/08
12/31/09
12/31/10
12/31/11
12/31/12
12/31/13
Kronos Common Stock
S&P 500 Composite Stock
S&P 500 Diversified Chemicals
The information contained in the performance graph shall not be deemed “soliciting material” or “filed”
with the SEC, or subject to the liabilities of Section 18 of the Securities Exchange Act, except to the extent we
specifically request that the material be treated as soliciting material or specifically incorporate this performance
graph by reference into a document filed under the Securities Act or the Securities Exchange Act.
Equity compensation plan information
We have an equity compensation plan, which was approved by our stockholders, pursuant to which an
aggregate of 200,000 shares of our common stock can be awarded to members of our board of directors. At
December 31, 2013, 193,000 shares are available for award under this plan. See Note 13 to our Consolidated
Financial Statements.
18
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.”
2009
Years ended December 31,
2012
2011
2010
(In millions, except per share data
and TiO2 operating statistics)
2013
STATEMENTS OF OPERATIONS DATA:
Net sales
Gross margin
Income (loss) from operations
Net income (loss)
Net income (loss) per share (1),(2)
Cash dividends per share (2)
BALANCE SHEET DATA (at year end):
$ 1,142.0 $ 1,449.7 $ 1,943.3
748.4
546.5
321.0
2.77
1.075
130.3
(15.7)
(34.7)
(.35)
-
345.3
178.4
130.6
1.29
.125
$ 1,976.3
560.4
359.6
218.5
1.89
.60
$ 1,732.4
112.2
(132.6)
(102.0)
(.88)
.60
Total assets
Notes payable and long-term debt including
$ 1,325.0 $ 1,707.6 $ 1,823.9
$ 2,027.0
$ 1,619.1
current maturities
Common stockholders’ equity (1)
STATEMENTS OF CASH FLOW DATA:
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities (1)
TiO2 OPERATING STATISTICS:
613.2
312.5
539.6
761.2
365.1
924.3
400.1
1,062.1
183.5
935.1
$
86.3 $
(23.7)
(49.8)
126.0 $
(145.8)
295.1
$
295.6
(218.1)
(299.6)
$
76.9
149.8
(28.1 )
130.4
(68.2)
(292.3)
Sales volume (3)
Production volume (3)
Production capacity at beginning of year (3)
Production rate as a percentage of capacity
445
402
532
528
524
532
76%
99%
503
550
532
103%
470
469
550
85 %
498
474
550
86%
(1)
(2)
In November, 2010, we completed a secondary public offering of 8.97 million shares of our common stock
in an underwritten offering for net proceeds of $337.6 million. Net income per share for 2010 reflects the
impact of the issuance of the 8.97 million shares of common stock in November 2010.
In May 2011, we implemented a 2-for-1 stock split of our common stock effected in the form of a stock
dividend. All per share disclosures above reflect this stock split. Cash dividends in 2011 include a $.50 per
share special dividend paid to stockholders in the first quarter of 2011. See Note 13 to our Consolidated
Financial Statements.
(3) Metric tons in thousands
19
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Business overview
We are a leading global producer and marketer of value-added TiO2. TiO2 is used for a variety of
manufacturing applications, including plastics, paints, paper and other industrial products. During 2013,
approximately one-half of our sales volumes were sold into European markets. We believe we are the largest
producer of TiO2 in Europe with an estimated 18% share of European TiO2 sales volumes in 2013. In addition, we
estimate we have an 18% share of North American TiO2 sales volumes in 2013. Our production facilities are
located throughout Europe and North America.
We consider TiO2 to be a “quality of life” product, with demand affected by gross domestic product, or
GDP, and overall economic conditions in our markets located in various regions of the world. Over the long-term,
we expect demand for TiO2 will grow by 2% to 3% per year, consistent with our expectations for the long-term
growth in GDP. However, even if we and our competitors maintain consistent shares of the worldwide market,
demand for TiO2 in any interim or annual period may not change in the same proportion as the change in GDP, in
part due to relative changes in the TiO2 inventory levels of our customers. We believe that our customers’ inventory
levels are influenced in part by their expectation for future changes in market TiO2 selling prices as well as their
expectation for future availability of product. Although certain of our TiO2 grades are considered specialty
pigments, the majority of our grades and substantially all of our production are considered commodity pigment
products with price and availability being the most significant competitive factors along with quality and customer
service.
The factors having the most impact on our reported operating results are:
(cid:121) Our TiO2 sales and production volumes,
(cid:121) TiO2 selling prices,
(cid:121) Manufacturing costs, particularly raw materials such as third-party feedstock ore, maintenance and
energy-related expenses, and
(cid:121) Currency exchange rates (particularly the exchange rate for the U.S. dollar relative to the euro, the
Norwegian krone and the Canadian dollar).
Our key performance indicators are our TiO2 average selling prices, our level of TiO2 sales and production
volumes and the cost of our third-party feedstock ore. TiO2 selling prices generally follow industry trends and the
selling prices will increase or decrease generally as a result of competitive market pressures.
In addition, our effective income tax rate in each of 2011 and 2012 was impacted by certain favorable and
unfavorable developments discussed below.
Executive summary
We reported a net loss of $102.0 million, or $.88 per share for 2013 compared to net income of $218.5
million, or $1.89 per share for 2012. We had a net loss in 2013 compared to net income in 2012 principally due to a
loss from operations in 2013 resulting from the unfavorable effects of lower average selling prices, higher raw
material costs and a litigation settlement charge in 2013. Also negatively impacting 2013 results were unabsorbed
fixed production and other costs associated with the labor lockout at our Canadian plant, and costs resulting from the
terms of a new collective bargaining agreement reached with our unionized Canadian workforce, and other back-to-
work expenses as further discussed below.
20
We reported net income of $218.5 million, or $1.89 per share for 2012, compared to net income of $321.0
million, or $2.77 per share for 2011. Our earnings per share decreased from 2011 to 2012 due to lower income from
operations in 2012 as a result of the unfavorable effects of lower sales and production volumes and higher raw
material costs partially offset by higher average selling prices and the favorable effects of a lower effective income
tax rate in 2012.
Our net loss in 2013 includes:
(cid:121)
(cid:121)
(cid:121)
a pre-tax litigation settlement charge of $35 million ($22.5 million, or $.19 per share, net of
income tax benefit),
approximately $28 million aggregate costs ($21 million, or $.18 per share, net of income tax
benefit) related to unabsorbed fixed production and other costs as a result of the Canadian plant
lockout, and costs associated with the terms of a new collective bargaining agreement reached
with our Canadian workforce, and
an aggregate charge of $8.9 million ($5.8 million, or $.05 per share, net of income tax benefit)
related to the voluntary prepayment of $390 million principal amount of our term loan, consisting
of the write-off of original issue discount costs and deferred financing costs.
Our net income in 2012 includes an aggregate charge of $7.2 million ($4.7 million, or $.04 per share, net of
income tax benefit) associated with the June 2012 redemption of the remaining €279.2 million principal amount of
our 6.5% Senior Secured Notes, consisting of the call premium paid, interest from the June 14, 2012 indenture
discharge date to the July 20, 2012 redemption date and the write-off of unamortized deferred financing costs and
original issue discount.
Our net income in 2011 includes an income tax provision of $17.2 million for U.S. incremental income
taxes ($.15 per share) on current earnings repatriated from our German subsidiary, which earnings were used to fund
a portion of the redemption and repurchases of our Senior Secured Notes. In addition, our net income in 2011
includes a net charge of $3.1 million ($2.1 million, or $.02 per share, net of income tax benefit) related to the
redemption and open market purchases of €120.8 million principal amount of our Senior Notes, consisting of the
call premium, the write-off of unamortized deferred financing costs and original issue discount associated with the
redeemed and purchased Notes.
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 we have prepared in accordance with
accounting principles generally accepted in the United States of America, or 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 ongoing basis we evaluate our estimates,
including those related to the recoverability of long-lived assets, pension and other postretirement benefit obligations
and the underlying actuarial assumptions related thereto, the realization of deferred income tax assets and accruals
for litigation, income tax and other contingencies. We base our estimates on historical experience and on various
other assumptions which we believe to be reasonable under the circumstances, the results of which form the basis
for making judgments about the reported amounts of assets, liabilities, revenues and expenses. Actual results may
differ significantly from previously-estimated amounts under different assumptions or conditions.
21
The following critical accounting policies affect our more significant judgments and estimates used in the
preparation of our Consolidated Financial Statements:
(cid:121) Long-lived assets - We recognize an impairment charge associated with our long-lived assets,
including property and equipment, whenever we determine that recovery of such long-lived asset is not
probable. Such determination is made in accordance with the applicable GAAP requirements of
Accounting Standard Codification, or ASC, Topic 360-10-35 Property, Plant and Equipment and is
based upon, among other things, estimates of the amount of future net cash flows to be generated by
the long-lived asset and estimates of the current fair value of the asset. Significant judgment is
required in estimating such cash flows. Adverse changes in such estimates of future net cash flows or
estimates of fair value could result in an inability to recover the carrying value of the long-lived asset,
thereby possibly requiring an impairment charge to be recognized in the future. We do not assess our
property and equipment for impairment unless certain impairment indicators specified in ASC Topic
360-10-35 are present. We did not evaluate any long-lived assets for impairment during 2013 because
no such impairment indicators were present.
(cid:121) Benefit plans - We maintain various defined benefit pension plans and postretirement benefits other
than pensions, or OPEB, plans. The amounts recognized as defined benefit pension and OPEB
expenses and the reported amounts of pension asset and accrued pension and OPEB costs are
actuarially determined based on several assumptions, including discount rates, expected rates of return
on plan assets and expected health care trend rates. Variances from these actuarially assumed rates
will result in increases or decreases, as applicable, in the recognized pension and OPEB obligations,
pension and OPEB expenses and funding requirements. These assumptions are more fully described
below under “Defined Benefit Pension Plans” and “OPEB Plans.”
(cid:121)
Income taxes - We recognize deferred taxes for future tax effects of temporary differences between
financial and income tax reporting. We record a valuation allowance to reduce our deferred income
tax assets to the amount that is believed to be realized under the more-likely-than-not recognition
criteria. While we have considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for a valuation allowance, it is possible that 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 $842 million for German corporate purposes and $127 million for German trade tax
purposes at December 31, 2013). At December 31, 2013, we have concluded that no deferred income
tax asset valuation allowance is required to be recognized with respect to such carryforwards,
principally because (i) such carryforwards have an indefinite carryforward period, (ii) we have utilized
a portion of such carryforwards during the most recent three-year period and (iii) we currently expect
to utilize the remainder of such carryforwards over the long term. However, prior to the complete
utilization of such carryforwards, if we were to generate losses in our German operations for an
extended period of time, it is possible that we might conclude the benefit of such carryforwards would
no longer meet the more-likely-than-not recognition criteria, at which point we would be required to
recognize a valuation allowance against some or all of the then-remaining tax benefit associated with
the carryforwards.
We record a reserve for uncertain tax positions where we believe it is more-likely-than-not our tax
positions 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.
22
In addition, we evaluate 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 to be distributed to the U.S.
(cid:121) 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 and other significant judgments and estimates, such
as allowance for doubtful accounts, reserves for obsolete or unmarketable inventories, impairment of equity method
investments and long-lived assets, defined benefit pension plans and loss accruals. In addition, net income is
impacted by the significant judgments and estimates for deferred income tax asset valuation allowances and loss
accruals.
Comparison of 2013 to 2012 Results of Operations
Net sales
Cost of sales
Gross margin
Other operating expense, net
Income (loss) from operations
TiO2 operating statistics:
Sales volumes*
Production volumes*
Percentage change in net sales:
TiO2 product pricing
TiO2 sales volumes
TiO2 product mix
Changes in currency exchange rates
Total
* Thousands of metric tons
Year ended December 31,
2012
2013
(Dollars in millions)
$ 1,976.3
1,415.9
560.4
200.8
359.6
$
100% $ 1,732.4
1,620.2
72
112.2
28
10
244.8
18% $ (132.6 )
100 %
94
6
14
(8)%
470
469
498
474
%
Change
6 %
1 %
(19)%
6
-
1
(12)%
23
Industry conditions and 2013 overview – In the second quarter of 2013, we announced price increases for
our TiO2 products in all of our markets, implementation of which began in June 2013. In the third and fourth
quarters of 2013, we notified customers of additional price increases to be implemented as contract terms and
market conditions allow. As a result, after about a year of decreasing selling prices within the TiO2 industry, our
selling prices have generally stabilized. Our average selling prices have remained stable through the last three
quarters of 2013, and our average selling prices in the fourth quarter of 2013 were 1% higher as compared to the
third quarter of 2013. Demand for TiO2 products has generally been strong in 2013, primarily in European and
export markets, as customers have generally depleted their inventories in response to general global economic
uncertainty.
While we operated our production facilities at full practical capacity rates in the first quarter of 2012, we
operated our facilities at reduced rates during the remainder of 2012 (approximately 86% of practical capacity in the
second quarter, approximately 71% in the third quarter and approximately 80% in the fourth quarter) to align
production levels and inventories to current and anticipated near-term customer demand levels. We continued to
operate our production facilities at reduced capacity rates in 2013 (approximately 92%, 90%, 82% and 81% of
practical capacity in the first through fourth quarter periods, respectively). Our production capacity utilization rates
in the second half of 2013 were impacted by the lockout at our Canadian production facility, as discussed below.
We experienced significantly higher costs for our raw materials such as third party feedstock ore and
petroleum coke in 2012. We operate two ilmenite mines in Norway, the production from which provides all of the
feedstock for our European sulfate process facilities as well as third party ilmenite ore sales. Our cost of sales per
metric ton of TiO2 sold in the first half of 2013 was significantly higher than TiO2 sold in the first half of 2012, as a
substantial portion of the TiO2 products we sold in the first quarter of 2012 (and a portion of the TiO2 products we
sold in the second quarter of 2012) was produced with lower-cost feedstock ore purchased in 2011, while a
substantial portion of the TiO2 products we sold in the first quarter of 2013 (and a portion of the TiO2 products we
sold in the second quarter of 2013) was produced with higher-cost feedstock ore purchased in 2012. We have seen
some moderation in the cost of TiO2 feedstock ore procured from third parties in 2013, but such reductions did not
begin to be significantly reflected in our cost of sales until the third quarter of 2013. As expected, our cost of sales
per metric ton of TiO2 sold in the second half of 2013 was lower than the cost of sales per metric ton of TiO2 sold in
the second half of 2012, primarily due to the lower feedstock ore costs. If third-party feedstock ore costs reflected in
our cost of sales in 2013 had been based on our current cost of third-party feedstock ore, our cost of sales for 2013
would have been approximately $218 million lower.
Net sales - Our net sales decreased 12% or $243.9 million in 2013 compared to 2012, primarily due to the
net effects of a 19% decrease in average TiO2 selling prices (which decreased net sales by approximately $375
million) and a 6% increase in sales volumes (which increased net sales by approximately $119 million). TiO2
selling prices will increase or decrease generally as a result of competitive market pressures, changes in the relative
level of supply and demand as well as changes in raw material and other manufacturing costs.
Our sales volumes increased 6% in 2013 as compared to 2012 due to increased customer demand primarily
in European and certain export markets, partially offset by decreased demand in North American markets. In
addition, we estimate the favorable effect of changes in currency exchange rates increased our net sales by
approximately $18 million, or 1%, as compared to 2012.
24
Cost of sales - Cost of sales increased $204.3 million or 14% in 2013 compared to 2012 due to the net
impact of higher raw materials and other production costs of approximately $115 million (primarily caused by the
higher third-party feedstock ore costs), a 6% increase in sales volumes, a 1% increase in production volumes and
currency fluctuations (primarily the euro). Our cost of sales per metric ton of TiO2 sold in the first half of 2013 was
significantly higher than TiO2 sold in the first half of 2012, as a substantial portion of the TiO2 products we sold in
the first quarter of 2012 (and a portion of the TiO2 products we sold in the second quarter of 2012) was produced
with lower-cost feedstock ore purchased in 2011, while a substantial portion of the TiO2 products we sold in the first
quarter of 2013 (and a portion of the TiO2 products we sold in the second quarter of 2013) was produced with
higher-cost feedstock ore purchased in 2012. As expected, the cost of sales per metric ton of TiO2 sold in the second
half of 2013 was lower than the cost of sales per metric ton of TiO2 sold in the second half of 2012 primarily due to
the lower feedstock ore costs as discussed and quantified above. Cost of sales as a percentage of net sales increased
to 94% in 2013 compared to 72% in 2012 primarily due to the combined effects of higher raw materials and other
production costs and the lower average TiO2 selling prices as discussed above. In addition, cost of sales in 2013
includes approximately $19 million of unabsorbed fixed production and other manufacturing costs associated with
the lockout at the Canadian TiO2 production facility and approximately $9 million of one-time costs resulting from
the terms of the new collective bargaining agreement for our Canadian workforce, each of which were charged
directly to cost of sales as discussed below.
Unionized employees in our Canadian TiO2 production facility were covered by a collective bargaining
agreement that expired June 15, 2013. The Canadian facility represents approximately 19% of our worldwide TiO2
production capacity. The union employees represented by the Confederation des Syndicat National (CSN) rejected
our revised global offer, and we declared a lockout of unionized employees upon the expiration of the existing
contract. Effective the end of November 2013, a new collective bargaining agreement was reached with CSN and
production at the facility resumed in February 2014. During the lockout we operated our Canadian plant at
approximately 15% of the plant’s capacity with non-union management employees. The reduction in our TiO2
production volumes at our Canadian facility resulted in approximately $19 million of unabsorbed fixed production
and other manufacturing costs that were charged directly to cost of sales. In addition, we recognized approximately
$9 million in expenses associated with reaching a new collective bargaining agreement, consisting of a net $7
million non-cash charge due to the curtailment of one of our Canadian defined benefit pension plans and our
Canadian other postretirement benefit plan and approximately $2 million of severance and other back-to-work
expenses.
We reduced our TiO2 production volumes during 2012 in order to align inventory levels with lower
demand, which resulted in approximately $25 million of unabsorbed fixed production costs that were charged
directly to cost of sales.
Other operating expense, net – Other operating expense in 2013 includes a litigation settlement charge of
$35 million. See Note 15 to our Consolidated Financial Statements.
Gross margin and income (loss) from operations - Income from operations decreased by $492.2 million
from income of $359.6 million in 2012 to a loss of $132.6 million in 2013. Income (loss) from operations as a
percentage of net sales decreased to (8)% in 2013 from 18% in 2012. This decrease was driven by the decline in
gross margin, which decreased to 6% in 2013 compared to 28% in 2012, and the 2013 litigation settlement charge
discussed above. As discussed and quantified above, our gross margin has decreased primarily due to the net effects
of lower selling prices, higher manufacturing costs (primarily raw materials), higher sales volumes, costs associated
with reaching a new Canadian collective bargaining agreement and lower unabsorbed fixed costs charged directly to
cost of sales. Additionally, changes in currency exchange rates negatively affected our gross margin and income
from operations. We estimate that changes in currency exchange rates decreased income from operations by
approximately $2 million in 2013 compared to 2012.
As a percentage of net sales, selling, general and administrative expenses were relatively consistent at
approximately 11% and 9% for 2013 and 2012 respectively.
Other non-operating income (expense) - We recognized an aggregate $7.2 million pre-tax charge in the
second quarter of 2012 related to the early extinguishment of our remaining Senior Secured Notes. See Note 9 to
our Consolidated Financial Statements.
25
We recognized a $3.9 million securities transaction loss in the fourth quarter of 2012 on the sale, pursuant
to a tender offer, of our 4.2 million shares of Titanium Metals Corporation (TIMET) stock for $70.0 million. See
Note 6 to our Consolidated Financial Statements.
We recognized an aggregate $8.9 million pre-tax charge, consisting of the write-off of unamortized original
issue discount costs and deferred financing costs, in 2013 related to the voluntary prepayment of our term loan by
$290 million in the first quarter of 2013 and the remaining $100 million in the third quarter of 2013. See Note 9 to
our Condensed Financial Statements.
Interest expense decreased $7.1 million from $26.7 million in 2012 to $19.6 million in 2013 primarily due
to lower average debt levels in 2013. See Note 9 to our Consolidated Financial Statements.
Interest and dividend income decreased $7.8 million to $1.2 million in 2013 primarily due to lower
balances available for investment, principally related to our loan to Valhi which was completely repaid in December
2012. Interest income on our loan to Valhi was $7.1 million in 2012.
Income tax expense (benefit) – We recognized an income tax benefit of $57.9 million in 2013 compared to
an income tax provision of $112.3 million in 2012. This difference is primarily due to our decreased earnings in
2013. Our income tax provision in 2012 includes a net incremental tax benefit of $3.1 million. We determined
during the third quarter of 2012 that due to global changes in the 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 and our provision for income taxes in the third quarter of 2012 included an incremental tax benefit of
$11.1 million. During the fourth quarter of 2012 as a result of a change in circumstances related to our sale and the
sale by certain of our affiliates of their shares of TIMET common stock, which sale provided an opportunity for us
and other members of our consolidated U.S. federal income tax group to elect to claim foreign tax credits, we
determined that we could tax-efficiently remit non-cash dividends from our non-U.S. jurisdictions before the end of
the year that absent the TIMET sale would not have been considered. Our provision for income taxes in the fourth
quarter of 2012 includes an incremental tax related to the non-cash dividend distributions of $8.0 million. See Note
10 to our Consolidated Financial Statements for a tabular reconciliation of our statutory income tax provision to our
actual tax provision.
Comparison of 2012 to 2011 Results of Operations
Year ended December 31,
2012
2011
(Dollars in millions)
$ 1,943.3
1,194.9
748.4
201.9
546.5
$
100% $ 1,976.3
1,415.9
61
560.4
39
11
200.8
28% $ 359.6
100 %
72
28
10
18 %
%
Change
503
550
470
469
(6)%
(15)%
10%
(6)
2
(4)
2%
Net sales
Cost of sales
Gross margin
Other operating income and expenses, net
Income from operations
TiO2 operating statistics:
Sales volumes*
Production volumes*
Percentage change in net sales:
TiO2 product pricing
TiO2 sales volumes
TiO2 product mix
Changes in currency exchange rates
Total
* Thousands of metric tons
26
Net sales - Our net sales increased 2% or $33.0 million in 2012 compared to 2011, primarily due to the net
effects of a 10% increase in average TiO2 selling prices (which increased net sales by approximately $194 million)
and a 6% decrease in sales volumes (which decreased net sales by approximately $117 million). TiO2 selling prices
will increase or decrease generally as a result of competitive market pressures, changes in the relative level of supply
and demand as well as changes in raw material and other manufacturing costs.
Our sales volumes decreased 6% in 2012 as compared to 2011 due to decreased customer demand in
European markets partially offset by higher sales in U.S. and export markets. In addition, we estimate the
unfavorable effect of changes in currency exchange rates decreased our net sales by approximately $82 million, or
4%, as compared to 2011.
