Kronos(KRO) - 2023 Q3 - Quarterly Report

Part I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents unaudited condensed consolidated financial statements, showing a significant decline in performance and liquidity for the nine months ended September 30, 2023 Condensed Consolidated Balance Sheets Total assets decreased from $1,934.4 million to $1,715.9 million, driven by reductions in cash and inventories, while stockholders' equity also declined | Metric | Dec 31, 2022 (Millions) | Sep 30, 2023 (Millions) | Change (Millions) | | :-------------------------- | :---------------------- | :---------------------- | :---------------- | | Total Assets | $1,934.4 | $1,715.9 | $(218.5) | | Total Liabilities | $977.2 | $882.7 | $(94.5) | | Total Stockholders' Equity | $957.2 | $833.2 | $(124.0) | | Cash and cash equivalents | $327.8 | $155.3 | $(172.5) | | Inventories, net | $608.7 | $497.8 | $(110.9) | Condensed Consolidated Statements of Operations The company reported a net loss for both the three and nine months ended September 30, 2023, a significant reversal from prior year net income due to lower sales and gross margin | Metric | 3 Months Ended Sep 30, 2022 (Millions) | 3 Months Ended Sep 30, 2023 (Millions) | 9 Months Ended Sep 30, 2022 (Millions) | 9 Months Ended Sep 30, 2023 (Millions) | | :-------------------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------- | | Net sales | $459.6 | $396.9 | $1,587.8 | $1,266.4 | | Gross margin | $84.0 | $34.4 | $353.8 | $109.3 | | Income (loss) from operations | $30.8 | $(25.3) | $179.3 | $(50.3) | | Net income (loss) | $21.0 | $(20.4) | $124.4 | $(43.8) | | Net income (loss) per basic and diluted share | $0.18 | $(0.18) | $1.08 | $(0.38) | Condensed Consolidated Statements of Comprehensive Income (Loss) A comprehensive loss of $21.5 million for the three months and $55.7 million for the nine months reflects the net loss and ongoing currency translation losses | Metric | 3 Months Ended Sep 30, 2022 (Millions) | 3 Months Ended Sep 30, 2023 (Millions) | 9 Months Ended Sep 30, 2022 (Millions) | 9 Months Ended Sep 30, 2023 (Millions) | | :-------------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------- | | Net income (loss) | $21.0 | $(20.4) | $124.4 | $(43.8) | | Total other comprehensive loss, net | $(23.8) | $(1.1) | $(48.9) | $(11.9) | | Comprehensive income (loss) | $(2.8) | $(21.5) | $75.5 | $(55.7) | Condensed Consolidated Statements of Stockholders' Equity Total stockholders' equity decreased by $124.0 million, primarily due to the net loss, dividends paid, and other comprehensive losses | Metric | Dec 31, 2022 (Millions) | Sep 30, 2023 (Millions) | Change (Millions) | | :-------------------------- | :---------------------- | :---------------------- | :---------------- | | Total Stockholders' Equity | $957.2 | $833.2 | $(124.0) | | Retained deficit (Dec 31, 2022) | $(105.4) | $(214.8) | $(109.4) | | Accumulated other comprehensive loss (Dec 31, 2022) | $(331.5) | $(343.4) | $(11.9) | | Net loss (9 months) | - | $(43.8) | - | | Dividends paid (9 months) | - | $(65.6) | - | Condensed Consolidated Statements of Cash Flows Operating activities shifted from providing $59.1 million in cash to using $58.9 million, driven by net loss and working capital changes | Metric | 9 Months Ended Sep 30, 2022 (Millions) | 9 Months Ended Sep 30, 2023 (Millions) | Change (Millions) | | :------------------------------------- | :------------------------------------- | :------------------------------------- | :---------------- | | Net cash provided by (used in) operating activities | $59.1 | $(58.9) | $(118.0) | | Net cash used in investing activities | $(44.3) | $(42.1) | $2.2 | | Net cash used in financing activities | $(67.4) | $(69.0) | $(1.6) | | Balance at end of period (Cash, cash equivalents and restricted cash) | $344.4 | $161.8 | $(182.6) | Notes to Condensed Consolidated Financial Statements These notes provide detailed disclosures on financial statements, including accounting policies, specific accounts, revenue recognition, and recent restructuring efforts Note 1 - Organization and basis of presentation This note details the company's ownership structure and confirms the unaudited financial statements are prepared consistently with the annual report - Valhi, Inc. holds approximately 50% of Kronos's common stock, and NL Industries, Inc. holds approximately 31%[24] - The financial statements are unaudited and prepared on the same basis as the 2022 Annual Report on Form 10-K, including only normal recurring adjustments[25] Note 2 - Accounts and other receivables, net This section provides a breakdown of accounts and other receivables, net, as of December 31, 2022, and September 30, 2023 | Metric | Dec 31, 2022 (Millions) | Sep 30, 2023 (Millions) | | :-------------------------- | :---------------------- | :---------------------- | | Trade