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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
OR
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number
(Exact name of registrant as specified in its charter)
| ||
(State or other jurisdiction of | (IRS Employer |
(Address of principal executive offices)
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
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.
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).
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 | ☐ | ☒ | |
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
Number of shares of the registrant’s common stock, $.01 par value per share, outstanding on July 29, 2022:
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
INDEX
|
|
|
| Page | |
|---|---|---|---|---|---|
Part I. | FINANCIAL INFORMATION |
| |||
Item 1. | Financial Statements |
| |||
Condensed Consolidated Balance Sheets - | 3 | ||||
5 | |||||
6 | |||||
7 | |||||
8 | |||||
Notes to Condensed Consolidated Financial Statements (unaudited) | 10 | ||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17 | ||||
27 | |||||
27 | |||||
28 | |||||
28 | |||||
Items 2, 3, 4 and 5 of Part II are omitted because there is no information to report. |
| ||||
2
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
ASSETS | December 31, | June 30, | ||||
| 2021 |
| 2022 | |||
(unaudited) | ||||||
Current assets: |
|
|
|
| ||
Cash and cash equivalents | $ | | $ | | ||
Restricted cash |
| |
| | ||
Accounts and other receivables, net |
| |
| | ||
Inventories, net |
| |
| | ||
Prepaid expenses and other |
| |
| | ||
Total current assets |
| |
| | ||
Other assets: |
|
|
|
| ||
Investment in TiO2 manufacturing joint venture |
| |
| | ||
Restricted cash |
| |
| | ||
Marketable securities |
| |
| | ||
Operating lease right-of-use assets |
| |
| | ||
Deferred income taxes |
| |
| | ||
Other |
| |
| | ||
Total other assets |
| |
| | ||
Property and equipment: |
|
|
|
| ||
Land |
| |
| | ||
Buildings |
| |
| | ||
Equipment |
| |
| | ||
Mining properties |
| |
| | ||
Construction in progress |
| |
| | ||
| |
| | |||
Less accumulated depreciation and amortization |
| |
| | ||
Net property and equipment |
| |
| | ||
Total assets | $ | | $ | | ||
3
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In millions)
LIABILITIES AND STOCKHOLDERS’ EQUITY | December 31, | June 30, | ||||
| 2021 |
| 2022 | |||
(unaudited) | ||||||
Current liabilities: |
|
|
|
| ||
Current maturities of long-term debt | $ | | $ | | ||
Accounts payable and accrued liabilities |
| |
| | ||
Income taxes |
| |
| | ||
Total current liabilities |
| |
| | ||
Noncurrent liabilities: |
|
|
|
| ||
Long-term debt |
| |
| | ||
Accrued pension costs |
| |
| | ||
Payable to affiliate - income taxes |
| |
| | ||
Operating lease liabilities |
| |
| | ||
Deferred income taxes |
| |
| | ||
Other |
| |
| | ||
Total noncurrent liabilities |
| |
| | ||
Stockholders’ equity: |
|
|
|
| ||
Common stock |
| |
| | ||
Additional paid-in capital |
| |
| | ||
Retained deficit |
| ( |
| ( | ||
Accumulated other comprehensive loss |
| ( |
| ( | ||
Treasury stock, at cost | ( | - | ||||
Total stockholders’ equity |
| |
| | ||
Total liabilities and stockholders’ equity | $ | | $ | | ||
Commitments and contingencies (Notes 10 and 12)
See accompanying notes to Condensed Consolidated Financial Statements.
4
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
2021 |
| 2022 |
| 2021 |
| 2022 | ||||||
(unaudited) | ||||||||||||
Net sales | $ | | $ | | $ | | $ | | ||||
Cost of sales |
| |
| |
| |
| | ||||
Gross margin |
| |
| |
| |
| | ||||
Selling, general and administrative expense |
| |
| |
| |
| | ||||
Other operating income: |
|
|
|
|
|
|
|
| ||||
Currency transactions, net |
| |
| |
| - |
| | ||||
Other operating expense, net |
| ( |
| ( |
| ( |
| ( | ||||
Income from operations |
| |
| |
| |
| | ||||
Other income (expense): |
|
|
|
|
|
|
|
| ||||
Interest and dividend income |
| |
| |
| |
| | ||||
Marketable equity securities |
| |
| |
| |
| | ||||
Other components of net periodic pension and OPEB cost |
| ( |
| ( |
| ( |
| ( | ||||
Interest expense |
| ( |
| ( |
| ( |
| ( | ||||
Income before income taxes |
| |
| |
| |
| | ||||
Income tax expense |
| |
| |
| |
| | ||||
Net income | $ | | $ | | | | ||||||
Net income per basic and diluted share | | | | | ||||||||
|
|
|
| |||||||||
Weighted average shares used in the calculation of net income per share |
| |
| |
| |
| | ||||
See accompanying notes to Condensed Consolidated Financial Statements.
