Kronos Worldwide, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Dollar amounts are in millions except per-share data. Kronos produces and markets titanium dioxide (TiO₂) pigments; approximately 40% of its sales volumes in the first nine months were sold into Europe.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $396.9 | $459.6 | $1,266.4 | $1,587.8 |
| Gross margin | $34.4 (9%) | $84.0 (18%) | $109.3 (9%) | $353.8 (22%) |
| Operating income (loss) | $(25.3) | $30.8 | $(50.3) | $179.3 |
| Net income (loss) | $(20.4) | $21.0 | $(43.8) | $124.4 |
| EPS, basic and diluted | $(0.18) | $0.18 | $(0.38) | $1.08 |
- Q3 sales fell 14% year over year: sales volumes declined 6% and average TiO₂ selling prices declined 8%; currency movements added an estimated $12 million to sales.
- Nine-month sales declined 20%, driven mainly by a 22% reduction in sales volumes and a 2% decline in average selling prices.
- Cost of sales was 91% of sales in both Q3 and the first nine months of 2023, versus 82% and 78%, respectively, in the prior-year periods. Lower production caused unabsorbed fixed costs of about $20 million in Q3 and $74 million for the nine months; nine-month production costs were also about $90 million higher, primarily due to raw materials.
- Cash used in operating activities was $58.9 million for the first nine months, versus $59.1 million provided in 2022. Capital expenditures were $42.1 million; dividends paid were $65.6 million.
Balance sheet and liquidity
- At September 30, cash, cash equivalents and restricted cash totaled $161.8 million, down from $334.6 million at December 31, 2022. Inventory declined to $497.8 million from $608.7 million.
- Total debt was $423.2 million, mainly €400 million of 3.75% Senior Secured Notes due September 2025. The $225 million revolving facility had no borrowings and was fully available, subject to its borrowing-base calculation. The company reported compliance with debt covenants.
- Management expected sufficient liquidity for short- and long-term obligations, while noting that actual developments could adversely affect liquidity.
Changes, outlook and risks
- Management described an extended industry downturn, with demand below historical levels across major markets. Capacity utilization was 71% in the first nine months of 2023, versus 96% in the comparable 2022 period. European demand remained particularly weak; North America and some export markets showed signs of stabilization.
- Management expects full-year 2023 operating results to be lower than 2022. It expects near-term demand to remain below historical norms and cited pressure on European and export pricing from low-cost Chinese imports. It anticipates lower input costs and cost-reduction actions will improve margins in 2024; these are expectations, not quantified guidance.
- Workforce reductions are expected to affect about 100 individuals. The company expects a $6 million charge in Q4 2023, with most related cash payments completed by Q1 2024.
- Unusual items included $2.5 million of nine-month insurance-settlement gains related to Hurricane Laura and a $1.3 million UK pension-plan settlement loss. The company also recognized a $1.3 million unrealized loss on Valhi shares in the nine-month period.
- Principal risks include cyclical demand and pricing, customer inventories, raw-material and energy costs, production interruptions, currency fluctuations, competition and imports, liquidity and refinancing, taxes, and environmental regulation. Tax authorities are examining certain returns; management believes accruals are adequate and expects no material adverse effect from examinations. The company reported no litigation accrual, concluding a material loss was not reasonably possible.
Important facts for investors to verify
- Whether demand, sales volumes and TiO₂ pricing stabilize, particularly in Europe, and how imports affect selling prices.
- Whether production curtailments, lower input costs and other savings restore margins and operating cash flow, including the timing and cost of workforce reductions.
- Cash levels and revolver availability as the company funds dividends, capital spending and operations; the filing reports negative operating cash flow for the first nine months.
- Repayment or refinancing plans for the €400 million notes due in September 2025 and continued covenant compliance.
- Developments in tax examinations, environmental matters and other contingencies; interim results may not indicate full-year performance.