receivables | $220.3 | $282.2 | | Total | $255.1 | $299.8 | Note 3 - Inventories, net This note details the composition of inventories, net, including raw materials and finished products, at year-end 2022 and Q3 2023 | Metric | Dec 31, 2022 (Millions) | Sep 30, 2023 (Millions) | | :-------------------------- | :---------------------- | :---------------------- | | Raw materials | $145.3 | $132.6 | | Finished products | $349.9 | $246.2 | | Total | $608.7 | $497.8 | Note 4 - Marketable securities This note describes the company's holdings in Valhi common stock, including fair value and voting restrictions | Metric | Dec 31, 2022 (Millions) | Sep 30, 2023 (Millions) | Unrealized Loss (Millions) | | :-------------------------- | :---------------------- | :---------------------- | :------------------------- | | Valhi common stock (Fair value) | $3.2 | $1.9 | $(1.3) | - The company holds approximately 144,000 shares of Valhi's common stock, but cannot vote these shares as a majority-owned subsidiary of Valhi[30][31] Note 5 - Long-term debt This section outlines the company's long-term debt obligations, primarily Senior Notes, and confirms compliance with debt covenants | Metric | Dec 31, 2022 (Millions) | Sep 30, 2023 (Millions) | | :------------------------------------ | :---------------------- | :---------------------- | | Kronos International, Inc. 3.75% Senior Notes | $424.1 | $422.5 | | Total debt | $425.2 | $423.2 | - The company had no borrowings under its $225 million global revolving credit facility during the first nine months of 2023, with the full amount available[33] - The company is in compliance with all debt covenants at September 30, 2023[34] Note 6 - Accounts payable and accrued liabilities This note provides a breakdown of accounts payable and accrued liabilities at year-end 2022 and Q3 2023 | Metric | Dec 31, 2022 (Millions) | Sep 30, 2023 (Millions) | | :-------------------------- | :---------------------- | :---------------------- | | Accounts payable | $177.2 | $117.9 | | Total | $312.3 | $246.4 | Note 7 - Other noncurrent liabilities This section presents the total other noncurrent liabilities at December 31, 2022, and September 30, 2023 | Metric | Dec 31, 2022 (Millions) | Sep 30, 2023 (Millions) | | :-------------------------- | :---------------------- | :---------------------- | | Total | $20.5 | $20.7 | Note 8 - Revenue recognition This note details net sales by point of destination for Europe and North America for the three and nine months ended September 30, 2022 and 2023 | Metric | 3 Months Ended Sep 30, 2022 (Millions) | 3 Months Ended Sep 30, 2023 (Millions) | 9 Months Ended Sep 30, 2022 (Millions) | 9 Months Ended Sep 30, 2023 (Millions) | | :-------------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------- | | Net sales (Total) | $459.6 | $396.9 | $1,587.8 | $1,266.4 | | Net sales - point of destination: Europe | $197.5 | $179.9 | $731.6 | $580.0 | | Net sales - point of destination: North America | $182.5 | $165.1 | $558.4 | $466.7 | Note 9 - Employee benefit plans This note provides information on net periodic pension costs, a settlement loss, and expected contributions for employee benefit plans | Metric | 3 Months Ended Sep 30, 2022 (Millions) | 3 Months Ended Sep 30, 2023 (Millions) | 9 Months Ended Sep 30, 2022 (Millions) | 9 Months Ended Sep 30, 2023 (Millions) | | :-------------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------- | | Net periodic pension cost (income) | $2.6 | $5.6 | $8.3 | $8.8 | - A $1.3 million settlement loss was incurred in Q2 2023 due to the termination and buy-out of a UK pension plan[40] - Expected 2023 contributions for pension plans are approximately $17 million[40] Note 10 - Income taxes This note details income tax expense or benefit, attributing changes to lower earnings and the jurisdictional mix of income | Metric | 3 Months Ended Sep 30, 2022 (Millions) | 3 Months Ended Sep 30, 2023 (Millions) | 9 Months Ended Sep 30, 2022 (Millions) | 9 Months Ended Sep 30, 2023 (Millions) | | :-------------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------- | | Income tax expense (benefit) | $1.2 | $(8.7) | $34.3 | $(19.7) | - The difference in income tax expense/benefit is primarily due to lower earnings in 2023 and the jurisdictional mix of earnings[41][77][87] - Non-U.S. tax rates are generally higher than U.S. federal statutory tax rate of 21%[41][77][87] Note 11 - Stockholders' equity This note provides details on accumulated other comprehensive loss and the company's stock repurchase program activities | Metric | Dec 31, 2022 (Millions) | Sep 30, 2023 (Millions) | | :------------------------------------ | :---------------------- | :---------------------- | | Accumulated other comprehensive loss | $(331.5) | $(343.4) | - The company acquired 313,814 shares of common stock for $2.8 