UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
For the transition period from to
Commission file number 1-31763
KRONOS WORLDWIDE, INC.
(Exact name of registrant as specified in its charter)
Delaware
76-0294959
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
5430 LBJ Freeway, Suite 1700
Dallas, Texas 75240-2620
(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
Trading Symbol(s)
Name of each exchange on which registered
Common stock
KRO
NYSE
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☒
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
Number of shares of the registrant’s common stock, $.01 par value per share, outstanding on July 30, 2021: 115,549,917.
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
INDEX
Pagenumber
Part I.
FINANCIAL INFORMATION
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets - December 31, 2020; June 30, 2021 (unaudited)
3
Condensed Consolidated Statements of Income (unaudited) - Three and six months ended June 30, 2020 and 2021
5
Condensed Consolidated Statements of Comprehensive Income (unaudited) - Three and six months ended June 30, 2020 and 2021
6
Condensed Consolidated Statements of Stockholders’ Equity (unaudited) - Three and six months ended June 30, 2020 and 2021
7
Condensed Consolidated Statements of Cash Flows (unaudited) - Six months ended June 30, 2020 and 2021
8
Notes to Condensed Consolidated Financial Statements (unaudited)
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
Item 3.
Quantitative and Qualitative Disclosure About Market Risk
25
Item 4.
Controls and Procedures
26
Part II.
OTHER INFORMATION
Legal Proceedings
27
Item 1A.
Risk Factors
Item 6.
Exhibits
Items 2, 3, 4 and 5 of Part II are omitted because there is no information to report.
- 2 -
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
December 31,
June 30,
2020
2021
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
355.3
363.8
Restricted cash
2.0
1.8
Accounts and other receivables, net
323.0
347.8
Inventories, net
519.0
429.4
Prepaid expenses and other
19.0
16.3
Total current assets
1,218.3
1,159.1
Other assets:
Investment in TiO2 manufacturing joint venture
103.3
103.5
4.7
4.6
Marketable securities
2.2
3.5
Operating lease right-of-use assets
26.1
23.3
Deferred income taxes
151.0
142.4
Other
6.5
11.0
Total other assets
293.8
288.3
Property and equipment:
Land
44.1
43.2
Buildings
233.9
231.4
Equipment
1,173.7
1,159.3
Mining properties
127.8
128.1
Construction in progress
56.1
64.3
1,635.6
1,626.3
Less accumulated depreciation and amortization
1,111.0
1,116.8
Net property and equipment
524.6
509.5
Total assets
2,036.7
1,956.9
- 3 -
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
.7
Accounts payable and accrued liabilities
243.8
194.3
Income taxes
15.7
6.8
Total current liabilities
260.2
201.8
Noncurrent liabilities:
Long-term debt
486.7
472.5
Accrued pension costs
372.6
359.0
Payable to affiliate - income taxes
50.6
44.7
Operating lease liabilities
18.8
17.1
24.6
23.8
26.7
26.8
Total noncurrent liabilities
980.0
943.9
Stockholders' equity:
1.2
Additional paid-in capital
1,395.3
1,395.4
Retained deficit
(151.8
)
(148.1
Accumulated other comprehensive loss
(448.2
(437.3
Total stockholders' equity
796.5
811.2
Total liabilities and stockholders' equity
Commitments and contingencies (Notes 10 and 12)
See accompanying notes to Condensed Consolidated Financial Statements.
- 4 -
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
Three months ended
Six months ended
Net sales
386.0
478.6
807.0
943.6
Cost of sales
290.2
369.6
623.1
738.9
Gross margin
95.8
109.0
183.9
204.7
Selling, general and administrative expense
52.7
62.9
106.2
120.9
Other operating income (expense):
Currency transactions, net
(6.1
.5
6.1
-
Other operating expense, net
(4.0
(2.8
(7.3
(6.0
Income from operations
33.0
43.8
76.5
77.8
Other income (expense):
Interest and dividend income
.2
.1
1.4
Insurance settlement gain
1.5
Marketable equity securities
(.2
(1.7
1.3
Other components of net periodic pension and OPEB cost
(4.7
(4.3
(9.4
(8.6
Interest expense
(4.6
(5.2
(9.2
(10.2
Income before income taxes
23.7
34.9
59.1
60.5
Income tax expense
5.1
9.2
13.5
15.2
Net income
18.6
25.7
45.6
45.3
Net income per basic and diluted share
.16
.22
.39
Weighted average shares used in the calculation
of net income per share
115.5
115.6
- 5 -
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Other comprehensive income (loss), net of tax:
Currency translation
18.0
(23.9
4.0
Defined benefit pension plans
3.1
7.0
Other postretirement benefit plans
(.1
Total other comprehensive income (loss), net
21.1
5.3
(17.9
10.9
Comprehensive income
39.7
31.0
27.7
56.2
- 6 -
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Three months ended June 30, 2020 and 2021 (unaudited)
Accumulated
Additional
other
Common
paid-in
Retained
comprehensive
Treasury
stock
capital
deficit
loss
Total
Balance at March 31, 2020
1,396.2
(126.3
(487.8
(1.0
782.3
Other comprehensive income, net of tax
Issuance of common stock
Dividends paid - $.18 per share
(20.8
Treasury stock retired
1.0
Balance at June 30, 2020
(128.5
(466.7
801.3
Balance at March 31, 2021
(153.0
(442.6
800.9
Balance at June 30, 2021
Six months ended June 30, 2020 and 2021 (unaudited)
Balance at December 31, 2019
(132.5
(448.8
816.1
Other comprehensive loss, net of tax
Dividends paid - $.36 per share
(41.6
Treasury stock acquired
Balance at December 31, 2020
- 7 -
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Depreciation
29.5
25.5
Amortization of operating lease right-of-use assets
3.3
(8.5
1.1
Benefit plan expense greater than cash funding
7.6
1.7
(1.3
Contributions to TiO2 manufacturing joint venture, net
(6.3
Other, net
.4
Change in assets and liabilities:
(11.7
(30.7
(3.8
84.4
Prepaid expenses
5.6
2.6
(53.4
