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.
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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. ☐
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Number of shares of the registrant’s common stock, $.01 par value per share, outstanding on November 1, 2024:
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
INDEX
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| Page | |
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Part I. | FINANCIAL INFORMATION |
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Item 1. | Financial Statements |
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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 | 22 | ||||
35 | |||||
35 | |||||
36 | |||||
37 | |||||
Items 2, 3, 4 and 5 of Part II are omitted because there is no information to report. |
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2
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
ASSETS | December 31, | September 30, | ||||
| 2023 |
| 2024 | |||
(unaudited) | ||||||
Current assets: |
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|
| ||
Cash and cash equivalents | $ | | $ | | ||
Restricted cash |
| |
| | ||
Accounts and other receivables, net |
| |
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Inventories, net |
| |
| | ||
Prepaid expenses and other |
| |
| | ||
Total current assets |
| |
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Other assets: |
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|
| ||
Investment in TiO2 manufacturing joint venture |
| |
| - | ||
Restricted cash |
| |
| | ||
Marketable securities |
| |
| | ||
Operating lease right-of-use assets |
| |
| | ||
Deferred income taxes |
| |
| | ||
Goodwill | - | | ||||
Other |
| |
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Total other assets |
| |
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Property and equipment: |
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Land |
| |
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Buildings |
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Equipment |
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Mining properties |
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Construction in progress |
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Less accumulated depreciation and amortization |
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Net property and equipment |
| |
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Total assets | $ | | $ | | ||
3
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In millions)
LIABILITIES AND STOCKHOLDERS’ EQUITY | December 31, | September 30, | ||||
| 2023 |
| 2024 | |||
(unaudited) | ||||||
Current liabilities: |
|
|
|
| ||
Current maturities of long-term debt | $ | - | $ | | ||
Accounts payable and accrued liabilities | | | ||||
Income taxes |
| |
| | ||
| ||||||
Total current liabilities |
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Noncurrent liabilities: |
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Long-term debt |
| |
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Accrued pension costs |
| |
| | ||
Payable to affiliate - income taxes |
| |
| - | ||
Operating lease liabilities |
| |
| | ||
Deferred income taxes |
| |
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Other |
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Total noncurrent liabilities |
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Stockholders’ equity: |
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Common stock |
| |
| | ||
Additional paid-in capital |
| |
| | ||
Retained deficit |
| ( |
| ( | ||
Accumulated other comprehensive loss |
| ( |
| ( | ||
Total stockholders’ equity |
| |
| | ||
Total liabilities and stockholders’ equity | $ | | $ | | ||
Commitments and contingencies (Notes 10, 12 and 17)
See accompanying notes to Condensed Consolidated Financial Statements.
4
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
Three months ended | Nine months ended | |||||||||||
September 30, | September 30, | |||||||||||
2023 |
| 2024 |
| 2023 |
| 2024 | ||||||
(unaudited) | ||||||||||||
Net sales | $ | | $ | | $ | | $ | | ||||
Cost of sales |
| |
| |
| |
| | ||||
Gross margin |
| |
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Selling, general and administrative expense |
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Other operating income (expense): |
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Currency transactions, net |
| ( |
| |
| |
| | ||||
Other operating expense, net | ( | ( | ( | ( | ||||||||
Income (loss) from operations |
| ( |
| |
| ( |
| | ||||
Other income (expense): |
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|
| ||||
Gain on remeasurement of investment | - | | - | | ||||||||
Interest and dividend income |
| |
| |
| |
| | ||||
Marketable equity securities |
| - |
| |
| ( |
| | ||||
Other components of net periodic pension and OPEB cost |
| ( |
| ( |
| ( |
| ( | ||||
Interest expense |
| ( |
| ( |
| ( |
| ( | ||||
Income (loss) before income taxes |
| ( |
| |
| ( |
| | ||||
Income tax expense (benefit) |
| ( |
| |
| ( |
| | ||||
Net income (loss) | $ | ( | $ | | $ | ( | $ | | ||||
Net income (loss) per basic and diluted share | $ | ( | $ | | $ | ( | $ | | ||||
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Weighted average shares used in the calculation of |
| |
| |
| |
| | ||||
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 | Nine months ended | |||||||||||
September 30, | September 30, | |||||||||||
| 2023 |
| 2024 |
| 2023 |
| 2024 | |||||
(unaudited) | ||||||||||||
Net income (loss) | $ | ( | $ | | $ | ( | $ | | ||||
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Other comprehensive income (loss), net of tax: |
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| ||||
Currency translation |
| ( |
| |
| ( |
| ( | ||||
Defined benefit pension plans |
| |
| |
| |
| | ||||
Other postretirement benefit plans |
| ( |
| - |
| ( |
| - | ||||
Total other comprehensive income (loss), net |
| ( |
| |
| ( |
| ( | ||||
Comprehensive income (loss) | $ | ( | $ | | $ | ( | $ | | ||||
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 September 30, 2023 and 2024 (unaudited) | ||||||||||||||||||
Accumulated | ||||||||||||||||||
Additional | other | |||||||||||||||||
Common | paid-in | Retained | comprehensive | Treasury | ||||||||||||||
| stock |
| capital |
| deficit |
| loss |
| stock |
| Total | |||||||
Balance at June 30, 2023 | $ | | $ | | $ | ( | $ | ( | $ | - | $ | | ||||||
Net loss |
| - |
| - |
| ( |
| - |
| - |
| ( | ||||||
Other comprehensive loss, net of tax |
| - |
| - |
| - |
| ( |
| - |
| ( | ||||||
Dividends paid - $ |
| - |
| - |
| ( |
| - |
| - |
| ( | ||||||
Balance at September 30, 2023 | $ | | $ | | $ | ( | $ | ( | $ | - | $ | | ||||||
Balance at June 30, 2024 | $ | | $ | | $ | ( | $ | ( | $ | - | $ | | ||||||
Net income |
| - |
| - |
| |
| - |
| - |
| | ||||||
Other comprehensive income, net of tax |
| - |
| - |
| - |
| |
| - |
| | ||||||
Dividends paid - $ |
| - |
| - |
| ( |
| - |
| - |
| ( | ||||||
Balance at September 30, 2024 | $ | | $ | | $ | ( | $ | ( | $ | - | $ | | ||||||
Nine months ended September 30, 2023 and 2024 (unaudited) | ||||||||||||||||||
Accumulated | ||||||||||||||||||
Additional | other | |||||||||||||||||
Common | paid-in | Retained | comprehensive | Treasury | ||||||||||||||
| stock |
| capital |
| deficit |
| loss |
| stock |
| Total | |||||||
Balance at December 31, 2022 | $ | | $ | | $ | ( | $ | ( | $ | ( | $ | | ||||||
Net loss |
| - |
| - |
| ( |
| - |
| - |
| ( | ||||||
Other comprehensive loss, net of tax |
| - |
| - |
| - |
| ( |
| - |
| ( | ||||||
Issuance of common stock |
| - |
| |
| - |
| - |
| - |
| | ||||||
Dividends paid - $ |
| - |
| - |
| ( |
| - |
| - |
| ( | ||||||
Treasury stock acquired |
| - |
| - |
| - |
| - |
| ( |
| ( | ||||||
Treasury stock retired |
| - |
| ( |
| - |
| - |
| |
| - | ||||||
Balance at September 30, 2023 | $ | | $ | | $ | ( | $ | ( | $ | - | $ | | ||||||
Balance at December 31, 2023 | $ | | $ | | $ | ( | $ | ( | $ | - | $ | | ||||||
Net income |
| - |
| - |
| |
| - |
| - |
| | ||||||
Other comprehensive loss, net of tax |
| - |
| - |
| - |
| ( |
| - |
| ( | ||||||
Issuance of common stock |
| - |
| |
| - |
| - |
| - |
| | ||||||
Dividends paid - $ |
| - |
| - |
| ( |
| - |
| - |
| ( | ||||||
Balance at September 30, 2024 | $ | | $ | | $ | ( | $ | ( | $ | - | $ | | ||||||
See accompanying notes to Condensed Consolidated Financial Statements.
