| KRONOS WORLDWIDE INC ITEM 1A RISK FACTORS Listed below are certain risk factors associated with the Company and its businesses |
| 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 cyclical and we may experience prolonged depressed market conditions for our products, which may result in reduced earnings or operating losses |
| Approximately 90prca of our revenues is attributable to sales of TiO2 |
| Pricing within the global TiO2 industry over the long term is cyclical, and changes in industry 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 tight supply, causing prices and profit margins to increase, followed by periods of capacity additions, and demand reductions resulting in oversupply and declining prices and profit margins |
| Selling prices (in billing currencies) for TiO2 were generally: increasing during the first quarter of 2003, flat during the second quarter of 2003, decreasing during the last half of 2003 and the first quarter of 2004, flat during the second quarter of 2004, increasing in the last half of 2004 and the first six months of 2005 and decreasing during the second half of 2005 |
| Our overall average TiO2 selling prices in billing currencies: o were 3prca higher in 2003 as compared to 2002; o were 2prca lower in 2004 as compared to 2003; and o were 8prca higher in 2005 as compared to 2004 |
| Future growth in demand for TiO2 may not be sufficient to alleviate any future conditions of excess industry capacity, and such conditions may not be sustained or may be further aggravated by anticipated or unanticipated capacity additions or other events |
| The demand for TiO2 during a given year is also subject to annual seasonal fluctuations |
| TiO2 sales are generally higher in the first half of the year than in the second half of the year due in part to the increase in paint production in the spring to meet the spring and summer painting season demand |
| As a global business, we are exposed to local business risks in different countries, which could result in operating losses |
| We conduct a substantial portion of our businesses in several jurisdictions outside of the United States and are subject to risks normally associated with international operations, which include trade barriers, tariffs, exchange controls, national and regional labor strikes, social and political risks, general economic risks, seizures, nationalizations, compliance with a variety of foreign laws, including tax laws, and the difficulty in enforcing agreements and collecting receivables through foreign legal systems |
| For example, we have substantial net operating loss carryforwards in Germany, and any change in German tax law that adversely impacts our ability to fully utilize such carryforwards could adversely affect us |
| We may incur losses from fluctuations in currency exchange rates |
| We operate our businesses in several different countries, and sell our products worldwide |
| Therefore, we are exposed to risks related to the prices that we receive for our products and the need to convert currencies that we may receive for some of our products into the currencies required to pay some of our debt, or into currencies in which we may purchase certain raw materials or pay for certain services, all of which could result in future losses depending on fluctuations in foreign currency exchange rates |
| We sell several of our products in mature and highly competitive industries and face price pressures in the markets in which we operate, which may result in reduced earnings or operating losses |
| The global markets in which we operate our business are highly competitive |
| Competition is based on a number of factors, such as price, product quality and service |
| Some of our competitors may be able to drive down prices for our products because their costs are lower than our costs |
| In addition, some of our competitors &apos 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 |
| In addition, new competitors could emerge by modifying their existing production facilities so they could manufacture products that compete with our products |
| The occurrence of any of these events could result in reduced earnings or operating losses |
| Higher costs or limited availability of our raw materials may decrease our liquidity |
| The number of sources for, and availability of, certain raw materials is specific to the particular geographical region in which a facility is located |
| For example, titanium-containing feedstocks suitable for use in our TiO2 facilities are available from a limited number of suppliers around the world |
| Political and economic instability in the countries from which we purchase our raw material supplies could adversely affect their availability |
| Should our vendors not be able to meet their contractual obligations or should we be otherwise unable to obtain necessary raw materials, we may incur higher costs for raw materials or may be required to reduce production levels, either of which may decrease our liquidity as we may be unable to offset such higher costs with increased selling prices for our products |
| We are subject to many environmental and safety regulations with respect to our operating facilities that may result in unanticipated costs or liabilities |
| Our facilities are subject to extensive laws, regulations, rules and ordinances relating to the protection of the environment, including those governing the discharge of pollutants in the air and water and the generation, management and disposal of hazardous substances and wastes or other materials |
| We may incur substantial costs, including fines, damages and criminal penalties or civil sanctions, or experience interruptions in our operations for actual or alleged violations or compliance requirements arising under environmental laws |
| Our operations could result in violations under environmental laws, including spills or other releases of hazardous substances to the environment |
