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KRO Kronos Worldwide

Filed: 5 May 21, 4:16pm

 

 

 

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 March 31, 2021 

OR

☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

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 April 30, 2021:  115,542,717.

 

 

 


 

 

KRONOS WORLDWIDE, INC. AND SUBSIDIARIES

INDEX

 

 

  

 

  

Page
number

 

Part I.

  

FINANCIAL INFORMATION

  

 

 

Item 1.

  

Financial Statements

  

 

 

  

 

Condensed Consolidated Balance Sheets -
   December 31, 2020; March 31, 2021 (unaudited)

  

3

 

  

 

Condensed Consolidated Statements of Income (unaudited) -
   Three months ended March 31, 2020 and 2021

  

5

 

  

 

Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) -
   Three months ended March 31, 2020 and 2021

  

6

 

  

 

Condensed Consolidated Statements of Stockholders’ Equity (unaudited) -
   Three months ended March 31, 2020 and 2021

  

7

 

  

 

Condensed Consolidated Statements of Cash Flows (unaudited) -
   Three months ended March 31, 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

  

23

Item 4.

  

 

Controls and Procedures

  

23

 

Part II.

  

OTHER INFORMATION

  

 

 

Item 1.

  

Legal Proceedings

  

25

Item 1A.

  

 

Risk Factors

  

25

Item 6.

  

 

Exhibits

  

25

 

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)

 

 

 

December 31,

 

 

March 31,

 

 

2020

 

 

2021

 

 

 

 

 

 

(unaudited)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

355.3

 

 

$

373.6

 

Restricted cash

 

2.0

 

 

 

1.7

 

Accounts and other receivables, net

 

323.0

 

 

 

338.3

 

Inventories, net

 

519.0

 

 

 

473.0

 

Prepaid expenses and other

 

19.0

 

 

 

13.6

 

 

 

 

 

 

 

 

 

Total current assets

 

1,218.3

 

 

 

1,200.2

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

Investment in TiO2 manufacturing joint venture

 

103.3

 

 

 

106.7

 

Restricted cash

 

4.7

 

 

 

4.6

 

Marketable securities

 

2.2

 

 

 

3.0

 

Operating lease right-of-use assets

 

26.1

 

 

 

24.6

 

Deferred income taxes

 

151.0

 

 

 

143.3

 

Other

 

6.5

 

 

 

7.1

 

 

 

 

 

 

 

 

 

Total other assets

 

293.8

 

 

 

289.3

 

 

 

 

 

 

 

 

 

Property and equipment:

 

 

 

 

 

 

 

Land

 

44.1

 

 

 

42.7

 

Buildings

 

233.9

 

 

 

228.0

 

Equipment

 

1,173.7

 

 

 

1,141.1

 

Mining properties

 

127.8

 

 

 

128.5

 

Construction in progress

 

56.1

 

 

 

59.5

 

 

 

1,635.6

 

 

 

1,599.8

 

Less accumulated depreciation and amortization

 

1,111.0

 

 

 

1,092.7

 

 

 

 

 

 

 

 

 

Net property and equipment

 

524.6

 

 

 

507.1

 

 

 

 

 

 

 

 

 

Total assets

$

2,036.7

 

 

$

1,996.6

 

 

- 3 -


 

 

KRONOS WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In millions)

 

 

 

December 31,

 

 

March 31,

 

 

2020

 

 

2021

 

 

 

 

 

 

(unaudited)

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current maturities of long-term debt

$

.7

 

 

$

.7

 

Accounts payable and accrued liabilities

 

243.8

 

 

 

238.0

 

Income taxes

 

15.7

 

 

 

16.5

 

 

 

 

 

 

 

 

 

Total current liabilities

 

260.2

 

 

 

255.2

 

 

 

 

 

 

 

 

 

Noncurrent liabilities:

 

 

 

 

 

 

 

Long-term debt

 

486.7

 

 

 

465.9

 

Accrued pension costs

 

372.6

 

 

 

355.8

 

Payable to affiliate - income taxes

 

50.6

 

 

 

50.6

 

Operating lease liabilities

 

18.8

 