Cost of sales - Cost of sales increased $221.0 million or 18% in 2012 compared to 2011 due to the net
impact of higher raw materials and other production costs of approximately $331 million (primarily related to third-
party feedstock ore and petroleum coke costs), a 6% decrease in sales volumes, a 15% decrease in production
volumes and currency fluctuations (primarily the euro). Cost of sales as a percentage of net sales increased to 72%
in 2012 compared to 61% in 2011 primarily due to the net effects of higher raw material costs and other production
costs, the unfavorable effects of unabsorbed fixed production costs resulting from reduced production volumes and
higher average selling prices. The reduction in our TiO2 production volumes during 2012, as discussed above,
resulted in approximately $25 million of unabsorbed fixed production costs which were charged directly to cost of
sales. Additionally, 2012 reflects the benefit of lower raw material costs in the first quarter of 2012 (as compared to
current costs) as lower cost raw materials purchased at the end of 2011 were used in the first quarter 2012
production process.
Gross margin and income from operations - Income from operations decreased by $186.9 million from
$546.5 million in 2011 to $359.6 million in 2012. Income from operations as a percentage of net sales decreased to
18% in 2012 from 28% in 2011. This decrease was driven by the decline in gross margin, which decreased to 28%
in 2012 compared to 39% in 2011. As discussed and quantified above, our gross margin has decreased primarily
due to the net effects of higher manufacturing costs (primarily raw materials), higher selling prices, lower sales
volumes and unabsorbed fixed costs related to lower production volumes. Additionally, changes in currency
exchange rates negatively affected our gross margin and income from operations. We estimate that changes in
currency exchange rates decreased income from operations by approximately $10 million in 2012 compared to
2011.
As a percentage of net sales, selling, general and administrative expenses were relatively consistent at
approximately 9% and 10% for 2012 and 2011 respectively.
Other non-operating income (expense) - In March 2011, we redeemed €80 million of our 6.5% Senior
Secured Notes and borrowed under our European revolving credit facility in order to fund the redemption. In the
third and fourth quarters of 2011, we repurchased in open market transactions an aggregate €40.8 million principal
amount of our Senior Notes. As a result of these redemptions and open market purchases, we recognized a net $3.1
million pre-tax interest charge consisting of the call premium and the write-off of unamortized deferred financing
costs and original issue discount associated with the redeemed and repurchased Senior Notes.
We recognized an aggregate $7.2 million pre-tax charge in the second quarter of 2012 related to the early
extinguishment of our remaining Senior Secured Notes. See Note 9 to our Consolidated Financial Statements.
We recognized a $3.9 million securities transaction loss in the fourth quarter of 2012 on the sale, pursuant
to a tender offer, of our 4.2 million shares of Titanium Metals Corporation (TIMET) stock for $70.0 million. See
Note 6 to our Consolidated Financial Statements.
Interest expense decreased $6.0 million from $32.7 million in 2011 to $26.7 million in 2012 primarily due
to the effects of lower 2012 average debt levels of our Senior Secured Notes resulting from the March 2011
redemption and open market purchases in the third and fourth quarters of 2011. In addition, outstanding debt in
2012 carried lower average interest rates than in 2011. See Note 9 to our Consolidated Financial Statements.
27
Income tax provision - Our income tax provision was $112.3 million in 2012 compared to $196.1 million in
2011. This decrease in provision for income taxes was primarily due to lower income from operations in 2012
compared to 2011. See Note 10 to our Consolidated Financial Statements for a tabular reconciliation of our
statutory income tax provision to our actual tax provision. Some of the more significant items impacting this
reconciliation are summarized below.
(cid:121) Our income tax provision in 2012 includes a net incremental tax benefit of $3.1 million. We
determined during the third quarter that due to global changes in the business we would not remit
certain dividends from our non-U.S. jurisdictions. As a result, certain current year tax attributes were
available for carryback to offset prior year tax expense and our provision for income taxes in the third
quarter included an incremental tax benefit of $11.1 million. During the fourth quarter as a result of a
change in circumstances related to our sale and the sale by certain of our affiliates of their shares of
TIMET common stock, which sale provided an opportunity for us and other members of our
consolidated U.S. federal income tax group to elect to claim foreign tax credits, we determined that we
could tax-efficiently remit non-cash dividends from our non-U.S. jurisdictions before the end of the
year that absent the TIMET sale would not have been considered. Our provision for income taxes in
the fourth quarter of 2012 includes an incremental tax related to the non-cash dividend distributions of
$8.0 million.
(cid:121) Our income tax provision in 2011 includes $17.2 million for U.S. incremental income taxes on current
earnings repatriated from our German subsidiary, which earnings were used to fund a portion of the
redemption and repurchases of our Senior Secured Notes.
Effects of currency exchange rates
We have substantial operations and assets located outside the United States (primarily in Germany,
Belgium, Norway and Canada). The majority of our sales from non-U.S. operations are denominated in currencies
other than the U.S. dollar, principally the euro, other major European currencies and the Canadian dollar. A portion
of our sales generated from our non-U.S. operations is denominated in the U.S. dollar. Certain raw materials used
worldwide, primarily titanium-containing feedstocks, are purchased primarily 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
non-U.S. 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. In
addition to the impact of the translation of sales and expenses over time, our non-U.S. operations also generate
currency transaction gains and losses which primarily relate to the difference between the currency exchange rates in
effect when non-local currency sales or operating costs are initially accrued and when such amounts are settled with
the non-local currency.
Overall, we estimate that fluctuations in currency exchange rates had the following effects on our sales and
income from operations for the periods indicated.
Impact of changes in currency exchange rates - 2013 vs. 2012
Transaction gains/(losses) recognized
2012
2013
Change
(in millions)
Translation
gain/loss-
impact of
rate changes
Total currency
impact
2013 vs. 2012
Impact on:
Net sales
Income from operations
$
$
-
(1)
$
-
(4)
$
-
(3)
18 $
1
18
(2 )
28
Impact of changes in currency exchange rates - 2012 vs. 2011
Transaction gains/(losses) recognized
2011
2012
Change
(in millions)
Translation
gain/loss-
impact of
rate changes
Total currency
impact
2011 vs. 2012
Impact on:
Net sales
Income from operations
$
Outlook
$
-
3
$
-
(1)
$
-
(4)
(82 ) $
(6 )
(82)
(10)
During 2013 we operated our production facilities at 86% of practical capacity. Our production utilization
rates in 2013 were impacted by the lockout at our Canadian production facility that began in June 2013, as we
operated our Canadian plant at approximately 15% of the plant’s capacity with non-union management employees
during the lockout. We believe that our annual attainable production capacity for 2014 is approximately 555,000
metric tons. While we expect our production volumes to be higher in 2014 as compared to 2013, we expect that we
will operate at less-than-full production capacity for 2014, due principally to the ramp-up of operations at our
Canadian facility following the end of the lockout in December 2013 as well as the implementation of certain
productivity-enhancing capital improvement projects at other facilities which will result in longer-than-normal
maintenance shutdowns in certain instances. Assuming economic conditions do not deteriorate in the various
regions of the world, we expect our sales volumes to be higher in 2014 as compared to 2013. We will continue to
monitor current and anticipated near-term customer demand levels and align our production and inventories
accordingly.
We have seen some moderation in the cost of TiO2 feedstock ore procured in 2013; however, these
reductions did not begin to be significantly reflected in our cost of sales until the third quarter of 2013. As expected,
our cost of sales per metric ton of TiO2 sold in the second half of 2013 was lower than the cost of sales per metric
ton of TiO2 sold in the second half of 2012, primarily due to the lower feedstock ore costs. Given the time lag
between when we procure third-party feedstock ore and when the TiO2 product produced with such third-party
feedstock is sold and recognized in our cost of sales, we expect our cost of sales per metric ton of TiO2 sold in 2014
will be lower than the cost of sales per metric ton of TiO2 sold in 2013. Although the cost of feedstock ore has and
continues to moderate, such reductions have been inadequate to compensate for the decline in selling prices for our
products over the past year. We started 2013 with selling prices 16% lower than the beginning of 2012, and our
average selling prices at the end of 2013 were 7% below prices at the end of 2012 (with most of the decline during
2013 occurring in the first quarter). In addition, our average selling prices at the end of 2013 were slightly higher as
compared to our average selling prices during the year 2013. In the second quarter of 2013, we announced price
increases for our TiO2 products in all of our markets, implementation of which began in June 2013. In the third and
fourth quarters of 2013, we notified customers of additional price increases to be implemented as contract terms and
market conditions allow. Industry data indicates that overall TiO2 inventory held by producers has been
significantly decreased and we believe most customers hold very low inventories of TiO2 with many operating on a
just-in-time basis. As a result, lead times for delivery are increasing. With the strong sales volumes experienced in
2013, we continue to see evidence of improvement in demand for our TiO2 products, which we believe will support
implementation of additional selling price increases in the near term.
Overall, we expect that income from operations in 2014 will be higher as compared to 2013, as a result of:
(cid:121)
(cid:121)
(cid:121)
(cid:121)
the favorable effect of lower-cost feedstock ore,
the favorable effects of anticipated higher sales and production volumes in 2014 (in part from the
resumption of production at our Canadian TiO2 production facility),
the litigation settlement charge recognized in 2013, and
the favorable impact of increases in our selling prices that we would be able to achieve during
2014.
29
Due to the constraints, high capital costs and extended lead time associated with adding significant new
TiO2 production capacity, especially for premium grades of TiO2 products produced from the chloride process, we
believe increased and sustained profit margins will be necessary to financially justify major expansions of TiO2
production capacity required to meet expected future growth in demand. As a result of customer decisions over the
last year and the resulting adverse effect on global TiO2 pricing, industry projects to increase TiO2 production
capacity have been cancelled or deferred indefinitely. Given the lead time required for such production capacity
expansions, we expect a prolonged shortage of TiO2 products will occur as economic conditions improve and global
demand levels for TiO2 continue to increase.
Our expectations for our future operating results are based upon a number of factors beyond our control,
including worldwide growth of gross domestic product, competition in the marketplace, 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.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated cash flows
Operating activities
Trends in cash flows as a result of our operating activities (excluding the impact of significant asset
dispositions and relative changes in assets and liabilities) are generally similar to trends in our earnings.
Cash provided by operating activities was $130.4 million in 2013 compared to $76.9 million in 2012. This
$53.5 million increase was primarily due to the net effects of the following:
(cid:121)
(cid:121)
(cid:121)
lower income from operations in 2013 of $492.2 million,
lower net cash used in 2013 of $419.9 million associated with relative changes in our inventories,
receivables, prepaids, payables and accruals primarily due to the relative decrease in our inventories as
discussed below,
lower net cash paid for income taxes in 2013 of $61.1 million resulting from our decreased
profitability,
(cid:121) higher net distributions from our TiO2 joint venture in 2013 of $31.6 million, primarily due to the
timing of the joint venture’s working capital needs,
(cid:121)
lower cash paid for interest in 2013 of $17.0 million, primarily due to lower debt levels in 2013, and to
financing costs incurred in 2012 associated with the new term loan and a $6.2 million call premium
paid upon redemption of the Senior Secured Notes.
Cash provided by operating activities was $76.9 million in 2012 compared to $295.6 million in 2011. This
$218.7 million decrease was primarily due to the net effects of the following:
(cid:121)
(cid:121)
lower income from operations in 2012 of $186.9 million,
lower net cash paid for income taxes in 2012 of $10.4 million resulting from lower operating income
and the timing of payments,
(cid:121) higher net cash used in 2012 associated with relative changes in our inventories, receivables, prepaids,
payables and accruals of $8.4 million in 2012, and
(cid:121) higher net contributions to our TiO2 joint venture in 2012 of $24.5 million, primarily to support the
joint venture’s higher working capital needs associated with higher-cost feedstock ore.
Changes in working capital are affected by accounts receivable and inventory changes. As shown below:
(cid:121) Our average days sales outstanding increased slightly from December 31, 2012 to December 31, 2013
as a result of lower average daily net sales resulting from lower average selling prices partially offset
by higher sales volumes, and
30
(cid:121) Our average days sales in inventory decreased from December 31, 2012 to December 31, 2013, due to
lower inventory raw material costs and lower inventory volumes in 2013.
For comparative purposes, we have provided prior year numbers below.
Days sales outstanding
Days sales in inventory
55 days
104 days
61 days
102 days
December 31,
2011
December 31,
2012
December 31,
2013
62 days
75 days
Investing activities
Our capital expenditures were $68.6 million in 2011, $74.8 million in 2012 and $67.6 million in 2013.
Capital expenditures are primarily incurred to maintain and improve the cost effectiveness of our manufacturing
facilities. Our capital expenditures during the past three years include an aggregate of approximately $80.2 million
($24.8 million in 2013) for our ongoing environmental protection and compliance programs.
During 2012, we:
(cid:121)
(cid:121)
(cid:121)
collected a net $136.1 million on our unsecured revolving demand promissory note with Valhi,
sold our 4.2 million shares of common stock of TIMET for $70.0 million and
sold $21.1 million in mutual fund marketable securities.
During 2011, we:
loaned a net $74.2 million under our unsecured revolving demand promissory note with Valhi,
(cid:121)
(cid:121) purchased a net $21.8 million in mutual fund marketable securities and
(cid:121) purchased $43.2 million in marketable equity securities of related parties, including $3.6 million of
purchases in late 2010 which settled in early 2011.
Our marketable securities are discussed in Note 6 to our Consolidated Financial Statements. Our loan to
Valhi is further discussed in Note 14.
Financing activities
During 2013, we:
(cid:121) voluntarily prepaid $390.0 million principal amount on our term loan,
(cid:121) borrowed $190.0 million and subsequently repaid $20 million on our note payable with Contran
entered into in February 2013,
(cid:121) borrowed $162.1 million and subsequently repaid $151.0 million on our revolving North American
credit facility,
(cid:121) borrowed €10 million ($12.8 million when borrowed) on our European credit facility and subsequently
repaid an aggregate €20 million ($26.5 million when repaid),
(cid:121) borrowed $1.7 million from a Canadian economic development agency,
(cid:121) purchased 49,000 shares of our common stock in open market transactions for $.7 million, and
(cid:121) paid quarterly dividends to stockholders aggregating $.60 per share ($69.5 million).
During 2012, we:
(cid:121) borrowed €80 million ($107.4 million when borrowed) on our European credit facility and
subsequently repaid an aggregate €70 million ($88.6 million when repaid),
31
(cid:121) borrowed an aggregate $394.0 million on a term loan entered into in June 2012 that was issued at
98.5% of the principal amount borrowed and subsequently repaid $10.0 million principal amount,
(cid:121)
retired €279.2 million principal amount of our 6.5% Senior Secured Notes ($352.3 million when
retired),
(cid:121) borrowed and subsequently repaid $71 million on our revolving North American credit facility, and
(cid:121) paid quarterly dividends to stockholders aggregating $.60 per share ($69.5 million).
During 2011, we:
(cid:121)
redeemed €80 million principal amount of our €400 million 6.5% Senior Secured Notes at 102.17% of
the face value for an aggregate of $115.7 million, including a $2.5 million call premium in March
2011,
(cid:121) borrowed €80 million ($113.3 million when borrowed) under our European credit facility in order to
fund the €80 million redemption of our Senior Secured Notes and subsequently repaid €80 million
($115.0 million when repaid),
(cid:121)
repurchased €40.8 million principal amount of our 6.5% Senior Secured Notes in open market
transactions for an aggregate of €40.6 million ($57.6 million when repurchased), and
(cid:121) paid quarterly dividends to stockholders aggregating $.575 per share ($.125 per share in the first
quarter and $.15 per share in each of the second, third and fourth quarters), or an aggregate of $66.7
million, and paid a special dividend to stockholders of $.50 per share, or an aggregate of $57.9 million,
in the first quarter.
In February 2014, our board of directors declared a first quarter 2014 regular quarterly dividend of $.15 per
share, payable March 20, 2014 to stockholders of record as of March 10, 2014.
Outstanding debt obligations and borrowing availability
At December 31, 2013, our consolidated debt comprised:
(cid:121) $170.0 million under our note payable to Contran due in June 2018,
(cid:121) $11.1 million under our North American revolving credit facility which matures in June 2017, and
(cid:121)
approximately $2.4 million of other indebtedness.
In February 2014, we entered into a new $350 million term loan. We used $170 million of the net proceeds
of this new term loan to prepay the outstanding principal balance of our note payable to Contran (along with accrued
and unpaid interest through the prepayment date) and the note payable was cancelled. The remaining $172.8 million
net proceeds are available for our general corporate purposes. See Note 9 to our Consolidated Financial Statements.
Our Canadian subsidiary has a Cdn. $10.0 million loan agreement for the limited purpose of issuing letters
of credit. The facility contains certain restrictive covenants which, among other things, restrict the subsidiary from
incurring additional indebtedness in excess of Cdn. $35 million.
32
Our North American and European revolvers and our new term loan contain a number of covenants and
restrictions which, among other things, restrict our ability to incur additional debt, incur liens, pay dividends or
merge or consolidate with, or sell or transfer substantially all of our assets to, another entity, and contains other
provisions and restrictive covenants customary in lending transactions of this type. Certain of our credit agreements
contain provisions which could result in the acceleration of indebtedness prior to their stated maturity for reasons
other than defaults for failure to comply with typical financial or payment 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. Our European
revolving credit facility also requires the maintenance of certain financial ratios. At both September 30, 2013 and
December 31, 2013, and based on the current earnings before income tax, interest, depreciation and amortization
expense (EBITDA) of the borrowers, we would not have met the financial test under the European revolver if the
borrowers had any net debt outstanding at such dates. In December 2013, the lenders under our European revolving
credit facility granted a waiver until June 30, 2014 with respect to the financial test, but our ability to borrow any
amounts under the facility is subject to the requirement that the borrowers maintain a specified level of EBITDA.
We are in compliance with all of our debt covenants at December 31, 2013, as amended by the waiver with respect to
our European revolving credit facility discussed above. We believe that we will be able to continue to comply with the
financial covenants contained in our credit facilities through their maturity, including the requirement to maintain a
specified level of EBITDA with respect to our European revolving credit facility consistent with the waiver; however if
future operating results differ materially from our expectations we may be unable to maintain compliance. We believe
we have alternate sources of liquidity, including cash on hand and borrowings under our North American revolver,
(which does not contain any financial maintenance covenants) in order to adequately address any compliance issues
which might arise. See Note 9 to our Consolidated Financial Statements.
In addition to the outstanding indebtedness indicated above, at December 31, 2013 we had $89.1 million
available for borrowing under our North American revolving credit facility, and we could borrow all such available
amount without violating any of the facility’s covenants. At December 31, 2013, we were in compliance with the
minimum EBITDA requirement set forth in the waiver in respect of the European revolving credit facility discussed
above, and based on the terms of the waiver, our borrowing availability under such facility was limited to 50% of the
credit facility, or €60 million ($82.8 million). Effective January 1, 2014, and in accordance with the terms of such
waiver, our available borrowing under the facility increased to 75% of the credit facility, or €90 million ($124.1
million).
Our assets consist primarily of investments in operating subsidiaries, and our ability to service parent-level
obligations depends in 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. Our new term loan is collateralized, by,
among other things, a first priority lien on (i) 100% of the common stock of certain of our U.S. wholly-owned
subsidiaries, (ii) 65% of the common stock or other ownership interest of our Canadian subsidiary (Kronos Canada,
Inc.) and certain first-tier European subsidiaries (Kronos Titan GmbH and Kronos Denmark ApS) and (iii) a
$395.7 million unsecured promissory note issued by our wholly-owned subsidiary, Kronos International, Inc. (KII).
The term loan is also collateralized by a second priority lien on our U.S. assets which collateralize our North
American revolving facility. Our North American revolving credit facility is collateralized by, among other things,
a first priority lien on the borrower’s trade receivables and inventories. Our European revolving credit facility is
collateralized by, among other things, the accounts receivable and inventories of the borrowers plus a limited pledge
of all the other assets of the Belgian borrower. See Note 9 to our Consolidated Financial Statements.
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
33
other assets outside the ordinary course of business or (iv) pay dividends. 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, our 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.
Based upon our expectation for the TiO2 industry and anticipated demands on cash resources, we expect to
have sufficient liquidity to meet our short term obligations (defined as the twelve-month period ending
December 31, 2014) and our long-term obligations (defined as the five-year period ending December 31, 2018, our
time period for long-term budgeting). If actual developments differ from our expectations, our liquidity could be
adversely affected.
Cash, cash equivalents, restricted cash and marketable securities
At December 31, 2013 we had:
Cash and cash equivalents
Restricted cash
Noncurrent marketable securities
Held by
U.S.
entities
$
.6
-
30.4
Non-U.S.
entities
(In millions)
$
53.2 $
10.0
-
Total
53.8
10.0
30.4
In addition and as discussed above, in February 2014 we entered into a new $350 million term loan. After
using $170 million of the net proceeds of this new term loan to prepay the outstanding principal balance of our note
payable to Contran (along with accrued and unpaid interest through the prepayment date), the remaining $172.8
million net proceeds are available for our general corporate purposes.
Stock repurchase program
In December 2010 our board of directors authorized the repurchase of up to 2.0 million shares of our
common stock in open market transactions, including block purchases, or in privately-negotiated transactions at
unspecified prices and over an unspecified period of time. In 2013, we repurchased 49,000 shares under the plan
and 1,951,000 shares are available for repurchase. See Note 13 to our Consolidated Financial Statements.
Capital expenditures
We intend to spend approximately $68 million to maintain and improve our existing facilities during 2014,
including approximately $14 million in the area of environmental compliance, protection and improvement. The
majority of our expenditures in 2014 will be to maintain and improve the cost-effectiveness of our manufacturing
facilities. Our capital expenditures in the area of environmental compliance, protection and improvement include
expenditures which are primarily focused on increased operating efficiency but also result in improved
environmental protection, such as lower emissions from our manufacturing plants. Capital spending for 2014 is
expected to be funded through cash on hand or borrowing under existing credit facilities.
34
Off-balance sheet financing
Other than operating lease commitments disclosed in Note 15 to our Consolidated Financial Statements, we
are not party to any material off-balance sheet financing arrangements.
Related party transactions
We are party to certain transactions with related parties. See Note 14 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 10 and 15 to our Consolidated Financial Statements for a description of certain income tax
examinations currently underway, certain legal proceedings and other commitments.
Recent accounting pronouncements
Not applicable
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 9, 14, 15 and 16 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, 2013 (and as adjusted to reflect our new $350 million term loan entered into in
February 2014, and the application of the net proceeds as discussed above) by the type and date of payment.