5
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2021 |
| 2022 |
| 2021 |
| 2022 | |||||
(unaudited) | ||||||||||||
Net income | $ | | $ | | $ | | $ | | ||||
|
|
|
| |||||||||
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
| ||||
Currency translation |
| |
| ( |
| |
| ( | ||||
Defined benefit pension plans |
| |
| |
| |
| | ||||
Other postretirement benefit plans |
| - |
| - |
| ( |
| ( | ||||
Total other comprehensive income (loss), net |
| |
| ( |
| |
| ( | ||||
Comprehensive income | $ | | $ | | $ | | $ | | ||||
See accompanying notes to Condensed Consolidated Financial Statements.
6
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions)
Three months ended June 30, 2021 and 2022 (unaudited) | ||||||||||||||||||
Accumulated | ||||||||||||||||||
Additional | other | |||||||||||||||||
Common | paid-in | Retained | comprehensive | Treasury | ||||||||||||||
| stock |
| capital |
| deficit |
| loss |
| stock |
| Total | |||||||
Balance at March 31, 2021 | $ | | $ | | $ | ( | $ | ( | $ | - | $ | | ||||||
Net income |
| - |
| - |
| |
| - |
| - |
| | ||||||
Other comprehensive income, net of tax |
| - |
| - |
| - |
| |
| - |
| | ||||||
Issuance of common stock |
| - |
| |
| - |
| - |
| - |
| | ||||||
Dividends paid - $.18 per share |
| - |
| - |
| ( |
| - |
| - |
| ( | ||||||
Balance at June 30, 2021 | $ | | $ | | $ | ( | $ | ( | $ | - | $ | | ||||||
Balance at March 31, 2022 | $ | | $ | | $ | ( | $ | ( | $ | ( | $ | | ||||||
Net income |
| - |
| - |
| |
| - |
| - |
| | ||||||
Other comprehensive loss, net of tax |
| - |
| - |
| - |
| ( |
| - |
| ( | ||||||
Issuance of common stock | - | | - | - | - | | ||||||||||||
Dividends paid - $.19 per share |
| - |
| - |
| ( |
| - |
| - |
| ( | ||||||
Treasury stock retired | - | ( | - | - | | - | ||||||||||||
Balance at June 30, 2022 | $ | | $ | | $ | ( | $ | ( | $ | - | $ | | ||||||
Six months ended June 30, 2021 and 2022 (unaudited) | ||||||||||||||||||
Accumulated | ||||||||||||||||||
Additional | other | |||||||||||||||||
Common | paid-in | Retained | comprehensive | Treasury | ||||||||||||||
| stock |
| capital |
| deficit |
| loss |
| stock |
| Total | |||||||
Balance at December 31, 2020 | $ | | $ | | $ | ( | $ | ( | $ | - | $ | | ||||||
Net income |
| - |
| - |
| |
| - |
| - |
| | ||||||
Other comprehensive income, net of tax |
| - |
| - |
| - |
| |
| - |
| | ||||||
Issuance of common stock |
| - |
| |
| - |
| - |
| - |
| | ||||||
Dividends paid - $.36 per share |
| - |
| - |
| ( |
| - |
| - |
| ( | ||||||
Balance at June 30, 2021 | $ | | $ | | $ | ( | $ | ( | $ | - | $ | | ||||||
Balance at December 31, 2021 | $ | | $ | | $ | ( | $ | ( | $ | ( | $ | | ||||||
Net income |
| - |
| - |
| |
| - |
| - |
| | ||||||
Other comprehensive loss, net of tax |
| - |
| - |
| - |
| ( |
| - |
| ( | ||||||
Issuance of common stock |
| - |
| |
| - |
| - |
| - |
| | ||||||
Dividends paid - $.38 per share |
| - |
| - |
| ( |
| - |
| - |
| ( | ||||||
Treasury stock acquired | - | - | - | - | ( | ( | ||||||||||||
Treasury stock retired | - | ( | - | - | | - | ||||||||||||
Balance at June 30, 2022 | $ | | $ | | $ | ( | $ | ( | $ | - | $ | | ||||||
See accompanying notes to Condensed Consolidated Financial Statements
7
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Six months ended | ||||||
June 30, | ||||||
| 2021 |
| 2022 | |||
(unaudited) | ||||||
Cash flows from operating activities: |
|
|
|
| ||
Net income | $ | | $ | | ||
Depreciation |
| |
| | ||
Amortization of operating lease right-of-use assets |
| |
| | ||
Deferred income taxes |
| |
| | ||
Benefit plan expense greater than cash funding |
| |
| | ||
Marketable equity securities |
| ( |
| ( | ||
Contributions to TiO2 manufacturing joint venture, net |
| ( |
| ( | ||
Other, net |
| |
| | ||
Change in assets and liabilities: |
|
|
|
| ||
Accounts and other receivables, net |
| ( |
| ( | ||
Inventories, net |
| |
| ( | ||
Prepaid expenses |
| |
| ( | ||
Accounts payable and accrued liabilities |
| ( |
| ( | ||
Income taxes |
| ( |
| | ||
Accounts with affiliates |
| ( |
| | ||
Other, net | | | ||||
Net cash provided by operating activities |
| |
| | ||
Cash flows from investing activities: | ||||||