 

 

17.6

 

Deferred income taxes

 

24.6

 

 

 

24.1

 

Other

 

26.7

 

 

 

26.5

 

 

 

 

 

 

 

 

 

Total noncurrent liabilities

 

980.0

 

 

 

940.5

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Common stock

 

1.2

 

 

 

1.2

 

Additional paid-in capital

 

1,395.3

 

 

 

1,395.3

 

Retained deficit

 

(151.8

)

 

 

(153.0

)

Accumulated other comprehensive loss

 

(448.2

)

 

 

(442.6

)

 

 

 

 

 

 

 

 

Total stockholders' equity

 

796.5

 

 

 

800.9

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

$

2,036.7

 

 

$

1,996.6

 

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

 

 

March 31,

 

 

2020

 

 

2021

 

 

(unaudited)

 

Net sales

$

421.0

 

 

$

465.0

 

Cost of sales

 

332.9

 

 

 

369.3

 

 

 

 

 

 

 

 

 

Gross margin

 

88.1

 

 

 

95.7

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

53.5

 

 

 

58.0

 

Other operating income (expense):

 

 

 

 

 

 

 

Currency transactions, net

 

12.2

 

 

 

(.5

)

Other operating expense, net

 

(3.3

)

 

 

(3.2

)

 

 

 

 

 

 

 

 

Income from operations

 

43.5

 

 

 

34.0

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

Interest and dividend income

 

1.2

 

 

 

.1

 

Insurance settlement gain

 

1.5

 

 

 

-

 

Marketable equity securities

 

(1.5

)

 

 

.8

 

Other components of net periodic pension and OPEB cost

 

(4.7

)

 

 

(4.3

)

Interest expense

 

(4.6

)

 

 

(5.0

)

 

 

 

 

 

 

 

 

Income before income taxes

 

35.4

 

 

 

25.6

 

 

 

 

 

 

 

 

 

Income tax expense

 

8.4

 

 

 

6.0

 

 

 

 

 

 

 

 

 

Net income

$

27.0

 

 

$

19.6

 

 

 

 

 

 

 

 

 

Net income per basic and diluted share

$

.23

 

 

$

.17

 

 

 

 

 

 

 

 

 

Weighted average shares used in the calculation

  of net income per share

 

115.6

 

 

 

115.5

 

 

See accompanying notes to Condensed Consolidated Financial Statements.  

 

- 5 -


 

KRONOS WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions)

 

 

 

Three months ended

 

 

March 31,

 

 

2020

 

 

2021

 

 

(unaudited)

 

Net income

$

27.0

 

 

$

19.6

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

Currency translation

 

(41.9

)

 

 

2.2

 

Defined benefit pension plans

 

3.0

 

 

 

3.5

 

Other postretirement benefit plans

 

(.1

)

 

 

(.1

)

 

 

 

 

 

 

 

 

Total other comprehensive income (loss), net

 

(39.0

)

 

 

5.6

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

$

(12.0

)

 

$

25.2

 

 

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 March 31, 2020 and 2021 (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

other

 

 

 

 

 

 

 

 

 

 

Common

 

 

paid-in

 

 

Retained

 

 

comprehensive

 

 

Treasury

 

 

 

 

 

 

stock

 

 

capital

 

 

deficit

 

 

loss

 

 

stock

 

 

Total

 

 

 

 

Balance at December 31, 2019

$

1.2

 

 

$

1,396.2

 

 

$

(132.5

)

 

$

(448.8

)

 

$

-

 

 

$

816.1

 

Net income

 

-

 

 

 

-

 

 

 

27.0

 

 

 

-

 

 

 

-

 

 

 

27.0

 

Other comprehensive loss, net of tax

 

-

 

 

 

-

 

 

 

-

 

 

 

(39.0

)

 

 

-

 

 

 

(39.0

)

Dividends paid - $.18 per share

 

-

 

 

 

-

 

 

 

(20.8

)

 

 

-

 

 

 

-

 

 

 

(20.8

)

Treasury stock acquired

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1.0

)

 

 

(1.0

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2020

$

1.2

 

 