Contractual commitment
$
Indebtedness:
Principal (1)
Interest payments (2)
Operating leases
Long-term supply contracts for the purchase
of TiO2 feedstock (3)
Long-term service and other supply contracts (4)
Litigation settlement (5)
Fixed asset acquisitions
Estimated tax obligations (6)
Payment due date
2015/
2016
2017/
2018
2019 and
after
Total
2014
3.1 $
12.9
12.2
7.7 $
25.1
15.3
18.4 $
23.3
6.8
154.3 $
12.6
23.4
315.2
64.7
35.0
15.7
9.4
468.2
505.0
27.6
-
-
-
580.7
-
14.2
-
-
-
62.7
-
16.9
-
-
-
207.2
183.5
73.9
57.7
-
820.2
123.4
35.0
15.7
9.4
1,318.8
Adjustment for effect of new term loan:
Repayment of Contran note payable: (7)
Principal
Interest payments
New term loan issued in February 2014: (7)
Principal
Interest payments
Adjusted commitments
(2.6)
(10.8)
(7.0)
(24.2)
(7.0)
(23.1)
(153.4 )
(12.6 )
(170.0)
(70.7)
2.6
14.3
471.7 $
7.0
32.7
589.2 $
7.0
32.0
71.6 $
350.0
333.4
17.9
96.9
392.5 $ 1,525.0
$
35
(1) At December 31, 2013, a significant portion of the amount shown for indebtedness relates to our note
payable to Contran Corporation ($170.0 million at December 31, 2013). See Item 7A - “Quantitative
and Qualitative Disclosures About Market Risk” and Note 9 to the Consolidated Financial
Statements. A portion of the amount shown for indebtedness relates to borrowings under our
Canadian subsidiary’s agreement with an economic development agency of the Province of Quebec,
Canada (borrowings of USD $1.7 million at December 31, 2013).
(2) The amounts shown for interest for any outstanding variable-rate indebtedness is based upon the
December 31, 2013 interest rates and assumes that such variable-rate indebtedness remains
outstanding until maturity.
(3) Our contracts for the purchase of TiO2 feedstock contain fixed quantities that we are required to
purchase, or specify a range of quantities within which we are required to purchase based on our
feedstock requirements. The pricing under these agreements is generally negotiated quarterly. The
timing and amount shown for our commitments related to the supply contracts for TiO2 feedstock are
based upon our current estimate of the quantity of material that will be purchased in each time period
shown, the payment that would be due based upon such estimated purchased quantity and an estimate
of the prices for the various suppliers which is primarily based on first quarter 2014 pricing. The
actual amount of material purchased and the actual amount that would be payable by us, may vary
from such estimated amounts. Our obligation for the purchase of TiO2 feedstock is more fully
described in Note 15 to our Consolidated Financial Statements and above in “Business – raw
materials.” The amounts shown in the table above include the feedstock ore requirements from
contracts we entered into in January 2014.
(4) The amounts shown for the long-term service and other supply contracts primarily pertain to
agreements we have entered into with various providers of products or services which help to run our
plant facilities (electricity, natural gas, etc.), utilizing December 31, 2013 exchange rates. See Note
15 to our Consolidated Financial Statements.
(5) The accrued litigation settlement is described in Note 15 to our Consolidated Financial Statements.
(6) The amount shown for estimated tax obligations is the consolidated amount of income taxes payable
at December 31, 2013, which is assumed to be paid during 2014.
(7) The terms of our new term loan and the application of the net proceeds are discussed in Note 9 to our
Consolidated Financial Statements.
The above table does not reflect:
(cid:121) Any amounts we might pay to fund our defined benefit pension plans and OPEB plans, as the timing
and amount of any such future fundings are unknown and dependent on, among other things, the future
performance of defined benefit pension plan assets, interest rate assumptions and actual future retiree
medical costs. We expect to be required to contribute an aggregate of approximately $25.7 million to
our defined benefit pension plans and OPEB plans during 2014. Such defined benefit pension plans
and OPEB plans are discussed below in greater detail. See Note 11 to our Consolidated Financial
Statements.
(cid:121) Any amounts we might pay to settle any of our uncertain tax positions, as the timing and amount of
any such future settlements are unknown and dependent on, among other things, the timing of tax
audits. See Note 10 to our Consolidated Financial Statements; and
(cid:121) Any amounts we might pay to acquire TiO2 from our TiO2 manufacturing joint venture, as the timing
and amount of such purchases are unknown and dependent on, among other things, the amount of TiO2
produced by the joint venture in the future and the joint venture’s future cost of producing such TiO2.
However, the table does include amounts related to our share of the joint venture’s ore requirements
necessary to produce TiO2 for us. See Item 1, “Business” and Note 5 to our Consolidated Financial
Statements.
36
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
purchase, 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 the U.S., Europe and Canada. See Note 11 to our
Consolidated Financial Statements.
Under defined benefit pension plan accounting, defined benefit pension plan expense, pension assets and
accrued pension costs are each recognized based on certain actuarial assumptions. These assumptions are
principally the assumed discount rate, the assumed long-term rate of return on plan assets and the assumed increase
in future compensation levels. We recognize the full funded status of our defined benefit pension plans as either an
asset (for overfunded plans) or a liability (for underfunded plans) in our Consolidated Balance Sheet.
We recognized consolidated defined benefit pension plan expense of $25.8 million in 2011, $25.1 million
in 2012 and $36.8 million in 2013. Included in our 2013 defined benefit plan expense is a curtailment charge of
$7.3 million resulting from amendments to one of our Canadian plans. Certain non-U.S. employees are covered by
plans in their respective countries, principally in Germany, Canada and Norway. Participation in the defined benefit
pension plan in Germany was closed to new participants effective in 2005. German(cid:3)employees(cid:3)hired(cid:3)beginning(cid:3)in(cid:3)
2005(cid:3) participate(cid:3) in(cid:3) a(cid:3) new(cid:3) plan(cid:3) in(cid:3) which(cid:3) the(cid:3) retirement(cid:3) benefit(cid:3) is(cid:3) based(cid:3) upon(cid:3) the(cid:3) amount(cid:3) of(cid:3) employee(cid:3) and(cid:3)
employer(cid:3) contributions(cid:3) to(cid:3) the(cid:3) plan,(cid:3) but(cid:3) for(cid:3) which(cid:3) in(cid:3) accordance(cid:3) with(cid:3) German(cid:3) law(cid:3) the(cid:3) employer(cid:3) guarantees(cid:3) a(cid:3)
minimum(cid:3)rate(cid:3)of(cid:3)return(cid:3)on(cid:3)invested(cid:3)assets(cid:3)and(cid:3)a(cid:3)guaranteed(cid:3)indexed(cid:3)lifetime(cid:3)benefit(cid:3)payment(cid:3)after(cid:3)retirement(cid:3)
based(cid:3)on(cid:3)the(cid:3)participant’s(cid:3)account(cid:3)balance(cid:3)at(cid:3)the(cid:3)time(cid:3)of(cid:3)retirement.(cid:3)In(cid:3)accordance(cid:3)with(cid:3)GAAP,(cid:3)the(cid:3)new(cid:3)pension(cid:3)
plan(cid:3)is(cid:3)accounted(cid:3)for(cid:3)as(cid:3)a(cid:3)defined(cid:3)benefit(cid:3)plan,(cid:3)principally(cid:3)because(cid:3)of(cid:3)such(cid:3)guaranteed(cid:3)minimum(cid:3)rate(cid:3)of(cid:3)return(cid:3)and(cid:3)
guaranteed(cid:3) lifetime(cid:3) benefit(cid:3) payment.(cid:3) (cid:3) Participation in the defined benefit plan in Canada with respect to hourly
workers was closed to new participants in December 2013, and existing hourly plan participants will no longer
accrue additional benefits after December 2013. Our U.S. plan was closed to new participants in 1996, and existing
participants no longer accrued any additional benefits after that date. 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 for financial reporting purposes. We made contributions to all of our plans
which aggregated $25.5 million in 2011, $28.2 million in 2012 and $27.0 million in 2013.
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 third-party advice about appropriate discount rates and these advisors may in some
cases use their own market indices. We adjust these discount rates as of each December 31 valuation date to reflect
then-current interest rates on such long-term bonds. We use these discount rates to determine the actuarial present
value of the pension obligations as of December 31 of that year. We also use these discount rates to determine the
interest component of defined benefit pension expense for the following year.
At December 31, 2013, approximately 64%, 19%, 11% and 3% of the projected benefit obligations related
to our plans in Germany, Canada, Norway and the U.S., respectively. We use several different discount rate
assumptions in determining our consolidated defined benefit pension plan obligation and expense. This is because
we maintain defined benefit pension plans in several different countries in Europe and North America and the
interest rate environment differs from country to country.
37
We used the following discount rates for our defined benefit pension plans:
Obligations
at December 31, 2011
and expense in 2012
5.5%
4.3%
3.5%
4.2%
Discount rates used for:
Obligations
at December 31, 2012
and expense in 2013
3.5%
3.9%
4.3%
3.6%
Obligations
at December 31, 2013
and expense in 2014
3.5%
4.7%
4.0%
4.5%
Germany
Canada
Norway
U.S.
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. Unlike the discount rate, which is adjusted each year based
on changes in current long-term interest rates, the assumed long-term rate of return on plan assets will not
necessarily change based upon the actual short-term performance of the plan assets in any given year. Defined
benefit pension expense each year is based upon the assumed long-term rate of return on plan assets for each plan,
the actual fair value of the plan assets as of the beginning of the year and an estimate of the amount of contributions
to and distributions from the plan during 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, 2013, approximately 55%, 24%, 14% and 3% of the plan assets related to our plans in the
Germany, Canada, Norway and the U.S., respectively. We use several different long-term rates of return on plan
asset assumptions in determining our consolidated defined benefit pension plan expense. This is because the plan
assets in different countries are invested in a different mix of investments and the long-term rates of return for
different investments differ from country to country.
In determining the expected long-term rate of return on plan asset assumptions, we consider the long-term
asset mix (e.g. equity vs. fixed income) for the assets for each of our plans and the expected long-term rates of return
for such asset components. In addition, we receive third-party advice about appropriate long-term rates of return.
Such assumed asset mixes are summarized below:
(cid:121)
(cid:121)
(cid:121)
(cid:121)
In Germany, the composition of our plan assets is established to satisfy the requirements of the
German insurance commissioner.
In Canada, we currently have a plan asset target allocation of 45% to equity securities, 48% to fixed
income securities, 7% to other investments and the remainder primarily to cash and liquid investments.
We expect the long-term rate of return for such investments to average approximately 125 basis points
above the applicable equity or fixed income index.
In Norway, we currently have a plan asset target allocation of 12% to equity securities, 78% to fixed
income securities, 9% to real estate and the remainder primarily to cash and liquid investments. The
expected long-term rate of return for such investments is approximately 8%, 4%, 6% and 4%,
respectively.
In the U.S. substantially all of the assets are invested in The Combined Master Retirement Trust
(CMRT), a collective investment trust sponsored by Contran to permit the collective investment by
certain master trusts which fund certain employee benefits plans sponsored by Contran and certain of
its affiliates. The CMRT’s long-term investment objective is to provide a rate of return exceeding a
composite of broad market equity and fixed income indices (including the S&P 500 and certain Russell
indices).. Prior to December 2012, the CMRT had an investment in TIMET common stock; however,
on December 20, 2012 the CMRT sold its shares of common stock in conjunction with the tender
offer. See Note 6 to our Consolidated Financial Statements. During the history of the CMRT from its
inception in 1988 through December 31, 2013, the average annual rate of return has been 14%.
38
Our pension plan weighted average asset allocations by asset category were as follows:
Equity securities and limited partnerships
Fixed income securities
Real estate
Other
Total
Equity securities and limited partnerships
Fixed income securities
Real estate
Other
Total
Germany
25%
61
10
4
100%
Germany
27%
54
10
9
100%
December 31, 2013
Canada
Norway
CMRT
53%
41
-
6
100%
11 %
60
8
21
100 %
64%
35
-
1
100%
December 31, 2012
Canada
Norway
CMRT
54%
38
-
8
100%
13 %
68
8
11
100 %
53%
12
-
35
100%
We regularly review our actual asset allocation for each non-US plan and will periodically rebalance the
investments in each plan to more accurately reflect the targeted allocation when considered appropriate. The CMRT
trustee and investment committee do not maintain a specific target asset allocation in order to achieve their
objectives, but instead they periodically change the asset mix of the CMRT based upon, among other things, advice
they receive from third-party advisors and their expectations regarding potential returns for various investment
alternatives and what asset mix will generate the greatest overall return.
Our assumed long-term rates of return on plan assets for 2011, 2012 and 2013 were as follows:
Germany
Canada
Norway
U.S.
2011
2012
2013
5.0%
6.0%
4.8%
10.0%
4.8 %
5.8 %
4.8 %
10.0 %
4.8%
5.8%
4.8%
10.0%
We currently expect to use the same long-term rate of return on plan asset assumptions in 2014 as we used
in 2013 for purposes of determining the 2014 defined benefit pension plan expense, except for our U.S. plan where
we expect to use 7.5% for the reasons discussed in Note 11 to our Consolidated Financial Statements.
To the extent that a plan’s particular pension benefit formula calculates the pension benefit in whole or in
part based upon future compensation levels, the projected benefit obligations and the pension expense will be based
in part upon expected increases in future compensation levels. For all of our plans for which the benefit formula is
so calculated, we generally base the assumed expected increase in future compensation levels upon average long-
term inflation rates for the applicable country.
In addition to the actuarial assumptions discussed above, the amount of recognized defined benefit pension
expense and the amount of net pension asset and net pension liability will vary based upon relative changes in
currency exchange rates.
39
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. These amounts are recognized in other
comprehensive income. In addition, any actuarial gains generated in future periods would reduce the negative
amortization effect of any cumulative unrecognized actuarial losses, while any actuarial losses generated in future
periods would reduce the favorable amortization effect of any cumulative unrecognized actuarial gains.
During 2013, all of our defined benefit pension plans generated a combined net actuarial gain of
approximately $14.7 million. This actuarial gain resulted primarily from the general increase in discount rates from
December 31, 2012 to December 31, 2014, and by an actual return on plan assets during 2013 in excess of the
expected return.
Based on the actuarial assumptions described above and our current expectation for what actual average
currency exchange rates will be during 2014, we expect our defined benefit pension expense will approximate $22
million in 2014. In comparison, we expect to be required to contribute approximately $25.7 million to such plans
during 2014.
As noted above, defined benefit pension expense and the amounts recognized as accrued pension costs are
based upon the actuarial assumptions discussed above. We believe all of the actuarial assumptions used are
reasonable and appropriate. However, if we had lowered the assumed discount rate by 25 basis points for all plans
as of December 31, 2013, our aggregate projected benefit obligations would have increased by approximately $24.2
million at that date and our defined benefit pension expense would be expected to increase by approximately $1.5
million during 2013. Similarly, if we lowered the assumed long-term rate of return on plan assets by 25 basis points
for all of our plans, our defined benefit pension expense would be expected to increase by approximately $1.0
million during 2013.
OPEB plans
Certain of our subsidiaries in the U.S. and Canada currently provide certain health care and life insurance
benefits for eligible retired employees. See Note 11 to the Consolidated Financial Statements. Under other
postretirement employee benefits (OPEB) accounting, OPEB expense and accrued OPEB costs are based on certain
actuarial assumptions, principally the assumed discount rate and the assumed rate of increases in future health care
costs. We recognize the full unfunded status of our OPEB plans as a liability.
We recognized consolidated OPEB cost of approximately $.3 million in 2011, $.6 million in 2012 and nil
in 2013. Included in our 2013 OPEB cost is a curtailment gain of $.6 million resulting from amendments to our
Canadian plan. Similar to defined benefit pension benefits, the amount of funding will differ from the expense
recognized for financial reporting purposes and contributions to the plans to cover benefit payments aggregated $.4
million in each of 2011 and 2012 and $.3 million in 2013. Substantially all of our U.S. accrued OPEB cost relates to
benefits being paid to current retirees and their dependents and no material amount of OPEB benefits are being
earned by current U.S. employees. Some of our Canadian employees are earning OPEB benefits. Our expected
OPEB benefit payments for 2014 are expected to be similar to those paid in 2013.
The discount rates we use for determining OPEB expense and the related OPEB obligations are based on
current interest rates earned on high-quality bond yields in the applicable country where the benefits are being paid.
In addition, we receive third-party advice about appropriate discount rates and these advisors may in some cases use
their own market indices. We adjust these discount rates as of each valuation date to reflect then-current interest
rates on such bonds. We use these discount rates to determine the actuarial present value of the OPEB obligations as
of December 31 of that year. We also use these discount rates to determine the interest component of OPEB
expense for the following year.
40
In estimating the health care cost trend rate, we consider our actual health care cost experience, future
benefit structures, industry trends and advice from our third-party actuaries. During each of the past three years, we
have assumed that the relative increase in health care costs will generally trend downward over the next several
years, reflecting, among other things, assumed increases in efficiency in the health care system and industry-wide
cost containment initiatives. For example, at December 31, 2013, the expected rate of increase in future health care
costs ranges from 7.0% in 2014, declining to 5.0% in 2020 and thereafter.
Based on the actuarial assumptions described above and our current expectation for what actual average
currency exchange rates will be during 2014, we expect our consolidated OPEB benefit will approximate $.2 million
in 2014. In comparison, we expect to be required to make approximately $.5 million of contributions to such plans
during 2014.
We believe that all of the actuarial assumptions used are reasonable and appropriate. However, if we had
lowered the assumed discount rate by 25 basis points for all plans as of December 31, 2013, our aggregate projected
benefit obligations would have increased by approximately $.2 million at that date and our OPEB cost would be
expected to increase by nil during 2013. If assumed a one percent change in assumed health care trend rates for all
plans, our OPEB costs would be expected to remain consistent with the 2013 costs.
Operations outside the United States
As discussed above, we have substantial operations located outside the United States for which the
functional currency is not the U.S. dollar. As a result, the reported amount of our assets and liabilities related to our
non-U.S. operations, and therefore our consolidated net assets, will fluctuate based upon changes in currency
exchange rates. At December 31, 2013, we had substantial net assets denominated in the euro, Canadian dollar and
Norwegian krone.
41
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 indebtedness. At
December 31, 2013, the majority of our aggregate indebtedness comprised variable-rate instruments. The following
table presents principal amounts and weighted average interest rates for our aggregate outstanding indebtedness at
December 31, 2013. See Note 9 to our Consolidated Financial Statements.
Indebtedness
December 31, 2013:
Variable rate indebtedness:
Note payable to Contran
North American credit facility
December 31, 2012:
Variable rate indebtedness:
Term loan - dollar denominated
European credit facility - euro denominated
Amount
Carrying
value
Fair
value
(In millions)
Interest
rate
Maturity
date
$
$
$
$
170.0 $
11.1
181.1 $
170.0
11.1
181.1
7.38 %
3.75 %
2018
2017
384.5 $
13.2
397.7 $
396.8
13.2
410.0
5.75 %
2.01 %
2018
2017
Currency exchange rates
We are exposed to market risk arising from changes in currency exchange rates as a result of manufacturing
and selling our products worldwide. Earnings are primarily affected by fluctuations in the value of the U.S. dollar
relative to the euro, the Canadian dollar, the Norwegian krone and the United Kingdom pound sterling.
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. See
Note 16 to our Consolidated Financial Statements for a discussion of certain currency forward contracts to which we
are a party at December 31, 2013.
Marketable security prices
We are exposed to market risk due to changes in prices of the marketable securities which we own. The
fair value of securities which includes investments in mutual funds and in publicly-traded shares of related parties
was $21.6 million and $30.4 million, respectively, at December 31, 2012 and December 31, 2013. The potential
change in the aggregate fair value of these investments, assuming a 10% change in prices, would be approximately
$2 million and $3 million, respectively, at December 31, 2012 and December 31, 2013.
42
Raw materials
We are exposed to market risk from changes in commodity prices relating to our raw materials. As
discussed in Item 1 we generally enter into long-term supply agreements for certain of our raw material
requirements including TiO2 feedstock. Many of our raw material contracts contain fixed quantities we are required
to purchase, or specify a range of quantities within which we are required to purchase. Raw material pricing under
these agreements is generally negotiated quarterly or semi-annually depending upon the suppliers. For certain raw
material requirements we do not have long-term supply agreements either because we have assessed the risk of the
unavailability of those raw materials and/or the risk of a significant change in the cost of those raw materials to be
low, or because long-term supply agreements for those raw materials are generally not available.
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” (page F-1).
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
CONTROLS AND PROCEDURES
ITEM 9A.
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 Bobby D. O’Brien, our Vice Chairman of the
Board, President and Chief Executive Officer and Gregory M. Swalwell, our Executive Vice President and Chief
Financial Officer, have evaluated the design and effectiveness of our disclosure controls and procedures as of
December 31, 2013. Based upon their evaluation, these executive officers have concluded that our disclosure
controls and procedures are effective as of December 31, 2013.
43
Scope of management report on 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:
(cid:121) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of our assets,
(cid:121) 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
(cid:121) 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 Consolidated Financial Statements.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to report on internal control over financial
reporting in this Annual Report on Form 10-K for the year ended December 31, 2013. Our independent registered
public accounting firm is also required to annually attest to our internal control over financial reporting.
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, 2013 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 in 1992
(commonly referred to as the “1992 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, 2013.
PricewaterhouseCoopers LLP, the independent registered public accounting firm that has audited our
consolidated financial statements included in this Annual Report, has audited the effectiveness of our internal
control over financial reporting as of December 31, 2013, as stated in their report, which is included in this Annual
Report on Form 10-K.
Certifications
Our chief executive officer is required to annually file a certification with the New York Stock Exchange,
or NYSE, certifying our compliance with the corporate governance listing standards of the NYSE. During 2013, our
chief executive officer filed such annual certification with the NYSE. The 2013 certification was unqualified.
44
Our chief executive officer and chief financial officer are also required to, among other things, file
quarterly 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, 2013 have been filed as
Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K.
ITEM 9B. OTHER INFORMATION
Not applicable
45
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated by reference to our 2014 definitive proxy statement
to be filed with the SEC pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this
report.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to our 2014 proxy statement.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference to our 2014 proxy statement.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this Item is incorporated by reference to our 2014 proxy statement. See also
Note 14 to our Consolidated Financial Statements.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by the Item is incorporated by reference to our 2014 proxy statement.
46
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a) and (c) Financial Statements
The Registrant
The consolidated financial statements of the Registrant listed on the accompanying Index of Financial
Statements (see page F-1) are filed as part of this Annual Report.
50%-or-less owned persons
We are not required to provide any consolidated financial statements pursuant to Rule 3-09 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, 2013 will be furnished to the Commission upon request.
We will also furnish, without charge, a copy of our amended and restated Code of Business Conduct
and Ethics, as adopted by the board of directors on February 9, 2012, upon request. Such requests
should be directed to the attention of the Corporate Secretary at our corporate offices located at 5430
LBJ Freeway, Suite 1700, Dallas, TX 75240.
Item No.
3.1+
3.2
4.1
10.1
10.2
Exhibit Index
Restated First Amended and Restated Certificate of Incorporation of Kronos Worldwide, Inc., as
amended on May 12, 2011 - incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report
on Form 8-K (File No. 001-31763) filed on May 12, 2011.
Amended and Restated Bylaws of Kronos Worldwide, Inc. as of October 25, 2007 - incorporated by
reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K (File No. 001-31763) filed
with the U.S. Securities and Exchange Commission on October 31, 2007.
Satisfaction and Discharge of Indenture, Release, Assignment and Transfer, dated as of June 14, 2012,
issued by The Bank of New York Mellon, formerly known as The Bank of New York, a New York
banking corporation - incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K
(File No. 001-31763) dated June 13, 2012 and filed by the registrant on June 18, 2012.