Capital expenditures |
| ( |
| ( | ||
Other |
| - |
| | ||
Net cash used in investing activities |
| ( |
| ( | ||
Cash flows from financing activities: |
|
|
|
| ||
Payments on long-term debt |
| ( |
| ( | ||
Deferred financing fees |
| ( |
| - | ||
Dividends paid |
| ( |
| ( | ||
Treasury stock acquired |
| - |
| ( | ||
Net cash used in financing activities |
| ( |
| ( | ||
Cash, cash equivalents and restricted cash - net change from: |
|
|
|
| ||
Operating, investing and financing activities | | ( | ||||
Effect of currency exchange rate changes on cash |
| ( |
| ( | ||
Balance at beginning of period |
| |
| | ||
Balance at end of period | $ | | $ | | ||
8
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In millions)
Six months ended | ||||||
June 30, | ||||||
| 2021 |
| 2022 | |||
(unaudited) | ||||||
Supplemental disclosures: |
|
|
|
| ||
Cash paid for: |
|
|
|
| ||
Interest, net of amount capitalized | $ | | $ | | ||
Income taxes |
| |
| | ||
Accrual for capital expenditures |
| |
| | ||
See accompanying notes to Condensed Consolidated Financial Statements
9
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(unaudited)
Note 1 - Organization and basis of presentation:
Organization - At June 30, 2022, Valhi, Inc. (NYSE: VHI) held approximately
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, 2021 that we filed with the Securities and Exchange Commission (SEC) on March 9, 2022 (2021 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, 2021 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, 2021) 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, 2022 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 2021 Consolidated Financial Statements contained in our 2021 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:
December 31, | June 30, | |||||
| 2021 |
| 2022 | |||
(In millions) | ||||||
Trade receivables | $ | | $ | | ||
Recoverable VAT and other receivables |
| |
| | ||
Receivables from affiliates: |
| |||||
Louisiana Pigment Company, L.P. (LPC) | | | ||||
Other | | | ||||
Refundable income taxes |
| |
| | ||
Allowance for doubtful accounts |
| ( |
| ( | ||
Total | $ | | $ | | ||
10
Note 3 - Inventories, net:
December 31, | June 30, | |||||
| 2021 |
| 2022 | |||
(In millions) | ||||||
Raw materials | $ | | $ | | ||
Work in process |
| |
| | ||
Finished products |
| |
| | ||
Supplies |
| |
| | ||
Total | $ | | $ | | ||
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.
| Fair value |
|
|
| |||||||
measurement | Market | Cost | Unrealized | ||||||||
Marketable security |
| level |
| value |
| basis |
| gain | |||
| (In millions) | ||||||||||
December 31, 2021: |
|
|
|
|
|
|
|
| |||
Valhi common stock |
| 1 | $ | | $ | | $ | | |||
NL and CompX common stocks |
| 1 |
| |
| |
| - | |||
Total | $ | | $ | | $ | | |||||
June 30, 2022: |
|
|
|
|
|
| |||||
Valhi common stock |
| 1 | $ | | $ | | $ | | |||
At December 31, 2021 and June 30, 2022, we held approximately
The Valhi common stock we own is 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:
December 31, | June 30, | |||||
| 2021 |
| 2022 | |||
(In millions) | ||||||
Kronos International, Inc. | $ | | $ | | ||
Other |
| |
| | ||
Total debt |
| |
| | ||
Less current maturities |
| |
| | ||
Total long-term debt | $ | | $ | | ||
11
Senior Notes - At June 30, 2022, the carrying value of our
Revolving credit facility - During the first six months of 2022, we had
Other - We are in compliance with all of our debt covenants at June 30, 2022.
Note 6 - Accounts payable and accrued liabilities:
December 31, | June 30, | |||||
| 2021 |
| 2022 | |||
(In millions) | ||||||
Accounts payable | $ | | $ | | ||
Accrued sales discounts and rebates |
| |
| | ||
Employee benefits |
| |
| | ||
Payables to affiliates: |
| |||||
LPC | | | ||||
Income taxes payable to Valhi | | | ||||
| |
| | |||
Other |
| |
| | ||
Total | $ | | $ | | ||
Note 7 - Other noncurrent liabilities:
| December 31, | June 30, | ||||
| 2021 |
| 2022 | |||
(In millions) | ||||||
Accrued postretirement benefits | $ | | $ | | ||
Employee benefits |
| |
| | ||
Other |
| |
| | ||
Total | $ | | $ | | ||
12
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.