$

1,396.2

 

 

$

(126.3

)

 

$

(487.8

)

 

$

(1.0

)

 

$

782.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2020

$

1.2

 

 

$

1,395.3

 

 

$

(151.8

)

 

$

(448.2

)

 

$

-

 

 

$

796.5

 

Net income

 

-

 

 

 

-

 

 

 

19.6

 

 

 

-

 

 

 

-

 

 

 

19.6

 

Other comprehensive income, net of tax

 

-

 

 

 

-

 

 

 

-

 

 

 

5.6

 

 

 

-

 

 

 

5.6

 

Dividends paid - $.18 per share

 

-

 

 

 

-

 

 

 

(20.8

)

 

 

-

 

 

 

-

 

 

 

(20.8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2021

$

1.2

 

 

$

1,395.3

 

 

$

(153.0

)

 

$

(442.6

)

 

$

-

 

 

$

800.9

 

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

- 7 -


 

KRONOS WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

 

 

Three months ended

 

 

March 31,

 

 

2020

 

 

2021

 

 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

$

27.0

 

 

$

19.6

 

Depreciation

 

14.9

 

 

 

12.7

 

Amortization of operating lease right-of-use assets

 

1.6

 

 

 

1.7

 

Deferred income taxes

 

(.9

)

 

 

.2

 

Benefit plan expense greater than cash funding

 

3.0

 

 

 

3.7

 

Marketable equity securities

 

1.5

 

 

 

(.8

)

Contributions to TiO2 manufacturing joint venture, net

 

(2.2

)

 

 

(3.4

)

Other, net

 

(1.1

)

 

 

.1

 

Change in assets and liabilities:

 

 

 

 

 

 

 

Accounts and other receivables, net

 

(38.7

)

 

 

(23.5

)

Inventories, net

 

3.3

 

 

 

35.6

 

Prepaid expenses

 

3.6

 

 

 

5.0

 

Accounts payable and accrued liabilities

 

(30.5

)

 

 

.5

 

Income taxes

 

9.4

 

 

 

.9

 

Accounts with affiliates

 

(1.5

)

 

 

4.2

 

Other, net

 

.8

 

 

 

.2

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

(9.8

)

 

 

56.7

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

(15.3

)

 

 

(10.8

)

Proceeds from insurance settlement

 

1.5

 

 

 

-

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

(13.8

)

 

 

(10.8

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Payments on long-term debt

 

(.1

)

 

 

(.2

)

Dividends paid

 

(20.8

)

 

 

(20.8

)

Treasury stock acquired

 

(1.0

)

 

 

-

 

 

 

 

 

 

 

 

 

Net cash used in financing activities

 

(21.9

)

 

 

(21.0

)

 

 

 

 

 

 

 

 

Cash, cash equivalents and restricted cash - net change from:

 

 

 

 

 

 

 

Operating, investing and financing activities

 

(45.5

)

 

 

24.9

 

Currency translation

 

(3.9

)

 

 

(7.0

)

Balance at beginning of period

 

392.3

 

 

 

362.0

 

 

 

 

 

 

 

 

 

Balance at end of period

$

342.9

 

 

$

379.9

 

 

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

Interest, net of amount capitalized

$

8.5

 

 

$

9.2

 

Income taxes

 

(.1

)

 

 

3.9

 

Accrual for capital expenditures

 

2.3

 

 

 

2.5

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

- 8 -


 

 

KRONOS WORLDWIDE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(unaudited)

 

Note 1 - Organization and basis of presentation:

Organization - At March 31, 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 March 31, 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 period ended March 31, 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:

 

 

December 31,

 

 

March 31,

 

 

2020

 

 

2021

 

 

(In millions)

 

Trade receivables

$

294.8

 

 

$

314.7

 

Recoverable VAT and other receivables

 

21.3

 

 

 

17.5

 

Receivables from affiliates

 

3.5

 

 

 

2.7

 

Refundable income taxes

 

5.3

 

 

 

5.4

 

Allowance for doubtful accounts

 

(1.9

)

 

 

(2.0

)

Total

$

323.0

 

 

$

338.3

 