7
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Nine months ended | ||||||
September 30, | ||||||
| 2023 |
| 2024 | |||
(unaudited) | ||||||
Cash flows from operating activities: |
|
|
|
| ||
Net income (loss) | $ | ( | $ | | ||
Depreciation |
| |
| | ||
Amortization of operating lease right-of-use assets |
| |
| | ||
Gain on remeasurement of investment in TiO2 manufacturing joint venture | - | ( | ||||
Premium on issuance of senior secured notes | - | | ||||
Deferred income taxes |
| ( |
| | ||
Benefit plan expense less than cash funding |
| ( |
| ( | ||
Marketable equity securities |
| |
| ( | ||
Contributions to TiO2 manufacturing joint venture, net |
| ( |
| ( | ||
Other, net |
| |
| | ||
Change in assets and liabilities: |
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|
|
| ||
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 (used in) operating activities |
| ( |
| | ||
Cash flows from investing activities: | ||||||
Capital expenditures |
| ( |
| ( | ||
Acquisition of remaining TiO2 manufacturing joint venture interest, |
| - |
| ( | ||
Net cash used in investing activities |
| ( |
| ( | ||
Cash flows from financing activities: |
|
|
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| ||
Revolving credit facility: |
|
|
| |||
Borrowings |
| - | | |||
Payments | - | ( | ||||
Payments on long-term debt | ( | ( | ||||
Proceeds from issuance of senior secured notes | - | | ||||
Loan from Contran | - | | ||||
Deferred financing fees | - | ( | ||||
Dividends paid |
| ( |
| ( | ||
Treasury stock acquired |
| ( |
| - | ||
Net cash provided by (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)
Nine months ended | ||||||
September 30, | ||||||
| 2023 |
| 2024 | |||
(unaudited) | ||||||
Supplemental disclosures: |
|
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Cash paid for: |
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|
|
| ||
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
September 30, 2024
(unaudited)
Note 1 - Organization and basis of presentation:
Organization - At September 30, 2024, 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, 2023 that we filed with the Securities and Exchange Commission (SEC) on March 6, 2024 (2023 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, 2023 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, 2023) 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 September 30, 2024 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 2023 Consolidated Financial Statements contained in our 2023 Annual Report.
Effective July 16, 2024 (“Acquisition Date”), we acquired the
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.
10
Note 2 - Accounts and other receivables, net:
December 31, | September 30, | |||||
| 2023 |
| 2024 | |||
(In millions) | ||||||
Trade receivables | $ | | $ | | ||
Recoverable VAT and other receivables |
| |
| | ||
Receivables from affiliates, other: |
|
| ||||
LPC | | - | ||||
Other | | | ||||
Refundable income taxes |
| |
| | ||
Allowance for doubtful accounts |
| ( |
| ( | ||
Total | $ | | $ | | ||
Note 3 - Inventories, net:
December 31, | September 30, | |||||
| 2023 |
| 2024 | |||
(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 our related party, Valhi. 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. Unrealized gains or losses on equity securities are recognized in Other income (expense) - Marketable equity securities on our Condensed Consolidated Statements of Operations.
| Fair value |
|
|
| |||||||
measurement | Market | Cost | Unrealized | ||||||||
Marketable security |
| level |
| value |
| basis |
| gain (loss) | |||
| (In millions) | ||||||||||
December 31, 2023: |
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| |||
Valhi common stock |
| 1 | $ | | $ | | $ | ( | |||
September 30, 2024: |
|
|
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|
|
| |||||
Valhi common stock |
| 1 | $ | | $ | | $ | | |||
At December 31, 2023 and September 30, 2024, we held approximately
The Valhi common stock we own is subject to the restrictions on resale pursuant to certain provisions of the Securities and Exchange Commission (SEC) Rule 144. In addition, as a majority-owned subsidiary of Valhi we cannot vote our shares of Valhi common stock under Delaware General Corporation Law, but we do receive dividends from Valhi on these shares when declared and paid.
11
Note 5 - Long-term debt:
December 31, | September 30, | |||||
| 2023 |
| 2024 | |||
(In millions) | ||||||
Kronos International, Inc. | $ | - | $ | | ||
Kronos International, Inc. |
| |
| | ||
Subordinated, Unsecured Term Loan from Contran |
| - |
| | ||
Revolving credit facility | - | | ||||
Total debt |
| |
| | ||
Less current maturities |
| - |
| ( | ||
Total long-term debt | $ | | $ | | ||
On July 30, 2024, KII issued an additional €
The
| ● |
| ● | have a maturity date of March 15, 2029. Prior to March 15, 2026, we may redeem some or all of the |
12
| ● | are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by Kronos Worldwide, Inc. and each of our direct and indirect domestic, wholly-owned subsidiaries; |
| ● | are collateralized by a first priority lien on (i) |
| ● | 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 this type (however, there are no ongoing financial maintenance covenants); and |
| ● | contain customary default provisions, including a default under any of our other indebtedness in excess of $ |
At September 30, 2024, the carrying value of the
Subordinated, Unsecured Term Loan from Contran - As part of the refinancing of a majority of our Old Notes discussed above, we borrowed $
Revolving credit facility – Effective July 17, 2024, we completed an amendment to our Global Revolver (the “Second Amendment”). Among other things, the Second Amendment increased the maximum borrowing amount from $
13
maintenance of a fixed charge coverage ratio, as defined in the agreement, of at least
Other – We are in compliance with all of our debt covenants at September 30, 2024.
Note 6 - Accounts payable and accrued liabilities:
December 31, | September 30, | |||||
| 2023 |
| 2024 | |||
(In millions) | ||||||
Accounts payable | $ | | $ | | ||
Accrued sales discounts and rebates |
| |
| | ||
Employee benefits |
| |
| | ||
Payables to affiliates: |
|
| ||||
LPC | | - | ||||
Income taxes payable to Valhi | | | ||||
Other | | - | ||||
Accrued interest | | | ||||
| |
| | |||
Other |
| |
| | ||
Total | $ | | $ | | ||
Note 7 - Other noncurrent liabilities:
| December 31, | September 30, | ||||
| 2023 |
| 2024 | |||
(In millions) | ||||||
Asset retirement obligations | $ | | $ | | ||
Accrued postretirement benefits | | | ||||
Employee benefits |
| |
| | ||
Earn-out liability | - | | ||||
Other |
| |
| | ||
Total | $ | | $ | | ||
See Notes 13 and 17 to our Condensed Consolidated Financial Statements for additional details related to the acquisition earn-out liability.