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2021 |
| 2022 |
| 2021 |
| 2022 | |||||
(In millions) | ||||||||||||
Net sales - point of origin: | ||||||||||||
United States | $ | | $ | | $ | | $ | | ||||
Germany |
| |
| |
| |
| | ||||
Canada |
| |
| |
| |
| | ||||
Belgium |
| |
| |
| |
| | ||||
Norway |
| |
| |
| |
| | ||||
Eliminations |
| ( |
| ( |
| ( |
| ( | ||||
Total | $ | | $ | | $ | | $ | | ||||
Net sales - point of destination: |
|
|
|
|
|
|
|
| ||||
Europe | $ | | $ | | $ | | $ | | ||||
North America |
| |
| |
| |
| | ||||
Other |
| |
| |
| |
| | ||||
Total | $ | | $ | | $ | | $ | | ||||
Note 9 - Employee benefit plans:
The components of net periodic defined benefit pension cost are presented in the table below.
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2021 |
| 2022 |
| 2021 |
| 2022 | |||||
(In millions) | ||||||||||||
Net periodic pension cost (income): |
|
|
|
|
|
|
|
| ||||
Service cost | $ | | $ | | $ | | $ | | ||||
Interest cost |
| |
| |
| |
| | ||||
Expected return on plan assets |
| ( |
| ( |
| ( |
| ( | ||||
Amortization of prior service cost | .1 | - | .1 | - | ||||||||
Recognized actuarial losses |
| |
| |
| |
| | ||||
Total | $ | | $ | | $ | | $ | | ||||
We expect our 2022 contributions for our pension plans to be approximately $
13
Note 10 - Income taxes:
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2021 |
| 2022 |
| 2021 |
| 2022 | |||||
(In millions) | ||||||||||||
Expected tax expense, at U.S. federal statutory | $ | | $ | | $ | | $ | | ||||
Non-U.S. tax rates |
| |
| |
| |
| | ||||
Incremental net tax benefit on earnings and losses of U.S. |
| ( |
| ( |
| ( |
| ( | ||||
Valuation allowance, net |
| |
| ( |
| |
| ( | ||||
Global intangible low-tax income, net |
| |
| |
| |
| | ||||
Adjustment to the reserve for uncertain tax positions, net |
| |
| |
| ( |
| ( | ||||
Nondeductible expenses |
| .2 |
| .3 |
| .4 |
| .6 | ||||
Other, net |
| |
| |
| |
| | ||||
Income tax expense | $ | | $ | | $ | | $ | | ||||
Comprehensive provision for income taxes allocable to: |
|
|
|
|
|
|
|
| ||||
Net income | $ | | $ | | $ | | $ | | ||||
Other comprehensive income - pension plans |
| |
| |
| |
| | ||||
Total | $ | | $ | | $ | | $ | | ||||
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.
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 $
14
Note 11 – Stockholders’ equity:
Changes in accumulated other comprehensive loss are presented in the table below. See Note 9 for discussion of our defined benefit pension plans.
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2021 |
| 2022 |
| 2021 |
| 2022 | |||||
(In millions) | ||||||||||||
Accumulated other comprehensive loss, net of tax: |
|
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|
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|
|
|
| ||||
Currency translation: |
|
|
|
|
|
|
|
| ||||
Balance at beginning of period | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Other comprehensive income (loss) |
| |
| ( |
| |
| ( | ||||
Balance at end of period | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Defined benefit pension plans: |
|
|
|
|
|
|
|
| ||||
Balance at beginning of period | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Other comprehensive income - amortization |
| |
| |
| |
| | ||||
Balance at end of period | $ | ( | $ | ( | $ | ( | $ | ( | ||||
OPEB plans: |
|
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|
|
|
|
|
| ||||
Balance at beginning of period | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Other comprehensive loss - amortization |
| - | - |
| ( |
| ( | |||||
Balance at end of period | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Total accumulated other comprehensive loss: |
|
|
|
|
|
|
|
| ||||
Balance at beginning of period | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Other comprehensive income (loss) |
| |
| ( |
| |
| ( | ||||
Balance at end of period | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Our board of directors has previously authorized the repurchase of up to
During the fourth quarter of 2021, we acquired
15
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, 2021 |
| June 30, 2022 | |||||||||
Carrying | Fair | Carrying | Fair | |||||||||
amount | value | amount | value | |||||||||
(In millions) | ||||||||||||
Cash, cash equivalents and restricted cash | $ | | $ | | $ | | $ | | ||||
Long-term debt - Fixed rate Senior Notes |
| |
| |
| |
| | ||||
At June 30, 2022, the estimated market price of our Senior Notes was €
16
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, 2022, 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, |
| ● | 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 rate 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 titanium-containing feedstock purchased from third parties. 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 $45.9 million, or $.40 per share, in the second quarter of 2022 compared to $25.7 million, or $.22 per share, in the second quarter of 2021. For the first six months of 2022, we reported net income of $103.4 million, or $.90 per share, compared to net income of $45.3 million, or $.39 per share, in the first six months of 2021. Net income increased in the 2022 periods as compared to the same periods in 2021, primarily due to higher income from operations resulting from the net effects of higher average TiO2 selling prices and higher production costs. Comparability of our results was also impacted by the effects of changes in currency exchange rates.