(40.5
21.3
Accounts with affiliates
(13.5
.3
Net cash provided by operating activities
18.1
78.1
Cash flows from investing activities:
Capital expenditures
(25.4
(21.2
Proceeds from insurance settlement
Net cash used in investing activities
Cash flows from financing activities:
Payments on long-term debt
(.4
Deferred financing fees
(1.8
Dividends paid
Net cash used in financing activities
(42.7
(43.8
Cash, cash equivalents and restricted cash - net change from:
Operating, investing and financing activities
(48.5
13.1
(4.9
Balance at beginning of period
392.3
362.0
Balance at end of period
343.4
370.2
Supplemental disclosures:
Cash paid for:
Interest, net of amount capitalized
8.8
31.3
Accrual for capital expenditures
- 8 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
Note 1 - Organization and basis of presentation:
Organization - At June 30, 2021, Valhi, Inc. (NYSE: VHI) held approximately 50% of our outstanding common stock and a wholly-owned subsidiary of NL Industries, Inc. (NYSE: NL) held approximately 30% of our common stock. Valhi owned approximately 83% of NL’s outstanding common stock and a wholly-owned subsidiary of Contran Corporation held approximately 92% of Valhi’s outstanding common stock. A majority of Contran's outstanding voting stock is held directly by Lisa K. Simmons and various family trusts established for the benefit of Ms. Simmons, Thomas C. Connelly (the husband of Ms. Simmons’ late sister) and their children and for which Ms. Simmons or Mr. Connelly, as applicable, serve as trustee (collectively, the “Other Trusts”). With respect to the Other Trusts for which Mr. Connelly serves as trustee, he is required to vote the shares of Contran voting stock held in such trusts in the same manner as Ms. Simmons. Such voting rights of Ms. Simmons last through April 22, 2030 and are personal to Ms. Simmons. The remainder of Contran’s outstanding voting stock is held by another trust (the “Family Trust”), which was established for the benefit of Ms. Simmons and her late sister and their children and for which a third-party financial institution serves as trustee. Consequently, at June 30, 2021 Ms. Simmons and the Family Trust may be deemed to control Contran, and therefore may be deemed to indirectly control the wholly-owned subsidiary of Contran, Valhi, NL and us.
Basis of presentation - The unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report have been prepared on the same basis as the audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2020 that we filed with the Securities and Exchange Commission (SEC) on March 10, 2021 (2020 Annual Report). In our opinion, we have made all necessary adjustments (which include only normal recurring adjustments), in order to state fairly, in all material respects, our consolidated financial position, results of operations and cash flows as of the dates and for the periods presented. We have condensed the Consolidated Balance Sheet at December 31, 2020 contained in this Quarterly Report as compared to our audited Consolidated Financial Statements at that date, and we have omitted certain information and footnote disclosures (including those related to the Consolidated Balance Sheet at December 31, 2020) normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). Our results of operations for the interim periods ended June 30, 2021 may not be indicative of our operating results for the full year. The Condensed Consolidated Financial Statements contained in this Quarterly Report should be read in conjunction with our 2020 Consolidated Financial Statements contained in our 2020 Annual Report.
Unless otherwise indicated, references in this report to “we,” “us” or “our” refer to Kronos Worldwide, Inc. and its subsidiaries (NYSE: KRO) taken as a whole.
Note 2 - Accounts and other receivables, net:
Trade receivables
294.8
321.6
Recoverable VAT and other receivables
20.5
Receivables from affiliates
2.4
Refundable income taxes
Allowance for doubtful accounts
(1.9
(2.0
- 9 -
Note 3 - Inventories, net:
Raw materials
133.2
93.4
Work in process
36.8
37.7
Finished products
269.2
217.9
Supplies
79.8
80.4
Note 4 - Marketable securities:
Our marketable securities consist of investments in the publicly-traded shares of related parties: Valhi, NL and CompX International Inc. NL owns 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. Any unrealized gains or losses on the securities are recognized in Other income (expense) - Marketable equity securities on our Condensed Consolidated Statements of Income.
Fair value
measurement
Market
Cost
Unrealized
Marketable security
level
value
basis
gain (loss)
December 31, 2020:
Valhi common stock
1
2.1
3.2
(1.1
NL and CompX common stocks
June 30, 2021:
3.4
At December 31, 2020 and June 30, 2021, we held approximately 144,000 shares of Valhi’s common stock. We also held a nominal number of shares of NL and CompX common stocks. At December 31, 2020 and June 30, 2021, the per share quoted market price of Valhi’s common stock was $15.20 and $24.33, respectively.
The Valhi, CompX and NL common stocks we own are subject to restrictions on resale pursuant to certain provisions of SEC Rule 144. In addition, as a majority-owned subsidiary of Valhi we cannot vote our shares of Valhi common stock under Delaware General Corporation law, but we receive dividends from Valhi on these shares when declared and paid.
Note 5 - Long-term debt:
Kronos International, Inc. 3.75% Senior Notes
485.7
471.8
Total debt
487.4
473.2
Less current maturities
Total long-term debt
Senior Notes - At June 30, 2021, the carrying value of our 3.75% Senior Secured Notes due September 15, 2025 (€400 million aggregate principal amount outstanding) is stated net of unamortized debt issuance costs of $4.1 million.
