Kronos Worldwide, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; financial statements are unaudited. Kronos produces and markets titanium dioxide (TiO2) pigments for paints, plastics, paper, and other products. Approximately half of Q1 sales volumes were sold in Europe. Valhi owned approximately 50% of Kronos and an NL Industries subsidiary approximately 31% at quarter-end.
Financial results
Amounts in millions of dollars, except per-share data and operating statistics.
| Metric | Q1 2022 | Q1 2023 |
|---|---|---|
| Net sales | $562.9 | $426.3 |
| Gross margin | $149.3 (27% of sales) | $30.8 (7% of sales) |
| Operating income (loss) | $83.3 | $(18.3) |
| Net income (loss) | $57.5 | $(15.2) |
| Net income (loss) per share | $0.50 | $(0.13) |
| Cash used in operating activities | $18.6 | $109.8 |
| Capital expenditures | $14.2 | $16.4 |
- Sales fell 24% year over year. TiO2 sales volumes declined 29%, partly offset by a 4% increase in average selling prices; currency movements reduced sales by an estimated $11 million.
- Production volumes declined 24%, and facilities operated at 76% of practical capacity versus full practical capacity a year earlier. Higher production costs, particularly raw materials and energy, and $22 million of unabsorbed fixed production costs weighed on gross margin.
- SG&A decreased $8.2 million to $53.2 million, mainly from lower variable distribution costs. The Q1 2023 operating loss included a $1.7 million insurance settlement gain related to Hurricane Laura; the after-tax benefit was $1.3 million.
- Cash and cash equivalents were $177.8 million at March 31, down from $327.8 million at December 31, 2022. Cash, cash equivalents, and restricted cash totaled $184.2 million, including $81.4 million held by non-U.S. subsidiaries. Operating cash use increased by $91.2 million year over year, primarily reflecting weaker operating results and working-capital movements.
- At March 31, total debt was $434.4 million, principally €400 million of 3.75% senior secured notes due September 2025, carried at $433.5 million. The $225 million revolving credit facility was undrawn and fully available; Kronos reported compliance with debt covenants.
- Current assets were $1,135.1 million and current liabilities $259.7 million. Stockholders’ equity was $912.1 million. The company paid $21.9 million in dividends during the quarter ($0.19 per share) and repurchased 159,796 shares for $1.4 million.
Changes and management outlook
- Compared with Q1 2022, Kronos swung from $57.5 million net income to a $15.2 million net loss. Lower demand and volumes, higher production costs, and reduced capacity utilization were key drivers; higher selling prices only partly offset these pressures.
- Management said demand remained weak across major markets, although pockets of improvement appeared in Q1. It expected demand to gradually recover during 2023, while continuing reduced production rates at certain facilities in Q2 to manage inventory. Management expected selling prices to rise during the rest of 2023 and margins to improve as demand increased, but forecast lower full-year 2023 operating results than in 2022.
- Management expects approximately $43 million of 2023 capital expenditures and approximately $17 million of pension contributions. It stated it expects sufficient liquidity for short- and long-term obligations, while noting actual developments could adversely affect liquidity.
- The company cites cyclical TiO2 demand, customer inventory levels, selling-price competition, energy and feedstock costs and availability, production interruptions, currency fluctuations, economic and geopolitical conditions, interest rates, and refinancing and liquidity as risks. Management reported no material accrued litigation losses and believes tax examination outcomes should not materially affect financial position, results, or liquidity.
Investor verification points
- Track whether TiO2 demand, sales volumes, capacity utilization, and selling prices recover as management anticipated, and whether cost inflation and fixed-cost under-absorption ease.
- Reconcile cash usage and working-capital movements, especially receivables and accounts payable, against the company’s liquidity outlook.
- Monitor the €400 million notes due in 2025, covenant compliance, and the availability and terms of revolving credit.
- Assess the sustainability of the dividend and share repurchases amid operating losses and cash outflows.
- Review currency, raw-material, energy, environmental, tax, and other contingent risks; the filing states that interim results may not indicate full-year results.