Amended and Restated Tax Agreement between Valhi, Inc. and Kronos Worldwide, Inc. dated as of
December 1, 2012 - incorporated by reference to Exhibit 10.1 to the Registrant’s Annual Report on
Form 10-K (File No. 001-31763) for the year ended December 31, 2012.
Intercorporate Services Agreement by and between Contran Corporation and Kronos Worldwide, Inc.,
effective as of January 1, 2004 - incorporated by reference to Exhibit 10.2 to the Quarterly Report on
Form 10-Q of the Registrant (File No. 001-31763) for the quarter ended March 31, 2004.
10.3*
Kronos Worldwide, Inc. 2012 Director Stock Plan - incorporated by reference to Exhibit 4.4 of the
Registration statement on Form S-8 of the Registrant (File No. 333-113425).
47
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
€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. (File No. 001-00640) for the quarter ended June 30, 2002.
First Amendment Agreement, dated September 3, 2004, Relating to a Facility Agreement dated June
25, 2002 among Kronos Titan GmbH, Kronos Europe S.A./N.V., Kronos Titan AS and Titania A/S, as
borrowers, Kronos Titan GmbH, Kronos Europe S.A./N.V. and Kronos Norge AS, as guarantors,
Kronos Denmark ApS, as security provider, with Deutsche Bank Luxembourg S.A., acting as agent -
incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K of the Registrant dated
November 17, 2004 (File No. 333-119639).
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 10.3 to the Annual Report on Form 10-K of Kronos International, Inc. (File No. 333-100047)
for the year ended December 31, 2009.
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 10.4 to the Annual Report on Form 10-K of Kronos International, Inc. (File No. 333-100047)
for the year ended December 31, 2009.
Fourth Amendment Agreement Relating to a Facility Agreement dated June 25, 2002 executed as of
September 15, 2009 by and among Deutsche Bank AG, as mandated lead arranger, Deutsche Bank
Luxembourg S.A., as agent, the participating lenders, Kronos Titan GmbH, Kronos Europe S.A./N.V.,
Kronos Titan AS, Kronos Norge AS, Titania AS and Kronos Denmark ApS - incorporated by reference
to Exhibit 10.5 to the Annual Report on Form 10-K of Kronos International, Inc. (File No. 333-
1000947) for the year ended December 31, 2009.
Fifth Amendment Agreement Relating to a Facility Agreement dated June 25, 2002 executed as of
October 28, 2010 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. dated October 28, 2010
(File No. 333-100047).
Sixth Amendment Agreement Relating to a Facility Agreement dated June 25, 2002 executed as of
September 27, 2012 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, Titania AS, Kronos Norge AS, and Kronos Denmark ApS - incorporated by
reference to Exhibit 10.1 to our Current Report on Form 8-K (File No. 001-31763) filed with the U.S.
Securities and Exchange Commission on October 3, 2012.
Credit Agreement, dated June 13, 2012, by and among Kronos Worldwide, Inc. and Wells Fargo Bank,
National Association - incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K
(File No. 001-31763) dated June 13, 2012 and filed by the registrant on June 18, 2012.
Guaranty and Security Agreement, dated June 13, 2012, among Kronos Worldwide, Inc., Kronos
Louisiana, Inc., Kronos (US), Inc., Kronos International, Inc. and Wells Fargo Bank, National
Association - incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K (File No.
001-31763)dated June 13, 2012 and filed by the registrant on June 18, 2012.
48
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
Intercreditor Agreement dated as of June 18, 2012, by and between Wells Fargo Capital Finance and
Wells Fargo Bank, National Association, and acknowledged by Kronos Worldwide, Inc., Kronos
Louisiana, Inc. and Kronos (US), Inc. - incorporated by reference to Exhibit 10.3 to the Current Report
on Form 8-K/A dated June 13, 2012 (File No. 001-31763) and filed by the registrant on June 19, 2012.
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 (File No. 001-00640)of
NL Industries, Inc. for the year ended December 31, 1985.
Master Technology Exchange Agreement, dated as of October 18, 1993, among Kronos Worldwide,
Inc. (f/k/a Kronos, Inc.), Kronos Louisiana, Inc., Kronos International, Inc., Tioxide Group Limited and
Tioxide Group Services Limited - incorporated by reference to Exhibit 10.8 to the Quarterly Report on
Form 10-Q (File No. 001-00640) of NL Industries, Inc. for the quarter ended September 30, 1993.
Form of Assignment and Assumption Agreement, dated as of January 1, 1999, between Kronos Inc.
(formerly known as Kronos (USA), Inc.) and Kronos International, Inc. - incorporated by reference to
Exhibit 10.9 to Kronos International, Inc.’s Registration Statement on Form S-4 (File No. 333-100047).
Form of Cross License Agreement, effective as of January 1, 1999, between Kronos Inc. (formerly
known as Kronos (USA), Inc.) and Kronos International, Inc. - incorporated by reference to Exhibit to
Kronos International, Inc.’s Registration Statement on Form S-4 (File No. 333-100047).
Formation Agreement dated as of October 18, 1993 among Tioxide Americas Inc., Kronos Louisiana,
Inc. and Louisiana Pigment Company, L.P. - incorporated by reference to Exhibit 10.2 to NL
Industries, Inc.’s Quarterly Report on Form 10-Q (File No. 001-00640) for the quarter ended
September 30, 1993.
Joint Venture Agreement dated as of October 18, 1993 between Tioxide Americas Inc. and Kronos
Louisiana, Inc. - incorporated by reference to Exhibit 10.3 to NL Industries, Inc.’s Quarterly Report on
Form 10-Q (File No. 001-00640) for the quarter ended September 30, 1993.
Kronos Offtake Agreement dated as of October 18, 1993 between Kronos Louisiana, Inc. and
Louisiana Pigment Company, L.P. - incorporated by reference to Exhibit 10.4 to NL Industries, Inc.’s
Quarterly Report on Form 10-Q (File No. 001-00640) for the quarter ended September 30, 1993.
Amendment No. 1 to Kronos Offtake Agreement dated as of December 20, 1995 between Kronos
Louisiana, Inc. and Louisiana Pigment Company, L.P. - incorporated by reference to Exhibit 10.22 to
NL Industries, Inc.’s Annual Report on Form 10-K (File No. 001-00640) for the year ended December
31, 1995.
Tioxide Americas Offtake Agreement dated as of October 18, 1993 between Tioxide Americas Inc. and
Louisiana Pigment Company, L.P. - incorporated by reference to Exhibit 10.5 to NL Industries, Inc.’s
Quarterly Report on Form 10-Q (File No. 001-00640) for the quarter ended September 30, 1993.
Amendment No. 1 to Tioxide Americas Offtake Agreement dated as of December 20, 1995 between
Tioxide Americas Inc. and Louisiana Pigment Company, L.P. - incorporated by reference to Exhibit
10.24 to NL Industries, Inc.’s Annual Report on Form 10-K (File No. 001-00640) for the year ended
December 31, 1995.
Parents’ Undertaking dated as of October 18, 1993 between ICI American Holdings Inc. and Kronos
Worldwide, Inc. (f/k/a Kronos, Inc.) - incorporated by reference to Exhibit 10.9 to NL Industries, Inc.’s
Quarterly Report on Form 10-Q (File No. 001-00640) for the quarter ended September 30, 1993.
Allocation Agreement dated as of October 18, 1993 between Tioxide Americas Inc., ICI American
Holdings, Inc., Kronos Worldwide, Inc. (f/k/a Kronos, Inc.) and Kronos Louisiana, Inc. - incorporated
by reference to Exhibit 10.10 to NL Industries, Inc.’s Quarterly Report on Form 10-Q (File No. 001-
00640) for the quarter ended September 30, 1993.
49
10.26
Insurance sharing agreement dated October 30, 2003 by and among CompX International Inc., Contran
Corporation, Keystone Consolidated Industries, Inc., Titanium Metals Corp., Valhi, Inc., NL Industries,
Inc. and Kronos Worldwide, Inc. - incorporated by reference to Exhibit 10.48 to NL Industries, Inc.’s
Annual Report on Form 10-K (File No. 001-00640) for the year ended December 31, 2003.
10.27**
Sixth Amended and Restated Unsecured Revolving Demand Promissory Note dated December 31,
2013 in the original principal amount of $100.0 million executed by Valhi, Inc. and payable to the
order of Kronos Worldwide, Inc.
10.28
10.29
10.30
10.31
10.32
Unsecured Term Loan Promissory Note dated February 15, 2013 in the original principal amount of
$290 million executed by Kronos Worldwide, Inc. and payable to the order of Contran Corporation -
incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K (File No. 001-31763) of
the Registrant dated February 15, 2013.
Restated and Amended Agreement by and between Richards Bay Titanium (Proprietary) Limited
(acting through its sales agent Rio Tinto Iron & Titanium Limited) and Kronos (US), Inc. effective
January 1, 2012 - incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q (File
No. 001-31763) of the Registrant dated May 8, 2013.
Credit Agreement, dated February 18, 2014, by and among Kronos Worldwide, Inc. and Deutsche
Bank AG New York Branch - incorporated by reference to Exhibit 10.1 to the Current Report on Form
8-K (File No. 001-31763) dated February 18, 2014 and filed by the registrant on February 18, 2014.
Guaranty and Security Agreement, dated February 18, 2014, among Kronos Worldwide, Inc., Kronos
Louisiana, Inc., Kronos (US), Inc., Kronos International, Inc. and Deutsche Bank AG New York
Branch - incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K (File No. 001-
31763) dated February 18, 2014 and filed by the registrant on February 18, 2014.
Intercreditor Agreement dated as of February 18, 2014, by and between Wells Fargo Capital Finance
and Deutsche Bank AG New York Branch, and acknowledged by Kronos Worldwide, Inc., Kronos
Louisiana, Inc. and Kronos (US), Inc. - incorporated by reference to Exhibit 10.3 to the Current Report
on Form 8-K (File No. 001-31763) dated February 18, 2014 and filed by the registrant on February 18,
2014.
21.1**
Subsidiaries.
23.1**
Consent of PricewaterhouseCoopers LLP.
31.1**
Certification.
31.2**
Certification.
32.1**
Certification.
101.INS**
XBRL Instance Document
101.SCH**
XBRL Taxonomy Extension Schema
101.CAL**
XBRL Taxonomy Extension Calculation Linkbase
101.DEF**
XBRL Taxonomy Extension Definition Linkbase
101.LAB**
XBRL Taxonomy Extension Label Linkbase
101.PRE**
XBRL Taxonomy Extension Presentation Linkbase
+
Exhibit 3.1 is restated for the purposes of the disclosure requirements of Item 601 of Regulation S-K
promulgated by the U.S. Securities and Exchange Commission and does not represent a restated certificate of
incorporation that has been filed with the Delaware Secretary of State.
* Management contract, compensatory plan or arrangement
**
Filed herewith
50
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Kronos Worldwide, Inc.
(Registrant)
By: /s/ Bobby D. O’Brien
Bobby D. O’Brien, March 12, 2014
(Vice Chairman, President and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
/s/ Steven L. Watson
Steven L. Watson, March 12, 2014
(Chairman of the Board)
/s/ Thomas P. Stafford
Thomas P. Stafford, March 12, 2014
(Director)
/s/ C. Kern Wildenthal
C. Kern Wildenthal, March 12, 2014
(Director)
/s/ Loretta J. Feehan
Loretta J. Feehan, March 12, 2014
(Director)
/s/ Tim C. Hafer
Tim C. Hafer, March 12, 2014
(Vice President, Controller,
Principal Accounting Officer)
/s/ Bobby D. O’Brien
Bobby D. O’Brien, March 12, 2014
(Vice Chairman, President and Chief Executive Officer)
/s/ C. H. Moore, Jr.
C. H. Moore, Jr., March 12, 2014
(Director)
/s/ Keith R. Coogan
Keith R. Coogan, March 12, 2014
(Director)
/s/ R. Gerald Turner
R. Gerald Turner, March 12, 2014
(Director)
/s/ Gregory M. Swalwell
Gregory M. Swalwell, March 12, 2014
(Executive Vice President and
Chief Financial Officer, Principal Financial Officer)
51
KRONOS WORLDWIDE, INC.
Annual Report on Form 10-K
Items 8, 15(a) and 15(c)
Index of Financial Statements
Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - December 31, 2012 and 2013
Consolidated Statements of Operations -
Years ended December 31, 2011, 2012 and 2013
Consolidated Statements of Comprehensive Income (Loss) -
Years ended December 31, 2011, 2012 and 2013
Consolidated Statements of Stockholders’ Equity -
Years ended December 31, 2011, 2012 and 2013
Consolidated Statements of Cash Flows -
Years ended December 31, 2011, 2012 and 2013
Notes to Consolidated Financial Statements
Page
F-2
F-3
F-5
F-6
F-7
F-8
F-10
All financial statement schedules have been omitted either because they are not applicable or required, or the
information that would be required to be included is disclosed in the Notes to the Consolidated Financial Statements.
F-1
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Accounts and other receivables
Receivable from affiliate
Inventories, net
Prepaid expenses and other
Deferred income taxes
Total current assets
Other assets:
Investment in TiO2 manufacturing joint venture
Marketable securities
Deferred income taxes
Other
Total other assets
Property and equipment:
Land
Buildings
Equipment
Mining properties
Construction in progress
Less accumulated depreciation and amortization
December 31,
2012
2013
$
282.7 $
2.7
285.8
-
638.3
9.8
4.1
53.8
2.6
268.3
14.2
416.6
9.1
16.6
1,223.4
781.2
109.9
21.6
120.5
29.1
102.3
30.4
148.4
20.5
281.1
301.6
45.2
238.9
1,082.9
131.3
37.3
1,535.6
1,013.1
46.3
242.7
1,122.8
130.1
50.0
1,591.9
1,055.6
Net property and equipment
522.5
536.3
Total assets
$
2,027.0 $
1,619.1
F-3
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In millions, except per share data)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt
Accounts payable and accrued liabilities
Payables to affiliates
Income taxes
Deferred income taxes
Total current liabilities
Noncurrent liabilities:
Long-term debt
Deferred income taxes
Accrued pension cost
Accrued postretirement benefits cost
Other
Total noncurrent liabilities
Stockholders' equity:
Common stock, $.01 par value; 240.0 shares authorized; 115.9 shares issued
Additional paid-in capital
Retained deficit
Accumulated other comprehensive loss
Total stockholders' equity
$
December 31,
2012
2013
21.2 $
231.6
41.6
23.1
10.9
3.1
242.3
21.7
8.9
2.0
328.4
278.0
378.9
24.0
189.2
14.1
30.3
180.4
19.5
163.8
7.8
34.5
636.5
406.0
1.2
1,399.1
(141.1 )
(197.1 )
1.2
1,398.5
(312.6)
(152.0)
1,062.1
935.1
Total liabilities and stockholders' equity
$
2,027.0 $
1,619.1
Commitments and contingencies (Notes 10 and 15)
See accompanying notes to consolidated financial statements.
F-4
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
Net sales
Cost of sales
Gross margin
Selling, general and administrative expense
Other operating income (expense):
Currency transaction gains (losses), net
Disposition of property and equipment
Other income (expense), net
Corporate expense
Income (loss) from operations
Other income (expense):
Interest and dividend income
Marketable securities transaction losses, net
Loss on prepayment of debt, net
Interest expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Net income (loss) per basic and diluted share
Cash dividends per share
Weighted average shares used in the calculation of
net income (loss) per share
$
$
$
$
Years ended December 31,
2012
2011
1,943.3 $ 1,976.3 $
1,415.9
1,194.9
2013
1,732.4
1,620.2
748.4
560.4
112.2
195.0
183.4
190.4
3.0
(1.0)
.1
(9.0)
(1.0 )
(1.0 )
(1.5 )
(13.9 )
(3.8)
(.8)
(1.1)
(48.7)
546.5
359.6
(132.6)
7.0
(.6)
(3.1)
(32.7)
9.0
(3.9 )
(7.2 )
(26.7 )
1.2
-
(8.9)
(19.6)
517.1
330.8
(159.9)
196.1
112.3
(57.9)
321.0 $
218.5 $
(102.0)
2.77 $
1.89 $
(.88)
1.075 $
.60 $
.60
115.9
115.9
115.9
See accompanying notes to consolidated financial statements.
F-5
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
Years ended December 31,
2012
2013
2011
Net income (loss)
$
321.0 $
218.5 $
(102.0)
Other comprehensive income (loss), net of tax:
Marketable securities
Currency translation
Defined benefit pension plans
Other postretirement benefit plans
5.1
(26.7)
(10.2)
(1.7)
(.9 )
28.3
(38.1 )
(.6 )
6.6
6.7
27.9
3.9
Total other comprehensive income (loss), net
(33.5)
(11.3 )
45.1
Comprehensive income (loss)
$
287.5 $
207.2 $
(56.9)
See accompanying notes to consolidated financial statements.
F-6
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-
F
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Years ended December 31,
2012
2013
2011
$
Cash flows from operating activities:
Net income (loss)
Depreciation and amortization
Deferred income taxes
Loss on prepayment of debt, net
Call premium paid
Marketable security transaction losses, net
Benefit plan expense greater (less) than cash funding:
Defined benefit pension plans
Other postretirement benefit plans
Distributions from (contributions to) TiO2 manufacturing joint
venture, net
Other, net
Change in assets and liabilities:
Accounts and other receivables
Inventories
Prepaid expenses
Accounts payable and accrued liabilities
Income taxes
Accounts with affiliates
Other noncurrent assets
Other noncurrent liabilities
321.0 $
47.5
63.8
3.1
(2.5)
.6
.7
(.2)
3.8
6.7
(48.2)
(183.8)
.3
94.8
19.4
(29.8)
(3.2)
1.6
218.5 $
47.8
22.6
7.2
(6.2 )
3.9
(3.5 )
.2
(20.7 )
.5
-
(184.8 )
(3.7 )
(56.2 )
(18.5 )
67.2
(11.4 )
14.0
(102.0)
50.2
(67.9)
8.9
-
-
9.4
(.2)
10.9
8.2
24.8
222.2
.8
9.1
(9.6)
(37.2)
(1.5)
4.3
Net cash provided by operating activities
295.6
76.9
130.4
Cash flows from investing activities:
Capital expenditures
Loan to Valhi:
Loans
Collections
Proceeds from sale of marketable securities:
TIMET common stock
Mutual funds
Purchase of marketable securities:
TIMET common stock
Valhi common stock
Mutual funds
Change in restricted cash
Other, net
(68.6)
(74.8 )
(67.6)
(214.7)
140.5
(178.7 )
314.8
-
251.0
(30.4)
(12.8)
(272.8)
(5.2)
(5.1)
70.0
21.1
-
-
-
(2.6 )
-
-
-
-
-
-
-
-
(.5)
(.1)
Net cash provided by (used in) investing activities
(218.1)
149.8
(68.2)
F-8
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In millions)
Years ended December 31,
2012
2013
2011
Cash flows from financing activities:
Indebtedness:
Borrowings
Principal payments
Deferred financing fees
Dividends paid
Treasury stock acquired
Other, net
113.3
(288.1)
-
(124.6)
-
(.2)
572.4
(523.8 )
(7.1 )
(69.5 )
-
(.1 )
366.6
(588.7)
-
(69.5)
(.7)
-
Net cash used in financing activities
(299.6)
(28.1 )
(292.3)
Cash and cash equivalents - net change from:
Operating, investing and financing activities
Effect of exchange rate changes on cash
(222.1)
(.1)
198.6
1.6
(230.1)
1.2
Net change for the year
(222.2)
200.2
(228.9)
Balance at beginning of year
304.7
82.5
282.7
Balance at end of year
Supplemental disclosures –
Cash paid for:
Interest (including call premium), net of amounts capitalized
Income taxes
Accrual for capital expenditures
$
$
82.5 $
282.7 $
53.8
35.3 $
104.7
16.7
35.6 $
94.3
12.2
18.6
33.2
7.4
See accompanying notes to consolidated financial statements.
F-9
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
Note 1 - Summary of significant accounting policies:
Organization and basis of presentation - At December 31, 2013, (i) Valhi, Inc. (NYSE: VHI) held
approximately 50% of our outstanding common stock (ii) NL Industries, Inc. (NYSE: NL) held approximately 30%
of our common stock, (iii) Valhi owned approximately 83% of NL’s outstanding common stock and (iv) Contran
Corporation and its subsidiaries held approximately 94% of Valhi’s outstanding common. Substantially all of
Contran’s outstanding voting stock is held by family trusts established for the benefit of Lisa K. Simmons and
Serena Simmons Connelly, daughters of Harold C. Simmons, and their children (for which Ms. Lisa Simmons and
Ms. Connelly are co-trustees) or is held directly by Ms. Lisa Simmons and Ms. Connelly or persons or entities
related to them, including their step-mother Annette C. Simmons, the widow of Mr. Simmons. Prior to his death in
December 2013, Mr. Simmons served as sole trustee of the family trusts. Under a voting agreement entered into in
February 2014 by all of the voting stockholders of Contran, the size of the board of directors of Contran was fixed at
five members, each of Ms. Lisa Simmons, Ms. Connelly and Ms. Annette Simmons have the right to designate one
of the five members of the Contran board and the other two members of the Contran board must consist of members
of Contran management. Ms. Lisa Simmons, Ms. Connelly, and Ms. Annette Simmons each serve as members of
the Contran board. The voting agreement expires in February 2017 (unless Ms. Lisa Simmons, Ms. Connelly and
Ms. Annette Simmons otherwise mutually agree), and the ability of Ms. Lisa Simmons, Ms. Connelly, and Ms.
Annette Simmons to each designate one member of the Contran board is dependent upon each of their continued
beneficial ownership of at least 5% of the combined voting stock of Contran. Consequently, Ms. Lisa Simmons,
Ms. Connelly and Ms. Annette Simmons may be deemed to control Contran, Valhi, NL and us.
Unless otherwise indicated, references in this report to “we,” “us” or “our” refers to Kronos Worldwide,
Inc. and its subsidiaries, taken as a whole.
Management’s estimates - In preparing our financial statements in conformity with accounting principles
generally accepted in the United States of America (GAAP) we are required to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amount of revenues and expenses during the reporting period. Actual
results may differ significantly from previously-estimated amounts under different assumptions or conditions.
Principles of consolidation - The consolidated financial statements include our accounts and those of our
majority-owned subsidiaries. We have eliminated all material intercompany accounts and balances.
Translation of currencies - We translate the assets and liabilities of our subsidiaries whose functional
currency is other than the U.S. dollar at year-end exchange rates, while we translate our revenues and expenses at
average exchange rates prevailing during the year. We accumulate the resulting translation adjustments in
stockholders’ equity as part of accumulated other comprehensive income (loss), net of related deferred income taxes.
We recognize currency transaction gains and losses in income currently.
Derivatives and hedging activities - We recognize derivatives as either assets or liabilities measured at fair
value. We recognize the effect of changes in the 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 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 cash and cash equivalents - We classify cash and cash equivalents that have been segregated or
are otherwise limited in use as restricted. To the extent the restricted amount relates to a recognized liability, we
classify such restricted amount as either a current or noncurrent asset to correspond with the classification of the
liability. To the extent the restricted amount does not relate to a recognized liability, we classify restricted cash as a
current asset. See Note 7.