 

 

- 9 -


 

 

Note 3 - Inventories, net:

 

 

December 31,

 

 

March 31,

 

 

2020

 

 

2021

 

 

(In millions)

 

Raw materials

$

133.2

 

 

$

134.7

 

Work in process

 

36.8

 

 

 

30.5

 

Finished products

 

269.2

 

 

 

229.4

 

Supplies

 

79.8

 

 

 

78.4

 

Total

$

519.0

 

 

$

473.0

 

 

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

 

 

 

 

 

Marketable security

 

level

 

value

 

 

basis

 

 

Unrealized loss

 

 

 

 

 

(In millions)

 

December 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Valhi common stock

 

1

 

$

2.1

 

 

$

3.2

 

 

$

(1.1

)

NL and CompX common stocks

 

1

 

 

.1

 

 

 

.1

 

 

 

-

 

Total

 

 

 

$

2.2

 

 

$

3.3

 

 

$

(1.1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Valhi common stock

 

1

 

$

2.9

 

 

$

3.2

 

 

$

(.3

)

NL and CompX common stocks

 

1

 

 

.1

 

 

 

.1

 

 

 

-

 

Total

 

 

 

$

3.0

 

 

$

3.3

 

 

$

(.3

)

 

At December 31, 2020 and March 31, 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 March 31, 2021, the per share quoted market price of Valhi’s common stock was $15.20 and $20.51, 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:

 

 

December 31,

 

 

March 31,

 

 

2020

 

 

2021

 

 

(In millions)

 

Kronos International, Inc. 3.75% Senior Notes

$

485.7

 

 

$

465.0

 

Other

 

1.7

 

 

 

1.6

 

Total debt

 

487.4

 

 

 

466.6

 

Less current maturities

 

.7

 

 

 

.7

 

Total long-term debt

$

486.7

 

 

$

465.9

 

 

Senior Notes - At March 31, 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 $4.3 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 0 borrowings on either facility in 2021 through their termination concurrent with entering into the Global Revolver.  The full $225 million was available for borrowing upon the commencement of the Global Revolver.  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.

 

- 10 -


 

Other - We are in compliance with all of our debt covenants at March 31, 2021.

 

Note 6 - Accounts payable and accrued liabilities:

 

December 31,

 

 

March 31,

 

 

2020

 

 

2021

 

 

(In millions)

 

Accounts payable

$

111.0

 

 

$

132.0

 

Employee benefits

 

27.8

 

 

 

30.3

 

Accrued sales discounts and rebates

 

29.1

 

 

 

14.6

 

Payables to affiliates:

 

 

 

 

 

 

 

Louisiana Pigment Company, L.P.

 

19.3

 

 

 

16.8

 

Income taxes payable to Valhi

 

8.6

 

 

 

9.7

 

Operating lease liabilities

 

6.7

 

 

 

6.3

 

Other

 

41.3

 

 

 

28.3

 

Total

$

243.8

 

 

$

238.0

 

 

Note 7 - Other noncurrent liabilities:

 

December 31,

 

 

March 31,

 

 

2020

 

 

2021

 

 

(In millions)

 

Accrued postretirement benefits

$

8.7

 

 

$

8.8

 

Employee benefits

 

6.2

 

 

 

5.8

 

Other

 

11.8

 

 

 

11.9

 

Total

$

26.7

 

 

$

26.5

 

 

 

- 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.

 

 

Three months ended

 

 

March 31,

 

 

2020

 

 

2021

 

 

(In millions)

 

Net sales - point of origin:

 

 

 

 

 

 

 

United States

$

237.0

 

 

$

253.9

 

Germany

 

229.1

 

 

 

231.2

 

Canada

 

67.7

 

 

 

97.2

 

Belgium

 

66.1

 

 

 

66.5

 

Norway

 

54.3

 

 

 

71.0

 

Eliminations

 

(233.2

)

 

 

(254.8

)

Total

$

421.0

 

 

$

465.0

 

 

 

 

 

 

 

 

 

Net sales - point of destination:

 

 

 

 

 

 

 

Europe

$

214.5

 

 