17
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 and energy 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 such as disruptions in energy supplies, transportation interruptions, cyber-attacks and public health crises such as COVID-19) |
| ● | Our ability to renew or refinance credit facilities |
| ● | Potential increases in interest rates |
| ● | Our ability to maintain sufficient liquidity |
18
| ● | 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) |
| ● | 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 2022 with average TiO2 selling prices 16% higher than at the beginning of 2021 and our average TiO2 selling prices increased 12% in the first six months of 2022 in response to our rising production costs. Overall sales volumes in the first six months of 2022 were comparable to sales volumes in the same period of 2021, with higher 2022 sales volumes in North America and Latin America offset by lower sales volumes in Europe.
The following table shows our capacity utilization rates during 2021 and 2022. Throughout most of 2021 and continuing into the first quarter of 2022, our production facilities operated at full practical capacity. We operated our production facilities at 98% of practical capacity utilization in the first six months of 2022. During the second quarter of 2022, we operated our facilities at approximately 95% of practical capacity primarily due to maintenance activities and availability of certain raw materials which temporarily reduced our production rates.
| Production Capacity Utilization Rates | |||
| 2021 |
| 2022 | |
First Quarter | 97% | 100% | ||
Second Quarter |
| 100% | 95% | |
Due to significant increases in production costs (primarily energy and feedstock), our cost of sales per metric ton of TiO2 sold in the second quarter and first half of 2022 was higher as compared to the comparable periods in 2021 (excluding the effect of changes in currency exchange rates).
19
Quarter ended June 30, 2022 compared to the quarter ended June 30, 2021
| Three months ended June 30, | ||||||||||
2021 | 2022 |
| |||||||||
(Dollars in millions) |
| ||||||||||
Net sales |
| $ | 478.6 |
| 100 | % | $ | 565.3 |
| 100 | % |
Cost of sales |
| 369.6 |
| 77 |
| 444.8 |
| 79 | |||
Gross margin |
| 109.0 |
| 23 |
| 120.5 |
| 21 | |||
Selling, general and administrative expense |
| 62.9 |
| 13 |
| 63.2 |
| 11 | |||
Other operating income (expense): |
|
|
|
|
|
|
|
| |||
Currency transactions, net |
| .5 |
| - |
| 11.9 |
| 2 | |||
Other operating expense, net |
| (2.8) |
| (1) |
| (4.0) |
| (1) | |||
Income from operations |
| $ | 43.8 |
| 9 | % | $ | 65.2 |
| 11 | % |
| % Change | ||||||||||
TiO2 operating statistics: |
|
|
|
|
|
|
|
| |||
Sales volumes* |
| 144 |
|
| 142 | (1) | % | ||||
Production volumes* |
| 137 |
|
| 132 | (4) | % | ||||
Percentage change in net sales: |
|
|
|
|
|
|
| ||||
TiO2 product pricing |
|
|
|
|
| 26 | % | ||||
TiO2 sales volumes |
|
|
|
|
|
| (1) |
| |||
TiO2 product mix/other |
|
|
|
|
|
| (1) | ||||
Changes in currency exchange rates |
|
|
|
|
|
| (6) | ||||
Total |
|
|
|
|
| 18 | % | ||||
* | Thousands of metric tons |
Net sales - Net sales in the second quarter of 2022 increased 18%, or $86.7 million, compared to the second quarter of 2021 primarily due to a 26% increase in average TiO2 selling prices (which increased net sales by approximately $124 million) partially offset by a 1% decrease in sales volumes (which decreased net sales by approximately $5 million). We estimate that changes in currency exchange rates (primarily the euro) decreased our net sales by approximately $29 million in the second quarter of 2022 as compared to the second quarter of 2021. 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 1% in the second quarter of 2022 as compared to the second quarter of 2021 primarily due to lower availability of certain of our high-demand products as a result of lower production volumes during the quarter and, somewhat lower demand, primarily in the residential architectural coatings markets, from our European and export customers towards the end of the second quarter.
Cost of sales and gross margin - Cost of sales increased $75.2 million, or 20%, in the second quarter of 2022 compared to the second quarter of 2021 due to the net effects of higher production costs of approximately $95 million (primarily raw materials and energy), a 1% decrease in sales volumes and a 4% decrease in production volumes. Our cost of sales as a percentage of net sales increased to 79% in the second quarter of 2022 compared to 77% in the same period of 2021 primarily due to the unfavorable effects of higher production costs including higher raw material and energy costs and lower absorption of fixed costs from lower production volumes.
Gross margin as a percentage of net sales decreased to 21% in the second quarter of 2022 compared to 23% in the second quarter of 2021. As discussed and quantified above, our gross margin as a percentage of net sales decreased primarily due to the net effects of higher average TiO2 selling prices, lower production and sales volumes, higher production costs and changes in currency exchange rates.
Selling, general and administrative expense - Selling, general and administrative expense as a percentage of net sales decreased to 11% in the second quarter of 2022 compared to 13% in the second quarter of 2021, primarily due to the effects of higher net sales resulting from higher average TiO2 selling prices.