F-10
Marketable securities and securities transactions - We carry marketable debt and equity securities at fair
value. Accounting Standard Codification (ASC) Topic 820, Fair Value Measurements and Disclosures, establishes
a consistent framework for measuring fair value and (with certain exceptions) this framework is generally applied to
all financial statement items required to be measured at fair value. The standard requires fair value measurements to
be classified and disclosed in one of the following three categories:
(cid:121) Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities;
(cid:121) 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
(cid:121) Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value
measurement and unobservable.
We classify all of our marketable securities as available-for-sale and unrealized gains or losses on these
securities are recognized through other comprehensive income, net of deferred income taxes, except for any decline
in value we conclude is other than temporary, which is accounted for as a realized loss as a component of net
income. We base realized gains and losses upon the specific identification of the securities sold.
We evaluate our investments whenever events or conditions occur to indicate that the fair value of such
investments has declined below their carrying amounts. If the carrying amount for an investment declines below its
historical cost basis, we evaluate all available positive and negative evidence including, but not limited to, the extent
and duration of the impairment, business prospects for the investee and our intent and ability to hold the investment
for a reasonable period of time sufficient for the recovery of fair value. If we determine the decline in fair value is
other than temporary, the carrying amount of the investment is written down to fair value.
See Notes 6, 11 and 16.
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.
Inventories and cost of sales - We state inventories at the lower of cost or market, net of allowance for
obsolete and slow-moving inventories. We generally base inventory costs for all inventory categories on average
cost that approximates the first-in, first-out method. Inventories include the costs for raw materials, the cost to
manufacture the raw materials into finished goods and overhead. Depending on the inventory’s stage of completion,
our manufacturing costs can include the costs of packing and finishing, utilities, maintenance, depreciation, and
salaries and benefits associated with our manufacturing process. We allocate fixed manufacturing overheads based
on normal production capacity. Unallocated overhead costs resulting from periods with abnormally low production
levels are charged to expense as incurred. As inventory is sold to third parties, we recognize the cost of sales in the
same period that the sale occurs. We periodically review our inventory for estimated obsolescence or instances
when inventory is no longer marketable for its intended use, and we record any write-down equal to the difference
between the cost of inventory and its estimated net realizable value based on assumptions about alternative uses,
market conditions and other factors.
Investment in TiO2 manufacturing joint venture - We account for our investment in a 50%-owned
manufacturing joint venture by the equity method. See Note 5.
F-11
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 $1.0 million in 2011, $1.1 million in 2012 and $1.5 million in 2013. We compute depreciation of property and
equipment for financial reporting purposes (including mining equipment) principally by the straight-line method
over the estimated useful lives of the assets as follows:
Asset
Buildings and improvements
Machinery and equipment
Mine development costs
Useful lives
10 to 40 years
3 to 20 years
units-of-production
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 our ilmenite mines 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 our 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 fair value or discounted cash flow value is required.
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 either the interest method or the straight-line
method over the term of the applicable issue.
Employee benefit plans - Accounting and funding policies for our retirement plans are described in Note
11.
Income taxes - We, Valhi and our qualifying subsidiaries are members of Contran’s consolidated U.S.
federal income tax group (the Contran Tax Group) and we and certain of our qualifying subsidiaries also file
consolidated income tax returns with Contran in various U.S. state jurisdictions. As a member of the Contran Tax
Group, we are jointly and severally liable for the federal income tax liability of Contran and the other companies
included in the Contran Tax Group for all periods in which we are included in the Contran Tax Group. See Note 15.
As a member of the Contran Tax Group, we are a party to a tax sharing agreement which provides that we compute
our provision for U.S. income taxes on a separate-company basis using the tax elections made by Contran. Pursuant
to the tax sharing agreement, we make payments to or receive payments from Valhi in amounts we would have paid
to or received from the U.S. Internal Revenue Service or the applicable state tax authority had we not been a
member of the Contran Tax Group. We made net payments of income taxes to Valhi of $43.5 million in 2011,
$32.1 million in 2012 and $24.2 million in 2013.
F-12
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. The earnings of
non-U.S. subsidiaries subject to permanent reinvestment plans aggregated $1.0 billion at December 31, 2012 and $.9
billion at December 31, 2013. 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 non-
U.S. 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.
We record a reserve for uncertain tax positions for tax positions where we believe that it is more-likely-
than-not our position will not prevail with the applicable tax authorities. The amount of the benefit associated with
our uncertain tax positions that we recognize is limited to the largest amount for which we believe the likelihood of
realization is greater than 50%. We accrue penalties and interest on the difference between tax positions taken on
our tax returns and the amount of benefit recognized for financial reporting purposes. We classify our reserves for
uncertain tax positions in a separate current or noncurrent liability, depending on the nature of the tax position. See
Note 10.
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) or other standard shipping terms. 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).
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 not associated with our manufacturing process, travel and entertainment, promotional materials
and professional fees. We include shipping and handling costs in selling, general and administrative expense and
these costs were $93 million in 2011, $89 million in 2012 and $93 million in 2013. We expense advertising costs as
incurred and these costs were approximately $1 million in 2011, $.5 million in 2012 and $1 million in 2013. We
expense research, development and certain sales technical support costs as incurred and these costs approximated
$20 million in 2011, $19 million in 2012 and $18 million in 2013.
Note 2 - Geographic information:
Our operations are associated with the production and sale of titanium dioxide pigments (TiO2). TiO2 is
used to impart whiteness, brightness, opacity and durability to a wide variety of products, including paints, plastics,
paper, fibers and ceramics. Additionally, TiO2 is a critical component of everyday applications, such as coatings,
plastics and paper, as well as many specialty products such as inks, foods and cosmetics. At December 31, 2012 and
2013 the net assets of non-U.S. subsidiaries included in consolidated net assets approximated $579.2 million and
$491.6 million, respectively.
F-13
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.
2011
Years ended December 31,
2012
(In millions)
2013
Net sales - point of origin:
Germany
United States
Norway
Belgium
Canada
Eliminations
Total
Net sales - point of destination:
Europe
North America
Other
Total
Identifiable assets - net property and equipment:
Germany
Belgium
Norway
Canada
Other
Total
Note 3 - Accounts and other receivables:
Trade receivables
Recoverable VAT and other receivables
Refundable income taxes
Allowance for doubtful accounts
Total
$ 1,039.7 $
749.6
245.1
301.8
301.7
(694.6)
$ 1,943.3 $
977.7 $
915.8
1,042.8
830.4
284.0
261.2
272.9
254.6
339.1
246.5
(940.2 )
(776.1)
1,976.3 $ 1,732.4
$ 1,141.4 $
498.5
303.4
$ 1,943.3 $
1,011.4 $
652.5
312.4
904.6
560.7
267.1
1,976.3 $ 1,732.4
December 31,
2012
2013
(In millions)
$
$
243.9
94.8
104.7
70.8
8.3
522.5
$
$
266.4
100.1
96.8
65.1
7.9
536.3
December 31,
2012
2013
(In millions)
229.7 $ 226.1
28.3
14.9
(1.0 )
285.8 $ 268.3
38.9
18.3
(1.1 )
$
$
F-14
Note 4 - Inventories, net:
Raw materials
Work in process
Finished products
Supplies
Total
December 31,
2012
2013
(In millions)
66.6
151.5 $
18.0
27.3
262.6
394.8
69.4
64.7
638.3 $ 416.6
$
$
Note 5 - Investment in TiO2 manufacturing joint venture:
We own a 50% interest in Louisiana Pigment Company, L.P. (LPC). LPC is a manufacturing joint venture
whose other 50%-owner is Tioxide Americas LLC (Tioxide). Tioxide is a subsidiary of Huntsman Corporation.
LPC owns and operates a chloride-process TiO2 plant in Lake Charles, Louisiana.
We and Tioxide are both required to purchase one-half of the TiO2 produced by LPC, unless we and
Tioxide agree otherwise (such as in 2012, when we purchased approximately 52% of the production from the plant).
LPC operates on a break-even basis and, accordingly, we report no equity in earnings of LPC. Each owner’s
acquisition transfer price for its share of the TiO2 produced is equal to its share of the joint venture’s production
costs and interest expense, if any. Our share of net cost is reported as cost of sales as the related TiO2 acquired from
LPC is sold. We report distributions we receive from LPC, which generally relate to excess cash generated by LPC
from its non-cash production costs, and contributions we make to LPC, which generally relate to cash required by
LPC when it builds working capital, as part of our cash flows from operating activities in our Consolidated
Statements of Cash Flows. The components of our net distributions from LPC are shown in the table below.
2011
Years ended December 31,
2012
(In millions)
2013
Distributions from LPC
Contributions to LPC
Net distributions (contributions)
$
$
29.7 $
(25.9)
3.8 $
79.5 $
(100.2 )
(20.7 ) $
70.7
(59.8)
10.9
Summary balance sheets of LPC are shown below:
ASSETS
Current assets
Property and equipment, net
Total assets
LIABILITIES AND PARTNERS’ EQUITY
Other liabilities, primarily current
Partners’ equity
Total liabilities and partners’ equity
December 31,
2012
2013
(In millions)
$
$
$
$
139.8 $ 127.2
126.0
114.1
265.8 $ 241.3
43.2 $
33.9
222.6
207.4
265.8 $ 241.3
F-15
Summary income statements of LPC are shown below:
2011
Years ended December 31,
2012
(In millions)
2013
Revenues and other income:
Kronos
Tioxide
Cost and expenses:
Cost of sales
General and administrative
Net income
$
$
144.8 $
145.7
290.5
290.1
.4
290.5
- $
250.2 $
227.5
477.7
477.3
.4
477.7
- $
224.5
224.6
449.1
448.7
.4
449.1
-
Note 6 - Marketable securities:
Our marketable securities consist of investments in the publicly-traded shares of related parties: Valhi, NL
and CompX International Inc. NL owns the 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 16. 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.
Marketable security
December 31, 2012
Noncurrent assets:
Valhi common stock
NL and CompX common stocks
Total
December 31, 2013
Noncurrent assets:
Valhi common stock
NL and CompX common stocks
Total
Fair value
measurement
level
Market
value
Cost
basis
Unrealized
gains
1
1
1
1
$
$
21.5 $
.1
21.6 $
15.3 $
.1
15.4 $
6.2
-
6.2
$
$
30.3 $
.1
30.4 $
15.3 $
.1
15.4 $
15.0
-
15.0
At December 31, 2012 and 2013, we held approximately 1.7 million shares of Valhi’s common stock,
which we purchased during 2010 and 2011. We also held a nominal number of shares of CompX and NL common
stocks. At December 31, 2012 and 2013, the quoted per share market price of Valhi’s common stock was $12.50
and $17.58, respectively.
Prior to December 31, 2012, we held approximately 4.2 million shares, or 2.4%, of Titanium Metals
Corporation’s (TIMET) outstanding common stock, which we purchased during 2010 and 2011. TIMET was also
an affiliate of ours, as Contran, Mr. Harold Simmons and persons and other entities related to Mr. Simmons
(including us) owned a majority of TIMET’s outstanding common stock. In December 2012, we sold all of our
shares of TIMET common stock for $70.0 million ($16.50 per share) pursuant to a cash tender offer by a third party,
and all of our affiliates also sold their shares of TIMET common stock for the same price. Securities transactions in
2012 consist of a $3.9 million pre-tax loss we recognized on the sale of these TIMET shares.
F-16
The Valhi, CompX and NL common stocks we own are subject to the restrictions on resale pursuant to certain
provisions of the Securities and Exchange Commission (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.
Note 7 - Other noncurrent assets:
Deferred financing costs, net
Restricted cash
Pension asset
Other
Total
Note 8 - Accounts payable and accrued liabilities:
Accounts payable
Employee benefits
Accrued sales discounts and rebates
Accrued interest
Accrued legal settlement
Other
Total
The accrued legal settlement is discussed in Note 15.
Note 9 - Long-term debt:
Term loan
Note payable to Contran
Revolving North American credit facility
Revolving European credit facility
Other
Total debt
Less current maturities
Total long-term debt
F-17
December 31,
2012
2013
(In millions)
7.0 $
7.5
5.1
9.5
29.1 $
2.5
7.4
.2
10.4
20.5
December 31,
2012
2013
(In millions)
161.3 $
29.6
14.9
.2
-
25.6
231.6 $
123.9
26.7
16.7
.1
35.0
39.9
242.3
December 31,
2012
2013
(In millions)
384.5 $
-
-
13.2
2.4
400.1
21.2
378.9 $
-
170.0
11.1
-
2.4
183.5
3.1
180.4
$
$
$
$
$
$
Term loan - In February 2013, we voluntarily prepaid an aggregate $290 million principal amount of our
prior $400 million term loan that had been issued in June 2012. 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 such 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 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%. The carrying value of the
term loan at December 31, 2012 includes unamortized original issue discount of $5.5 million.
In February 2014, we entered into a new $350 million term loan. We used $170 million of the net proceeds
of the new term loan to prepay the outstanding principal balance of our note payable to Contran (along with accrued
and unpaid interest through the prepayment date), and such note payable was cancelled. The term loan was issued at
99.5% of the principal amount, or an aggregate of $348.25 million. The remaining $172.8 million net proceeds of
the term loan are available for our general corporate purposes. The new term loan:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
bears interest, at our option, at LIBOR (with LIBOR no less than 1.0%) plus 3.75%, or the base rate, as
defined in the agreement, plus 2.75%;
requires quarterly principal repayments of $875,000 commencing in June 2014, other mandatory
principal repayments of formula-determined amounts under specified conditions with all remaining
principal balance due in February 2020. Voluntary principal prepayments are permitted at any time,
provided that a call premium of 1% of the principal amount of such prepayment applies to any
voluntary prepayment made on or before February 2015 (there is no prepayment penalty applicable to
any voluntary prepayment after February 2015);
is collateralized by, among other things, a first priority lien on (i) 100% of the common stock of certain
of our U.S. wholly-owned subsidiaries, (ii) 65% of the common stock or other ownership interest of
our Canadian subsidiary (Kronos Canada, Inc.) and certain first-tier European subsidiaries (Kronos
Titan GmbH and Kronos Denmark ApS) and (iii) a $395.7 million unsecured promissory note issued
by our wholly-owned subsidiary, Kronos International, Inc. (KII) to us;
is also collateralized by a second priority lien on all of the U.S. assets which collateralize our new
North American revolving facility, as discussed below;
contains a number of covenants and restrictions which, among other things, restrict our ability to incur
additional debt, incur liens, pay dividends or merge or consolidate with, or sell or transfer substantially
all of our assets to, another entity, contains other provisions and restrictive covenants customary in
lending transactions of this type (however, there are no ongoing financial maintenance covenants); and
contains customary default provisions, including a default under any of our other indebtedness in
excess of $50 million.
F-18
Note payable to Contran - As discussed above, in February 2013 we entered into a promissory note with
Contran. This new loan from Contran contained terms and conditions similar to the terms and conditions of our
prior term loan, except that the loan from Contran was unsecured and contained no ongoing financial maintenance
covenant. The independent members of our board of directors approved the terms and conditions of the loan from
Contran. The note required quarterly principal payments of $5.0 million which commenced in March 2013, with
any remaining outstanding principal due by June 2018. Voluntary principal prepayments were permitted at any time
without penalty. The note bore 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 were 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 had the option to use either the base rate or LIBOR rate
methods. In 2013, we borrowed $190 million and subsequently repaid $20 million. The average interest rate on
these borrowings as of and for the period from issuance to December 31, 2013 was 7.375%. As discussed above, in
February 2014 we used $170 million of the proceeds from our new term loan and prepaid the remaining balance
owed to Contran under this note payable, and the note payable to Contran was cancelled. In accordance with
GAAP, since we have refinanced the note payable to Contran with a portion of the net proceeds from our new term
loan, current maturities of long-term debt at December 31, 2013, as it relates to the note payable to Contran, is based
upon the required quarterly principal repayments of the new term loan.
Senior Secured Notes – In March 2011, we redeemed €80 million of our €400 million 6.5% Senior
Secured Notes at 102.17% of the principal amount for an aggregate of $115.7 million, including a $2.5 million call
premium. During the third and fourth quarters of 2011, we repurchased in open market transactions an aggregate of
€40.8 million principal amount of the Senior Notes for an aggregate of €40.6 million (an aggregate of $57.6 million
when repurchased). Following such partial redemption and repurchases, €279.2 million principal amount of Senior
Notes remained outstanding. We recognized a $3.3 million pre-tax interest charge related to the redemption of €80
million of the 6.5% Senior Secured Notes consisting of the call premium, the write-off of unamortized deferred
financing costs and original issue discount associated with the redeemed Senior Notes. We recognized a $.2 million
net gain on the €40.8 million principal amount of Senior Notes repurchased in open market transactions. We
borrowed under our European revolving credit facility in order to fund the redemption in March 2011, while we
used cash on hand to fund the open market repurchases.
Immediately upon the June 2012 issuance of our prior term loan discussed above, we sent a request to the
trustee under the indenture for the Senior Notes, asking that all remaining €279.2 million principal amount
outstanding of the Senior Notes be called for redemption on July 20, 2012. We also directed that a portion of the
proceeds from the prior term loan be irrevocably sent to the trustee, in an amount sufficient to pay the principal, call
premium at 1.01083% of the principal amount and all accrued and unpaid interest due through the July 20, 2012
redemption date. Upon the trustee’s confirmation of receipt of such funds on June 14, 2012, the trustee discharged
our obligations under the indenture and released the liens on all collateral thereunder. Because we were released as
being the primary obligor under the indenture as of June 14, 2012, the Senior Notes were derecognized as of that
date along with the funds irrevocably sent to the trustee to effect the July 20, 2012 redemption. We recognized an
aggregate $7.2 million pre-tax charge related to the early extinguishment of debt in the second quarter of 2012,
consisting of the call premium paid, interest from the June 14, 2012 indenture discharge date to the July 20, 2012
redemption date and the write-off of unamortized deferred financing costs and original issue discount associated
with the redeemed Senior Notes.
F-19
Revolving credit facilities
Revolving North American credit facility - In June 2012, we entered into a $125 million revolving bank
credit facility which matures June 2017. Borrowings under the revolving credit facility are available for our general
corporate purposes. Available borrowings on this facility are based on formula-determined amounts of eligible trade
receivables and inventories, as defined in the agreement, of certain of our North American subsidiaries less any
outstanding letters of credit up to $15 million issued under the facility (with revolving borrowings by our Canadian
subsidiary limited to $25 million). Any amounts outstanding under the revolving credit facility bear interest, at our
option, at LIBOR plus a margin ranging from 1.5% to 2.0% or at the applicable base rate, as defined in the
agreement, plus a margin ranging from .5% to 1.0%. The credit facility is collateralized by, among other things, a
first priority lien on the borrowers’ trade receivables and inventories. The facility contains a number of covenants
and restrictions which, among other things, restricts the borrowers’ ability to incur additional debt, incur liens, pay
dividends or merge or consolidate with, or sell or transfer all or substantially all of their assets to, another entity,
contains other provisions and restrictive covenants customary in lending transactions of this type and under certain
conditions requires the maintenance of a specified financial covenant (fixed charge coverage ratio, as defined) to be
at least 1.0 to 1.0. During 2013, we borrowed $162.1 million and repaid an aggregate $151.0 million under this
facility. The average interest rate on these borrowings as of and for the period from borrowing to December 31,
2013 was 2.69% and 3.75%, respectively. At December 31, 2013 we had approximately $89.1 million available for
borrowing under this revolving facility.
Revolving European credit facility - Our operating subsidiaries in Germany, Belgium, Norway and
Denmark have a €120 million secured revolving bank credit facility that matures in September 2017. We may
denominate borrowings in Euros, Norwegian kroner or U.S. dollars. Outstanding borrowings bear interest at LIBOR
plus 1.90%. 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. The facility contains certain restrictive covenants that,
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 the assets to, another entity, and requires the
maintenance of certain financial ratios. In addition, the credit facility contains customary cross-default provisions
with respect to other debt and obligations of the borrowers, KII and its other subsidiaries.
During 2013, we borrowed €10 million ($12.8 million when borrowed) and repaid the entire outstanding
balance of €20 million ($26.5 million when repaid) 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 December 31,
2013, there were no outstanding borrowings under this facility. Our European credit facility requires the
maintenance of certain financial ratios. At September 30, 2013, and based on the earnings before income tax,
interest, depreciation and amortization expense (EBITDA) of the borrowers, we would not have met the financial
covenant test if the borrowers had any net debt outstanding. In December 2013, the lenders under our European
revolving credit facility granted a waiver until June 30, 2014 with respect to the financial test, but our ability to
borrow any amounts under the facility is subject to the requirement that the borrowers maintain a specified level of
EBITDA. At December 31, 2013 we are in compliance with the minimum EBITDA set forth in the waiver, and our
borrowing availability was 50% of the credit facility, or €60 million ($82.8 million). Effective January 1, 2014, per
the waiver, our borrowing availability is 75% of the credit facility, or €90 million ($124.1 million).
Canada - In December 2011, our Canadian subsidiary entered into a Cdn. $10.0 million loan agreement
with the Bank of Montreal for the limited purpose of issuing letters of credit. The facility renews annually. Letters
of credit are collateralized by restricted deposits at the Bank of Montreal ($7.4 million at December 31, 2013). See
Note 7. The facility contains certain restrictive covenants which, among other things, restrict the subsidiary from
incurring additional indebtedness in excess of Cdn. $35 million. At December 31, 2013, an aggregate of Cdn. $7.9
million letters of credit were outstanding under this facility.
F-20
In December 2011, our Canadian subsidiary entered into an agreement with an economic development
agency of the Province of Quebec, Canada pursuant to which we may borrow up to Cdn. $7.1 million from such
agency. Borrowings may only be used to fund capital improvements at our Canadian plant and are limited to a
specified percentage of such capital improvements. Borrowings are non-interest bearing, with monthly payments
commencing in 2018. The agreement contains certain restrictive covenants, which, among other things, restricts the
subsidiary’s ability to sell assets or enter into mergers, and requires our subsidiary to maintain certain financial
ratios and maintain specified levels of employment. At December 31, 2013, we had Cdn. $1.8 million (USD $1.7
million), outstanding under this agreement.
Restrictions and other - Aggregate maturities of debt at December 31, 2013 are presented in the table
below. Such maturities, as they relate to our note payable to Contran, are based upon the required quarterly
principal repayments of our new term loan.
Years ending December 31,
2014
2015
2016
2017
2018
2019 and thereafter
Total
Amount
(In millions)
3.1
$
3.9
3.8
14.6
3.8
154.3
183.5
$
After considering the effect of the new term loan we obtained in February 2014 and the application of the
net proceeds as discussed above, our aggregate maturities of long-term debt would be:
Years ending December 31,
2014
2015
2016
2017
2018
2019 and thereafter
Total
Amount
(In millions)
3.1
$
3.9
3.8
14.6
3.8
334.3
363.5
$
We are in compliance with all of our debt covenants at December 31, 2013.