$

227.3

 

North America

 

132.3

 

 

 

145.3

 

Other

 

74.2

 

 

 

92.4

 

Total

$

421.0

 

 

$

465.0

 

 

Note 9 - Employee benefit plans:

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

 

Three months ended

 

 

March 31,

 

 

2020

 

 

2021

 

 

(In millions)

 

Service cost

$

3.2

 

 

$

3.8

 

Interest cost

 

2.6

 

 

 

2.2

 

Expected return on plan assets

 

(2.3

)

 

 

(3.0

)

Recognized actuarial losses

 

4.4

 

 

 

5.1

 

Total

$

7.9

 

 

$

8.1

 

 

 

- 12 -


 

We expect our 2021 contributions for our pension plans to be approximately $17 million.

Note 10 - Income taxes:

 

Three months ended

 

 

March 31,

 

 

2020

 

 

2021

 

 

(In millions)

 

Expected tax expense, at U.S. federal statutory

   income tax rate of 21%

$

7.4

 

 

$

5.4

 

Non-U.S. tax rates

 

.9

 

 

 

.7

 

Incremental net tax benefit on earnings and losses

   of U.S. and non-U.S. companies

 

(1.3

)

 

 

(.7

)

Global intangible low-tax income, net

 

1.2

 

 

 

.5

 

Valuation allowance, net

 

(.5

)

 

 

.5

 

Adjustment to the reserve for uncertain tax positions, net

 

.4

 

 

 

(.5

)

Other, net

 

.3

 

 

 

.1

 

Income tax expense

$

8.4

 

 

$

6.0

 

 

 

 

 

 

 

 

 

Comprehensive provision for income taxes allocable to:

 

 

 

 

 

 

 

Net income

$

8.4

 

 

$

6.0

 

Other comprehensive income - pension plans

 

1.4

 

 

 

1.6

 

Total

$

9.8

 

 

$

7.6

 

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.

 

Three months ended

 

 

March 31,

 

 

2020

 

 

2021

 

 

(In millions)

 

Accumulated other comprehensive loss, net of tax:

 

 

 

 

 

 

 

Currency translation:

 

 

 

 

 

 

 

Balance at beginning of period

$

(246.8

)

 

$

(233.4

)

Other comprehensive income (loss)

 

(41.9

)

 

 

2.2

 

Balance at end of period

$

(288.7

)

 

$

(231.2

)

 

 

 

 

 

 

 

 

Defined benefit pension plans:

 

 

 

 

 

 

 

Balance at beginning of period

$

(202.2

)

 

$

(214.5

)

Other comprehensive income - amortization

   of prior service cost and net losses included in

   net periodic pension cost

 

3.0

 

 

 

3.5

 

Balance at end of period

$

(199.2

)

 

$

(211.0

)

 

 

 

 

 

 

 

 

OPEB plans:

 

 

 

 

 

 

 

Balance at beginning of period

$

.2

 

 

$

(.3

)

Other comprehensive loss - amortization

   of prior service credit and net losses

   included in net periodic OPEB cost

 

(.1

)

 

 

(.1

)

Balance at end of period

$

.1

 

 

$

(.4

)

 

 

 

 

 

 

 

 

Total accumulated other comprehensive loss:

 

 

 

 

 

 

 

Balance at beginning of period

$

(448.8

)

 

$

(448.2

)

Other comprehensive income (loss)

 

(39.0

)

 

 

5.6

 

Balance at end of period

$

(487.8

)

 

$

(442.6

)

 

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.  

 

- 14 -


 

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

 

 

March 31, 2021

 

 

 

Carrying amount

 

 

Fair

value

 

 

Carrying amount

 

 

Fair

value

 

 

 

(In millions)

 

Cash, cash equivalents and restricted cash

 

$

362.0

 

 

$

362.0

 

 

$

379.9

 

 

$

379.9

 

Long-term debt - Fixed rate Senior Notes

 

 

485.7

 

 

 

499.9

 

 

 

465.0

 

 

 

478.1

 

At March 31, 2021, the estimated market price of our Senior Notes was €1,019 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 three months ended March 31, 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 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 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 $19.6 million, or $.17 per share, in the first quarter of 2021 as compared to net income of $27.0 million, or $.23 per share, in the first quarter of 2020.  Net income in the first quarter of 2021 was lower than in the first quarter of 2020 primarily due to lower income from operations resulting from the net effects of changes in currency exchange rates, higher sales volumes, lower production costs and slightly lower average TiO2 selling prices.  