20
Income from operations - Income from operations increased by $21.4 million to $65.2 million in the second quarter of 2022 compared to $43.8 million in the second quarter of 2021. Income from operations as a percentage of net sales increased to 11% in the second quarter of 2022 from 9% in the same period of 2021 as a result of the factors impacting gross margin discussed above. We estimate changes in currency exchange rates increased income from operations by approximately $12 million in the second quarter of 2022 as compared to the same period in 2021, as discussed in the Effects of currency exchange rates section below.
Other non-operating income (expense) - We recognized a gain of $2.3 million on the change in value of our marketable equity securities in the second quarter of 2022 compared to a gain of $.5 million in the second quarter of 2021. See Note 4 to our Condensed Consolidated Financial Statements. Other components of net periodic pension and OPEB cost in the second quarter of 2022 decreased $1.2 million compared to the second quarter of 2021 primarily due to the net effects of higher discount rates impacting interest cost and previously unrecognized actuarial losses. See Note 9 to our Condensed Consolidated Financial Statements. Interest expense in the second quarter of 2022 decreased $.9 million compared to the second quarter of 2021 primarily due to fees associated with the refinancing of our revolving credit facility in the second quarter of 2021 and the effects of the strengthening of the U.S. dollar relative to the euro (see discussion in the Effects of currency exchange rates section below). See Note 5 to our Condensed Consolidated Financial Statements.
Income tax expense - We recognized income tax expense of $14.8 million in the second quarter of 2022 compared to income tax expense of $9.2 million in the second quarter of 2021. The difference is primarily due to higher earnings in the second quarter of 2022 and the jurisdictional mix of such 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.
Six months ended June 30, 2022 compared to the six months ended June 30, 2021
| Six months ended June 30, | ||||||||||
2021 | 2022 |
| |||||||||
(Dollars in millions) |
| ||||||||||
Net sales |
| $ | 943.6 |
| 100 | % | $ | 1,128.2 |
| 100 | % |
Cost of sales |
| 738.9 |
| 78 |
| 858.4 |
| 76 | |||
Gross margin |
| 204.7 |
| 22 |
| 269.8 |
| 24 | |||
Selling, general and administrative expense |
| 120.9 |
| 13 |
| 124.6 |
| 11 | |||
Other operating income (expense): |
|
|
|
|
|
| |||||
Currency transactions, net |
| - |
| - |
| 10.4 |
| 1 | |||
Other operating expense, net |
| (6.0) |
| (1) |
| (7.1) |
| (1) | |||
Income from operations |
| $ | 77.8 |
| 8 | % | $ | 148.5 |
| 13 | % |
| % Change | ||||||||||
TiO2 operating statistics: |
|
|
|
|
|
|
|
| |||
Sales volumes* | 285 | 286 | - | % | |||||||
Production volumes* | 267 | 270 | 1 | % | |||||||
Percentage change in net sales: |
|
|
|
|
|
|
| ||||
TiO2 product pricing |
|
|
|
|
|
| 25 | % | |||
TiO2 sales volumes |
|
|
|
|
| - | |||||
TiO2 product mix/other |
|
|
|
|
|
| - | ||||
Changes in currency exchange rates |
|
|
|
|
|
| (5) | ||||
Total |
|
|
|
|
| 20 | % | ||||
* | Thousands of metric tons |
Net sales - Net sales in the first six months of 2022 increased 20%, or $184.6 million, compared to the first six months of 2021 primarily due a 25% increase in average TiO2 selling prices (which increased net sales by approximately $236 million). In addition to the impact of higher average selling prices, we estimate that changes in currency exchange rates (primarily the euro) decreased our net
21
sales by approximately $51 million in the first six months of 2022 as compared to the first six months of 2021. 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 in the first six months of 2022 were comparable to the first six months of 2021.
Cost of sales and gross margin - Cost of sales increased $119.5 million, or 16%, in the first six months of 2022 compared to the first six months of 2021 primarily due to higher production costs of $159 million (including higher costs for raw materials and energy). Our cost of sales as a percentage of net sales decreased to 76% in the first six months of 2022 compared to 78% in the same period of 2021 as the favorable effects of higher average TiO2 selling prices more than offset the unfavorable impact of higher production costs, including higher raw material and energy costs.
Gross margin as a percentage of net sales increased to 24% in the first six months of 2022 compared to 22% in the first six months of 2021. As discussed and quantified above, our gross margin as a percentage of net sales increased primarily due to the net effects of higher average TiO2 selling prices, higher raw material and energy costs and changes in currency exchange rates.
Selling, general and administrative expense - Selling, general and administrative expense as a percentage of net sales decreased to 11% of net sales in the first six months of 2022 compared to 13% in the first six months of 2021, primarily due to the effects of higher net sales resulting from higher average TiO2 selling prices.