F-21
Note 10 - Income taxes:
Pre-tax income (loss):
U.S.
Non-U.S.
Total
Expected tax expense (benefit), at U.S. federal statutory income tax rate
of 35%
Non-U.S. tax rates
Incremental U.S. tax on earnings (loss) of non-U.S. companies
Adjustment to the reserve for uncertain tax positions, net
Tax rate changes
French dividend surtax
U.S. state income taxes and other, net
Provision for income taxes (benefit)
Years ended December 31,
2013
2012
2011
(In millions)
105.1 $
412.0
517.1 $
115.9 $
214.9
330.8 $
(15.1)
(144.8)
(159.9)
181.0 $
(17.3)
28.8
1.6
.1
-
1.9
196.1 $
115.8 $
(11.9 )
1.0
4.3
(.1 )
.3
2.9
112.3 $
(56.0)
4.2
(7.4)
(.4)
(.2)
-
1.9
(57.9)
$
$
$
$
Years ended December 31,
2012
2013
2011
(In millions)
Components of income tax expense:
Currently payable (refundable):
U.S. federal and state
Non-U.S.
Deferred income taxes (benefit):
U.S. federal and state
Non-U.S.
Provision for income taxes (benefit)
Comprehensive provision for income taxes (benefit) allocable to:
Net income (loss)
Other comprehensive income (loss):
Pension plans
OPEB plans
Currency translation
Marketable securities
Total
$
$
52.0 $
78.7
130.7
3.9
61.5
65.4
196.1 $
45.8 $
42.6
88.4
(4.2 )
28.1
23.9
112.3 $
7.3
(1.2)
6.1
(22.0)
(42.0)
(64.0)
(57.9)
Years ended December 31,
2012
2013
2011
(In millions)
$
196.1 $
112.3 $
(57.9)
(3.3)
(.7)
-
3.1
195.2 $
(18.6 )
(.2 )
4.9
(.9 )
97.5 $
11.8
1.4
5.5
3.1
(36.1)
$
F-22
The components of our net deferred income taxes at December 31, 2012 and 2013 are summarized in the
following table.
Tax effect of temporary differences related to:
Inventories
Property and equipment
Accrued OPEB costs
Accrued pension cost
Accrued legal settlement
Other accrued liabilities and deductible
differences
Other taxable differences
Tax on unremitted earnings of non-U.S.
subsidiaries
Tax loss and tax credit carryforwards
Valuation allowance
Adjusted gross deferred tax assets
(liabilities)
Netting by tax jurisdiction
Less net current deferred tax asset (liability)
Net noncurrent deferred tax asset
December 31,
2012
2013
Assets
Liabilities
Assets
Liabilities
(In millions)
$
2.7 $
-
4.0
28.3
-
(10.1) $
(70.5)
-
-
-
3.5 $
-
2.2
19.9
12.6
9.4
-
-
(11.8)
10.3
-
-
145.4
(.1)
189.7
(65.1)
124.6
4.1
(7.6)
-
-
(100.0)
65.1
(34.9)
(10.9)
-
190.3
(.1 )
238.7
(73.7 )
165.0
16.6
(2.3)
(72.3)
-
-
-
-
(18.0)
(2.6)
-
-
(95.2)
73.7
(21.5)
(2.0)
(liability)
$
120.5 $
(24.0) $
148.4 $
(19.5)
Our provision for income taxes in 2011 includes $17.2 million for U.S. incremental income taxes on
current earnings repatriated from our German subsidiary, which earnings were used to fund a portion of the
repurchases of our Senior Secured Notes discussed in Note 9. In addition, we accrue U.S. incremental income taxes
on the earnings of our Canadian subsidiary, which earnings we previously determined are not permanently
reinvested.
In the third quarter of 2012, France enacted certain changes in their income tax laws, including a 3%
nondeductible surtax on all dividend distributions on 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 if and when a dividend is declared and
at that time the related tax will be remitted to the French government in accordance with the applicable tax law.
During 2012 and 2013, our French subsidiary distributed dividends of $8.9 million and nil, respectively. At
December 31, 2013, our French subsidiary has undistributed earnings of approximately $11.0 million that, if
distributed, would be subject to the 3% surtax.
F-23
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 tax 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. $7.9 million (see Note 9). 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 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 2011, 2012 and 2013 was not material, and at
December 31, 2011, 2012 and 2013, we had $3.1 million, $3.4 million and $3.7 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 2011, 2012 and 2013:
Changes in unrecognized tax benefits:
Unrecognized tax benefits at beginning of year
Net increase (decrease):
Tax positions taken in prior periods
Tax positions taken in current period
Settlements with taxing authorities - cash paid
Lapse due to applicable statute of limitations
Change in currency exchange rates
Unrecognized tax benefits at end of year
$
2011
Years ended December 31,
2012
(In millions)
2013
$
7.9 $
8.8 $
13.0
.3
1.0
-
-
(.4)
8.8 $
(.2 )
4.3
(.1 )
(.1 )
.3
13.0 $
(.3)
3.9
-
-
(.7)
15.9
If our uncertain tax positions were recognized, a benefit of $11.9 million, $16.4 million and $15.1 million
would affect our effective income tax rates for 2011, 2012 and 2013 respectively. At December 31, 2013, we
currently estimate that our unrecognized tax benefits will change by $3 million during the next twelve months
related to our prior year returns.
We file income tax returns in various U.S. federal, state and local jurisdictions. We also file income tax
returns in various non-U.S. jurisdictions, principally in Germany, Canada, Belgium and Norway. Our U.S. income
tax returns prior to 2010 are generally considered closed to examination by applicable tax authorities. Our non-U.S.
income tax returns are generally considered closed to examination for years prior to 2009 for Germany, 2010 for
Belgium, 2008 for Canada and 2004 for Norway.
F-24
At December 31, 2013, we had the equivalent of $842 million and $127 million of net operating loss
carryforwards for German corporate and trade tax purposes, respectively and we had the equivalent of $102 million
of net operating loss carryforwards for Belgian corporate tax purposes. At December 31, 2013, we have concluded
that no deferred income tax asset valuation allowance is required to be recognized with respect to such
carryforwards, principally because (i) such carryforwards have an indefinite carryforward period, (ii) we have
utilized a portion of such German carryforwards during the most recent three-year period and (iii) we currently
expect to utilize the remainder of such carryforwards over the long term. However, prior to the complete utilization
of these carryforwards, if we generate operating losses in our German and Belgian operations for an extended period
of time, it is possible we might conclude the benefit of the carryforwards would no longer meet the more-likely-
than-not recognition criteria, at which point we would be required to recognize a valuation allowance against some
or all of the then-remaining tax benefit associated with the carryforwards.
Note 11 - Employee benefit plans:
Defined contribution plans - We maintain various defined contribution pension plans with our
contributions based on matching or other formulas. Defined contribution plan expense approximated $1.5 million in
2011, $1.6 million in 2012 and $1.8 million in 2013.
Accounting for defined benefit and postretirement benefits other than pensions (OPEB) plans - We
recognize 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. Changes in the funded status of these plans are recognized either in net
income (loss), to the extent they are reflected in periodic benefit cost, or through other comprehensive income (loss).
Defined benefit plans - We sponsor various defined benefit pension plans. Non-U.S. employees are
covered by plans in their respective countries and a majority of U.S. employees are eligible to participate in a
contributory savings plan. The benefits under our plans are based upon years of service and employee
compensation. Our funding policy is to contribute annually the minimum amount required under ERISA (or
equivalent non-U.S.) regulations plus additional amounts as we deem appropriate.
We expect to contribute the equivalent of approximately $25.7 million to all of our defined benefit pension
plans during 2014. Benefit payments to plan participants out of plan assets are expected to be the equivalent of:
Years ending December 31,
2014
2015
2016
2017
2018
Next 5 years
$
Amount
(In millions)
25.5
25.4
25.2
25.9
26.4
148.2
F-25
The funded status of our non-U.S. defined benefit pension plans is presented in the table below.
Change in projected benefit obligations (PBO):
Benefit obligations at beginning of the year
Service cost
Interest cost
Participant contributions
Actuarial losses (gains)
Change in currency exchange rates
Benefits paid
Benefit obligations at end of the year
Change in plan assets:
Fair value of plan assets at beginning of the year
Actual return on plan assets
Employer contributions
Participant contributions
Change in currency exchange rates
Benefits paid
Fair value of plan assets at end of year
Funded status
Amounts recognized in the balance sheet:
Noncurrent pension asset
Accrued pension costs:
Current
Noncurrent
Total
Accumulated other comprehensive loss:
Actuarial losses
Prior service cost
Net transition obligations
Total
Accumulated benefit obligations (ABO)
December 31,
2013
2012
(In millions)
$
460.3 $
10.4
22.3
1.8
96.4
15.0
(24.1 )
582.1
582.1
13.1
21.1
1.9
(2.8)
4.5
(24.8)
595.1
336.2
47.9
27.7
1.8
11.2
(24.1 )
400.7
$ (181.4 ) $
400.7
27.9
26.7
1.9
(1.0)
(24.8)
431.4
(163.7)
$
5.1 $
.2
(1.9 )
(184.6 )
$ (181.4 ) $
(1.4)
(162.5)
(163.7)
$
$
$
187.1 $
5.4
1.3
193.8 $
536.5 $
157.4
2.7
-
160.1
550.2
F-26
The components of our net periodic defined benefit pension cost for our non-U.S. defined benefit pension
plans are presented in the table below. During 2011, certain eligible participants elected to take lump sum
distributions upon their retirement, resulting in a nominal settlement charge in 2011. In December 2013, we
amended one of our Canadian plans in which participation with respect to hourly workers was closed to new
participants in December 2013, and existing hourly plan participants will no longer accrue additional benefits after
December 2013, resulting in a $7.1 million curtailment charge for recognition of previously unamortized prior
service cost and transition obligation and $.2 million for special termination benefits. The amounts shown below for
the amortization of prior service cost, net transition obligations and recognized actuarial losses for 2011, 2012 and
2013 were recognized as components of our accumulated other comprehensive income (loss) at December 31, 2010,
2011 and 2012, respectively, net of deferred income taxes.
2011
Years ended December 31,
2012
(In millions)
2013
Net periodic pension cost:
Service cost benefits
Interest cost on PBO
Expected return on plan assets
Settlement losses
Curtailment loss
Recognized actuarial losses
Amortization of prior service cost
Amortization of net transition obligations
Total
$
$
11.2 $
23.6
(17.6)
.5
-
6.6
1.2
.5
26.0 $
10.4 $
22.3
(17.0 )
-
-
7.9
1.1
.4
25.1 $
13.1
21.1
(18.5)
-
7.3
12.5
1.1
.4
37.0
Certain information concerning our non-U.S. defined benefit pension plans is presented in the table below.
Plans for which the ABO exceeds plan assets:
PBO
ABO
Fair value of plan assets
December 31,
2013
2012
(In millions)
$ 520.0 $ 527.0
489.5
482.1
333.5 364.2
The weighted-average rate assumptions used in determining the actuarial present value of benefit
obligations for our non-U.S. defined benefit pension plans as of December 31, 2012 and 2013 are presented in the
table below.
Rate
Discount rate
Increase in future compensation levels
December 31,
2012
2013
3.7%
3.1%
3.8 %
2.7 %
The weighted-average rate assumptions used in determining the net periodic pension cost for our non-U.S.
defined benefit pension plans for 2011, 2012 and 2013 are presented in the table below.
Rate
Years ended December 31,
2012
2013
2011
Discount rate
Increase in future compensation levels
Long-term return on plan assets
5.1%
3.1%
5.5%
4.9%
3.2%
5.2%
3.7 %
3.1 %
5.0 %
F-27
Variances from actuarially assumed rates will result in increases or decreases in accumulated pension
obligations, pension expense and funding requirements in future periods.
The funded status of our U.S. defined benefit pension plan is presented in the table below.
Change in PBO:
Benefit obligations at beginning of the year
Interest cost
Actuarial losses (gains)
Benefits paid
Benefit obligations at end of the year
Change in plan assets:
Fair value of plan assets at beginning of the year
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at end of year
Funded status
Amounts recognized in the balance sheet:
Accrued pension costs:
Current
Noncurrent
Total
Accumulated other comprehensive loss - actuarial
losses
ABO
December 31,
2012
2013
(In millions)
17.8 $
.8
1.4
(.9)
19.1
12.9
1.9
.5
(.9)
14.4
(4.7) $
(.1) $
(4.6)
(4.7) $
10.7 $
19.1 $
19.1
.7
(1.7 )
(.9 )
17.2
14.4
2.0
.3
(.9 )
15.8
(1.4 )
(.1 )
(1.3 )
(1.4 )
8.1
17.2
$
$
$
$
$
$
The components of our net periodic defined benefit pension cost for our U.S. defined benefit pension plan
is presented in the table below. The amounts shown below for recognized actuarial losses for 2011, 2012 and 2013
were recognized as components of our accumulated other comprehensive income (loss) at December 31, 2010, 2011
and 2012 respectively, net of deferred income taxes.
2011
Years ended December 31,
2012
(In millions)
2013
Net periodic pension cost (income):
Interest cost on PBO
Expected return on plan assets
Recognized actuarial losses
Total
$
$
.9
$
(1.4)
.3
(.2) $
.8 $
(1.3)
.5
- $
.7
(1.4)
.5
(.2)
The discount rate assumptions used in determining the actuarial present value of the benefit obligation for
our U.S. defined benefit pension plan as of December 31, 2012 and 2013 are 3.6% and 4.5%, respectively. The
impact of assumed increases in future compensation levels does not have an effect on the benefit obligation as the
plan is frozen with regards to compensation.
F-28
The weighted-average rate assumptions used in determining the net periodic pension cost for our U.S.
defined benefit pension plan for 2011, 2012 and 2013 are presented in the table below. The impact of assumed
increases in future compensation levels does not have an effect on the periodic pension cost as the plan is frozen
with regards to compensation.
Rate
Discount rate
Long-term return on plan assets
Years ended December 31,
2012
2013
2011
5.1%
10.0%
4.2%
10.0%
3.6%
10.0%
Variances from actuarially assumed rates will result in increases or decreases in accumulated pension
obligations, pension expense and funding requirements in future periods.
The amounts shown in the above tables for actuarial losses, prior service cost and net transition obligations
at December 31, 2012 and 2013 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 and are recognized, net of deferred income taxes, in our accumulated other comprehensive income
(loss) at December 2012 and 2013. We expect approximately $10.4 million, $.5 million and $.1 million of the
unrecognized actuarial losses, prior service costs and net transition obligations, respectively, will be recognized as
components of our consolidated net periodic defined benefit pension cost in 2014.
The table below details the changes in our consolidated other comprehensive income (loss) during 2011,
2012 and 2013.
Changes in plan assets and benefit obligations
recognized in other comprehensive income
(loss):
Current year:
Net actuarial gain (loss)
Plan curtailment
Settlements
Amortization of unrecognized:
Net actuarial losses
Prior service cost
Net transition obligations
Total
2011
Years ended December 31,
2012
(In millions)
2013
$
$
(19.8) $
-
.5
6.9
1.2
.5
(10.7) $
(66.9) $
-
-
8.3
1.1
.4
(57.1) $
14.7
7.1
-
13.0
1.1
.4
36.3
At December 31, 2012 and 2013, substantially all of the assets attributable to our U.S. plan were invested
in the Combined Master Retirement Trust (CMRT), a collective investment trust sponsored by Contran to permit the
collective investment by certain master trusts that fund certain employee benefits plans sponsored by Contran and
certain of its affiliates. The CMRT’s long-term investment objective is to provide a rate of return exceeding a
composite of broad market equity and fixed income indices (including the S&P 500 and certain Russell indices)
while utilizing both third-party investment managers as well as investments directed by Mr. Simmons (prior to his
death in December 2013). Prior to his death, Mr. Simmons was the sole trustee of the CMRT, and he, along with the
CMRT’s investment committee, of which Mr. Simmons was a member, actively managed the investments of the
CMRT.
F-29
The CMRT trustee and investment committee did not maintain a specific target asset allocation in order to
achieve their objectives, but instead they periodically change the asset mix of the CMRT based upon, among other
things, advice they receive from third-party advisors and their expectations regarding potential returns for various
investment alternatives and what asset mix would generate the greatest overall return. Prior to December 2012, the
CMRT had an investment in TIMET common stock; however, in December 2012 the CMRT sold its shares of
common stock in conjunction with the tender offer discussed in Note 6. During the history of the CMRT from its
inception in 1988 through December 31, 2013, the average annual rate of return has been 14%. For the years ended
December 31, 2011, 2012 and 2013, the assumed long-term rate of return for plan assets invested in the CMRT was
10%. In determining the appropriateness of the long-term rate of return assumption, we primarily relied on the
historical rates of return achieved by the CMRT, although we considered other factors as well including, among
other things, the investment objectives of the CMRT’s managers and their expectation that such historical returns
would in the future continue to be achieved over the long-term.
Following the death of Mr. Simmons in December 2013, the Contran board of directors in January 2014
appointed a financial institution as the new directed trustee of the CMRT, and the Contran board appointed five
individuals (all executive officers of Contran) as the new investment committee of the CMRT. The new investment
committee intends to reallocate to current and/or new investment managers or various mutual funds the portion of
the CMRT assets that had previously been under the direct and active management by Mr. Simmons. Such
reallocation will be done prudently over a period of time, given the asset composition of this portion of the portfolio.
Concurrent with this change in investment strategy in which there is no longer a portion of the CMRT’s assets under
the direct and active management by Mr. Simmons, and considering the long-term asset mix for the assets of the
CMRT and the expected long-term rates of return for such asset components as well as advice from Contran’s
actuaries, beginning in 2014 the assumed long-term rate of return for plan assets invested in the CMRT will be
reduced to 7.5%.
The CMRT unit value is determined semi-monthly, and the plans have the ability to redeem all or any
portion of their investment in the CMRT at any time based on the most recent semi-monthly valuation. However,
the plans do not have the right to individual assets held by the CMRT and the CMRT has the sole discretion in
determining how to meet any redemption request. For purposes of our plan asset disclosure, we consider the
investment in the CMRT as a Level 2 input because (i) the CMRT value is established semi-monthly and the plans
have the right to redeem their investment in the CMRT, in part or in whole, at anytime based on the most recent
value and (ii) observable inputs from Level 1 or Level 2 were used to value approximately 83% of the assets of the
CMRT at each of December 31, 2012 and 2013, as noted below. The aggregate fair value of all of the CMRT
assets, including funds of Contran and its other affiliates that also invest in the CMRT, and supplemental asset mix
details of the CMRT are as follows:
CMRT asset value
CMRT fair value input:
Level 1
Level 2
Level 3
CMRT asset mix:
Domestic equities, principally publicly traded
International equities, publicly traded
Fixed income securities, publicly traded
Privately managed limited partnerships
Other, primarily cash
December 31,
2012
2013
(In millions)
$
726.4 $
722.8
82%
1
17
100%
43%
2
12
8
35
100%
79 %
4
17
100 %
53 %
-
35
11
1
100 %
F-30
The relatively large percentage of the CMRT invested in cash and other assets at December 31, 2012 is the
result of the CMRT’s December 2012 disposition of its shares of TIMET common stock, which generated aggregate
proceeds to the CMRT of $254.7 million (or approximately 35% of the CMRT’s total asset value at December 31,
2012), and which funds were invested in a cash equivalent at the end of 2012. Subsequently in January 2013, the
CMRT redeployed such proceeds into other investments.
In determining the expected long-term rate of return on non-U.S. 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 third-party advice about appropriate long-term
rates of return. Such assumed asset mixes are summarized below:
(cid:121)
(cid:121)
(cid:121)
In Germany, the composition of our plan assets is established to satisfy the requirements of the
German insurance commissioner. Our German pension plan assets represent an investment in a large
collective investment fund established and maintained by Bayer AG in which several pension plans,
including our German pension plan and Bayer’s pension plans, have invested. Our plan assets
represent a very nominal portion of the total collective investment fund maintained by Bayer. These
plan assets are a Level 3 input because there is not an active market that approximates the value of our
investment in the Bayer investment fund. We determine the fair value of the Bayer plan assets based
on periodic reports we receive from the managers of the Bayer plan. These periodic reports are subject
to audit by the German pension regulator.
In Canada, we currently have a plan asset target allocation of 45% to equity securities, 48% to fixed
income securities, 7% to other investments and cash. We expect the long-term rate of return for such
investments to average approximately 125 basis points above the applicable equity or fixed income
index. The Canadian assets are Level 1 input because they are traded in active markets.
In Norway, we currently have a plan asset target allocation of 12% to equity securities, 78% to fixed
income securities, 9% to real estate and the remainder primarily to other investments and liquid
investments such as money markets. The expected long-term rate of return for such investments is
approximately 8%, 4%, 6% and 4%, respectively. The majority of Norwegian plan assets are Level 1
inputs because they are traded in active markets; however approximately 8% of our Norwegian plan
assets are invested in real estate and other investments not actively traded and are therefore a Level 3
input.
(cid:121) We also have plan assets in Belgium and the United Kingdom. The Belgian plan assets are invested in
certain individualized fixed income insurance contracts for the benefit of each plan participant as
required by the local regulators and are therefore a Level 3 input. The United Kingdom plan assets
consist of marketable securities which are Level 1 inputs because they trade in active markets.
We regularly review our actual asset allocation for each plan, and will periodically rebalance the
investments in each plan to more accurately reflect the targeted allocation and/or maximize the overall long-term
return when considered appropriate.
F-31
The composition of our December 31, 2012 and 2013 pension plan assets by fair value level is shown in the
table below. The amounts shown for plan assets invested in the CMRT include a nominal amount of cash held by
our U.S. pension plan which is not part of the plan’s investment in the CMRT.
Fair Value Measurements at December 31, 2012
Quoted prices
in active
markets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
$
224.8 $
(In millions)
-
$
- $
224.8
22.4
30.3
38.0
5.6
2.1
3.2
5.2
40.9
4.8
5.5
7.6
22.4
30.3
38.0
5.6
2.1
3.2
5.2
40.9
4.8
-
7.0
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
5.5
.6
14.4
10.3
415.1 $
-
3.1
162.6
$
14.4
-
14.4 $
-
7.2
238.1
$
Germany
Canada:
Local currency equities
Non local currency equities
Local currency fixed income
Global mutual fund
Cash and other
Norway:
Local currency equities
Non local currency equities
Local currency fixed income
Non local currency fixed income
Real estate
Cash and other
U.S.
CMRT
Other
Total
F-32
Fair Value Measurements at December 31, 2013
Quoted prices
in active
markets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
$
247.5 $
(In millions)
-
$
- $
247.5
24.0
33.0
44.7
6.1
.5
2.0
5.2
35.0
3.6
4.8
13.2
24.0
33.0
44.7
6.1
.5
2.0
5.2
35.0
3.6
-
12.4
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
4.8
.8
15.8
11.8
447.2 $
-
3.4
169.9
$
15.8
-
15.8 $
-
8.4
261.5
$
Germany
Canada:
Local currency equities
Non local currency equities
Local currency fixed income
Global mutual fund
Cash and other
Norway:
Local currency equities
Non local currency equities
Local currency fixed income
Non local currency fixed income
Real estate
Cash and other
U.S.