Revolving credit facilities - On April 20, 2021, we entered into a new global $225 million revolving credit facility (Global Revolver) which matures in April 2026. The Global Revolver replaces our previously existing North American and European revolving credit facilities and there were no borrowings on either facility in 2021 through their termination concurrent with entering into the Global Revolver. Since inception, we had no borrowings or repayments under the Global Revolver and at June 30, 2021, the
- 10 -
full $225 million was available for borrowing. Borrowings under the Global Revolver are available for our general corporate purposes. Available borrowings are based on formula-determined amounts of eligible trade receivables and inventories, as defined in the agreement, less any outstanding letters of credit issued under the Global Revolver. Borrowings by our Canadian, Belgian and German subsidiaries are limited to $25 million, €30 million and €60 million, respectively. Any amounts outstanding under the Global Revolver bear interest, at our option, at the applicable non-base rate (LIBOR, CDOR or EURIBOR, dependent on the currency of the borrowing) 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 2.0%. The Global Revolver 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 customary in lending transactions of this type which, among other things, restrict the borrowers’ ability to incur additional debt, incur liens, pay additional dividends or merge or consolidate with, or sell or transfer all or substantially all of their assets to another entity and, under certain conditions, requires the maintenance of a fixed charge coverage ratio, as defined in the agreement, of at least 1.0 to 1.0.
Other - We are in compliance with all of our debt covenants at June 30, 2021.
Note 6 - Accounts payable and accrued liabilities:
Accounts payable
111.0
87.5
Employee benefits
27.8
24.3
Accrued sales discounts and rebates
29.1
18.3
Payables to affiliates:
Louisiana Pigment Company, L.P.
19.3
16.8
Income taxes payable to Valhi
8.6
5.5
6.7
41.3
36.3
Note 7 - Other noncurrent liabilities:
Accrued postretirement benefits
8.7
9.0
6.2
5.7
11.8
12.1
- 11 -
Note 8 - Revenue recognition:
The following table disaggregates our net sales by place of manufacture (point of origin) and to the location of the customer (point of destination), which are the categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
Net sales - point of origin:
United States
226.6
236.0
463.6
489.9
Germany
183.1
238.8
412.2
470.0
Canada
85.6
103.0
153.3
200.2
Belgium
50.9
75.9
117.0
Norway
62.6
64.1
116.9
135.1
Eliminations
(222.8
(239.2
(456.0
(494.0
Net sales - point of destination:
Europe
169.8
236.8
384.3
464.1
North America
148.9
157.3
281.2
302.6
67.3
84.5
141.5
176.9
Note 9 - Employee benefit plans:
The components of net periodic defined benefit pension cost are presented in the table below.
Service cost
3.6
6.4
7.4
Interest cost
5.2
4.4
Expected return on plan assets
(2.3
(3.0
Amortization of prior service cost
Recognized actuarial losses
4.3
10.2
7.9
8.0
15.8
16.1
- 12 -
We expect our 2021 contributions for our pension plans to be approximately $17 million.
Note 10 - Income taxes:
Expected tax expense, at U.S. federal statutory
income tax rate of 21%
5.0
7.3
12.4
12.7
Non-U.S. tax rates
(.3
.6
Incremental net tax benefit on earnings and losses
of U.S. and non-U.S. companies
(3.3
(.8
(1.5
Global intangible low-tax income, net
3.0
4.2
Valuation allowance, net
Adjustment to the reserve for uncertain tax positions, net
Nondeductible expenses
(.5
(.6
Comprehensive provision for income taxes allocable to:
Other comprehensive income (loss):
Pension plans
1.6
2.8
OPEB plans
10.8
16.2
18.4
The amount shown in the preceding table of our income tax rate reconciliation for non-U.S. tax rates represents the result determined by multiplying the pre-tax earnings or losses of each of our non-U.S. subsidiaries by the difference between the applicable statutory income tax rate for each non-U.S. jurisdiction and the U.S. federal statutory tax rate. The amount shown on such table for incremental net tax expense (benefit) on earnings and losses of U.S. and non-U.S. companies includes, as applicable, (i) deferred income taxes (or deferred income tax benefits) associated with the current-year earnings of all of our non-U.S. subsidiaries and (ii) current U.S. income taxes (or current income tax benefit) including U.S. personal holding company tax, as applicable, attributable to current-year income (losses) of one of our non-U.S. subsidiaries, which subsidiary is treated as a dual resident for U.S. income tax purposes, to the extent the current-year income (losses) of such subsidiaries is subject to U.S. income tax under the U.S. dual-resident provisions of the Internal Revenue Code.
On March 27, 2020, the “Coronavirus Aid, Relief and Economic Security (CARES) Act” was signed into law in response to the COVID-19 pandemic. The CARES Act, among other things, includes modifications to the limitation of business interest for tax years beginning in 2019 and 2020 increasing the business interest limitation from 30% of adjusted taxable income to 50% of adjusted taxable income which increased our allowable interest expense deduction for 2019 and 2020. Consequently, in the first quarter of 2020 we recognized a cash tax benefit of $.5 million related to the reversal of the valuation allowance recognized in 2019 for the portion of the disallowed interest expense we did not expect to fully utilize at December 31, 2019.
Tax authorities are examining certain of our U.S. and non-U.S. tax returns and may propose tax deficiencies, including penalties and interest. We believe we have adequate accruals for additional taxes and related interest expense which could ultimately result from tax examinations. We believe the ultimate disposition of tax examinations should not have a material adverse effect on our consolidated financial position, results of operations or liquidity. We currently estimate that our unrecognized tax benefits will decrease by approximately $1.1 million during the next twelve months primarily due to the expiration of certain statutes of limitations.
- 13 -
Note 11 – Accumulated other comprehensive loss:
Changes in accumulated other comprehensive loss are presented in the table below. See Note 4 for further discussion of our marketable securities and Note 9 for discussion of our defined benefit pension plans.
