Business context and reporting period
Kronos Worldwide, Inc. is a global producer and marketer of titanium dioxide (TiO₂) pigments, used in products including paints, plastics and paper. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods. Management said COVID-19 materially reduced demand, particularly in the second quarter.
Financial and operating performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $386.0m | $484.5m | $807.0m | $921.0m |
| Gross margin | $95.8m (25%) | $109.5m (23%) | $183.9m (23%) | $218.8m (24%) |
| Income from operations | $33.0m (9% of sales) | $46.5m (10%) | $76.5m (9%) | $95.5m (10%) |
| Net income | $18.6m | $29.5m | $45.6m | $59.8m |
| Diluted earnings per share | $0.16 | $0.25 | $0.39 | $0.52 |
Q2 sales fell 20% year over year, principally because TiO₂ sales volumes declined 22%; average selling prices decreased 1%. For the first half, sales fell 12%, with volumes down 14% and average prices down 1%. Management attributed the volume decline primarily to pandemic-related demand contraction across major markets. First-half production volume decreased 2%; average capacity utilization was 95%, versus 97% a year earlier.
Q2 gross margin percentage improved to 25% from 23%, reflecting product mix and improved results from ilmenite mine operations, partly offset by lower prices and higher input costs. First-half gross margin percentage declined to 23% from 24%, as lower prices and higher raw-material and production costs outweighed lower volume-related costs. First-half operating income included $6.1m of net currency transaction gains; the comparable 2019 period had a $0.2m loss.
Cash flow, debt and liquidity
Operating cash flow was $18.1m for the first half of 2020, compared with $26.0m in 2019. Capital expenditures were $25.4m, resulting in operating cash flow less capital expenditures of negative $7.3m. Cash, cash equivalents and restricted cash totaled $343.4m at June 30, 2020, including $341.4m of cash and cash equivalents. The company paid $41.6m in dividends during the first half.
Total debt was $446.5m, including €400m principal amount of 3.75% Senior Secured Notes due September 2025 and $2.7m of other debt. The company reported compliance with all debt covenants. Available borrowing capacity was approximately $125.0m under its North American revolver and $100.9m under its European revolver, or about $226m combined. Total assets were $1,903.7m and stockholders’ equity was $801.3m at June 30, 2020.
Outlook, risks and notable items
Management expected sales volumes and resulting earnings for the remainder of 2020 to remain below prior periods because of the pandemic and reduced economic activity. It provided no specific earnings or revenue forecast. The duration and severity of demand weakness, customer recovery and potential disruptions to company or supplier operations remained uncertain. Facilities had remained open, raw-material availability had not been adversely affected, and management said it was adjusting production to market expectations.
Management said liquidity was sufficient for short- and long-term obligations and identified possible cash measures including inventory reductions, delaying capital expenditures and other cost savings. Planned 2020 capital expenditures were approximately $60m, including $25.4m spent through June 30; management said projects could be delayed. Expected 2020 pension contributions were approximately $17m. Management expected full-year interest expense to be comparable to 2019.
Notable items included a $1.5m first-half insurance settlement gain related to property damage and a $1.7m first-half loss on marketable equity securities. First-half other comprehensive loss was $17.9m, mainly reflecting $23.9m of currency translation losses. The company disclosed environmental, contractual, product liability, intellectual property, employment and other claims, but had not accrued litigation losses because it did not consider a material loss reasonably possible. Management reported no material changes to previously disclosed risk factors and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether demand, sales volumes and TiO₂ pricing recover, particularly in Europe and export markets, and how production and inventory levels respond.
- Whether operating cash generation is sufficient to fund capital spending, dividends and pension contributions if earnings remain weak.
- Revolver availability and covenant headroom as EBITDA and market conditions change; reported capacity and compliance reflect June 30, 2020 conditions.
- The effect of currency movements, raw-material costs and pension assumptions on margins and reported earnings.
- Developments in COVID-19 exposure, environmental or other claims, and the potential need to defer planned capital projects.