CMRT
Other
Total
A rollforward of the change in fair value of Level 3 assets follows.
Fair value at beginning of year
Gain on assets held at end of year
Gain on assets sold during the year
Assets purchased
Assets sold
Transfers out
Currency exchange rate fluctuations
Fair value at end of year
2012
2013
(In millions)
200.6 $
33.0
.1
15.1
(14.3)
(1.0)
4.6
238.1 $
238.1
11.2
-
16.1
(14.6 )
-
10.7
261.5
$
$
F-33
Postretirement benefits other than pensions (OPEB) - We provide certain health care and life insurance
benefits for eligible retired employees. Certain of our Canadian employees may become eligible for such
postretirement health care and life insurance benefits if they reach retirement age while working for us. In the U.S.,
employees who retired after 1998 are not entitled to any such benefits. The majority of all retirees are required to
contribute a portion of the cost of their benefits and certain current and future retirees are eligible for reduced health
care benefits at age 65. We have no OPEB plan assets, rather, we fund medical claims as they are paid.
Contribution to our OPEB plans to cover benefit payments are expected to be the equivalent of:
Years ending December 31,
2014
2015
2016
2017
2018
Next 5 years
Amount
(In millions)
.5
.5
.5
.5
.5
2.7
The funded status of our OPEB plans is presented in the table below:
Change in accumulated OPEB obligations:
Obligations at beginning of the year
Service cost
Interest cost
Actuarial losses (gains)
Plan amendments
Curtailment
Change in currency exchange rates
Benefits paid from employer contributions
Obligations at end of the year
Fair value of plan assets
Funded status
Amounts recognized in the balance sheet:
Current accrued pension costs
Noncurrent accrued pension costs
Total
Accumulated other comprehensive income:
Net actuarial losses
Prior service credit
Total
December 31,
2012
2013
(In millions)
13.2 $
.3
.6
.5
-
-
.4
(.4)
14.6
-
(14.6) $
(.5) $
(14.1)
(14.6) $
5.1 $
(4.7)
.4 $
14.6
.3
.6
(1.6 )
(4.4 )
(.1 )
(.9 )
(.3 )
8.2
-
(8.2 )
(.4 )
(7.8 )
(8.2 )
3.0
(7.9 )
(4.9 )
$
$
$
$
$
$
The amounts shown in the table above for net actuarial losses and prior service credit at December 31, 2012
and 2013 have not yet been recognized as components of our periodic OPEB cost as of those dates. These amounts
will be recognized as components of our periodic OPEB cost in future years and are recognized, net of deferred
income taxes, in our accumulated other comprehensive income (loss). We expect to recognize approximately $.3
million of unrecognized actuarial losses and $1.0 million of prior service credit as components of our periodic
OPEB cost in 2014.
At December 31, 2013, the accumulated OPEB obligations for all OPEB plans was comprised of $.9
million related to U.S. plans and $7.3 million related to our Canadian plan (2012 - $1.1 million and $13.5 million,
respectively).
F-34
In the fourth quarter of 2013, we amended the benefit formula for most Canadian participants of our plans
effective January 1, 2014, resulting in a curtailment gain as of December 31, 2013. Key assumptions including the
service cost and benefit duration as of December 31, 2013 now reflect these plan revisions to the benefit formula.
The components of our periodic OPEB costs are presented in the table below. The amounts shown below
for amortization of prior service credit and recognized actuarial losses for 2011, 2012 and 2013 were recognized as
components of our accumulated other comprehensive income (loss) at December 31, 2010, 2011 and 2012,
respectively, net of deferred income taxes.
2011
Years ended December 31,
2012
(In millions)
2013
Net periodic OPEB cost:
Service cost
Interest cost
Amortization of prior service credit
Recognized actuarial losses
Curtailment gain
Total
$
$
.2 $
.6
(.8)
.3
-
.3 $
.3 $
.6
(.6 )
.3
-
.6 $
.3
.6
(.6)
.3
(.6)
-
The table below details the changes in benefit obligations recognized in accumulated other comprehensive
income (loss) during 2011, 2012 and 2013.
Changes in benefit obligations recognized in other
comprehensive income (loss):
Current year:
Net actuarial loss
Plan amendments/curtailment
Amortization of unrecognized:
Net actuarial loss
Prior service credit
Total
Years ended December 31,
2011
2012
2013
(In millions)
$
$
(2.0) $
-
.3
(.8)
(2.5) $
(.5 ) $
-
.3
(.6 )
(.8 ) $
1.6
4.5
.3
(1.1)
5.3
A summary of our key actuarial assumptions used to determine the net benefit obligation as of
December 31, 2012 and 2013 are presented in the table below. The weighted average discount rate was determined
using the projected benefit obligation as of such dates. The impact of assumed increases in future compensation
levels does not have a material effect on the actuarial present value of the benefit obligation as substantially all of
such benefits relate solely to eligible retirees, for which compensation is not applicable.
Healthcare inflation:
Initial rate
Ultimate rate
Year of ultimate rate achievement
Weighted average discount rate
2012
2013
7.0%
5.0%
2018
3.9%
7.0 %
5.0 %
2020
4.6 %
Assumed health care cost trend rates affect the amounts we report for health care plans. A one percent
change in assumed health care trend rates would not have a material effect on the net periodic OPEB cost for 2013
or on the accumulated OPEB obligation at December 31, 2013.
F-35
The weighted average discount rate used in determining the net periodic OPEB cost for 2013 was 3.9%
(2012 - 4.1%; 2011 - 5.1%). Such weighted average rate was determined using the projected benefit obligation as of
the beginning of each year. The impact of assumed increases in future compensation levels does not have a material
effect on the net periodic OPEB cost as substantially all of such benefits relate solely to eligible retirees, for which
compensation is not applicable. The impact of the assumed rate of return on plan assets also does not have a
material effect on the net periodic OPEB cost as there were no plan assets as of December 31, 2012 or 2013.
Variances from actuarially-assumed rates will result in additional increases or decreases in accumulated
OPEB obligations, net periodic OPEB cost and funding requirements in future periods.
Note 12 - Other noncurrent liabilities:
Reserve for uncertain tax positions
Employee benefits
Insurance claims and expenses
Other
Total
December 31,
2012
2013
(In millions)
13.4 $
11.3
.3
5.3
30.3 $
16.5
12.2
.3
5.5
34.5
$
$
Note 13 - Stockholders’ equity:
NL common stock options held by our employees - Certain of our employees were granted nonqualified
options to purchase NL common stock under the terms of certain option plans sponsored by NL. Generally, the
stock options were granted at a price equal to or greater than 100% of the market price of NL’s common stock at the
date of grant, vested over a five-year period and expired ten years from the date of grant. No options were granted
during the past three years, and 25,950 options were exercised during 2011, after which no such options remained
outstanding.
Long-term incentive compensation plan - Prior to 2012, we had a long-term incentive compensation plan
that provided for the discretionary grant of, among other things, qualified incentive stock options, nonqualified stock
options, restricted common stock, stock awards and stock appreciation rights. Up to 150,000 shares of our common
stock could be issued pursuant to this plan. During 2011 and 2012 we awarded an aggregate of 3,500 and 4,500
shares, respectively, of our common stock pursuant to this plan to members of our board of directors. In February
2012, our board of directors voted to replace the existing long-term incentive plan with a new plan that would
provide for the award of stock to our board of directors, and up to a maximum of 200,000 shares could be awarded.
The new plan was approved at our May 2012 shareholder meeting and shortly thereafter the prior long-term
incentive compensation plan terminated. 7,000 shares were awarded under this new plan in 2013. 193,000 shares
are available for future award under this new plan.
Stock split - In May 2011, we amended our certificate of incorporation to increase the authorized number
of shares of our common stock from 60 million to 240 million. Also in May 2011, we implemented a 2-for-1 split
of our common stock effected in the form of a stock dividend. Other than the disclosure of the authorized number of
shares of our common stock discussed in this paragraph, we have adjusted all share and per-share disclosures for all
periods presented in our consolidated financial statements prior to the 2011 stock split to give effect to the stock
split.
Special dividend - Cash dividends in 2011 include a $.50 per share special dividend paid to stockholders in
the first quarter of 2011.
F-36
Stock repurchase program - In December 2010, our board of directors authorized the repurchase of up to
2.0 million shares of our common stock in open market transactions, including block purchases, or in privately-
negotiated transactions at unspecified prices and over an unspecified period of time. We may repurchase our
common stock from time to time as market conditions permit. The stock repurchase program does not include
specific price targets or timetables and may be suspended at any time. Depending on market conditions, we may
terminate the program prior to its completion. We would use cash on hand or other sources of liquidity to acquire
the shares. Repurchased shares will be added to our treasury and cancelled.
During 2013 we repurchased 49,000 shares in market transactions for an aggregate of $.7 million in cash.
We cancelled these treasury shares and allocated their cost to common stock at par value and additional paid-in
capital. At December 31, 2013 an additional 1,951,000 shares are available for repurchase under this authorization.
Accumulated other comprehensive loss - Changes in accumulated other comprehensive income for 2011,
2012 and 2013 are presented in the table below.
Accumulated other comprehensive loss, net of tax:
Marketable securities:
Balance at beginning of year
Other comprehensive income (loss):
Years ended December 31,
2013
2012
2011
(In millions)
$
- $
5.1 $
4.2
Unrealized gains (losses) arising during the year
Less reclassification adjustment for amounts included in realized loss
$
Balance at end of year
5.1
-
5.1 $
(5.5 )
4.6
4.2 $
5.3
1.3
10.8
(63.5)
6.7
(56.8)
(65.1 ) $
(26.7 )
(91.8 ) $
(91.8 ) $
28.3
(63.5 ) $
(89.0 ) $
(99.2 ) $
(137.3)
6.5
(16.7 )
-
(99.2 ) $
7.0
(45.1 )
-
(137.3 ) $
10.0
12.6
5.3
(109.4)
1.8 $
.1 $
(.5)
(.3 )
(1.4 )
-
.1 $
(.2 )
(.4 )
-
(.5 ) $
(.6)
1.2
3.3
3.4
(152.3 ) $
(33.5 )
(185.8 ) $
(185.8 ) $
(11.3 )
(197.1 ) $
(197.1)
45.1
(152.0)
Currency translation:
Balance at beginning of year
Other comprehensive income (loss)
Balance at end of year
Defined benefit pension plans:
Balance at beginning of year
Other comprehensive income (loss):
Amortization of prior service cost and net losses included in net
periodic pension cost
Net actuarial gain (loss) arising during year
Plan curtailment
Balance at end of year
OPEB plans:
Balance at beginning of year
Other comprehensive income (loss):
Amortization of prior service credit and net losses included in net
periodic OPEB cost
Net actuarial gain (loss) arising during year
Plan amendments
Balance at end of year
Total accumulated other comprehensive loss:
Balance at beginning of year
Other comprehensive income (loss)
Balance at end of year
$
$
$
$
$
$
$
$
F-37
The marketable securities reclassification adjustment in 2012, all of which was reclassified into net income,
consists principally of the securities transaction loss related to the sale of TIMET common stock discussed in Note
6. See Note 11 for amounts related to our defined benefit pension plans and OPEB plans.
Note 14 - Related party transactions:
We may be deemed to be controlled by Ms. Lisa Simmons, Ms. Connelly and Ms. Annette Simmons. See
Note 1. Corporations that may be deemed to be controlled by or affiliated with such individuals 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 noncontrolling 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.
Current receivable from affiliate – LPC
Current payables to affiliates:
LPC
Income taxes payable to Valhi
Other
Total
Note payable to Contran – noncurrent
December 31,
2012
2013
(In millions)
- $
14.2
23.5 $
18.1
-
41.6 $
21.1
.5
.1
21.7
- $
170.0
$
$
$
$
From time to time, we will have loans and advances outstanding between us and various related parties
pursuant to term and demand notes. We generally enter into these loans and advances for cash management
purposes. When we loan funds to related parties, we are generally able to earn a higher rate of return on the loan
than we would earn if we invested the funds in other instruments, and when we borrow from related parties, we are
generally able to pay a lower rate of interest than we would pay if we had incurred third-party indebtedness. While
certain of these loans to affiliates may be of a lesser credit quality than cash equivalent instruments otherwise
available to us, we believe we have considered the credit risks in the terms of the applicable loans. In this regard:
(cid:121)
(cid:121)
In November 2010, we entered into an unsecured revolving demand promissory note with Valhi
whereby, as amended, we have agreed to loan Valhi up to $100 million (up to $225 million at
December 31, 2011 and prior to December 2012). Our loan to Valhi bears interest at prime plus
1.00%, payable quarterly, with all principal due on demand, but in any event no earlier than
December 31, 2015. The amount of our outstanding loans to Valhi at any time is at our discretion. As
of December 31, 2013 and 2012, we had no outstanding loans to Valhi under this promissory note; and
In February 2013, we entered into a promissory note with Contran in which we borrowed $190 million
on this note and subsequently repaid $20 million during 2013. We prepaid and cancelled this note
payable to Contran in February 2014 using a portion of the net proceeds of our new term loan. See
Note 9.
F-38
Interest income (including unused commitment fees) on our loan to Valhi was $3.7 million in 2011, $7.1
million in 2012 and $.5 million in 2013. Interest expense on our loan from Contran was $11.7 million in 2013.
Amounts payable to LPC are generally for the purchase of TiO2, while amounts receivable from LPC are
generally from the sale of TiO2 feedstock. See Note 5. Purchases of TiO2 from LPC were $144.8 million in 2011,
$250.2 million in 2012 and $224.5 million in 2013. Sales of feedstock to LPC were $93.0 million in 2011, $143.7
million in 2012 and $141.1 million in 2013.
Under the terms of various intercorporate services agreements (ISAs) entered into between us and various
related parties, including Contran, employees of one company will provide certain management, tax planning,
financial and administrative services to the other company on a fee basis. Such charges are based upon estimates of
the time devoted by the employees of the provider of the services to the affairs of the recipient, and the
compensation and associated expenses of such persons. Because of the large number of companies affiliated with
Contran, we believe we benefit from cost savings and economies of scale gained by not having certain management,
financial and administrative staffs duplicated at each entity, thus allowing certain individuals to provide services to
multiple companies but only be compensated by one entity. The net ISA fee charged to us, approved by the
independent members of our board of directors, is included in selling, general and administrative expense and
corporate expense and was $9.6 million in 2011, $11.2 million in 2012 and $12.9 million in 2013. This agreement is
renewed annually and we expect to pay approximately $12.3 million under the ISA during 2014.
Tall Pines Insurance Company and EWI RE, Inc. provide for or broker certain insurance policies for
Contran and certain of its subsidiaries and affiliates, including ourselves. Tall Pines and EWI are subsidiaries of
Valhi. Consistent with insurance industry practices, Tall Pines and EWI receive commissions from insurance and
reinsurance underwriters and/or assess fees for the policies that they provide or broker. The aggregate premiums
paid to Tall Pines and EWI by us and our joint venture were $9.5 million in 2011, $12.0 million in 2012 and $11.3
million in 2013. 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 from third-
party insurance carriers with an A.M. Best Company rating of generally at least A- (excellent) for substantially all of
the risks it underwrites. We expect these relationships with Tall Pines and EWI will continue in 2014.
Contran and certain of its subsidiaries and affiliates, including us, purchase certain of their insurance
policies as a group, with the costs of the jointly-owned policies being apportioned among the participating
companies. With respect to certain of such policies, it is possible that unusually large losses incurred by one or
more insureds during a given policy period could leave the other participating companies without adequate coverage
under that policy for the balance of the policy period. As a result, Contran and certain of its subsidiaries and
affiliates, including us, have entered into a loss sharing agreement under which any uninsured loss is shared by those
entities who have submitted claims under the relevant policy. We believe the benefits, in the form of reduced
premiums and broader coverage associated with the group coverage for such policies, justifies the risk associated
with the potential for any uninsured loss.
Note 15 - 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 U.S. and non-
U.S. 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.
F-39
Litigation matters - We are involved in various environmental, contractual, product liability, patent (or
intellectual property), employment and other claims and disputes incidental to our business. We currently believe
the disposition of all claims and disputes, individually or in the aggregate, should not have a material adverse effect
on our consolidated financial condition, results of operations or liquidity.
In March 2010, we were served with two complaints which were subsequently consolidated as Haley Paint
et al. v. E.I. Du Pont de Nemours and Company, et al. (United States District Court, for the District of Maryland,
Case No. 1:10-cv-00318-RDB). A third plaintiff intervened into the case in July 2011. The defendants included us,
E.I. Du Pont de Nemours & Company, Huntsman International LLC, Millennium Inorganic Chemicals, Inc. and the
National Titanium Dioxide Company Limited (d/b/a Cristal). Plaintiffs sought to represent a class consisting of all
persons and entities that purchased titanium dioxide in the United States directly from one or more of the defendants
on or after March 1, 2002. The complaint alleged that the defendants conspired and combined to fix, raise,
maintain, and stabilize the price at which titanium dioxide was sold in the United States and engaged in other
anticompetitive conduct. In May 2010, defendants filed a motion to dismiss, which plaintiffs opposed. In March
2011, the court denied the motion to dismiss. In February 2012, the plaintiffs submitted their motion for class
certification, which defendants opposed. In August 2012, the court granted the plaintiffs’ motion for class
certification and trial was set for September 2013. On September 10, 2013, and following the agreement by the
three other defendants in the third quarter of 2013 to enter into settlement agreements with the class plaintiffs, we
also entered into a settlement agreement with the class plaintiffs, without admitting any fault or wrongdoing, and
agreed to pay an aggregate of $35 million (payable in two installments at specified times, expected to occur by mid-
2014). Following the service of the Class Action Fairness Notice and the Order of Final Approval from the court,
we, and the other defendants, will be dismissed with prejudice from this matter. Other operating expense in 2013
includes a $35 million charge related to this settlement. See also Note 8.
In March 2013, we were served with the complaint, Los Gatos Mercantile, Inc. d/b/a Los Gatos Ace
Hardware, et al v. E.I. Du Pont de Nemours and Company, et al. (United States District Court, for the Northern
District of California, Case No. 3:13-cv-01180-SI). The defendants include us, E.I. Du Pont de Nemours &
Company, Huntsman International LLC and Millennium Inorganic Chemicals, Inc. Plaintiffs seek to represent a
class consisting of indirect purchasers of titanium dioxide in the states of Arizona, Arkansas, California, the District
of Columbia, Florida, Hawaii, Illinois, Iowa, Kansas, Maine, Massachusetts, Michigan, Minnesota, Mississippi,
Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico, New York, North Carolina, North Dakota,
Oregon, South Carolina, South Dakota, Tennessee, Utah, Vermont, West Virginia and Wisconsin that indirectly
purchased titanium dioxide from one or more of the defendants on or after March 1, 2002. The complaint alleges
that the defendants conspired and combined to fix, raise, maintain, and stabilize the price at which titanium dioxide
was sold in the United States and engaged in other anticompetitive conduct. The case is now proceeding in the trial
court. We believe the action is without merit, will deny all allegations of wrongdoing and liability and intend to
defend against the action vigorously.
In November 2013, we were served with the complaint, The Valspar Corporation, et al v. E.I. Du Pont de
Nemours and Company, et al. (United States District Court, for the District of Minnesota, Case No. 1:13-cv-03214-
RHK-L1B). The defendants include us, E.I. Du Pont de Nemours & Company, Huntsman International LLC,
Millennium Inorganic Chemicals, Inc. and the National Titanium Dioxide Company Limited (d/b/a Cristal).
Plaintiff opted out of the settlement in the original lawsuit, Haley Paint et al. v. E.I. Du Pont de Nemours and
Company, et al. (United States District Court, for the District of Maryland, Case No. 1:10-cv-00318-RDB) and filed
its own lawsuit against the Defendants. The complaint alleged that the defendants conspired and combined to fix,
raise, maintain, and stabilize the price at which titanium dioxide was sold in the United States and engaged in other
anticompetitive conduct. The case is now proceeding in the trial court. We believe the action is without merit, will
deny all allegations of wrongdoing and liability and intend to defend against the action vigorously.
F-40
Concentrations of credit risk - Sales of TiO2 accounted for approximately 92% of our sales in 2011, 90%
in 2012 and 90% in 2013. The remaining sales result from the mining and sale of ilmenite ore (a raw material used
in the sulfate pigment production process), and the manufacture and sale of iron-based water treatment chemicals
and certain titanium chemical products (derived from co-products of the TiO2 production processes). TiO2 is
generally sold to the paint, plastics and paper industries. Such markets are generally considered “quality-of-life”
markets whose demand for TiO2 is influenced by the relative economic well-being of the various geographic
regions. We sell TiO2 to over 4,000 customers, with the top ten customers approximating 30% of net sales in 2011
and 34% in both 2012 and 2013. We did not have sales to a single customer comprising 10% or more of our net
sales in 2011. In each of 2012 and 2013, one customer, Behr Process Corporation, accounted for approximately
10% of our net sales. The table below shows the approximate percentage of our TiO2 sales by volume for our
significant markets, Europe and North America, for the last three years.
Europe
North America
2011
2012
2013
53%
32%
47 %
35 %
49 %
33 %
Long-term contracts - We have long-term supply contracts that provide for certain of our TiO2 feedstock
requirements through 2016. The agreements require us to purchase certain minimum quantities of feedstock with
minimum purchase commitments aggregating approximately $820 million over the life of the contracts in years
subsequent to December 31, 2013. In addition, we have other long-term supply and service contracts that provide
for various raw materials and services. These agreements require us to purchase certain minimum quantities or
services with minimum purchase commitments aggregating approximately $123 million at December 31, 2013.
Operating leases - Our principal German operating subsidiary leases the land under its Leverkusen TiO2
production facility pursuant to a lease with Bayer AG that expires in 2050. The Leverkusen facility itself, which we
own and which represents approximately one-third of our current TiO2 production capacity, is located within
Bayer’s extensive manufacturing complex. We periodically establish the amount of rent for the land lease
associated with the Leverkusen facility by agreement with Bayer for periods of at least two years at a time. The
lease agreement provides for no formula, index or other mechanism to determine changes in the rent for such land
lease; rather, any change in the rent is subject solely to periodic negotiation between Bayer and us. 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 the
terms of a master supply and services agreement, a majority-owned subsidiary of Bayer provides raw materials,
including chlorine, auxiliary and operating materials, utilities and services necessary to operate the Leverkusen
facility. This agreement, as amended, expires in 2017 and will automatically renew for successive three year terms
until terminated by either party upon one year’s prior notice.
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 $13 million in 2011, $16 million in 2012 and $15 million in 2013. At December 31, 2013, future
minimum payments under non-cancellable operating leases having an initial or remaining term of more than one
year were as follows:
Years ending December 31,
2014
2015
2016
2017
2018
2019 and thereafter
Total
Amount
(In millions)
$
$
12.2
10.3
5.0
3.6
3.2
23.4
57.7
F-41
Approximately $18 million of the $57.7 million aggregate future minimum rental commitments at
December 31, 2013 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, 2013. As discussed above, any change in the rent is based solely on
negotiations between Bayer and us, and any such change in the rent is deemed “contingent rentals” under GAAP
which is excluded from the future minimum lease payments disclosed above.