14
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 | Nine months ended | |||||||||||
September 30, | September 30, | |||||||||||
| 2023 |
| 2024 |
| 2023 |
| 2024 | |||||
(In millions) | ||||||||||||
Net sales - point of origin: | ||||||||||||
United States | $ | | $ | | $ | | $ | | ||||
Germany |
| |
| |
| |
| | ||||
Canada |
| |
| |
| |
| | ||||
Norway |
| |
| |
| |
| | ||||
Belgium |
| |
| |
| |
| | ||||
Eliminations |
| ( |
| ( |
| ( |
| ( | ||||
Total | $ | | $ | | $ | | $ | | ||||
Net sales - point of destination: |
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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 | Nine months ended | |||||||||||
September 30, | September 30, | |||||||||||
| 2023 |
| 2024 |
| 2023 |
| 2024 | |||||
(In millions) | ||||||||||||
Net periodic pension cost (income): |
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|
|
|
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| ||||
Service cost | $ | | $ | | $ | | $ | | ||||
Interest cost |
| |
| |
| |
| | ||||
Expected return on plan assets |
| ( |
| ( |
| ( |
| ( | ||||
Recognized actuarial losses | | | | | ||||||||
Settlements |
| - |
| - |
| |
| - | ||||
Total | $ | | $ | | $ | | $ | | ||||
In the second quarter of 2023, we completed a termination and buy-out of our UK pension plan resulting in a $
15
Note 10 - Income taxes:
Three months ended | Nine months ended | |||||||||||
September 30, | September 30, | |||||||||||
| 2023 |
| 2024 |
| 2023 |
| 2024 | |||||
(In millions) | ||||||||||||
Expected tax expense (benefit), 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 |
| ( |
| |
| ( |
| | ||||
Nondeductible expenses |
| |
| |
| |
| | ||||
Other, net |
| |
| |
| ( |
| | ||||
Income tax expense (benefit) | $ | ( | $ | | $ | ( | $ | | ||||
Comprehensive provision (benefit) for income taxes allocable to: |
|
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|
|
|
|
| ||||
Net income (loss) | $ | ( | $ | | $ | ( | $ | | ||||
Other comprehensive income (loss): | ||||||||||||
Pension plans | | | | | ||||||||
OPEB 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 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 (losses) 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 subsidiary 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 not change materially during the next twelve months.
16
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 | Nine months ended | |||||||||||
September 30, | September 30, | |||||||||||
| 2023 |
| 2024 |
| 2023 |
| 2024 | |||||
(In millions) | ||||||||||||
Accumulated other comprehensive loss, net of tax: |
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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 |
| |
| |
| |
| | ||||
Settlement loss | - | - | | - | ||||||||
Balance at end of period | $ | ( | $ | ( | $ | ( | $ | ( | ||||
OPEB plans: |
|
|
|
|
|
|
|
| ||||
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 first and second quarters of 2023, we acquired
17
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.
See Note 17 for information on how we determine fair value of our acquisition earn-out liability. The fair value measurement is based on significant inputs not observable in the market and therefore represents a Level 3 measurement as defined in ASC 820. There has been no activity subsequent to the Acquisition Date impacting the fair value of the acquisition earn-out liability. The fair value of the acquisition earn-out liability is included in “Other noncurrent liabilities” on the Condensed Consolidated Balance Sheet. See Note 7.
The following table presents the financial instruments that are not carried at fair value but which require fair value disclosure:
December 31, 2023 |
| September 30, 2024 | |||||||||
Carrying | Fair | Carrying | Fair | ||||||||
amount | value | amount | value | ||||||||
(In millions) | |||||||||||
Cash, cash equivalents and restricted cash | $ | | $ | | $ | | $ | | |||
Long-term debt: |
|
|
|
| |||||||
Fixed rate | - | - | | | |||||||
Fixed rate | | | | ||||||||
Revolving credit facility | - | - | | | |||||||
At September 30, 2024, the estimated market price of our
Note 14 - Other operating income (expense), net:
On August 24, 2020, LPC temporarily halted production due to Hurricane Laura. Although storm damage to core processing facilities was not extensive, a variety of factors, including loss of utilities and limited access and availability of employees and raw materials, prevented the resumption of operations until September 25, 2020. The majority of our losses from property damage and our share of LPC’s lost production and other costs resulting from the disruption of operations, were covered by insurance. We recognized an aggregate gain of $
Note 15 - Recent accounting pronouncements:
In November 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The ASU requires public companies to disclose significant segment expenses and other segment items on an annual and interim basis. The ASU also mandates public companies to provide all annual segment
18
disclosures currently required annually in interim periods. Public entities with a single reportable segment are required to provide the new disclosures and all disclosures required under ASC 280. Public companies will also be required to disclose the title and position of the chief operating decision maker (CODM) and explain how the CODM uses the reported measure of segment profit or loss in assessing segment performance and allocation of resources. The ASU is effective for us beginning with our 2024 Annual Report, and for interim reporting, in the first quarter of 2025, with retrospective application required. We are in the process of evaluating the additional disclosure requirements across all segments.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The ASU requires additional annual disclosure and disaggregation for the rate reconciliation, income taxes paid and income tax expense by federal, state and foreign tax jurisdictions. In addition, the standard increases the disclosure requirements for items included in the rate reconciliation that meet a quantitative threshold. The ASU is effective for us beginning with our 2025 Annual Report. The ASU may be applied prospectively; however, entities have the option to apply it retrospectively. We are in the process of evaluating the additional disclosure requirements.
Note 16 - Restructuring costs:
In response to the extended period of reduced demand in 2023, we took measures to reduce our operating costs and improve our long-term cost structure such as the implementation of certain voluntary and involuntary workforce reductions during the third quarter of 2023 that primarily impacted our European operations. A substantial portion of our workforce reductions were accomplished through voluntary programs, for which eligible workforce reduction costs are recognized at the time both the employee and employer are irrevocably committed to the terms of the separation. These workforce reductions impacted approximately
In the third quarter of 2024, we closed our sulfate process line at our plant in Varennes, Canada. As a result of the sulfate process line closure, we recognized charges to Cost of sales in the first nine months of 2024 of $
A summary of the activity in our accrued restructuring costs for the first nine months of 2024 is shown in the table below:
Amount | ||
(In millions) | ||
Accrued workforce reduction costs at December 31, 2023 | $ | |
Workforce reduction costs accrued | | |
Workforce reduction costs paid | ( | |
Currency translation adjustments, net | ( | |
Accrued workforce reduction costs at September 30, 2024 | $ | |
Amounts recognized in the balance sheet: | ||
Current liability | $ | |
Noncurrent liability | - | |
Total | $ | |
Note 17 - Acquisition of Remaining Joint Venture Interest in LPC:
As discussed in Note 1, we acquired the
19
control of LPC and its estimated additional
For financial reporting purposes, the assets acquired and liabilities assumed of LPC have been included in our Condensed Consolidated Balance Sheet as of September 30, 2024, and the results of operations and cash flows of LPC have been included in our Condensed Consolidated Statement of Operations and Cash flows beginning as of the Acquisition Date. We incurred $
The potential earn-out payment of up to $
We remeasured our existing ownership interest in LPC to its estimated fair value at the Acquisition Date in accordance with ASC 805-10-25, for a business combination achieved in stages (because we previously had an ownership interest in LPC). As a result of such remeasurement, we recognized a pre-tax gain of approximately $
The following table summarizes the aggregate fair value of the consideration transferred to gain control of LPC, the current estimate for the fair value of our existing ownership interest in LPC and the amounts assigned to the identifiable assets acquired and liabilities assumed at the Acquisition Date. The estimated purchase price allocation is based upon management’s estimate of the fair value of the acquired assets and assumed liabilities using independent third-party appraiser valuation techniques including income, cost, and market approaches. The total consideration was allocated to the assets acquired and liabilities assumed, with the excess of the consideration over the estimated fair value of the net assets acquired recorded as goodwill.