million in the first nine months of 2023 under its stock repurchase program[45][103] - As of September 30, 2023, 1,017,518 shares are available for repurchase under the program[46][114] Note 12 - Commitments and contingencies This note discloses the company's involvement in various claims and disputes, with no material loss accrued for litigation matters - The company is involved in various environmental, contractual, product liability, patent, employment, and other claims and disputes[47] - No amounts have been accrued for litigation matters as it is not reasonably possible a material loss has been incurred[47] Note 13 - Financial instruments This note presents the carrying and fair values of financial instruments, including cash and long-term debt, and their valuation inputs | Metric | Carrying Amount (Sep 30, 2023, Millions) | Fair Value (Sep 30, 2023, Millions) | | :------------------------------------ | :--------------------------------------- | :---------------------------------- | | Cash, cash equivalents and restricted cash | $161.8 | $161.8 | | Long-term debt - Fixed rate Senior Notes | $422.5 | $385.0 | - The fair value of Senior Notes is based on quoted market prices (Level 2 inputs) from inactive markets[48] Note 14 - Other operating income (expense), net This note details the recognition of a gain from a business interruption insurance claim related to Hurricane Laura - Recognized an aggregate gain of $2.5 million in the first nine months of 2023 from a business interruption insurance claim related to Hurricane Laura (2020)[49][55] Note 15 - Restructuring costs This note describes workforce reductions initiated in Q3 2023 as part of cost-saving measures and expected related charges - Initiated workforce reductions in Q3 2023, impacting approximately 100 individuals, as part of cost-saving measures[50][65] - Expects to recognize a $6 million charge in Q4 2023 related to these workforce reductions, mostly in SG&A expense[50][68] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial performance, industry conditions, and outlook, highlighting reduced demand, lower profitability, and cost-saving initiatives Business overview Kronos is a leading global producer of titanium dioxide (TiO2) pigments, with long-term demand expected to grow 2-3% annually - Kronos is a leading global producer and marketer of value-added titanium dioxide (TiO2) pigments[51] - TiO2 is used in paints, plastics, paper, and other industrial/specialty products[51] - Approximately 40% of sales volumes for the first nine months of 2023 were sold into European markets[51] - Long-term demand for TiO2 is expected to grow 2-3% per year, consistent with GDP[52] - Key performance indicators include TiO2 average selling prices, sales and production volumes, and cost of titanium-containing feedstock[53] Executive summary Net income decreased significantly due to lower sales volumes, reduced average TiO2 selling prices, and higher production costs, exacerbated by weak demand and unabsorbed fixed costs | Metric | 3 Months Ended Sep 30, 2022 (Millions) | 3 Months Ended Sep 30, 2023 (Millions) | 9 Months Ended Sep 30, 2022 (Millions) | 9 Months Ended Sep 30, 2023 (Millions) | | :-------------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------- | | Net income (loss) | $21.0 | $(20.4) | $124.4 | $(43.8) | | Net income (loss) per share | $0.18 | $(0.18) | $1.08 | $(0.38) | - Net income decreased primarily due to lower sales volumes, lower average TiO2 selling prices, and higher production costs (raw materials) in the first nine months of 2023[54] - Results were significantly impacted by reduced demand across all major markets and unabsorbed fixed production costs due to reduced production volumes[54] Forward-looking information Forward-looking statements are subject to substantial risks and uncertainties, including supply/demand fluctuations, raw material costs, and global economic conditions - Forward-looking statements are subject to substantial risks and uncertainties that could significantly impact expected results[57][60] - Key risk factors include future supply and demand for products, cyclicality of business, changes in raw material and operating costs, global economic and political conditions, operating interruptions, competitive products, currency exchange rate fluctuations, and ability to maintain liquidity[58][66] Results of operations This section details the company's operational performance, highlighting the impact of industry conditions, sales, and production volumes on financial results Current industry conditions The TiO2 industry faces significantly reduced demand and declining selling prices, leading to lower capacity utilization and higher per-unit costs - The TiO2 industry is experiencing an extended period of significantly reduced demand across all major markets since Q3 2022[61] - Average