Income taxes - We and Valhi have agreed to a policy providing for the allocation of tax liabilities and tax
payments as described in Note 1. Under applicable law, we, along with every other member of the Contran Tax
Group, are each jointly and severally liable for the aggregate federal income tax liability of Contran and the other
companies included in the Contran Tax Group for all periods in which we are included in the Contran Tax Group.
Valhi has agreed, however, to indemnify us for any liability for income taxes of the Contran Tax Group in excess of
our tax liability computed in accordance with the tax allocation policy.
Note 16 - Financial instruments:
The following table summarizes the valuation of our financial instruments recorded on a fair value basis as
of December 31, 2012 and 2013:
Fair value measurements
Quoted prices
in active
markets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
(In millions)
Total
Asset (liability)
December 31, 2012
Currency forward contracts
$
Noncurrent marketable securities (See
Note 6)
December 31, 2013
1.8 $
1.8 $
21.6
21.6
Currency forward contracts
$
Noncurrent marketable securities (See
Note 6)
(1.0) $
(1.0) $
30.4
30.4
- $
-
- $
-
-
-
-
-
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.
Derivatives used to hedge forecasted transactions and specific cash flows associated with financial assets and
liabilities denominated in currencies other than the U.S. dollar and 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. The fair
value of the currency forward contracts is determined using Level 1 inputs based on the currency spot forward rates
quoted by banks or currency dealers.
F-42
At December 31, 2013, we had currency forward contracts to exchange:
(cid:120)
(cid:120)
(cid:120)
an aggregate of $36.0 million for an equivalent value of Canadian dollars at an exchange rate ranging
from Cdn. $1.02 to Cdn. $1.06 per U.S. dollar. These contracts with Wells Fargo Bank, N.A. mature
from January 2014 through December 2014 at a rate of $3.0 million per month, subject to early
redemption provisions at our option;
an aggregate $20.0 million for an equivalent value of Norwegian kroner at exchange rates ranging
from kroner 6.12 to kroner 6.25 per U.S. dollar. These contracts with DnB Nor Bank ASA mature at a
rate of $5.0 million per month in certain months from January 2014 through October 2014; and
an aggregate €20.0 million for an equivalent value of Norwegian kroner at exchange rates ranging
from kroner 8.04 to kroner 8.41 per euro. These contracts with DnB Nor Bank ASA mature at a rate of
€5.0 million per month in certain months from January 2014 through October 2014.
The estimated fair value of such currency forward contracts at December 31, 2013 was a $1.0 million net
liability, of which $.2 million is recognized as part of accounts and other receivables and $1.2 million is recognized
as part of accounts payable and accrued liabilities in our Consolidated Balance Sheet, with a corresponding $1.0
million currency transaction loss in our Consolidated Statement of Operations (2012 - $1.8 million net asset,
recognized as part of accounts and other receivables, with a corresponding $1.8 million currency transaction gain in
our Consolidated Statement of Operations). We did not use hedge accounting for any of our contracts to the extent
we held such contracts during 2011, 2012 and 2013.
The following table presents the financial instruments that are not carried at fair value but which require
fair value disclosure as of December 31, 2012 and 2013.
Cash, cash equivalents and restricted cash
Notes payable and long-term debt:
Variable rate:
European credit facility
Term loan
Note payable to Contran
North American credit facility
Common stockholders’ equity
December 31, 2012
Fair
value
Carrying
amount
December 31, 2013
Fair
value
Carrying
amount
(In millions)
$
292.9 $
292.9 $
63.8 $
63.8
13.2
384.5
-
-
13.2
396.8
-
-
1,062.1 2,260.2
-
-
170.0
11.1
935.1
-
-
170.0
11.1
2,207.2
At December 31, 2012, the estimated market price of our term loan was $1,017.5 per $1,000 principal
amount. The fair value of our term loan was based on quoted market prices; however, these quoted market prices
represented Level 2 inputs because the markets in which the Notes and term loan trade were not active. The fair
values of our note payable to Contran and our European credit facility represent Level 2 inputs, and are deemed to
approximate book value. The fair value of our common stockholders’ equity is based upon quoted market prices at
each balance sheet date, which represent Level 1 inputs. Due to their near-term maturities, the carrying amounts of
accounts receivable and accounts payable are considered equivalent to fair value. See Notes 1 and 6.
F-43
Note 17 - Quarterly results of operations (unaudited):
Year ended December 31, 2012
Net sales
Gross margin
Net income (loss)
Basic and diluted income (loss) per share
Year ended December 31, 2013
Net sales
Gross margin
Net income (loss)
Basic and diluted income (loss) per share
$
$
$
$
Quarter ended
March 31
June 30
September 30 December 31
(In millions, except per share data)
561.3 $
261.5
136.9
1.18 $
463.6 $
3.9
(41.1)
(.35) $
545.3 $
163.3
64.5
.56 $
481.1 $
9.6
(33.9)
(.29) $
472.9 $
86.0
35.2
.30 $
419.1 $
47.2
(29.9 )
(.26 ) $
396.8
49.6
(18.1)
(.16)
368.6
51.5
2.9
.03
We recognized the following amounts during 2012:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
a $7.2 million pre-tax interest charge related to the June redemption of our outstanding Senior Secured
Notes in the second quarter (see Note 9),
a $3.9 million pre-tax loss on the sale of TIMET stock in the fourth quarter (see Note 6),
an incremental tax benefit of $11.1 million in the third quarter as we determined that due to global
changes in the business we would not remit certain dividends from non-U.S. jurisdictions. As a result,
certain current year tax attributes were available for carryback to offset prior year tax expense. See
Note 10.
an incremental tax of $8.0 million in the fourth quarter. As a result of a change in circumstances
related to our sale and the sale by certain of our affiliates of their shares of TIMET common stock,
which sale provided an opportunity for us and other members of our consolidated U.S. federal income
tax group to elect to claim foreign tax credits, we determined that we could tax-efficiently remit non-
cash dividends from our non-U.S. jurisdictions before the end of the year that absent the TIMET sale
would not have been considered. Such incremental income tax recognized in the fourth quarter is the
incremental income tax on the non-cash dividends remitted in the fourth quarter. Our provision for
income taxes in the fourth quarter of 2012 also includes a $2.8 million expense related to a net increase
in our reserve for uncertain tax positions. See Note 10. In addition, an aggregate $3.5 million of such
fourth quarter 2012 provision for income taxes is a correction of amounts that should have been
recognized in the third quarter of 2011 and is not material to any current or prior periods.
We recognized the following amounts during 2013:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
a $6.6 million pre-tax charge related to the February voluntary prepayment of an aggregate $290
million principal amount of our term loan in the first quarter (see Note 9),
a $35 million pre-tax litigation settlement charge included in corporate expense in the third quarter (see
Note 15),
a $2.3 million pre-tax charge related to the July voluntary prepayment of the remaining $100 million
principal amount of our term loan in the third quarter (see Note 9),
pre-tax charges aggregating approximately $28 million consisting of unabsorbed fixed production and
other costs as a result of the Canadian plant lockout in the third and fourth quarters of approximately
$19 million, $7 million as a result of the pension curtailment charge discussed in Note 11, and $2
million for severance and other back-to-work expenses associated with reaching terms of the new
Canadian collective bargaining agreement. Approximately $7 million of the costs (primarily related to
unabsorbed fixed production costs) related to the third quarter of 2013 with the remaining costs
recognized in the fourth quarter of 2013, and
F-44
(cid:120)
a tax benefit in the fourth quarter of $3.9 million related to the utilization of certain current year U.S.
losses.
The sum of the quarterly per share amounts may not equal the annual per share amounts due to relative
changes in the weighted average number of shares used in the per share computations.
F-45
Kronos Worldwide, Inc.
Three Lincoln Centre
5430 LBJ Freeway, Suite 1700
Dallas, TX 75240-2697
News Release
FOR IMMEDIATE RELEASE
Contact: Janet Keckeisen
Vice President – Corporate
Strategy and Investor Relations
(972) 233-1700
KRONOS WORLDWIDE ANNOUNCES FOURTH QUARTER 2013 RESULTS
DALLAS, TEXAS…March 12, 2014… Kronos Worldwide, Inc. (NYSE:KRO) today reported net income for
the fourth quarter of 2013 of $2.9 million, or $.03 per share, compared to a net loss of $18.1 million, or
$.16 per share, in the fourth quarter of 2012. For the full year of 2013, Kronos Worldwide reported a net
loss of $102.0 million, or $.88 per share, compared with net income of $218.5 million, or $1.89 per share
in 2012. Comparability of the Company’s results for the fourth quarter periods was impacted by lower
income from operations in 2013 principally due to lower average TiO2 selling prices, partially offset by
lower raw materials costs. Comparability of the full year periods was impacted by lower income from
operations in 2013, principally due to lower average TiO2 selling prices, higher raw materials and other
production costs and a litigation settlement charge in 2013, as discussed further below. Comparability of
the Company’s results for the fourth quarter and full year of 2013 was also impacted by unabsorbed fixed
production and other costs associated with the labor lockout at our Canadian plant, and costs resulting
from the terms of a new collective bargaining agreement reached with our unionized Canadian workforce
and other back-to-work expenses, as discussed further below.
Net sales of $368.6 million in the fourth quarter of 2013 were $28.2 million, or 7%, lower than in the fourth
quarter of 2012. Net sales of $1,732.4 million in the full year of 2013 were $243.9 million, or 12%, lower
than in the full year 2012. Net sales decreased in the fourth quarter of 2013 as compared to the fourth
quarter of 2012 primarily due to lower average TiO2 selling prices. Net sales decreased in the full year of
2013 primarily due to lower average TiO2 selling prices, partially offset by higher sales volumes. The
Company’s average TiO2 selling prices decreased 10% in the fourth quarter of 2013 as compared to the
fourth quarter of 2012, and decreased 19% for the full year as compared to 2012. The Company’s
average TiO2 selling prices at the end of 2013 were 7% lower than at the end of 2012 and were 1%
higher in the fourth quarter of 2013 as compared to the third quarter of 2013. TiO2 sales volumes in the
fourth quarter of 2013 were 1% lower than in the fourth quarter of 2012, while sales volumes for the full
year 2013 were 6% higher than in 2012. TiO2 sales volumes in the fourth quarter of 2013 were impacted
by the continued lockout of unionized employees at the Company’s Canadian TiO2 facility, and the
resulting curtailment of production at such facility during the lockout. A new collective bargaining
agreement with the Canadian workforce was reached effective the end of November 2013, and
production at the facility resumed in February 2014. Fluctuations in currency exchange rates also
impacted net sales comparisons, increasing net sales by approximately $8 million in the fourth quarter
and approximately $18 million in the full year 2013 as compared to the comparable periods in 2012. The
table at the end of this press release shows how each of these items impacted the overall change in
sales.
The Company’s TiO2 segment profit (see description of non-GAAP information below) in the fourth
quarter of 2013 was $1.8 million compared to $4.7 million in the fourth quarter of 2012. For the full year
the Company’s segment loss was $83.6 million compared to segment profit of $373.8 million in 2012.
Segment profit decreased in the fourth quarter of 2013 compared to the same period of 2012 primarily
due to the net effects of lower raw materials and other production costs, lower average TiO2 selling prices
and one-time costs of approximately $9 million resulting from the terms of the new collective bargaining
agreement reached with the Company’s Canadian workforce mentioned above. Such one-time Canadian
costs consist principally of a non-cash pension charge of approximately $7 million due to the curtailment
of one of the Company’s Canadian defined benefit pension plans, and severance and other back-to-work
Page 1 of 6
expenses. Segment profit decreased in the full year of 2013 primarily due to the net effects of lower
average TiO2 selling prices, higher raw materials and other production costs, higher sales volumes and
the one-time Canadian costs mentioned above. As expected, the cost of sales per metric ton of TiO2
sold in the second half of 2013 was lower than the cost of sales per metric ton of TiO2 sold in the second
half of 2012, primarily due to lower feedstock ore costs. Our cost of sales per metric ton of TiO2 sold in
the first half of 2013 was significantly higher than TiO2 sold in the first half of 2012, as a substantial
portion of the TiO2 products we sold in the first quarter of 2013 (and a portion of the TiO2 products we
sold in the second quarter of 2013) was produced with significantly higher-cost feedstock ore purchased
in 2012.
Kronos’ TiO2 production volumes were 2% higher in the fourth quarter of 2013 as compared to the fourth
quarter of 2012, and were 1% higher for the year. Kronos’ production utilization rates were impacted by
the lockout at our Canadian production facility that began in June 2013, as we operated our Canadian
plant at approximately 15% of the plant’s capacity with non-union management employees during the
lockout. Segment profit was negatively impacted in 2013 by approximately $19 million of unabsorbed
fixed production and other manufacturing costs associated with the lockout at the Canadian TiO2
production facility, of which approximately $12 million related to the fourth quarter. Segment profit was
negatively impacted in 2012 by approximately $25 million of unabsorbed fixed production costs resulting
from reduced production volumes in 2012, most of which was incurred in the third quarter. Segment profit
comparisons were also impacted by the effects of fluctuations in currency exchange rates, which
increased segment profit by approximately $5 million in the fourth quarter and decreased segment profit
by approximately $2 million for the year.
Corporate expense in 2013 includes a third quarter pre-tax litigation settlement charge of $35 million ($22.5
million, or $.19 per share, net of income tax benefit).
We recognized a $3.9 million securities transaction loss in the fourth quarter of 2012 on the sale,
pursuant to a cash tender offer by a third party, of all of our shares of Titanium Metals Corporation
(TIMET) common stock for $70.0 million.
As previously reported, in June 2012, we entered into a $400 million term loan and used a portion of the
net proceeds to redeem the remaining €279.2 million principal amount outstanding of our 6.5% Senior
Secured Notes due April 2013. As a result, we recognized a second quarter 2012 charge of $7.2 million
($4.7 million, or $.04 per share, net of income tax benefit) associated with the early extinguishment of
In February 2013, we voluntarily prepaid an aggregate $290 million
such remaining Senior Notes.
principal amount under our $400 million term loan, using $100 million of available cash as well as
borrowings of $190 million under a new loan from Contran Corporation, our parent. 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 as well as borrowings of $50 million under our revolving North American
credit facility. As a result of such prepayments, the Company’s results in 2013 include an aggregate
charge of $8.9 million ($5.8 million, or $.05 per share, net of income tax benefit), consisting of the write-off
of unamortized original issue discount and deferred financing costs associated with such prepayments.
Our income tax provision in 2012 includes a net incremental tax benefit of $3.1 million. We determined
during the third quarter of 2012 that due to global changes in the business the Company would not remit
any dividends from our non-U.S. jurisdictions. As a result, certain tax attributes were available for
carryback to offset prior year tax expense and our provision for income taxes in the third quarter of 2012
included an incremental tax benefit of $11.1 million. However, as a result of a change in circumstances
related to our sale and the sale by certain of our affiliates of their shares of TIMET common stock, which
sale provided an opportunity for us and other members of our consolidated U.S. federal income tax group
to elect to claim foreign tax credits, we determined that we could tax-efficiently remit non-cash dividends
from our non-U.S. jurisdictions before the end of the year that absent the TIMET sale would not have
been considered. As a result, our provision for income taxes in the fourth quarter of 2012 includes
incremental taxes on the non-cash dividends remitted in the fourth quarter of $8.0 million. Our income tax
benefit in the fourth quarter of 2013 includes a tax benefit of $3.9 million related to the utilization of certain
current year U.S. losses.
Page 2 of 6
In February 2014, we entered into a new $350 million term loan. We used $170 million of the net
proceeds of this new term loan to prepay our note payable to Contran (along with accrued and unpaid
interest through the prepayment date), and the note payable to Contran was cancelled. The remaining
$172.8 million net proceeds are available for our general corporate purposes.
The statements in this release relating to matters that are not historical facts are forward-looking
statements that represent management's beliefs and assumptions based on currently available
information. Although the Company believes that the expectations reflected in such forward-looking
statements are reasonable, it cannot give any assurances that these expectations will prove to be correct.
Such statements by their nature involve substantial risks and uncertainties that could significantly impact
expected results, and actual future results could differ materially from those described in such forward-
looking statements. While it is not possible to identify all factors, the Company continues to face many
risks and uncertainties. The factors that could cause actual future results to differ materially include, but
are not limited to, the following:
Future supply and demand for our products;
The extent of the dependence of certain of our businesses on certain market sectors;
The cyclicality of our business;
(cid:120)
(cid:120)
(cid:120)
(cid:120) Customer inventory levels;
(cid:120) Unexpected or earlier-than-expected industry capacity expansion;
(cid:120) Changes in raw material and other operating costs (such as energy and ore costs);
(cid:120) Changes in the availability of raw materials (such as ore);
(cid:120) 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);
Potential consolidation of our competitors;
The impact of pricing and production decisions;
(cid:120) Competitive products and substitute products;
(cid:120) Customer and competitor strategies;
(cid:120)
(cid:120)
(cid:120) Competitive technology positions;
The introduction of trade barriers;
(cid:120)
Possible disruption of our business, or increases in our cost of doing business, resulting from
(cid:120)
terrorist activities or global conflicts;
Fluctuations in currency exchange rates (such as changes in the exchange rate between the U.S.
dollar and each of the euro, the Norwegian krone and the Canadian dollar), or possible
disruptions to our business resulting from potential instability resulting from uncertainties
associated with the euro;
(cid:120)
(cid:120) Operating interruptions (including, but not limited to, labor disputes, leaks, natural disasters, fires,
explosions, unscheduled or unplanned downtime, transportation interruptions and cyber attacks);
(cid:120) Our ability to renew or refinance credit facilities;
(cid:120) Our ability to maintain sufficient liquidity;
(cid:120)
(cid:120) Our ability to utilize income tax attributes, the benefits of which have been recognized under the
The ultimate outcome of income tax audits, tax settlement initiatives or other tax matters;
(cid:120)
more-likely-than-not recognition criteria;
Environmental matters (such as those requiring compliance with emission and discharge
standards for existing and new facilities);
(cid:120) Government laws and regulations and possible changes therein;
(cid:120)
(cid:120)
The ultimate resolution of pending litigation; and
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. The Company disclaims any intention or obligation to update or revise any
forward-looking statement whether as a result of changes in information, future events or otherwise.
In an effort to provide investors with additional information regarding the Company's results of operations
as determined by accounting principles generally accepted in the United States of America (GAAP), the
Page 3 of 6
Company has disclosed certain non-GAAP information, which the Company believes provides useful
information to investors:
(cid:120)
The Company discloses segment profit, which is used by the Company’s management to assess
the performance of the Company’s TiO2 operations. The Company believes disclosure of
segment profit provides useful information to investors because it allows investors to analyze the
performance of the Company’s TiO2 operations in the same way that the Company’s
management assesses performance. The Company defines segment profit as income before
income taxes, interest expense and certain general corporate items. Corporate items excluded
from the determination of segment profit include corporate expense and interest income not
attributable to the Company’s TiO2 operations.
Kronos Worldwide, Inc. is a major international producer of titanium dioxide products.
Page 4 of 6
KRONOS WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share and metric ton data)
Net sales
Cost of sales
Gross margin
Selling, general and administrative expense
Other operating income (expense):
Currency transactions, net
Other expense, net
Corporate expense
Income (loss) from operations
Other income (expense):
Trade interest income
Other interest and dividend income
Securities transaction losses, net
Loss on prepayment of debt
Interest expense
Income (loss) before income taxes
Income tax expense (benefit)
Three months ended
December 31,
2012
2013
(Unaudited)
Year ended
December 31,
2012
2013
$
396.8
347.2
$
368.6
317.1
$
1,976.3
1,415.9
$
1,732.4
1,620.2
49.6
44.2
(.5)
(.3)
(3.5)
1.1
.1
2.3
(3.9)
-
(6.7)
(7.1)
11.0
51.5
47.0
(2.4)
(.4)
(2.6)
(.9)
.1
.2
-
-
(3.0)
(3.6)
(6.5)
560.4
183.4
(1.0)
(2.5)
(13.9)
112.2
190.4
(3.8)
(1.9)
(48.7)
359.6
(132.6)
.3
8.7
(3.9)
(7.2)
(26.7)
330.8
112.3
.3
.9
-
(8.9)
(19.6)
(159.9)
(57.9)
Net income (loss)
$
(18.1)
$
2.9
$
218.5
$
(102.0)
Net income (loss) per basic and diluted share
$
(.16)
$
.03
$
1.89
$
(.88)
Weighted-average shares used in the
calculation of net income (loss) per share
115.9
115.9
115.9
115.9
TiO2 data - metric tons in thousands:
Sales volumes
Production volumes
102
113
101
115
470
469
498
474
Page 5 of 6
KRONOS WORLDWIDE, INC.
RECONCILIATION OF SEGMENT PROFIT TO
INCOME FROM OPERATIONS
(In millions)
(Unaudited)
Segment profit (loss)
Adjustments:
Trade interest income
Corporate expense
Three months ended
December 31,
2012
2013
Year ended
December 31,
2012
2013
$
4.7
$
1.8
$
373.8
$
(83.6)
(.1)
(3.5)
(.1)
(2.6)
(.3)
(13.9)
(.3)
(48.7)
Income (loss) from operations
$
1.1
$
(.9)
$
359.6
$
(132.6)
IMPACT OF PERCENTAGE CHANGE IN SALES
(Unaudited)
Three months ended
December 31,
2013 vs. 2012
Year ended
December 31,
2013 vs. 2012
Percentage change in sales:
TiO2 product pricing
TiO2 sales volume
TiO2 product mix
Changes in currency exchange rates
Total
(10) %
(1) %
2 %
2 %
(7) %
(19) %
6 %
- %
1 %
(12) %
Page 6 of 6
SUBSIDIARIES OF THE REGISTRANT
EXHIBIT 21.1
NAME OF CORPORATION
Kronos Canada, Inc.
Kronos International, Inc.
Kronos Titan GmbH
Kronos Recovery GmbH
Société(cid:3)Industrielle du Titane, S.A.
Kronos Limited
Kronos Denmark ApS
Kronos Europe S.A./N.V.
Kronos B.V.
Kronos Norge A/S
Kronos Titan A/S
Titania A/S
The Jossingfjord Manufacturing Company A/S
Elkania DA
Kronos Louisiana, Inc.
Kronos (US), Inc.
Louisiana Pigment Company, L.P.
(a) Held by the Registrant or the indicated subsidiary of the Registrant
Jurisdiction of
incorporation
or organization
Canada
Delaware
Germany
Germany
France
United Kingdom
Denmark
Belgium
Netherlands
Norway
Norway
Norway
Norway
Norway
Delaware
Delaware
Delaware
% of voting
securities held at
December 31, 2013(a)
100
100
100
100
99
100
100
100
100
100
100
100
100
50
100
100
50
Kronos Worldwide, Inc.
Three Lincoln Centre
5430 LBJ Freeway, Suite 1700
Dallas, TX 75240-2697
(972) 233-1700
(972) 448-1445 (Fax)