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Subject to final determination, which is expected to occur within 12 months of Acquisition Date, the provisional fair values of the assets acquired and liabilities assumed in the acquisition are as follows:
Amount | ||
(In millions) | ||
Consideration: | ||
Cash consideration | $ | |
Working capital adjustment | ( | |
Earn-out liability | | |
Total fair value of consideration | | |
Fair value of investment in TiO2 manufacturing | | |
Total | $ | |
Allocation of purchase price to identifiable | ||
Cash and cash equivalents | $ | |
Restricted cash | | |
Accounts and other receivables, net | | |
Inventories, net | | |
Prepaid expenses and other | | |
Other assets | | |
Property and equipment | | |
Accounts payable and accrued liabilities | ( | |
Other noncurrent liabilities | ( | |
Deferred tax liability | ( | |
Total net identifiable assets acquired | | |
Goodwill | | |
Total | $ | |
Property and equipment will be depreciated over useful lives of
As noted above, prior to the Acquisition Date we and Venator operated LPC as a manufacturing joint venture on a break-even basis. Under the terms of the operating agreement, Kronos’ purchase price of TiO2 produced by LPC equaled LPC’s production costs. Therefore, the pro forma impact of combining LPC’s results of operations assuming the LPC transaction had occurred as of January 1, 2023 would result in
21
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 nine months ended September 30, 2024, approximately 40% 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
As previously reported, effective July 16, 2024 (“Acquisition Date”), we acquired the 50% joint venture interest in Louisiana Pigment Company, L.P. (“LPC”) previously held by Venator Investments, Ltd. (“Venator”). Prior to the acquisition, LPC was operated as a manufacturing joint venture between us and Venator, and through a wholly-owned subsidiary, we held a 50% joint venture interest in LPC. Following the acquisition, LPC became a wholly-owned subsidiary of ours. We acquired the 50% joint venture interest that we did not already own for consideration of $185 million less a working capital adjustment of $11.0 million. An additional earn-out payment of up to $15 million based on our aggregate consolidated net income before interest expense, income taxes and depreciation and amortization expense, or EBITDA, during a two-year period comprising calendar years 2025 and 2026 may be required. The acquisition was financed through borrowings of $132.1 million under our global revolving credit facility (the “Global Revolver”) and the remainder paid with cash on hand. We accounted for the acquisition of LPC’s interest as a business combination. For financial reporting purposes, the assets acquired and liabilities assumed of LPC are included in our Condensed Consolidated Balance Sheet as of September 30, 2024, and the results of operations and cash flows of LPC are included in our Condensed Consolidated Statement of Operations and Cash Flows beginning as of the Acquisition Date. See Note 17 to our Condensed Consolidated Financial Statements.
We reported net income of $71.8 million, or $.62 per share, in the third quarter of 2024 compared to a net loss of $20.4 million, or $.18 per share, in the third quarter of 2023. For the first nine months of 2024, we reported net income of $99.4 million, or $.86 per share, compared to a net loss of $43.8 million, or $.38 per share, in the first nine months of 2023. Net income increased in the third
22
quarter and first nine months of 2024 compared to the same periods in 2023 primarily due to higher income from operations as a result of the effects of higher sales and production volumes and lower production costs (primarily energy and raw materials), partially offset by lower average TiO2 selling prices. Our results of operations in the first nine months of 2023 were significantly impacted by reduced demand for certain of our products occurring in all major markets and unabsorbed fixed production and other costs due to reduced production volumes. Demand has improved in all of our major markets in the first nine months of 2024 and production volumes have increased, contributing to our improved profitability. Comparability of our results was also impacted by the effects of changes in currency exchange rates.
Our net income in the first nine months of 2024 includes a non-cash, pre-tax gain of $64.5 million ($50.9 million, or $.44 per share, net of income tax expense) resulting from the measurement of our investment in LPC and an aggregate charge of $1.5 million ($1.1 million, or $.01 per share, net of income tax benefit) related to a write-off of deferred financing costs.
Our net loss in the first nine months of 2023 includes the recognition of a pre-tax insurance settlement gain of $2.5 million ($2.0 million, or $.02 per share, net of income tax expense) related to a business interruption insurance claim arising from Hurricane Laura in 2020 and a $1.3 million settlement loss related to the termination and buy-out of our UK pension plan ($.9 million, or $.01 per share, net of income tax expense).
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. 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 such forward-looking statements are reasonable, we do not know if these expectations will be correct. Such statements by their nature involve substantial risks and uncertainties that could significantly impact expected results. Actual future results could differ materially from those predicted. The factors that could cause 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; |
| ● | Our ability to realize expected cost savings from strategic and operational initiatives; |
| ● | Our ability to integrate acquisitions, including LPC into our operations and realize expected synergies and innovations; |
| ● | 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); |
| ● | Operating interruptions (including, but not limited to, labor disputes, leaks, natural disasters, fires, explosions, unscheduled or unplanned downtime, transportation interruptions, certain regional and world events or economic conditions and public health crises); |
| ● | Technology related disruptions (including, but not limited to, cyber-attacks, software implementation, upgrades or improvements, technology processing failures, or other events) related to our technology infrastructure that could impact |
23
| our ability to continue operations, or at key vendors which could impact our supply chain, or at key customers which could impact their operations and cause them to curtail or pause orders; |
| ● | 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; |
| ● | Our ability to renew or refinance credit facilities or other debt instruments in the future; |
| ● | Changes in interest rates; |
| ● | 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); |
| ● | Government laws and regulations and possible changes therein including new environmental, health and safety, sustainability, or other regulations (such as those seeking to limit or classify TiO2 or its use); and |
| ● | Pending or possible future litigation or other actions. |
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 and the TiO2 industry experienced an extended period of significantly reduced demand across all major markets which was reflected in our sales volumes throughout 2023. While demand has improved in 2024 resulting in increased sales volumes across all major markets compared to the prior year, overall demand remains below average historical levels and during the third quarter of 2024, demand moderated as compared to the first half of the year. We started 2024 with average TiO2 selling prices 13% lower than at the beginning of 2023 and our average TiO2 selling prices increased 4% during the first nine months of 2024. Our average TiO2 selling prices in the first nine months of 2024 were 7% lower than average prices during the first nine months of 2023.
We operated our production facilities at 71% of practical capacity utilization in the first nine months of 2023 in response to decreased demand and higher production costs. As a result of increased demand experienced in the fourth quarter of 2023 and first nine months of 2024, along with more favorable production costs, we began increasing our production rates during the first quarter of 2024
24
and we operated at near practical capacity in the second and third quarters of 2024 resulting in 93% of practical capacity utilization in the first nine months of 2024.
The following table shows our capacity utilization rates during 2023 and 2024.
| Production Capacity Utilization Rates | |||
| 2023 |
| 2024 | |
First Quarter | 76% | 87% | ||
Second Quarter |
| 64% | 99% | |
Third Quarter |
| 73% | 92% | |
Excluding the effect of changes in currency exchange rates, our cost of sales per metric ton of TiO2 sold in the first nine months of 2024 was significantly lower as compared to the comparable period in 2023 primarily due to significant decreases in per metric ton production costs (primarily feedstock and energy).