Income from operations - Income from operations increased by $70.7 million, or 91%, in the first six months of 2022 compared to the first six months of 2021. Income from operations as a percentage of net sales increased to 13% in the first six months of 2022 from 8% in the same period of 2021. This increase was driven by the effects of higher net sales on gross margin and selling, general and administrative expenses discussed above. We estimate that changes in currency exchange rates increased income from operations by approximately $7 million in the first six months of 2022 as compared to the same period in 2021, as further discussed below.
Other non-operating income (expense) - We recognized a gain of $2.4 million on the change in value of our marketable equity securities in the first six months of 2022 and a gain of $1.3 million in the first six months of 2021. See Note 4 to our Condensed Consolidated Financial Statements. Other components of net periodic pension and OPEB cost in the first six months of 2022 decreased $2.3 million compared to the first six months of 2021 primarily due to the net effects of higher discount rates impacting interest cost and previously unrecognized actuarial losses. See Note 9 to our Condensed Consolidated Financial Statements. Interest expense in the first six months of 2022 decreased $1.4 million compared to the first six months of 2021 due to fees associated with 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 $33.1 million in the first six months of 2022 compared to income tax expense of $15.2 million in the first six months of 2021. The difference is primarily due to higher earnings in 2022 and the jurisdictional mix of such 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
22
(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, 2022 vs June 30, 2021 | |||||||||||||||
Translation | Total | ||||||||||||||
gains/(losses) - | currency | ||||||||||||||
| Transaction gains recognized | impact of | impact | ||||||||||||
| 2021 |
| 2022 |
| Change |
| rate changes |
| 2022 vs 2021 | ||||||
| (In millions) | ||||||||||||||
Impact on: |
|
|
|
|
|
|
|
|
|
| |||||
Net sales | $ | - | $ | - | $ | - | $ | (29) | $ | (29) | |||||
Income from operations |
| 1 |
| 12 |
| 11 |
| 1 |
| 12 | |||||
The $29 million decrease in net sales (translation losses) was caused primarily by a strengthening of the U.S. dollar relative to the euro, as our euro-denominated sales were translated into fewer U.S. dollars in 2022 as compared to 2021. The strengthening of the U.S. dollar relative to the Canadian dollar and the Norwegian krone in 2022 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 $12 million increase in income from operations was comprised of the following:
| ● | Higher net currency transaction gains of approximately $11 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 |
| ● | There was minimal impact from the effect of rate changes on translation gains and losses. |
Impact of changes in currency exchange rates | |||||||||||||||
Six months ended June 30, 2022 vs June 30, 2021 | |||||||||||||||
Translation | Total | ||||||||||||||
losses - | currency | ||||||||||||||
| Transaction gains recognized | impact of | impact | ||||||||||||
| 2021 |
| 2022 |
| Change |
| rate changes |
| 2022 vs 2021 | ||||||
| (In millions) | ||||||||||||||
Impact on: |
|
|
|
|
|
|
|
|
|
| |||||
Net sales | $ | - | $ | - | $ | - | $ | (51) | $ | (51) | |||||
Income from operations |
| - |
| 10 |
| 10 |
| (3) |
| 7 | |||||
The $51 million decrease in net sales (translation losses) was caused primarily by a strengthening of the U.S. dollar relative to the euro, as our euro-denominated sales were translated into fewer U.S. dollars in 2022 as compared to 2021. The strengthening of the U.S. dollar relative to the Canadian dollar and the Norwegian krone in 2022 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.
23
The $7 million increase in income from operations was comprised of the following:
| ● | Higher net currency transaction gains of approximately $10 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 $3 million from net currency translation losses primarily caused by a strengthening of the U.S. dollar relative to the euro as the negative effects of the stronger U.S. dollar on euro-denominated sales more than offset the favorable effects of Canadian dollar and euro-denominated operating costs being translated into fewer U.S. dollars in 2022 as compared to 2021. |
Outlook
While overall demand remained strong through the second quarter, our plants operated at below capacity because maintenance shutdowns in the second quarter took longer than anticipated and availability of certain raw materials continued to impact plant operations and production planning. As a result, we had limited availability for certain high demand products that constrained sales during the quarter. In addition, late in the second quarter, we began to see some decline in demand primarily in the residential architectural coatings markets in certain areas of Europe and the export markets due to economic and geopolitical uncertainties. We are uncertain if and to what extent the reduction in demand will continue, but with tight inventories in most markets and continued strong underlying fundamentals across most of the global economy, we continue to believe that the long-term outlook for our industry remains positive. We will continue to monitor current and anticipated near-term customer demand levels and will align our production and inventories accordingly.
We also continue to experience cost increases and logistical challenges throughout our global supply chain. We experienced increases in our feedstock costs in the first six months of 2022 as compared to the same period in 2021, and we expect our feedstock costs to continue to increase moderately for the remainder of 2022. High energy costs and availability concerns (particularly natural gas supply in Germany) have introduced further cost increases and disruptions to global markets and such conditions are likely to continue for the foreseeable future. These disruptions and other global events have contributed to changing expectations of global demand for consumer products, including those of our customers, and could lead to softening of demand for TiO2 in the second half of 2022. We continue to manage through disruptions in global supply chains including availability of certain third-party feedstock and other raw materials along with certain transportation and logistics delays. We expect these challenges to continue for the foreseeable future.