Accumulated other comprehensive loss, net of tax:
Currency translation:
(288.7
(231.2
(246.8
(233.4
Other comprehensive income (loss)
(270.7
(229.4
Defined benefit pension plans:
(199.2
(211.0
(202.2
(214.5
Other comprehensive income - amortization
of prior service cost and net losses included in
net periodic pension cost
(196.1
(207.5
OPEB plans:
Other comprehensive loss - amortization
of prior service credit and net losses
included in net periodic OPEB cost
Total accumulated other comprehensive loss:
Note 12 - Commitments and contingencies:
We are involved in various environmental, contractual, product liability, patent (or intellectual property), employment and other claims and disputes incidental to our business. At least quarterly our management discusses and evaluates the status of any pending litigation to which we are a party. The factors considered in such evaluation include, among other things, the nature of such pending cases, the status of such pending cases, the advice of legal counsel and our experience in similar cases (if any). Based on such evaluation, we make a determination as to whether we believe (i) it is probable a loss has been incurred, and if so if the amount of such loss (or a range of loss) is reasonably estimable, or (ii) it is reasonably possible but not probable a loss has been incurred, and if so if the amount of such loss (or a range of loss) is reasonably estimable, or (iii) the probability a loss has been incurred is remote. We have not accrued any amounts for litigation matters because it is not reasonably possible we have incurred a loss that would be material to our consolidated financial statements, results of operations or liquidity.
Note 13 - Financial instruments:
See Note 4 for information on how we determine fair value of our marketable securities.
The following table presents the financial instruments that are not carried at fair value but which require fair value disclosure:
December 31, 2020
Carrying amount
Fair
Cash, cash equivalents and restricted cash
Long-term debt - Fixed rate Senior Notes
499.9
486.6
- 14 -
At June 30, 2021, the estimated market price of our Senior Notes was €1,023 per €1,000 principal amount. The fair value of our Senior Notes was based on quoted market prices; however, these quoted market prices represented Level 2 inputs because the markets in which the Senior Notes trade were not active. Due to their near-term maturities, the carrying amounts of accounts receivable and accounts payable are considered equivalent to fair value. See Notes 2 and 6.
- 15 -
ITEM 2.
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 titanium dioxide pigments (TiO2). TiO2 is used for a variety of manufacturing applications, including paints, plastics, paper and other industrial and specialty products. For the six months ended June 30, 2021, approximately one-half of our sales volumes were sold into European markets. Our production facilities are located in 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 our customers’ inventory levels are influenced in part by their expectation for future changes in 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 product quality and customer and technical support services.
The factors having the most impact on our reported operating results are:
•
TiO2 selling prices,
Our TiO2 sales and production volumes,
Manufacturing costs, particularly raw materials such as third-party feedstock, maintenance and energy-related expenses, and
Currency exchange rates (particularly the exchange rates for the U.S. dollar relative to the euro, the Norwegian krone and the Canadian dollar and the euro relative to the Norwegian krone).
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. TiO2 selling prices generally follow industry trends and selling prices will increase or decrease generally as a result of competitive market pressures.
Executive summary
We reported net income of $25.7 million, or $.22 per share, in the second quarter of 2021 as compared to net income of $18.6 million, or $.16 per share, in the second quarter of 2020. For the first six months of 2021, we reported net income of $45.3 million, or $.39 per share, compared to net income of $45.6 million, or $.39 per share, in the first six months of 2020. We reported higher net income in the second quarter of 2021 as compared to the second quarter of 2020 primarily due to higher income from operations resulting from the effects of higher sales volumes and higher average TiO2 selling prices, partially offset by higher manufacturing and other production costs. Net income for the first six months of 2021 was comparable to net income for the first six months of 2020 as higher net sales resulting from higher sales volumes and higher average TiO2 selling prices were offset by higher manufacturing and other production costs. The second quarter of 2020 was the period most impacted by the COVID-19 pandemic, specifically through reduced demand for certain of our products. Comparability of our results was also impacted by the effects of changes in currency exchange rates.
- 16 -
Forward-looking information
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Statements in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking in nature and represent management’s beliefs and assumptions based on currently available information. Statements in this report including, but not limited to, statements found in Item 2 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are forward-looking statements that represent our 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 the expectations reflected in 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 our actual future results to differ materially from those described herein are the risks and uncertainties discussed in this Quarterly Report and those described from time to time in our other filings with the SEC and 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
Customer and producer inventory levels
Unexpected or earlier-than-expected industry capacity expansion
Changes in raw material and other operating costs (such as energy and ore costs)
Changes in the availability of raw materials (such as ore)
General global economic and political conditions that harm the worldwide economy, disrupt our supply chain, increase material costs or reduce demand or perceived demand for our TiO2 products or impair our ability to operate our facilities (including changes in the level of gross domestic product in various regions of the world, natural disasters, terrorist acts, global conflicts and public health crises such as COVID-19)
Competitive products and substitute products
Customer and competitor strategies
Potential consolidation of our competitors
Potential consolidation of our customers
The impact of pricing and production decisions
Competitive technology positions
Potential difficulties in upgrading or implementing accounting and manufacturing software systems
The introduction of trade barriers or trade disputes
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 and between the euro and the Norwegian krone), or possible disruptions to our business resulting from uncertainties associated with the euro or other currencies
Operating interruptions (including, but not limited to, labor disputes, leaks, natural disasters, fires, explosions, unscheduled or unplanned downtime, transportation interruptions, cyber-attacks and public health crises such as COVID-19)
Our ability to renew or refinance credit facilities
Our ability to maintain sufficient liquidity
The ultimate outcome of income tax audits, tax settlement initiatives or other tax matters, including future tax reform
Our ability to utilize income tax attributes, the benefits of which may or may not have been recognized under the more-likely-than-not recognition criteria
Environmental matters (such as those requiring compliance with emission and discharge standards for existing and new facilities)
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Government laws and regulations and possible changes therein including new environmental health and safety regulations (such as those seeking to limit or classify TiO2 or its use)
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.
