Kronos Worldwide, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Kronos is a global producer and marketer of titanium dioxide (TiO₂) pigments, with production facilities in Europe and North America. Its largest shareholder, Valhi, held approximately 50% of common stock; an NL Industries subsidiary held approximately 31%.
Financial results
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $443.2 million | $565.3 million | $869.5 million | $1,128.2 million |
| Gross margin | $44.1 million (10%) | $120.5 million (21%) | $74.9 million (9%) | $269.8 million (24%) |
| Operating income (loss) | $(6.7) million | $65.2 million | $(25.0) million | $148.5 million |
| Net income (loss) | $(8.2) million | $45.9 million | $(23.4) million | $103.4 million |
| Basic and diluted EPS | $(0.07) | $0.40 | $(0.20) | $0.90 |
TiO₂ sales volumes fell 26% in Q2 and 28% in the first half year over year; production volumes fell 33% and 28%, respectively. First-half average selling prices were 1% higher year over year, but Q2 prices declined 2%. The filing does not provide a clear EBITDA value.
- Cash flow: Operating cash flow was a use of $76.6 million in the first half, versus $49.3 million provided in the prior-year period. Capital expenditures were $33.9 million; cash dividends paid were $43.8 million.
- Liquidity: Cash, cash equivalents and restricted cash totaled $176.1 million at June 30, down from $334.6 million at year-end 2022. The company also had the full $225 million revolving facility available, with no borrowings outstanding.
- Debt: Total debt was $433.1 million, principally €400 million of 3.75% senior secured notes due September 2025. The company reported compliance with debt covenants.
- Balance sheet: Current assets were $1,055.7 million and current liabilities were $260.6 million. Inventories declined to $540.7 million from $608.7 million at year-end; receivables increased to $308.0 million from $255.1 million.
Material changes and management commentary
- Sales and operating results weakened sharply as demand remained subdued across major markets, with customer destocking and lower production. Capacity utilization was 64% in Q2 2023 versus 95% in Q2 2022; first-half utilization was 70% versus 98%.
- Management attributed the margin decline to lower volumes, higher raw-material and energy costs, and fixed production costs not absorbed at reduced output. Unabsorbed fixed production costs were $22 million in Q2 and $54 million in the first half; higher production costs were approximately $18 million and $100 million, respectively.
- Management said demand may show pockets of improvement, particularly in North America, but expects near-term demand to remain below historical norms. Pricing faces pressure from product availability, short lead times and low-cost Chinese imports. Lower input costs and cost-reduction initiatives may help margins later in the year, while higher-cost inventory was expected to weigh on margins into Q3.
- The company expects lower full-year 2023 operating results than in 2022, citing weaker-than-expected demand recovery and higher production costs. It gave no specific numerical earnings guidance. Management expects long-term TiO₂ industry demand growth of 2%–3% annually.
- Management expects sufficient liquidity for short-term obligations through June 30, 2024 and its five-year planning horizon through June 30, 2028, subject to actual conditions. Planned 2023 capital expenditures were approximately $43 million.
Unusual items, risks and contingencies
- First-half results included a $2.2 million pre-tax insurance settlement gain related to the 2020 Hurricane Laura business-interruption claim and a $1.3 million UK pension plan termination and buy-out settlement loss.
- Currency movements reduced first-half sales by an estimated $12 million but reduced the operating loss by an estimated $21 million, primarily through translation effects.
- Key risks include cyclical TiO₂ demand and pricing, customer inventories, raw-material and energy costs and availability, production interruptions, foreign exchange movements, competition and low-cost imports, environmental regulation, and liquidity or refinancing needs.
- The company reported no material litigation accrual, stating that a material loss was not reasonably possible based on its assessment. It believes tax examination outcomes should not materially affect financial position, results or liquidity.
Most important facts for investors to verify
- Whether demand and customer restocking improve, and whether the anticipated recovery occurs without further pricing pressure.
- Whether reduced input costs and cost actions offset low utilization and the remaining high-cost inventory.
- Whether operating cash flow and cash balances stabilize while the company continues dividends and share repurchases.
- Plans and capacity to refinance or repay the €400 million notes due in September 2025, and continued covenant compliance.
- Execution of the 2023 capital expenditure plan and the potential effect of currency, energy, raw-material and geopolitical developments.