Our net income in 2020 includes the first quarter recognition of a pre-tax insurance settlement gain of $1.5 million ($1.2 million, or $.01 per share, net of income tax expense) related to a property damage claim.

 

 

- 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)

 

- 17 -


 

 

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 and our average TiO2 selling prices at the end of the first quarter of 2021 were 1% higher than the end of 2020.  We experienced higher sales volumes in our North American and Latin American markets, partially offset by lower sales volumes in our European market in the first three months of 2021 as compared to the same period of 2020.

We operated our production facilities at overall average capacity utilization rates of 97% in the first quarter of 2021 compared to 95% in the first quarter of 2020.  Due to the phase-out of sulfate production at one of our facilities in the fourth quarter of 2020, our TiO2 production volumes were 1% lower in the first quarter of 2021 as compared to the first quarter of 2020.

Quarter ended March 31, 2021 compared to the quarter ended March 31, 2020

 

Three months ended March 31,

 

 

2020

 

 

2021

 

 

 

(Dollars in millions)

 

Net sales

$

421.0

 

 

 

100

%

 

$

465.0

 

 

 

100

%

Cost of sales

 

332.9

 

 

 

79

 

 

 

369.3

 

 

 

79

 

Gross margin

 

88.1

 

 

 

21

 

 

 

95.7

 

 

 

21

 

Selling, general and administrative expense

 

53.5

 

 

 

13

 

 

 

58.0

 

 

 

13

 

Other operating income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency transactions, net

 

12.2

 

 

 

3

 

 

 

(.5)

 

 

 

-

 

Other operating expense, net

 

(3.3

)

 

 

(1

)

 

 

(3.2)

 

 

 

(1

)

Income from operations

$

43.5

 

 

 

10

%

 

$

34.0

 

 

 

7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% Change

 

TiO2 operating statistics:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales volumes*

 

136

 

 

 

 

 

 

 

141

 

 

 

3

%

Production volumes*

 

132

 

 

 

 

 

 

 

130

 

 

 

(1

)%

Percentage change in net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TiO2 sales volumes

 

 

 

 

 

 

 

 

 

 

 

 

 

3

%

TiO2 product pricing

 

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

TiO2 product mix/other

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

Changes in currency exchange rates

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

10

%

 

 

 

 

*

Thousands of metric tons

Net sales - Net sales in the first quarter of 2021 increased 10%, or $44.0 million, compared to the first quarter of 2020 primarily due to a 3% increase in sales volumes (which increased net sales by approximately $13 million), partially offset by a 1% decrease in average TiO2 selling prices (which decreased net sales by approximately $4 million). In addition to the net impact of higher sales volumes and lower average selling prices, we estimate that changes in currency exchange rates (primarily the euro) increased our net sales by approximately $20 million in the first quarter of 2021 as compared to the first 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.

 

- 18 -


 

Our sales volumes increased 3% in the first quarter of 2021 as compared to the first quarter of 2020 primarily due to higher demand in our North American and Latin American markets, partially offset by lower demand in our European market.

Cost of sales and gross margin - Cost of sales increased $36.4 million, or 11%, in the first quarter of 2021 compared to the first quarter of 2020 due to a 3% increase in sales volumes partially offset by lower production costs of approximately $13 million.  Our cost of sales as a percentage of net sales in the first quarter of 2021 was comparable to our cost of sales as a percentage of net sales in the first quarter of 2020.

Gross margin as a percentage of net sales was 21% in each of the first quarters of 2021 and 2020. Our gross margin as a percentage of net sales increases or decreases primarily due to the net effect of fluctuations in sales volumes, average TiO2 selling prices and raw materials and other production costs.  