Results of operations
Current industry conditions
We started 2021 with average TiO2 selling prices 3% lower than at the beginning of 2020. Average TiO2 selling prices were 3% higher in the second quarter of 2021 as compared to the second quarter of 2020 and 1% higher in the first six months of 2021 as compared to the first six months of 2020. Our average TiO2 selling prices at the end of the second quarter of 2021 were 4% higher than the end of 2020. We experienced higher sales volumes in all major markets in the first six months of 2021 as compared to the same period of 2020 primarily due to the COVID-19 related demand contraction in 2020 which was most acute in the second quarter of 2020.
We operated our production facilities at overall average capacity utilization rates of 99% in the first six months of 2021 compared to 95% in the first six months of 2020. TiO2 production volumes were higher in the first six months of 2021 as compared to the first six months of 2020 due to higher anticipated demand and our corresponding adjustments to planned production levels in 2020 as a result of the COVID-19 pandemic. The table below lists our comparative quarterly production capacity utilization rates.
Production Capacity Utilization Rates
First quarter
95%
97%
Second quarter
96%
100%
Quarter ended June 30, 2021 compared to the quarter ended June 30, 2020
Three months ended June 30,
(Dollars in millions)
100
%
75
77
23
13
(2
(1
% Change
TiO2 operating statistics:
Sales volumes*
124
144
Production volumes*
133
137
2
Percentage change in net sales:
TiO2 sales volumes
TiO2 product pricing
TiO2 product mix/other
Changes in currency exchange rates
24
*
Thousands of metric tons
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Net sales - Net sales in the second quarter of 2021 increased 24%, or $92.6 million, compared to the second quarter of 2020 primarily due to a 16% increase in sales volumes (which increased net sales by approximately $62 million), and a 3% increase in average TiO2 selling prices (which increased net sales by approximately $12 million). In addition to the impact of higher sales volumes and higher average selling prices, we estimate that changes in currency exchange rates (primarily the euro) increased our net sales by approximately $22 million in the second quarter of 2021 as compared to the second quarter of 2020. 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 16% in the second quarter of 2021 as compared to the second quarter of 2020 due to higher demand in all our major markets resulting from overall improvements in global economic activity in 2021 compared to the same period in 2020 when negative economic effects from the COVID-19 pandemic had the most significant impact.
Cost of sales and gross margin - Cost of sales increased $79.4 million, or 27%, in the second quarter of 2021 compared to the second quarter of 2020 due to a 16% increase in sales volumes and higher production costs of approximately $15 million (including higher costs for raw materials and energy). Our cost of sales as a percentage of net sales increased to 77% in the second quarter of 2021 compared to 75% in the same period of 2020 primarily due to the unfavorable effects of higher raw materials and other productions costs, as discussed above.
Gross margin as a percentage of net sales decreased to 23% in the second quarter of 2021 compared to 25% in the second quarter of 2020. As discussed and quantified above, our gross margin as a percentage of net sales decreased primarily due to the net effects of higher raw materials and other production costs partially offset by higher sales volumes and higher average TiO2 selling prices.
Selling, general and administrative expense - Selling, general and administrative expense was approximately 13% of net sales in the second quarters of 2021 and 2020.
Income from operations - Income from operations increased by $10.8 million, or 33%, in the second quarter of 2021 compared to the second quarter of 2020. Income from operations as a percentage of net sales was 9% in each of the second quarters of 2021 and 2020. Changes in currency exchange rates had a nominal effect on income from operations in the second quarter of 2021 as compared to the same period in 2020, as discussed below.
Other non-operating income (expense) - We recognized a gain of $.5 million on the change in value of our marketable equity securities in the second quarter of 2021 compared to a loss of $.2 million in the second quarter of 2020. See Note 4 to our Condensed Consolidated Financial Statements. Other components of net periodic pension and OPEB cost in the second quarter of 2021 was comparable to the second quarter of 2020. See Note 9 to our Condensed Consolidated Financial Statements. Interest expense in the second quarter of 2021 increased $.6 million compared to the second quarter of 2020 primarily due to costs associated with the refinancing of our revolving credit facility in April 2021. See Note 5 to our Condensed Consolidated Financial Statements.
Income tax expense - We recognized income tax expense of $9.2 million in the second quarter of 2021 compared to income tax expense of $5.1 million in the second quarter of 2020. The difference is primarily due to higher earnings in 2021 and the jurisdictional mix of earnings. Our earnings are subject to income tax in various U.S. and non-U.S. jurisdictions, and the income tax rates applicable to the pre-tax earnings (losses) of our non-U.S. operations are generally higher than the income tax rates applicable to our U.S. operations. We would generally expect our overall effective tax rate to be higher than the U.S. federal statutory tax rate of 21% primarily because of our sizeable non-U.S. operations. See Note 10 to our Condensed Consolidated Financial Statements.
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Six months ended June 30, 2021 compared to the six months ended June 30, 2020
Six months ended June 30,
78
22
260
285
265
267
17
Net sales - Net sales in the first six months of 2021 increased 17%, or $136.6 million, compared to the first six months of 2020 primarily due to a 9% increase in sales volumes (which increased net sales by approximately $73 million) and a 1% increase in average TiO2 selling prices (which increased net sales by approximately $8 million). In addition to the impact of higher sales volumes and higher average selling prices, we estimate that changes in currency exchange rates (primarily the euro) increased our net sales by approximately $42 million in the first six months of 2021 as compared to the first six months of 2020. 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 9% in the first six months of 2021 as compared to the first six months of 2020 primarily due to higher sales volumes in all major markets, with a significant portion of the increase occurring in the second quarter as a result of the impact of COVID-19 on the comparable period in 2020, as discussed above.