| Some of our operating facilities are in densely populated urban areas or in industrial areas adjacent to other operating facilities |
| In the event of an accidental release or catastrophic incident, we could incur material costs as a result of addressing such an event and in implementing measures to prevent such incidents |
| Given the nature of our business, violations of environmental laws may result in restrictions imposed on our operating activities or substantial fines, penalties, damages or other costs, including as a result of private litigation |
| Our production facilities have been used for a number of years to manufacture products or conduct mining operations |
| We may incur additional costs related to compliance with environmental laws applicable to our historic operations and these facilities |
| In addition, we may incur significant expenditures to comply with existing or future environmental laws |
| Costs relating to environmental matters will be subject to evolving regulatory requirements and will depend on the timing of promulgation and enforcement of specific standards that impose requirements on our operations |
| Costs beyond those currently anticipated may be required under existing and future environmental laws |
| If our patents are declared invalid or our trade secrets become known to competitors, our ability to compete may be adversely affected |
| Protection of our proprietary processes and other technology is important to our competitive position |
| Consequently, we rely on judicial enforcement for protection of our patents, and our patents may be challenged, invalidated, circumvented or rendered unenforceable |
| Furthermore, if any pending patent application filed by us does not result in an issued patent, or if patents are issued to us but such patents do not provide meaningful protection of our intellectual property, then the use of any such intellectual property by our competitors could result in decreasing our cash flows |
| Additionally, our competitors or other third parties may obtain patents that restrict or preclude our ability to lawfully produce or sell our products in a competitive manner, which could have the same effects |
| We also rely on certain unpatented proprietary know-how and continuing technological innovation and other trade secrets to develop and maintain our competitive position |
| Although it is our practice to enter into confidentiality agreements to protect our intellectual property, because these confidentiality agreements may be breached, such agreements may not provide sufficient protection for our trade secrets or proprietary know-how, or adequate remedies may not be available in the event of an unauthorized use or disclosure of such trade secrets and know-how |
| In addition, others could obtain knowledge of such trade secrets through independent development or other access by legal means |
| Loss of key personnel or our ability to attract and retain new qualified personnel could hurt our businesses and inhibit our ability to operate and grow successfully |
| Our success in the highly competitive markets in which we operate will continue to depend to a significant extent on the leadership teams of our businesses and other key management personnel |
| We generally do not have binding employment agreements with any of these managers |
| This increases the risks that we may not be able to retain our current management personnel and we may not be able to recruit qualified individuals to join our management team, including recruiting qualified individuals to replace any of our current personnel that may leave in the future |
| Our relationships with our union employees could deteriorate |
| At December 31, 2005, we employed approximately 2cmam415 persons worldwide in our various businesses |
| A significant number of our employees are subject to collective bargaining or similar arrangements |
| We may not be able to negotiate labor agreements with respect to these employees on satisfactory terms or at all |
| If our employees were to engage in a strike, work stoppage or other slowdown, we could experience a significant disruption of our operations or higher ongoing labor costs |
| Our leverage may impair our financial condition or limit our ability to operate our businesses |
| We currently have a significant amount of debt |
| As of December 31, 2005, our total consolidated debt was approximately dlra465 million, substantially all of which relates to KIIapstas Senior Secured Notes |
| Our level of debt could have important consequences to our stockholders and creditors, including: o making it more difficult for us to satisfy our obligations with respect to our liabilities; o increasing our vulnerability to adverse general economic and industry conditions; o requiring that a portion of our cash flow from operations be used for the payment of interest on our debt, therefore reducing our ability to use our cash flow to fund working capital, capital expenditures, dividends on our common stock acquisitions and general corporate requirements; o limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions and general corporate requirements; o limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and o placing us at a competitive disadvantage relative to other less leveraged competitors |
| In addition to our indebtedness, we are party to various lease and other agreements pursuant to which, along with our indebtedness, we are committed to pay approximately dlra272dtta1 million in 2006 |
| 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 |
| In addition, our ability to borrow funds under our subsidiaries &apos credit facilities in the future will in some instances depend in part on these subsidiaries &apos 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 |
| 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 |