In response to the extended period of reduced demand in 2023, discussed above, we took measures to reduce our operating costs and improve our long-term cost structure such as the implementation of certain voluntary and involuntary workforce reductions during the third quarter of 2023 that primarily impacted our European operations. A substantial portion of our workforce reductions were accomplished through voluntary programs, for which eligible workforce reduction costs are recognized at the time both the employee and employer are irrevocably committed to the terms of the separation. These workforce reductions impacted approximately 100 employees. We recognized a total of approximately $6 million in charges primarily in the fourth quarter of 2023 related to workforce reductions we implemented during the second half of the year. We have paid approximately $4 million through the end of the third quarter. The majority of the remaining related cash payments will be paid by the end of 2024.
In the third quarter of 2024, we closed our sulfate process line at our plant in Varennes, Canada. As a result of the sulfate process line closure, we recognized charges to cost of sales in the first nine months of 2024 of approximately $2 million related to workforce reductions for employees impacted of which approximately $.6 million was paid through the end of the third quarter. We also recognized a total of approximately $14 million in non-cash charges primarily related to accelerated depreciation in the second and third quarters of 2024.
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Quarter ended September 30, 2024 compared to the quarter ended September 30, 2023
| Three months ended September 30, | ||||||||||
2023 | 2024 |
| |||||||||
(Dollars in millions) |
| ||||||||||
Net sales |
| $ | 396.9 |
| 100 | % | $ | 484.7 |
| 100 | % |
Cost of sales |
| 362.5 |
| 91 |
| 383.5 |
| 79 | |||
Gross margin |
| 34.4 |
| 9 |
| 101.2 |
| 21 | |||
Selling, general and administrative expense |
| 53.6 |
| 13 |
| 62.3 |
| 13 | |||
Other operating income (expense): |
|
|
|
|
|
|
|
| |||
Currency transactions, net |
| (3.9) |
| (1) |
| 2.9 |
| - | |||
Other operating expense, net |
| (2.2) |
| (1) |
| (2.9) |
| - | |||
Income (loss) from operations |
| $ | (25.3) |
| (6) | % | $ | 38.9 |
| 8 | % |
| % Change | ||||||||||
TiO2 operating statistics: |
|
|
|
|
|
|
|
| |||
Sales volumes* |
| 107 |
|
| 130 | 21 | % | ||||
Production volumes* |
| 102 |
|
| 141 | 37 | % | ||||
Percentage change in net sales: |
|
|
|
|
|
|
| ||||
TiO2 sales volumes |
|
|
|
|
| 21 | % | ||||
TiO2 product pricing |
|
|
|
|
|
| (1) |
| |||
TiO2 product mix/other |
|
|
|
|
|
| 2 | ||||
Changes in currency exchange rates |
|
|
|
|
|
| - | ||||
Total |
|
|
|
|
| 22 | % | ||||
* | Thousands of metric tons |
Net sales - Net sales in the third quarter of 2024 increased 22%, or $87.8 million, compared to the third quarter of 2023 primarily due to the effects of a 21% increase in sales volumes (which increased net sales by approximately $83 million) partially offset by a 1% decrease in average TiO2 selling prices (which decreased net sales by approximately $4 million). The effects of changes in currency exchange rates in the third quarter of 2024 were comparable to the third quarter of 2023. TiO2 selling prices will increase or decrease generally as a result of competitive market pressures, changes in the relative level of supply and demand as well as changes in raw material and other manufacturing costs.
Our sales volumes increased 21% in the third quarter of 2024 as compared to the third quarter of 2023 due to higher overall demand across all major markets. Incremental sales volumes generated from the LPC acquisition did not materially impact quarter to quarter comparisons.
Cost of sales and gross margin - Cost of sales increased by $21.0 million, or 6%, in the third quarter of 2024 compared to the third quarter of 2023 due to the net effects of a 21% increase in sales volumes, higher production rates and lower production costs of approximately $24 million (primarily energy and raw materials). Cost of sales in the third quarter of 2024 also includes approximately $4 million in non-cash charges related to accelerated depreciation in connection with the closure of our sulfate process line in Canada. Our cost of sales in the third quarter of 2023 includes $20 million of unabsorbed fixed production and other manufacturing costs associated with production curtailments at our facilities during the third quarter of 2023 as we adjusted our TiO2 production volumes to align inventory levels with lower demand. Our third quarter production volumes include approximately 13,000 metric tons of incremental production resulting from the LPC acquisition.
Our cost of sales as a percentage of net sales improved to 79% in the third quarter of 2024 compared to 91% in the same period of 2023 primarily due to the favorable effects of lower production costs and higher production volumes resulting in increased coverage of fixed production costs.
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Gross margin as a percentage of net sales increased to 21% in the third quarter of 2024 compared to 9% in the third quarter of 2023. As discussed and quantified above, our gross margin as a percentage of net sales increased primarily due to higher sales and production volumes and lower production costs, which were partially offset by lower average TiO2 selling prices.
Selling, general and administrative expense - Selling, general and administrative expense increased $8.7 million, or 16%, in the third quarter of 2024 compared to the third quarter of 2023 primarily due to higher distribution costs related to higher sales volumes during the quarter. Our selling, general, and administrative expense in the third quarter of 2024 also includes $2.2 million of transaction costs incurred in connection with the LPC acquisition. Selling, general and administrative expense as a percentage of net sales remained consistent at 13% in the third quarter of 2024 compared to the third quarter of 2023.
Income (loss) from operations – We had income from operations of $38.9 million in the third quarter of 2024 compared to a loss from operations of $25.3 million in the third quarter of 2023 as a result of the factors impacting gross margin discussed above. We estimate that changes in currency exchange rates increased our income from operations by approximately $13 million in the third quarter of 2024 as compared to the same period in 2023, as discussed in the effects of currency exchange rates section below.
Other non-operating income (expense) - We recognized a gain on the remeasurement of our investment in LPC of $64.5 million in the third quarter of 2024 as a result of the acquisition. See Note 17 to our Condensed Consolidated Financial Statements. Interest expense in the third quarter of 2024 increased $7.5 million compared to interest expense in the third quarter of 2023 as a result of the February 2024 exchange of €325 million of our 3.75% Senior Secured Notes due 2025 for newly issued €276.174 million of 9.50% Senior Secured Notes due March 2029 plus additional cash consideration, the July 30, 2024 issuance of an additional €75 million of 9.50% Senior Secured Notes due 2029, and as a result of the $53.7 million subordinated, unsecured term loan from Contran due September 2029 at an interest rate of 11.5% which we entered into in February 2024 in connection with the exchange and which interest rate was amended to 9.54% in August 2024 in conjunction with the issuance of the additional €75 million of 9.50% Senior Secured Notes due 2029. See Note 5 to our Condensed Consolidated Financial Statements. We recognized an unrealized gain of $2.2 million in the third quarter of 2024 related to the change in market price of our marketable equity securities. There was no change in the relative market value of our marketable equity securities in the third quarter of 2023. See Note 4 to our Condensed Consolidated Financial Statements. Other components of net periodic pension and OPEB cost in the third quarter of 2024 decreased $.6 million compared to the third quarter of 2023 primarily due a higher expected return on plan assets. See Note 9 to our Condensed Consolidated Financial Statements.
Income tax expense (benefit) - We recognized income tax expense of $22.7 million in the third quarter of 2024 compared to an income tax benefit of $8.7 million in the third quarter of 2023. The difference is primarily due to higher earnings in the third quarter of 2024 and the jurisdictional mix of such earnings. Our earnings and losses 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, excluding the effect of any increase or decrease in our deferred income tax asset valuation allowance or changes in our reserve for uncertain tax positions, 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.
