Kronos Worldwide, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Financial figures are unaudited and, unless stated otherwise, in millions of dollars. Kronos produces and markets titanium dioxide (TiO₂) pigments for paints, plastics, paper and other uses; approximately half of first-half sales volume went to Europe. Valhi held about 50% of the company’s common stock and an NL subsidiary held about 30%.
Financial performance
| Metric | Q2 2020 | Q2 2021 | Six months 2020 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $386.0 | $478.6 | $807.0 | $943.6 |
| Gross margin | $95.8 (25%) | $109.0 (23%) | $183.9 (23%) | $204.7 (22%) |
| Income from operations | $33.0 | $43.8 | $76.5 | $77.8 |
| Net income | $18.6 | $25.7 | $45.6 | $45.3 |
| Diluted earnings per share | $0.16 | $0.22 | $0.39 | $0.39 |
- Q2 sales rose 24%, driven by 16% higher sales volume, 3% higher average TiO₂ prices and an estimated $22 million favorable currency translation effect. Operating income increased 33%; net income increased $7.1 million year over year.
- For the first half, sales rose 17%, including 9% higher volume, 1% higher average prices and an estimated $42 million favorable currency effect. Operating income was up 2%, but net income was slightly lower. Currency movements reduced first-half operating income by an estimated $17 million.
- Cost of sales rose faster than sales in both comparisons. Higher raw-material, energy and other production costs contributed to lower gross-margin percentages. First-half operating margin declined to 8% from 9%.
- First-half operating cash flow was $78.1 million, versus $18.1 million in 2020. Capital expenditures were $21.2 million; dividends paid were $41.6 million. Cash, cash equivalents and restricted cash totaled $370.2 million at June 30, 2021.
- At June 30, total debt was $473.2 million, including $471.8 million carrying value of 3.75% senior secured notes due September 2025. Cash less total debt was approximately $103 million. The company reported no borrowings on its $225 million revolving facility, with the full amount available, and stated it complied with debt covenants.
- Current assets were $1,159.1 million and current liabilities were $201.8 million. The balance sheet showed stockholders’ equity of $811.2 million.
Material changes and management commentary
- Higher sales volumes reflected recovery from COVID-19-related demand weakness, particularly in Q2 2020. First-half production capacity utilization was 99%, versus 95% a year earlier; Q2 2021 utilization was 100%.
- Management said demand had strengthened and expected global consumer-product demand, sales and production volumes to remain elevated through the rest of 2021. It expected 2021 sales and operating income to exceed 2020, principally from higher TiO₂ prices and volumes, while warning that increasing costs would continue to pressure margins.
- Supply-chain disruptions, including availability of feedstock and other raw materials and transportation delays, had so far had minimal operational impact, but management expected challenges to persist. Raw-material, shipping and energy costs were increasing; management expected TiO₂ selling prices to continue rising during 2021.
- The company entered a new $225 million global revolving credit facility in April 2021, maturing in April 2026, replacing its prior North American and European facilities. It planned approximately $85 million of 2021 capital expenditures, including $21.2 million already spent through June.
- Management expected sufficient liquidity for short- and long-term obligations, based on its forecasts. It noted liquidity could be adversely affected if actual conditions differ from expectations. The company expected approximately $17 million of 2021 pension contributions.
Risks, contingencies and other items
- Key risks include TiO₂ industry cyclicality, shifts in supply and demand and customer inventories, competition and pricing, feedstock and energy costs, currency volatility, supply-chain and operating interruptions, COVID-19, environmental regulation, and the ability to maintain liquidity and refinance debt.
- The company was involved in environmental, contractual, product-liability, intellectual-property, employment and other matters. It had not accrued litigation losses, stating it did not believe a material loss was reasonably possible. Tax authorities were examining certain returns; management considered its accruals adequate and did not expect examination outcomes to materially affect financial position, results or liquidity.
- Q2 interest expense increased by $0.6 million year over year, and first-half interest expense increased by $1.0 million, primarily due to costs associated with refinancing the revolving facilities and, for the half year, currency effects. The first half of 2020 included a $1.5 million insurance settlement gain that did not recur.
- Disclosure controls and procedures were assessed as effective at June 30, 2021; the filing reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether TiO₂ price increases and stronger demand continue to offset inflation in raw materials, energy, shipping and other production costs—and how that affects margins.
- Whether supply-chain and logistics constraints remain manageable and whether they affect production, deliveries or costs.
- Actual operating cash generation and working-capital trends; first-half cash flow benefited materially from inventory and other working-capital movements.
- Debt terms, revolving-facility availability and covenant compliance, especially if operating conditions weaken or dividends continue.
- Developments in tax examinations, environmental matters and other contingencies, and any material changes to management’s 2021 outlook.