Our expectations for the TiO2 industry and our operations are based on a number of factors outside our control. As noted above, we have experienced global supply chain disruptions and energy availability concerns; and future impacts on our operations will depend on, among other things, any future disruption in energy availability, our operations or our suppliers’ operations, or related possible shipping delays, 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.
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.
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Cash provided by operating activities was $49.3 million in the first six months of 2022 compared to cash provided by operating activities of $78.1 million in the first six months of 2021. This $28.8 million decrease in the amount of cash provided was primarily due to the net effect of the following:
| ● | higher amount of net cash used associated with relative changes in our inventories, receivables, payables and accruals in 2022 of $106.1 million as compared to 2021, and |
| ● | higher income from operations in 2022 of $70.7 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, 2021 to June 30, 2022 primarily due to relative changes in the timing of collections, and |
| ● | Our average days sales in inventory, or DSI, decreased from December 31, 2021 to June 30, 2022 primarily due to lower inventory volumes attributable to sales volumes exceeding production volumes in the first six months of 2022 compared to 2021 and supply disruptions and other transportation delays impacting the timing of raw material shipments. |
For comparative purposes, we have also provided comparable prior year numbers below.
| December 31, 2020 |
| June 30, 2021 |
| December 31, 2021 |
| June 30, 2022 | |
DSO | 68 days | 64 days | 65 days | 62 days | ||||
DSI | 74 days | 53 days | 59 days | 45 days |
Investing activities
Our capital expenditures of $30.5 million and $21.2 million in the first six months of 2022 and 2021, respectively, were primarily to maintain and improve the cost effectiveness of our manufacturing facilities.
Financing activities
During the first six months of 2022, we paid quarterly dividends of $.19 per share to stockholders aggregating $43.9 million and in the first six months of 2021, we paid quarterly dividends of $.18 per share to stockholders aggregating $41.6 million.
In addition, during the first quarter of 2022, we acquired 73,881 shares of our common stock in market transactions for an aggregate purchase price of $1.1 million.
Outstanding debt obligations
At June 30, 2022, our consolidated debt comprised:
| ● | €400 million aggregate outstanding on our Kronos International, Inc. (KII) 3.75% Senior Secured Notes ($415.1 million carrying amount, net of unamortized debt issuance costs) due in September 2025 (Senior Secured Notes), and |
| ● | approximately $2.1 million of other indebtedness. |
We had no outstanding borrowings at June 30, 2022 on our $225 million global revolving credit facility (Global Revolver) and the full $225 million was available for borrowings thereunder. Our Senior Secured Notes and our 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 are discussed in Note 8 to our Consolidated Financial Statements included in our 2021 Annual
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Report. We are in compliance with all of our debt covenants at June 30, 2022. We believe we will be able to continue to comply 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 Global Revolver is collateralized by, among other things, a first priority lien on the borrower’s trade receivables and inventories. See Note 5 to our Condensed Consolidated Financial Statements.
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, (iii) provide for the payment of dividends and (iv) fund purchases of shares of our common stock under our stock repurchase program. 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.
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, 2022 we had aggregate cash, cash equivalents and restricted cash on hand of $377.5 million, of which $104.2 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 $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, 2023) and our long-term obligations (defined as the five-year period ending June 30, 2027, our time period for long-term budgeting). If actual developments differ from our expectations, our liquidity could be adversely affected.
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Capital expenditures
We intend to invest approximately $80 million in capital expenditures primarily to maintain and improve our existing facilities during 2022, including $30.5 million in expenditures through June 30, 2022. It is possible we will delay planned capital projects based on market conditions including but not limited to expected demand, the general availability of materials, equipment and supplies necessary to complete such projects.
Stock repurchase program
At June 30, 2022, we have 1,475,229 shares available for repurchase under a stock repurchase program authorized by our board of directors.
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 2021 Annual Report. There have been no changes in our critical accounting policies during the first six months of 2022.
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 2021 Annual Report. See also Part I, Item 7A. - “Quantitative and Qualitative Disclosure About Market Risk” in our 2021 Annual Report and Note 13 to our Condensed Consolidated Financial Statements.
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 James M. Buch, our President and Chief Executive Officer and Tim C. Hafer, our Executive Vice President and Chief Financial Officer, has evaluated the design and effectiveness of our disclosure controls and procedures as of June 30, 2022. 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
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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. |
Other
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, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II. OTHER INFORMATION
Item 1A. Risk Factors
For a discussion of the risk factors related to our businesses, refer to Part I, Item 1A, “Risk Factors,” in our 2021 Annual Report.
Item 6.Exhibits
31.1 |
| |
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 3, 2022 | /s/ Tim C. Hafer |
Tim C. Hafer | |
Executive Vice President and Chief Financial Officer (duly authorized officer) | |
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