Selling, general and administrative expense - Selling, general and administrative expense was approximately 13% of net sales in the first quarters of 2021 and 2020.

Income from operations - Income from operations decreased by $9.5 million, or 22%, in the first quarter of 2021 compared to the first quarter of 2020.  Income from operations as a percentage of net sales decreased to 7% in the first quarter of 2021 from 10% in the same period of 2020.  We estimate that changes in currency exchange rates decreased income from operations by approximately $16 million in the first quarter of 2021 as compared to the same period in 2020, as discussed below.

Other non-operating income (expense) - We recognized a gain of $.8 million on the change in value of our marketable equity securities in the first quarter of 2021 compared to a loss of $1.5 million in the first quarter of 2020.  See Note 4 to our Condensed Consolidated Financial Statements.  Other components of net periodic pension and OPEB cost in the first quarter of 2021 was comparable to the first quarter of 2020. See Note 9 to our Condensed Consolidated Financial Statements.  Interest expense in the first quarter of 2021 was comparable to the first quarter of 2020 and we currently expect our interest expense for all of 2021 to be comparable to 2020.  

Income tax expense - We recognized income tax expense of $6.0 million in the first quarter of 2021 compared to income tax expense of $8.4 million in the first quarter of 2020.  The difference is primarily due to lower earnings in 2021.  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).

 

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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 March 31, 2021 vs March 31, 2020

 

 

 

 

 

 

Translation

gains (losses) -

impact of

rate changes

 

 

Total

currency

impact

2021 vs 2020

 

 

Transaction gains (losses) recognized

 

 

 

 

 

2020

 

 

2021

 

 

Change

 

(In millions)

 

Impact on:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

-

 

 

$

-

 

 

$

-

 

 

$

20

 

 

$

20

 

Income from operations

 

12

 

  

 

(1

)

 

 

(13

)

 

 

(3

)

 

 

(16

)

The $20 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 are denominated in the U.S. dollar.

The $16 million decrease in income from operations was comprised of the following:

 

Lower net currency transaction gains of approximately $13 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 weakening of the U.S. dollar relative to the Canadian dollar, as local currency-denominated operating costs were translated into more U.S. dollars in 2021 as compared to 2020. Such translation, as it related to the U.S. dollar relative to the euro and Norwegian krone, had a nominal effect on income from operations in 2021 as compared to 2020.

Outlook

Beginning in the second half of 2020 and continuing through the first quarter 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 maintained production at those increased levels through the first quarter of 2021. At the beginning of 2021, our average TiO2 selling prices were 3% lower than at the beginning of 2020 and average selling prices increased 1% during the first quarter of 2021, although still below corresponding 2020 levels.

Despite continued challenges and uncertainties related to the pandemic in certain regions and industries, we expect global demand for consumer products, including those of our customers, to remain strong throughout 2021 and we expect that our sales and production volumes will reflect the elevated demand. As global economic activity has begun to recover, we have experienced certain disruptions in global supply chains along with increasing production costs, including higher third-party feedstock prices and related shipping costs, which are likely to continue for much of 2021. Due to increased customer demand, we expect sales prices for TiO2 to continue to rise throughout 2021, mitigating increases in distribution and 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. We continue to monitor current and anticipated near-term customer demand levels and will align our production and inventories accordingly.

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. Future impacts of COVID-19 on our operations will depend on, among other things, demand for our products, any future disruption in our operations or our suppliers’ operations and the timing and effectiveness of the global measures deployed to fight COVID-19, 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 and are in varying stages of recovery. We continue to employ a variety of methods to protect the health and well-being of our workforce and our customers, and we are encouraging 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.

 

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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 $56.7 million in the first three months of 2021 compared to cash used in operating activities of $9.8 million in the first three months of 2020.  This $66.5 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 $84.6 million as compared to 2020,

 

lower income from operations in 2021 of $9.5 million,

 

higher cash paid for taxes in 2021 of $4.0 million due to the relative timing of payments, and

 

higher contributions to our TiO2 manufacturing joint venture in 2021 of $1.2 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 March 31, 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 March 31, 2021 primarily due to lower inventory volumes attributable to higher sales volumes in the first quarter of 2021 compared to the fourth quarter of 2020 while production volumes were comparable.  

