Kronos Worldwide, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Kronos produces and markets titanium dioxide (TiO₂) pigments. Results were materially affected by COVID-19-related demand weakness. Dollar amounts are in millions except per-share data and where otherwise noted.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $416.9 | $437.4 | $1,223.9 | $1,358.4 |
| Gross margin | $80.6; 19% of sales | $87.7; 20% | $264.5; 22% | $306.5; 23% |
| Operating income | $19.3 | $33.1 | $95.8 | $128.6 |
| Net income | $8.1 | $17.9 | $53.7 | $77.7 |
| Diluted EPS | $0.07 | $0.16 | $0.46 | $0.67 |
| Cash provided by operations | Not separately stated | Not separately stated | $56.1 | $123.8 |
Quarterly sales declined 5%, operating income declined 42%, and net income declined 55% year over year. For the first nine months, sales declined 10%, operating income 26%, and net income 31%. Nine-month TiO₂ sales volume fell 11% and average selling prices fell 2%; quarterly volume declined 6% and prices 4%. Management attributed lower earnings principally to weaker volumes and prices, with higher raw-material and production costs weighing on year-to-date results. Lower production costs, including energy, partly offset quarterly pressure.
Nine-month operating cash flow fell $67.7, reflecting lower operating income and less favorable changes in working capital, partly offset by lower cash taxes. Capital expenditures were $38.3, and management estimated approximately $60 for full-year 2020. Cash, cash equivalents and restricted cash totaled $353.9 at September 30, versus $392.3 at year-end 2019.
Balance sheet and liquidity
- Total assets were $1,946.9 and stockholders’ equity was $801.7 at September 30, 2020.
- Total debt was $467.4, including €400 million principal amount of 3.75% Senior Secured Notes due September 2025 and $2.7 of other debt. Debt carrying value was $465.9 long-term and $1.5 current. Approximate net debt using reported total debt and cash, cash equivalents and restricted cash was $113.5.
- Available revolving credit capacity was $125.0 in North America and $105.6 in Europe. The company reported compliance with all debt covenants and no revolver borrowings during the first nine months.
- Dividends paid were $62.4 during the first nine months, or $0.54 per share. The Q3 dividend was $0.18 per share.
Outlook, risks and unusual items
- Management said demand improved during Q3 from Q2, but had not returned to pre-pandemic levels in all regions. It expected sales volumes and earnings for the remainder of 2020 to remain below 2019 levels. No specific numerical earnings or sales guidance was provided.
- Production utilization was 86% in Q3 2020 versus 97% in Q3 2019; year-to-date utilization was 92% versus 97%. Production was reduced early in Q3 and began increasing late in the quarter as demand improved.
- COVID-19 duration, customer demand, potential operating or supplier disruptions, TiO₂ pricing and volumes, feedstock and energy costs, foreign exchange, and industry cyclicality remain important risks. Management stated it believed liquidity was adequate for short- and long-term obligations and could reduce inventory, defer capital spending, or pursue other cost savings if needed.
- Hurricane Laura temporarily halted production at the company’s 50%-owned Louisiana Pigment Company joint venture from August 24 until September 25. Hurricane Delta caused another temporary halt in October, with production resuming within five days. The company expects insurance to cover a majority of related losses, subject to deductibles, but had not recognized recoveries because claim amounts were not determinable. Q3 hurricane-related costs to Kronos were described as immaterial.
- Nine-month results included a $1.5 insurance settlement gain related to property damage. Pension and postretirement costs increased, primarily due to amortization of actuarial losses and lower expected returns on plan assets.
- The company reported various legal and environmental matters but had not accrued litigation amounts, stating a material loss was not reasonably possible. It reported no material changes to previously disclosed risk factors and no material changes in market risks.
Most important facts for investors to verify
- Whether post-Q3 demand and TiO₂ pricing improved or weakened, particularly in Europe and export markets.
- Whether production utilization recovered and inventory and working-capital trends supported cash generation.
- Actual full-year capital spending versus the approximately $60 estimate, and continued access to the stated revolving credit capacity.
- Insurance claim outcomes and any additional financial effects from Hurricanes Laura and Delta.
- Ability to sustain dividends and meet debt covenants if pandemic-related weakness persists.