The Organization for Economic Cooperation and Development (the “OECD”), the European Union and other countries have committed to enacting the OECD’s Pillar Two initiative that would provide a global minimum level of taxation for multinational companies to be applied on a country-by-country basis. Currently, many countries are drafting or have enacted legislation to implement the Pillar Two rules effective for years beginning on or after December 31, 2023. Based on legislation currently enacted, we do not anticipate any material impact to our Consolidated Financial Statements; however, until all the jurisdictions we operate in enact legislation, the full impact of Pillar Two to us is unknown.
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Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023
| Nine months ended September 30, | ||||||||||
2023 | 2024 |
| |||||||||
(Dollars in millions) |
| ||||||||||
Net sales |
| $ | 1,266.4 |
| 100 | % | $ | 1,464.0 |
| 100 | % |
Cost of sales |
| 1,157.1 |
| 91 |
| 1,191.1 |
| 81 | |||
Gross margin |
| 109.3 |
| 9 |
| 272.9 |
| 19 | |||
Selling, general and administrative expense |
| 156.9 |
| 12 |
| 174.4 |
| 12 | |||
Other operating income (expense): |
|
|
|
|
|
| |||||
Currency transactions, net |
| 4.6 |
| - |
| 4.9 |
| - | |||
Other operating expense, net |
| (7.3) |
| (1) |
| (9.1) |
| (1) | |||
Income (loss) from operations |
| $ | (50.3) |
| (4) | % | $ | 94.3 |
| 6 | % |
| % Change | ||||||||||
TiO2 operating statistics: |
|
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|
|
|
|
|
| |||
Sales volumes* | 313 | 394 | 26 | % | |||||||
Production volumes* | 296 | 399 | 35 | % | |||||||
Percentage change in net sales: |
|
|
|
|
|
|
| ||||
TiO2 sales volumes |
|
|
|
|
|
| 26 | % | |||
TiO2 product pricing |
|
|
|
|
| (7) | |||||
TiO2 product mix/other |
|
|
|
|
|
| (3) | ||||
Changes in currency exchange rates |
|
|
|
|
|
| - | ||||
Total |
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|
|
|
| 16 | % | ||||
Net sales - Net sales in the first nine months of 2024 increased 16%, or $197.6 million, compared to the first nine months of 2023 primarily due to the effects of a 26% increase in sales volumes due to improved overall demand across all major markets (which increased net sales by approximately $329 million) partially offset by a 7% decrease in average TiO2 selling prices (which decreased net sales by approximately $89 million). Changes in product mix negatively contributed to net sales, primarily due to changes in product sales mix in export markets in the first nine months of 2024 as compared to the same period in 2023. Additionally, we estimate that changes in currency exchange rates (primarily the euro) increased our net sales by approximately $5 million in the first nine months of 2024 as compared to the first nine months of 2023. TiO2 selling prices will increase or decrease generally as a result of competitive market pressures and changes in the relative level of supply and demand as well as changes in raw material and other manufacturing costs. Incremental sales volumes resulting from the LPC acquisition did not significantly impact period to period comparisons in the respective nine-month periods.
Cost of sales and gross margin - Cost of sales increased $34.0 million, or 3%, in the first nine months of 2024 compared to the first nine months of 2023 due to the net effects of a 26% increase in sales volumes, higher production rates resulting in reduced unabsorbed fixed production costs, and lower production costs of approximately $108 million (primarily raw materials and energy). Our unabsorbed fixed production costs in the first nine months of 2024 were $12 million (incurred in the first quarter) compared to $74 million in the first nine months of 2023 related to curtailments in 2023 and continuing into the first quarter of 2024, as discussed above. Our cost of sales in the first nine months of 2024 includes a charge of approximately $2 million related to workforce reductions and approximately $14 million in non-cash charges primarily related to accelerated depreciation in connection with the closure of our sulfate process line in Canada. Sales and production volumes resulting from the LPC acquisition did not materially impact comparisons to the prior year.
Our cost of sales as a percentage of net sales decreased to 81% in the first nine months of 2024 compared to 91% in the same period of 2023 primarily due to the favorable effects of lower production costs and higher production volumes resulting in increased coverage of fixed production costs.
Gross margin as a percentage of net sales increased to 19% in the first nine months of 2024 compared to 9% in the first nine months of 2023. As discussed and quantified above, our gross margin as a percentage of net sales increased primarily due to higher sales and production volumes as well as lower production costs, partially offset by lower average TiO2 selling prices.
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Selling, general and administrative expense - Selling, general and administrative expense increased $17.5 million, or 11%, in the first nine months of 2024 compared to the same period in 2023 primarily due to higher distribution costs related to higher sales volumes. Our selling, general and administrative expense in the first nine months of 2024 also includes $2.2 million of transaction costs incurred in connection with the LPC acquisition. Selling, general and administrative expense as a percentage of net sales remained consistent in the first nine months of 2024 compared to the first nine months of 2023.
Income (loss) from operations – We had income from operations of $94.3 million in the first nine months of 2024 compared to a loss from operations of $50.3 million in the first nine months of 2023 as a result of the factors impacting gross margin discussed above. We recognized a gain of $2.5 million in the first nine months of 2023 related to cash received from the settlement of a business interruption insurance claim. See Note 14 to our Condensed Consolidated Financial Statements. We estimate that changes in currency exchange rates increased our income from operations by approximately $10 million in the first nine months of 2024 as compared to the same period in 2023, as further discussed below.
Other non-operating income (expense) - We recognized a gain on the remeasurement of our investment in LPC of $64.5 million in the third quarter of 2024 as a result of the acquisition. See Note 17 to our Condensed Consolidated Financial Statements. Interest expense in the first nine months of 2024 increased $18.0 million compared to the first nine months of 2023 primarily due to higher interest rates on the debt exchange and the issuance of new notes noted above. As a result of the exchange, interest expense for the first nine months of 2024 includes a charge of $1.5 million for the write-off of deferred financing costs. See Note 5 to our Condensed Consolidated Financial Statements. We recognized a gain of $2.6 million on the change in value of our marketable equity securities in the first nine months of 2024 compared to a loss of $1.3 million in the first nine months of 2023. See Note 4 to our Condensed Consolidated Financial Statements. Other components of net periodic pension and OPEB cost in the first nine months of 2024 decreased $3.1 million compared to the first nine months of 2023 primarily due to a higher expected return on plan assets and a non-recurring $1.3 million in settlement costs related to the termination and buy-out of our UK pension plan in the second quarter of 2023. See Note 9 to our Condensed Consolidated Financial Statements.
Income tax expense (benefit) - We recognized income tax expense of $34.7 million in the first nine months of 2024 compared to an income tax benefit of $19.7 million in the first nine months of 2023. The difference is primarily due to higher earnings in 2024 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, excluding the effect of any increase or decrease in our deferred income tax asset valuation allowance or changes in our reserve for uncertain tax positions, to be higher than the U.S. federal statutory tax rate of 21% primarily because of our sizeable non-U.S. operations. However, in the first nine months of 2024, our consolidated effective income tax rate, excluding the effect of the valuation allowance and change in reserve for uncertain tax positions, is lower than the U.S. federal statutory rate of 21% due to the effect of lower earnings and tax benefits associated with losses incurred in certain high tax jurisdictions. See Note 10 to our Condensed Consolidated Financial Statements.