TiO2 selling prices declined 9% during the first nine months of 2023[61] | Metric | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | | :------------------------------------ | :-------------------------- | :-------------------------- | | Practical Capacity Utilization | 96% | 71% | - Cost of sales per metric ton of TiO2 sold in 9M 2023 was significantly higher YoY due to increased feedstock and unabsorbed fixed costs from reduced operating rates[64] Quarter ended September 30, 2023 compared to the quarter ended September 30, 2022 Net sales and gross margin significantly declined due to lower sales volumes, reduced selling prices, and increased unabsorbed fixed production costs | Metric | 3 Months Ended Sep 30, 2022 (Millions) | 3 Months Ended Sep 30, 2023 (Millions) | % Change | | :------------------------------------ | :------------------------------------- | :------------------------------------- | :------- | | Net sales | $459.6 | $396.9 | (14)% | | Sales volumes (Thousands of metric tons) | 113 | 107 | (6)% | | Production volumes (Thousands of metric tons) | 131 | 102 | (22)% | | Average TiO2 selling prices | - | - | (8)% | | Gross margin | $84.0 | $34.4 | (59)% | | Gross margin as % of net sales | 18% | 9% | (9) pp | | Income (loss) from operations | $30.8 | $(25.3) | (182)% | - Cost of sales decreased by $13.1 million (3%), but as a percentage of net sales increased to 91% (from 82%) due to $20 million in unabsorbed fixed production costs from lower production volumes[72] - Selling, general and administrative expense decreased by $5.4 million (9%) due to lower distribution costs, remaining at approximately 13% of net sales[74] - Changes in currency exchange rates increased net sales by approximately $12 million but increased loss from operations by approximately $10 million[70][75][90][91] Nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 Net sales decreased by 20%, and gross margin fell by 69%, primarily due to lower sales volumes, reduced selling prices, and higher raw material and unabsorbed fixed costs | Metric | 9 Months Ended Sep 30, 2022 (Millions) | 9 Months Ended Sep 30, 2023 (Millions) | % Change | | :------------------------------------ | :------------------------------------- | :------------------------------------- | :------- | | Net sales | $1,587.8 | $1,266.4 | (20)% | | Sales volumes (Thousands of metric tons) | 399 | 313 | (22)% | | Production volumes (Thousands of metric tons) | 401 | 296 | (26)% | | Average TiO2 selling prices | - | - | (2)% | | Gross margin | $353.8 | $109.3 | (69)% | | Gross margin as % of net sales | 22% | 9% | (13) pp | | Income (loss) from operations | $179.3 | $(50.3) | (128)% | - Cost of sales decreased by $76.9 million (6%), but as a percentage of net sales increased to 91% (from 78%) due to $74 million in unabsorbed fixed production costs and approximately $90 million in higher raw material costs[82] - Selling, general and administrative expense decreased by $26.7 million (15%) due to lower distribution costs, remaining at approximately 12% of net sales[84] - Changes in currency exchange rates decreased loss from operations by approximately $11 million[85][94] Effects of currency exchange rates Currency fluctuations, particularly in the euro, impacted net sales and income from operations, with most non-U.S. sales denominated in foreign currencies - Majority of non-U.S. sales are denominated in euro, other major European currencies, and Canadian dollar[88] - Raw materials are primarily purchased in U.S. dollars[88] | Impact on | Translation Gains (Millions) | Transaction Gains (Losses) (Millions) | Total Currency Impact (Millions) | | :-------------------------- | :--------------------------- | :------------------------------------ | :------------------------------- | | Net sales | $12 | $0 | $12 | | Income (loss) from operations | $1 | $(11) | $(10) | | Impact on | Translation Gains (Millions) | Transaction Gains (Losses) (Millions) | Total Currency Impact (Millions) | | :-------------------------- | :--------------------------- | :------------------------------------ | :------------------------------- | | Net sales | $0 | $0 | $0 | | Income (loss) from operations | $24 | $(13) | $11 | Outlook Customer demand remained weak in Q3 2023, but the company anticipates improved margins in 2024 due to cost reductions and inventory depletion, despite near-term uncertainties - Customer demand remained weak in Q3 2023, with Europe at historically low levels, while North America and export markets showed signs of stabilizing[94] - The company is taking actions to align production and inventories to forecasted demand and reduce costs, including production curtailments and workforce reductions[94] - Expects improved margins in 2024 due to depletion of high-cost inventory, declining raw material and energy costs, and cost reduction