Cost of sales and gross margin - Cost of sales increased $115.8 million, or 19%, in the first six months of 2021 compared to the first six months of 2020 due to a 9% increase in sales volumes and higher production costs (including higher costs for raw materials and energy) and the effects of currency fluctuations (primarily the euro). Our cost of sales as a percentage of net sales increased to 78% in the first six months of 2021 compared to 77% in the same period of 2020 primarily due to the unfavorable effects of currency fluctuations, as discussed below.
Gross margin as a percentage of net sales decreased to 22% in the first six months of 2021 compared to 23% in the first six months of 2020. As discussed and quantified above, our gross margin as a percentage of net sales decreased primarily due to the net effects of higher sales volumes, higher raw materials and other production costs and fluctuations in currency exchange rates.
Selling, general and administrative expense - Selling, general and administrative expense was approximately 13% of net sales in the first six months of 2021 and 2020.
Income from operations - Income from operations increased by $1.3 million, or 2%, in the first six months of 2021 compared to the first six months of 2020. Income from operations as a percentage of net sales decreased to 8% in the first six months of 2021 from 9% in the same period of 2020. This decrease was driven by the lower gross margin discussed above. We estimate that changes in
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currency exchange rates decreased income from operations by approximately $17 million in the first six months of 2021 as compared to the same period in 2020, as further discussed below.
Other non-operating income (expense) - We recognized a gain of $1.3 million on the change in value of our marketable equity securities in the first six months of 2021 and a loss of $1.7 million in the first six months of 2020. See Note 4 to our Condensed Consolidated Financial Statements. Other components of net periodic pension and OPEB cost in the first six months of 2021 decreased $.8 million compared to the first six months of 2020 primarily due to higher expected returns on plan assets offset by the net effects of lower discount rates impacting interest cost and previously unrecognized actuarial losses. See Note 9 to our Condensed Consolidated Financial Statements. We recognized an insurance settlement gain of $1.5 million related to a property damage claim recognized in the first six months of 2020. Interest expense in the first six months of 2021 increased $1.0 million compared to the first six months of 2020 due to the refinancing of our revolving credit facility in the second quarter of 2021 and the effects of changes in currency exchange rates.
Income tax expense - We recognized income tax expense of $15.2 million in the first six months of 2021 compared to income tax expense of $13.5 million in the first six months of 2020. The difference is primarily due to the jurisdictional mix of our earnings. Our earnings are subject to income tax in various U.S. and non-U.S. jurisdictions, and the income tax rates applicable to the pre-tax earnings (losses) of our non-U.S. operations are generally higher than the income tax rates applicable to our U.S. operations. We would generally expect our overall effective tax rate to be higher than the U.S. federal statutory tax rate of 21% primarily because of our sizeable non-U.S. operations. See Note 10 to our Condensed Consolidated Financial Statements.
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 (and consequently our non-U.S. operations will generally hold U.S. dollars from time to time). Certain raw materials used in all our production facilities, primarily titanium-containing feedstocks, are purchased primarily in U.S. dollars, while labor and other production and administrative costs are incurred 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 (i) the difference between the currency exchange rates in effect when non-local currency sales or operating costs (primarily U.S. dollar denominated) are initially accrued and when such amounts are settled with the non-local currency, and (ii) changes in currency exchange rates during time periods when our non-U.S. operations are holding non-local currency (primarily U.S. dollars).
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
Three months ended June 30, 2021 vs June 30, 2020
Translation
gains (losses) -
impact of
rate changes
currency
impact
2021 vs 2020
Transaction gains (losses) recognized
Change
Impact on:
(6
(8
The $22 million increase in net sales (translation gain) was caused primarily by a weakening of the U.S. dollar relative to the euro, as our euro-denominated sales were translated into more U.S. dollars in 2021 as compared to 2020. The weakening of the U.S. dollar relative to the Canadian dollar and the Norwegian krone in 2021 did not have a significant effect on our net sales, as a substantial portion of the sales generated by our Canadian and Norwegian operations is denominated in the U.S. dollar.
The $1 million decrease in income from operations was comprised of the following:
Lower net currency transaction losses of approximately $7 million primarily caused by relative changes in currency exchange rates at each applicable balance sheet date between the U.S. dollar and the euro, Canadian dollar and the Norwegian krone, and between the euro and the Norwegian krone, which causes increases or decreases, as applicable, in
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U.S. dollar-denominated receivables and payables and U.S. dollar currency held by our non-U.S. operations, and in Norwegian krone denominated receivables and payables held by our non-U.S. operations, and
Approximately $8 million from net currency translation losses primarily caused by a weakening of the U.S. dollar relative to the Canadian dollar and the Norwegian krone, as local currency-denominated operating costs were translated into more U.S. dollars in 2021 as compared to 2020, partially offset by net currency translation gains primarily caused by a weakening of the U.S. dollar relative to the euro as the positive effects of the weaker U.S. dollar on euro-denominated sales more than offset the unfavorable effects of euro-denominated operating costs being translated into more U.S. dollars in 2021 as compared to 2020.
Six months ended June 30, 2021 vs June 30, 2020
Transaction gains recognized
42
(11
(17
The $42 million increase in net sales (translation gain) was caused primarily by a weakening of the U.S. dollar relative to the euro, as our euro-denominated sales were translated into more U.S. dollars in 2021 as compared to 2020. The weakening of the U.S. dollar relative to the Canadian dollar and the Norwegian krone in 2021 did not have a significant effect on the reported amount of our net sales, as a substantial portion of the sales generated by our Canadian and Norwegian operations is denominated in the U.S. dollar.