For comparative purposes, we have also provided comparable prior year numbers below.

 

December 31,

2019

 

 

March 31,

2020

 

 

December 31,

2020

 

 

March 31,

2021

DSO

  71 days

 

 

69 days

 

 

68 days

 

 

64 days

DSI

  83 days

 

 

66 days

 

 

74 days

 

 

56 days

Investing activities

Our capital expenditures of $10.8 million and $15.3 million in the first three months of 2021 and 2020, respectively, were primarily to maintain and improve the cost effectiveness of our manufacturing facilities.

In addition, during the first three months of 2020, we received $1.5 million from an insurance settlement related to a property damage claim.

Financing activities

During the first three months of 2021 and 2020, we paid quarterly dividends of $.18 per share to stockholders aggregating $20.8 million.

In addition, during the first three 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 March 31, 2021, our consolidated debt comprised:

 

€400 million aggregate outstanding on our Kronos International, Inc. (KII) 3.75% Senior Secured Notes ($465.0 million carrying amount, net of unamortized debt issuance costs) due in September 2025 (Senior Secured Notes), and

 

approximately $1.6 million of other indebtedness.

 

- 21 -


 

 

On April 20, 2021, we entered into a new $225 million global revolving credit facility (Global Revolver) which matures in April 2026.  We had no outstanding borrowings on our previously existing North American and European revolving facilities at March 31, 2021, through the date of their termination.  We currently have no outstanding borrowings on the new Global Revolver 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 March 31, 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 March 31, 2021.  We believe we will be able to continue to comply with the financial covenants contained in our credit facilities through their 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.

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 March 31, 2021 we had aggregate cash, cash equivalents and restricted cash on hand of $379.9 million, of which $204.7 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 March 31, 2022) and our long-term obligations (defined as the five-year period ending March 31, 2026, our time period for long-term budgeting).  If actual

 

- 22 -


 

developments differ from our expectations, our liquidity could be adversely affected.

Capital expenditures

We intend to spend approximately $85 million in capital expenditures primarily to maintain and improve our existing facilities during 2021, including the $10.8 million we have spent through March 31, 2021.  It is possible we will delay planned capital projects based on market conditions.

Stock repurchase program

At March 31, 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 three 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.

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, President and Chief Executive Officer and James W. Brown, our Executive Vice President and Chief Financial Officer, have evaluated the design and effectiveness of our disclosure controls and procedures as of March 31, 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

 

- 23 -


 

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 March 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

- 24 -


 

Part II. OTHER INFORMATION

Item 1.

Refer to Note 12 to our Condensed Consolidated Financial Statements and our 2020 Annual Report for descriptions of certain legal proceedings.

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 2020 Annual Report. There have been no material changes to such risk factors during the three months ended March 31, 2021.

Item 6.

Exhibits

10.1

 

Credit Agreement dated as of April 20, 2021, by and among the Company, Kronos Louisiana, Inc., Kronos (US), Inc., Kronos Canada, Inc., Kronos Europe NV, Kronos Titan GmbH and Wells Fargo Bank, National Association as administrative agent and lender.

 

 

 

10.2

 

Guaranty and Security Agreement dated as of April 20, 2021, by and among the Company, Kronos Louisiana, Inc., Kronos (US), Inc., Kronos Canada, Inc., Kronos International, Inc. and Wells Fargo Bank, National Association as administrative agent and lender.

 

 

 

31.1

 

Certification

 

 

 

31.2

 

Certification

 

 

 

32.1

 

Certification

 

 

 

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)

 

 

- 25 -


 

 


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:  May 5, 2021

 

  /s/ James W. Brown

 

 

James W. Brown

 

 

Executive Vice President and

Chief Financial Officer

(Principal Financial Officer)

 

 

 

 

 

 

 

 

 

Date:  May 5, 2021

 

  /s/ Tim C. Hafer

 

 

Tim C. Hafer

 

 

Senior Vice President and Controller

(Principal Accounting Officer)

 

 

- 26 -