initiatives[95] - Expects lower operating results for the full year 2023 compared to 2022 due to weaker than expected demand recovery and higher production costs[95] - Near-term demand is expected to remain below historical norms, but the long-term outlook for the industry remains positive[96] LIQUIDITY AND CAPITAL RESOURCES This section details the company's cash flows, debt obligations, and future cash requirements, emphasizing its ability to meet short-term and long-term obligations Consolidated cash flows Operating activities shifted to a net cash outflow of $58.9 million, primarily due to lower income from operations and changes in working capital | Metric | 9 Months Ended Sep 30, 2022 (Millions) | 9 Months Ended Sep 30, 2023 (Millions) | Change (Millions) | | :------------------------------------- | :------------------------------------- | :------------------------------------- | :---------------- | | Net cash provided by (used in) operating activities | $59.1 | $(58.9) | $(118.0) | | Capital expenditures | $(44.4) | $(42.1) | $2.3 | | Dividends paid | $(65.8) | $(65.6) | $0.2 | - The increase in cash used in operating activities was primarily due to lower income from operations ($229.6 million decrease) and changes in working capital (net cash used associated with inventories, receivables, payables, and accruals decreased by $92.5 million)[99][102] - Days Sales Outstanding (DSO) increased from 64 days (Dec 31, 2022) to 68 days (Sep 30, 2023), while Days Sales in Inventory (DSI) decreased from 103 days to 61 days[100][102] Outstanding debt obligations The company's total consolidated debt is $423.2 million, with a $225 million global revolving credit facility fully available and all debt covenants in compliance | Debt Type | Amount (Sep 30, 2023, Millions) | | :------------------------------------ | :-------------------------------- | | Kronos International, Inc. 3.75% Senior Secured Notes | $422.5 | | Other indebtedness | $0.7 | | Total consolidated debt | $423.2 | - The company has a $225 million global revolving credit facility with full availability and no outstanding borrowings at September 30, 2023[104] - The company is in compliance with all debt covenants[104] Future cash requirements The company expects sufficient liquidity from operating cash flows to cover capital expenditures, debt, and dividends, with $161.8 million in cash at September 30, 2023 - Primary source of liquidity is cash flows from operating activities, used for capital expenditures, debt repayment, dividends, and stock repurchases[106] - At September 30, 2023, the company had $161.8 million in cash, cash equivalents, and restricted cash, with $87.3 million held by non-U.S. subsidiaries[112] - The company expects to have sufficient liquidity to meet short-term (12 months) and long-term (5 years) obligations[112] - Intends to invest approximately $46 million in capital expenditures in 2023, with $42.1 million already spent through September 30, 2023[113] Item 3. Quantitative and Qualitative Disclosure About Market Risk The company is exposed to market risks including currency exchange rates, interest rates, equity security, and raw material prices, with no material changes since the 2022 Annual Report - The company is exposed to market risks including currency exchange rates, interest rates, equity security, and raw material prices[117] - No material changes in market risks since the 2022 Annual Report[117] Item 4. Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting Evaluation of disclosure controls and procedures The CEO and CFO evaluated and concluded that disclosure controls and procedures were effective as of September 30, 2023[118] Internal control over financial reporting Management is responsible for maintaining adequate internal control over financial reporting to ensure reliable financial reporting and GAAP-compliant financial statement preparation[119] - The assessment of internal control over financial reporting excludes internal control over financial reporting of equity method investees and financial statement schedules required by Article 12 of Regulation S-X[120] Changes in internal control over financial reporting No material changes to internal control over financial reporting occurred during the quarter ended September 30, 2023[121] Part II. OTHER INFORMATION Item 1A. Risk Factors For a comprehensive discussion of risk factors, refer to Part I, Item 1A, "Risk Factors," in the company's 2022 Annual Report - For a discussion of risk factors, refer to Part I, Item 1A, "Risk Factors," in the company's 2022 Annual Report[123] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including amended bylaws, certifications, and Inline XBRL documents - Exhibits include Amended and Restated Bylaws (effective Oct 25, 2023), Certifications (31.1, 31.2, 32.1), and Inline XBRL documents[126]