The $17 million decrease in income from operations was comprised of the following:
Lower net currency transaction gains of approximately $6 million primarily caused by relative changes in currency exchange rates at each applicable balance sheet date between the U.S. dollar and the euro, Canadian dollar and the Norwegian krone, and between the euro and the Norwegian krone, which causes increases or decreases, as applicable, in U.S. dollar-denominated receivables and payables and U.S. dollar currency held by our non-U.S. operations, and in Norwegian krone denominated receivables and payables held by our non-U.S. operations, and
Approximately $11 million from net currency translation losses primarily caused by a weakening of the U.S. dollar relative to the Canadian dollar and Norwegian krone, as local currency-denominated operating costs were translated into more U.S. dollars in 2021 as compared to 2020, partially offset by net currency translation gains primarily caused by a weakening of the U.S. dollar relative to the euro as the positive effects of the weaker U.S. dollar on euro-denominated sales more than offset the unfavorable effects of euro-denominated operating costs being translated into more U.S. dollars in 2021 as compared to 2020.
Outlook
Beginning in the second half of 2020 and continuing through the first six months of 2021, our sales volumes have increased from reduced levels experienced in the first half of 2020 resulting from the COVID-19 pandemic. We increased production volumes in late 2020 to correspond to increasing demand and have continued to maintain these increased production volumes through the first six months of 2021. At the beginning of 2021, our average TiO2 selling prices were 3% lower than at the beginning of 2020 but average selling prices increased 4% during the first six months of 2021.
Based on current market conditions, we expect global demand for consumer products, including those of our customers, to remain strong throughout the remainder of 2021 and we expect that our sales and production volumes will reflect the elevated demand. As global economic activity continues to recover, we have experienced certain disruptions in global supply chains including availability of third-party feedstock and other raw materials along with transportation and logistics delays. Thus far our operations team has been able to manage through these disruptions with minimal impact on our operations; however, we expect these challenges to continue for the foreseeable future. In addition, we are experiencing increasing production costs, including higher raw material costs and related shipping costs and higher energy costs which are likely to continue through the end of the year. Driven by increased customer demand and rising costs, we expect sales prices for TiO2 will continue to rise throughout 2021, mitigating increases in distribution, raw materials and other production costs. As such, we expect our 2021 sales and income from operations will be higher than in 2020, principally due to higher TiO2 sales prices and higher sales volumes; however, we expect increasing costs to continue to challenge margins. We continue to monitor current and anticipated near-term customer demand levels and will align our production and inventories accordingly.
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Our expectations for the TiO2 industry and our operations are based on a number of factors outside our control, including the ongoing economic effects of the COVID-19 pandemic. As noted above, we have experienced global supply chain disruptions, including disruptions related to COVID-19, and future impacts of COVID-19 on our operations will depend on, among other things, any future disruption in our operations or our suppliers’ operations and the timing and effectiveness of the global measures deployed to fight COVID-19 and its variants, all of which remain uncertain and cannot be predicted. Our manufacturing and administrative facilities are generally located in densely populated regions of Europe and North America which have experienced substantial outbreaks of COVID-19, some of which are in varying stages of recovery while others are experiencing a resurgence of outbreaks related to COVID-19 variants. We continue to employ a variety of methods to protect the health and well-being of our workforce and our customers and we have encouraged our employees to be vaccinated. To-date, we have had limited cases of COVID-19 among our workforce and all of our facilities have remained open and operational.
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. In addition to the impact of the operating, investing and financing cash flows discussed below, changes in the amount of cash, cash equivalents and restricted cash we report from period to period can be impacted by changes in currency exchange rates, since a portion of our cash, cash equivalents and restricted cash is held by our non-U.S. subsidiaries.
Cash provided by operating activities was $78.1 million in the first six months of 2021 compared to cash provided by operating activities of $18.1 million in the first six months of 2020. This $60.0 million increase in the amount of cash provided was primarily due to the net effect of the following:
lower amount of net cash used associated with relative changes in our inventories, receivables, payables and accruals in 2021 of $92.5 million as compared to 2020,
higher income from operations in 2021 of $1.3 million,
higher cash paid for taxes in 2021 of $29.6 million due to the relative timing of payments (to provide COVID-19 related tax relief in 2020, certain tax payment deadlines were extended until the second half of 2020 in the U.S. and Norway), and
lower contributions to our TiO2 manufacturing joint venture in 2021 of $6.1 million.
Changes in working capital were affected by accounts receivable and inventory changes. As shown below:
Our average days sales outstanding, or DSO, decreased from December 31, 2020 to June 30, 2021 primarily due to relative changes in the timing of collections, and
Our average days sales in inventory, or DSI, decreased from December 31, 2020 to June 30, 2021 primarily due to lower inventory volumes attributable to higher sales volumes and timing of raw material shipments in the first six months of 2021 compared to 2020 while production volumes were comparable.
For comparative purposes, we have also provided comparable prior year numbers below.
2019
DSO
71 days
68 days
64 days
DSI
83 days
85 days
74 days
53 days
Investing activities
Our capital expenditures of $21.2 million and $25.4 million in the first six months of 2021 and 2020, respectively, were primarily to maintain and improve the cost effectiveness of our manufacturing facilities.
In addition, during the first six months of 2020, we received $1.5 million from an insurance settlement related to a property damage claim.
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Financing activities
During the first six months of 2021 and 2020, we paid quarterly dividends of $.18 per share to stockholders aggregating $41.6 million.
In addition, during the first six months of 2020, we acquired 122,489 shares of our common stock in market transactions for an aggregate purchase price of $1.0 million.
Outstanding debt obligations
At June 30, 2021, our consolidated debt comprised:
€400 million aggregate outstanding on our Kronos International, Inc. (KII) 3.75% Senior Secured Notes ($471.8 million carrying amount, net of unamortized debt issuance costs) due in September 2025 (Senior Secured Notes), and
approximately $1.4 million of other indebtedness.