The Organization for Economic Cooperation and Development (the “OECD”), the European Union and other countries have committed to enacting the OECD’s Pillar Two initiative that would provide a global minimum level of taxation for multinational companies to be applied on a country-by-country basis. Currently, many countries are drafting or have enacted legislation to implement the Pillar Two rules effective for years beginning on or after December 31, 2023. Based on legislation currently enacted, we do not anticipate any material impact to our Consolidated Financial Statements; however, until all the jurisdictions we operate in enact legislation, the full impact of Pillar Two to us is unknown.
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
29
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).
Fluctuations in currency exchange rates had the following effects on our sales and income (loss) from operations for the periods indicated.
Impact of changes in currency exchange rates | |||||||||||||||
Three months ended September 30, 2024 vs September 30, 2023 | |||||||||||||||
Translation | Total | ||||||||||||||
gains/(losses) - | currency | ||||||||||||||
| Transaction gains (losses) recognized | impact of | impact | ||||||||||||
| 2023 |
| 2024 |
| Change |
| rate changes |
| 2024 vs 2023 | ||||||
| (In millions) | ||||||||||||||
Impact on: |
|
|
|
|
|
|
|
|
|
| |||||
Net sales | $ | - | $ | - | $ | - | $ | (1) | $ | (1) | |||||
Income (loss) from operations |
| (4) |
| 3 |
| 7 |
| 6 |
| 13 | |||||
The $1 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 2024 as compared to 2023. The strengthening of the U.S. dollar relative to the Canadian dollar and the Norwegian krone in 2024 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 $13 million increase in income from operations was comprised of the following:
| ● | Lower net currency transaction losses of approximately $7 million primarily caused by relative changes in currency exchange rates at each applicable balance sheet date between the U.S. dollar and the euro, Canadian dollar and the Norwegian krone, and between the euro and the Norwegian krone, which causes increases or decreases, as applicable, in 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 $6 million from net currency translation gains primarily caused by a strengthening of the U.S. dollar relative to the Canadian dollar and the Norwegian krone, as local currency-denominated operating costs were translated into fewer U.S. dollars in 2024 as compared to 2023. The effect of the weakening of the U.S. dollar relative to the euro was nominal in 2024 as compared to 2023. |
Impact of changes in currency exchange rates | |||||||||||||||
Nine months ended September 30, 2024 vs September 30, 2023 | |||||||||||||||
Translation | Total | ||||||||||||||
gains - | currency | ||||||||||||||
| Transaction gains recognized | impact of | impact | ||||||||||||
| 2023 |
| 2024 |
| Change |
| rate changes |
| 2024 vs 2023 | ||||||
| (In millions) | ||||||||||||||
Impact on: |
|
|
|
|
|
|
|
|
|
| |||||
Net sales | $ | - | $ | - | $ | - | $ | 5 | $ | 5 | |||||
Income (loss) from operations |
| 4 |
| 5 |
| 1 |
| 9 |
| 10 | |||||
The $5 million increase in net sales (translation gains) 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 2024 as compared to 2023. The strengthening of the U.S. dollar relative to the Canadian dollar and the Norwegian krone in 2024 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.
30
The $10 million increase in income from operations was comprised of the following:
| ● | Higher net currency transaction gains of approximately $1 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 $9 million from net currency translation gains primarily caused by a strengthening of the U.S. dollar relative to the Canadian dollar and the Norwegian krone, as local currency-denominated operating costs were translated into fewer U.S. dollars in 2024 as compared to 2023. The effect of the weakening of the U.S. dollar relative to the euro was nominal in 2024 as compared to 2023. |
Outlook
Overall customer demand has improved in 2024 compared to the historical low demand we experienced during 2023, although overall demand levels remain below historical averages and, during the third quarter of 2024, customer demand moderated as compared to the first half of the year across all major markets. We expect demand to further soften in the fourth quarter; however, based on the improved demand experienced through the first nine months, along with the severe demand contraction we experienced during most of 2023, we continue to expect sales volumes in 2024 will exceed 2023 sales volumes. We are operating our facilities at production rates in line with the current and expected near-term demand and believe our production rates for the remainder of 2024 will continue to be higher than comparable periods in 2023. We have had limited success implementing TiO2 selling price increases, which need to continue to be realized to achieve margins more in-line with historical levels.
Throughout 2023, we implemented cost reduction initiatives designed to improve our long-term cost structure, including targeted workforce reductions. In the third quarter of 2024, to further improve gross margins through the optimization of production of our purified grades, we closed our sulfate process line at our facility in Canada. Raw material, energy and other input costs have generally improved compared to 2023. While the full positive impact of input cost improvements and cost reduction efforts are not yet fully reflected in our gross margin, during the second quarter gross margin began to improve and has continued to improve as we replace higher cost inventory with lower cost inventory produced in 2024. Overall, due to improved demand, modest increases in selling prices and lower production costs, including lower unabsorbed fixed costs, we expect to report higher operating results for the full year of 2024 as compared to 2023.
As noted above, we acquired full control of LPC in July 2024. We believe this acquisition is a unique opportunity to immediately add value to our customers and better serve the North American marketplace by allowing us to expand our product offerings and increase sales to new and existing customers while recognizing significant synergies, including commercial, overhead and supply chain optimization. We are in the process of fully integrating the additional LPC production capacity and we expect the acquisition will have a positive impact on our earnings, although the potential positive impact in 2024 will be limited by competitive pressures, demand moderation in North America and by the additional debt service costs associated with the increase in borrowings to complete the transaction. With the increased borrowing availability under our revolving credit facility, as well as cash on hand, we are well positioned to finance the required working capital build needed to fully integrate the acquired LPC production capacity, which we expect to be complete by the end of the year. Beginning in the third quarter, we reduced our quarterly dividend rate from $.19 per share to $.05 per share to provide the flexibility to absorb increased debt service costs, working capital needs and capital improvements from the LPC acquisition.
Our expectations for the TiO2 industry and our operations are based on a number of factors outside our control. We have experienced global market disruptions, including high energy costs, and future impacts on our operations will depend on, among other things, future energy costs and the impact economic conditions and geopolitical events have on our operations or our customers’ and suppliers’ operations, all of which remain uncertain and cannot be predicted.
31
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 $23.2 million in the first nine months of 2024 compared to cash used of $58.9 million in the first nine months of 2023. This $82.1 million increase in the amount of cash from operating activities was primarily due to the net effect of the following:
| ● | higher income from operations in 2024 of $144.6 million, |
| ● | cash premium of $6.0 million on the issuance of senior notes, |
| ● | higher amount of net cash used associated with relative changes in our inventories, receivables, payables and accruals in 2024 of $37.1 million, |
| ● | higher cash paid for taxes in 2024 of $21.2 million primarily due to higher earnings and the relative timing of payments, and |
| ● | higher cash paid for interest in 2024 of $16.0 million. |
Changes in working capital were affected by accounts receivable and inventory changes. As shown below:
| ● | Our average days sales outstanding, or DSO, increased from December 31, 2023 to September 30, 2024 primarily due to the relative changes in the timing of collections, and |
| ● | Our average days sales in inventory, or DSI, decreased from December 31, 2023 to September 30, 2024 primarily due to lower relative cost of sales (as a result of lower production costs, as discussed above) compared to the fourth quarter of 2023. |
For comparative purposes, we have also provided comparable prior year numbers below.
| December 31, 2022 |
| September 30, 2023 |
| December 31, 2023 |
| September 30, 2024 | |
DSO | 64 days | 68 days | 66 days | 68 days | ||||
DSI | 103 days | 61 days | 65 days | 60 days |
Investing activities
We paid $156.8 million, net of cash acquired, for the remaining TiO2 manufacturing joint venture interest in LPC. See Note 17 to our Condensed Consolidated Financial Statements.