On April 20, 2021, we entered into a new $225 million global revolving credit facility (Global Revolver) which matures in April 2026. We have no outstanding borrowings on the new Global Revolver at June 30, 2021 and the full $225 million was available for borrowings thereunder. Our Senior Secured Notes and our new Global Revolver contain a number of covenants and restrictions which, among other things, restrict our ability to incur or guarantee additional debt, incur liens, pay dividends or make other restricted payments, or merge or consolidate with, or sell or transfer substantially all of our assets to, another entity, and contain other provisions and restrictive covenants customary in lending transactions of these types. 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, the 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, the 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. The terms of all of our debt instruments outstanding at June 30, 2021 are discussed in Note 8 to our Consolidated Financial Statements included in our 2020 Annual Report. See Note 5 to our Condensed Consolidated Financial Statements for discussion of the terms of our new Global Revolver. We were in compliance with all of our debt covenants at June 30, 2021. We believe we will be able to maintain compliance with the financial covenants contained in our credit facility through its maturity.
Our assets consist primarily of investments in operating subsidiaries, and our ability to service our obligations, including the Senior Secured Notes, 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 Senior Secured Notes are collateralized by, among other things, a first priority lien on (i) 100% of the common stock or other ownership interests of each existing and future direct domestic subsidiary of KII and the guarantors, and (ii) 65% of the voting common stock or other ownership interests and 100% of the non-voting common stock or other ownership interests of each non-U.S. subsidiary that is directly owned by KII or any guarantor. Our new Global Revolver is collateralized by, among other things, a first priority lien on the borrower’s trade receivables and inventories.
Future cash requirements
Liquidity
Our primary source of liquidity on an ongoing basis is cash flows from operating activities which is generally used to (i) fund capital expenditures, (ii) repay any short-term indebtedness incurred for working capital purposes and (iii) provide for the payment of dividends. From time-to-time we will incur indebtedness, generally to (i) fund short-term working capital needs, (ii) refinance existing indebtedness or (iii) fund major capital expenditures or the acquisition of other assets outside the ordinary course of business. We will also from time-to-time sell assets outside the ordinary course of business and use the proceeds to (i) repay existing indebtedness, (ii) make investments in marketable and other securities, (iii) fund major capital expenditures or the acquisition of other assets outside the ordinary course of business or (iv) pay dividends.
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.
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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.
At June 30, 2021 we had aggregate cash, cash equivalents and restricted cash on hand of $370.2 million, of which $122.2 million was held by non-U.S. subsidiaries. Following implementation of a territorial tax system under the 2017 Tax Act, repatriation of any cash and cash equivalents held by our non-U.S. subsidiaries would not be expected to result in any material income tax liability as a result of such repatriation. Our new $225 million Global Revolver we entered into in April 2021, which replaced our North American and European facilities, matures in April 2026 and currently, the full $225 million is available for borrowing under this facility and we could borrow all available amounts without violating our existing debt covenants. See Note 5 to our Condensed Consolidated Financial Statements. 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 June 30, 2022) and our long-term obligations (defined as the five-year period ending June 30, 2026, our time period for long-term budgeting). If actual developments differ from our expectations, our liquidity could be adversely affected.
We intend to invest approximately $85 million in capital expenditures primarily to maintain and improve our existing facilities during 2021, including the $21.2 million we have spent through June 30, 2021. It is possible we will delay planned capital projects based on market conditions.
Stock repurchase program
At June 30, 2021, we have 1,563,519 shares available for repurchase under a stock repurchase program authorized by our board of directors.
Off-balance sheet financing
Neither we nor any of our subsidiaries or affiliates are parties to any off-balance sheet financing arrangements.
Commitments and contingencies
See Notes 10 and 12 to our Condensed Consolidated Financial Statements for a description of certain income tax contingencies, certain legal proceedings and other commitments.
Recent accounting pronouncements
Not applicable
Critical accounting policies
For a discussion of our critical accounting policies, refer to Part I, Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 Annual Report. There have been no changes in our critical accounting policies during the first six months of 2021.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
General
We are exposed to market risk, including currency exchange rates, interest rates, equity security and raw material prices. There have been no material changes in these market risks since we filed our 2020 Annual Report. See also Part I, Item 7A. - “Quantitative and Qualitative Disclosure About Market Risk” in our 2020 Annual Report and Note 13 to our Condensed Consolidated Financial Statements.
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ITEM 4.
CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
We maintain disclosure controls and procedures which, as defined in 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 Robert D. Graham, our Vice Chairman of the Board and Chief Executive Officer and Tim C. Hafer, our Senior Vice President and Chief Financial Officer, has evaluated the design and effectiveness of our disclosure controls and procedures as of June 30, 2021. Based upon their evaluation, these executive officers have concluded that our disclosure controls and procedures are effective as of the date of such evaluation.
Internal control over financial reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting which, 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 generally accepted accounting principles, and includes those policies and procedures that:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets,
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors, and
Provide reasonable assurance regarding prevention or timely detection of an unauthorized acquisition, use or disposition of our assets that could have a material effect on our Condensed Consolidated Financial Statements.
As permitted by the SEC, our assessment of internal control over financial reporting excludes (i) internal control over financial reporting of our equity method investees and (ii) internal control over the preparation of any financial statement schedules which would be required by Article 12 of Regulation S-X. However, our assessment of internal control over financial reporting with respect to our equity method investees did include our controls over the recording of amounts related to our investment that are recorded in our Condensed 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 June 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Part II. OTHER INFORMATION
Refer to Note 12 to our Condensed Consolidated Financial Statements and our 2020 Annual Report for descriptions of certain legal proceedings.
For a discussion of the risk factors related to our businesses, refer to Part I, Item 1A, “Risk Factors,” in our 2020 Annual Report.
31.1
Certification
31.2
32.1
101.INS
Inline XBRL Instance - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase
104
Cover page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Kronos Worldwide, Inc.
(Registrant)
Date: August 4, 2021
/s/ Tim C. Hafer
Tim C. Hafer
Senior Vice President and
Chief Financial Officer
(duly authorized officer)
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