Our capital expenditures of $17.2 million and $42.1 million in the first nine months of 2024 and 2023, respectively, were primarily to maintain and improve the cost effectiveness of our manufacturing facilities.
Financing activities
During the first nine months of 2024, we paid dividends of $.43 per share to stockholders aggregating $49.5 million ($.19, $.19 and $.05 per share in the first, second and third quarters of 2024, respectively) and $.57 per share aggregating $65.6 million ($.19 per share in each of the first, second and third quarters of 2023). On October 30, 2024, our board of directors declared a quarterly dividend of $.05 per share, payable December 12, 2024, to stockholders of record as of November 29, 2024.
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In addition, during the first three months of 2024, we exchanged €325 million of our Kronos International, Inc. (KII) 3.75% Senior Secured Notes due September 2025 (the “Old Notes”) for our newly issued €276.174 million 9.50% Senior Secured Notes due March 2029 (the “New Notes”) plus additional cash consideration of $52.6 million to certain eligible holders of the Old Notes and borrowed $53.7 million from Contran. In the third quarter we issued an additional €75 million principal amount of 9.50% Senior Secured Notes due 2029 (the Additional New Notes (as defined below) together with the Old Notes and the New Notes, the “Senior Secured Notes”). See Note 5 to our Condensed Consolidated Financial Statements.
Outstanding debt obligations
At September 30, 2024, our consolidated debt comprised:
| ● | €351.174 million aggregate outstanding on our 9.50% Senior Secured Notes due March 2029 plus €5.4 million of unamortized premium ($391.7 million carrying amount, net of unamortized debt issuance costs), |
| ● | €75 million aggregate outstanding on our 3.75% Senior Secured Notes due September 2025 ($83.9 million carrying amount), |
| ● | $53.7 million outstanding on our subordinated, unsecured term loan from Contran due September 2029 (the “Contran Term Loan”), and |
| ● | $25.0 million outstanding on our Global Revolver. |
Availability under the Global Revolver is subject to a borrowing base calculation, as defined in the agreement, and at September 30, 2024, approximately $268 million was available for borrowings. Effective July 17, 2024, we completed an amendment to our Global Revolver (the “Second Amendment”). Among other things, the Second Amendment increased the maximum borrowing amount from $225 million to $300 million, extended the maturity date to July 2029 and expanded the facility to include LPC and LPC’s receivables and certain of its inventories in the borrowing base. The LPC acquisition was financed through borrowings of $132.1 million under our Global Revolver with the remainder paid with cash on hand. On July 30, 2024, our wholly-owned subsidiary, KII, issued an additional €75 million principal amount of 9.50% Senior Secured Notes due 2029 (the “Additional New Notes”). The Additional New Notes were issued at a premium of 107.50% of their principal amount, plus accrued interest from February 12, 2024, resulting in net proceeds of approximately $90 million, after fees and estimated expenses. The Additional New Notes are fungible with the New Notes, are treated as a single series with the New Notes, and have the same terms as the New Notes, other than their date of issuance and issue price. The proceeds from the Additional New Notes were used to pay down borrowings under the Global Revolver. Subsequent to the issuance of the Additional New Notes, in August 2024, the Contran Term Loan was amended to change the interest rate from 11.5% to 9.54%. The amended rate reflects the effective interest rate of the Additional New Notes plus an additional interest rate spread of 2% which is based upon comparable debt transactions at the time of issuance of the Additional New Notes. See Note 5 to our Condensed Consolidated Financial Statements.
The Contran Term Loan is subordinated in right of payment to our Senior Secured Notes and our Global Revolver. Our Senior Secured Notes, the Contran Term Loan 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 2023 Annual Report. We are in compliance with all of our debt covenants at September 30, 2024. 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 and the Contran Term Loan, 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
33
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. We may also from time to time engage in preliminary discussions with existing or potential investors regarding the timing or terms of any such refinancing or other potential transaction. 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 September 30, 2024, we had aggregate cash, cash equivalents and restricted cash on hand of $102.9 million, of which $65.3 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. As amended, our Global Revolver matures in July 2029, and at September 30, 2024 approximately $268 million is available for borrowing under this facility. The borrowing base is calculated quarterly and the amount available for borrowing may change based on applicable quarter end balances. 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 September 30, 2025) and our long-term obligations (defined as the five-year period ending September 30, 2029, our time period for long-term budgeting). If actual developments differ from our expectations, our liquidity could be adversely affected.
Capital expenditures
We intend to invest approximately $42 million in capital expenditures primarily to maintain and improve our existing facilities during 2024, including $17.2 million in expenditures through September 30, 2024. 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 September 30, 2024, we have 1,017,518 shares available for repurchase under a stock repurchase program authorized by our board of directors.
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Commitments and contingencies
See Notes 10, 12 and 17 to our Condensed Consolidated Financial Statements for a description of certain income tax contingencies, certain legal proceedings and other commitments.
Recent accounting pronouncements
See Note 15 to our Condensed Consolidated Financial Statements.
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 2023 Annual Report. There have been no changes in our critical accounting policies during the first nine months of 2024 except as described below:
Business combinations - During the third quarter of 2024, we acquired the 50% joint venture interest in LPC previously held by Venator. Prior to the acquisition we accounted for our interest in LPC under the equity method. The application of the purchase method of accounting for business combinations requires us to use significant estimates and assumptions in the determination of the estimated fair value of assets acquired and liabilities assumed. Our estimates of the fair values of assets acquired and liabilities assumed are based upon assumptions we believe are reasonable, and when appropriate, include assistance from independent third-party valuation advisors. See Note 17 to our Condensed Consolidated Financial Statements.
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 2023 Annual Report. See also Part I, Item 7A. - “Quantitative and Qualitative Disclosure About Market Risk” in our 2023 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 September 30, 2024. Based upon their evaluation, these executive officers have concluded that our disclosure controls and procedures are effective as of the date of such evaluation.
Internal control over financial reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting which, as defined by Exchange Act Rule 13a-15(f) means a process designed by, or under the supervision of, our principal executive and principal financial officers, or persons performing similar functions, and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
| ● | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets, |
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| ● | 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 September 30, 2024 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
In addition to the risk factor discussed below, refer to Part I, Item 1A, “Risk Factors,” in our 2023 Annual Report for a discussion of the risk factors related to our businesses.
Our recent acquisition of the remaining 50% interest in LPC may not generate benefits we anticipate and may otherwise affect our business and prospects.
We recently completed the LPC Acquisition in which we purchased the 50% ownership interest in LPC we did not previously own. If we experience unforeseen technological, operational or other difficulties in managing the integration of LPC as our wholly-owned subsidiary, we may not be able to implement the process innovations at the facility as we expect. In addition, we may not be able to achieve the synergies or improve efficiency and product quality as we expect. With or without such difficulties, the integration of the LPC facility into our operations may divert significant management time and attention from our other operations. If we fail to successfully integrate LPC into our operations, or if the LPC Acquisition does not return expected synergies or a level of sales as we expect, or if LPC has unexpected legal or financial liabilities, our business, financial condition, results of operations and prospects could be adversely affected.
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Item 6.Exhibits
10.1* | ||
10.2* | ||
10.3* | ||
10.4* | ||
10.5* | ||
10.6* | ||
10.7* | ||
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) |
* Filed herewith
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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: November 6, 2024 | /s/ Tim C. Hafer |
Tim C. Hafer | |
Executive Vice President and Chief Financial Officer (duly authorized officer) | |
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