Kronos Worldwide, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited results. Kronos is a global producer and marketer of titanium dioxide (TiO₂) pigments.
Financial performance
- Second quarter: Net sales were $565.3 million, up 18% year over year; net income was $45.9 million, or $0.40 per diluted share, versus $25.7 million, or $0.22, in Q2 2021. Gross margin was $120.5 million (21% of sales), compared with $109.0 million (23%). Operating income rose to $65.2 million from $43.8 million.
- First half: Net sales were $1.128 billion, up 20%; net income was $103.4 million, or $0.90 per diluted share, versus $45.3 million, or $0.39. Gross margin increased to $269.8 million (24% of sales) from $204.7 million (22%); operating income rose to $148.5 million from $77.8 million.
- Drivers: Average TiO₂ selling prices rose 26% in Q2 and 25% in the first half year over year. Sales volumes were down 1% in Q2 and comparable for the first half. Higher feedstock and energy costs increased cost of sales; the stronger U.S. dollar reduced reported sales by an estimated $29 million in Q2 and $51 million in the first half.
- Cash flow: First-half operating cash flow was $49.3 million, down from $78.1 million. Capital expenditures were $30.5 million, versus $21.2 million. Dividends paid were $43.9 million. Cash, cash equivalents and restricted cash totaled $377.5 million at June 30, 2022.
- Debt and liquidity: Total debt was $417.2 million, including €400 million of 3.75% senior secured notes due September 2025. The $225 million revolving facility was undrawn and fully available; the company reported compliance with debt covenants. Current assets were $1.248 billion and current liabilities were $281.5 million.
- Other items: Q2 operating results included $11.9 million of net currency transaction gains. First-half other comprehensive loss was $25.1 million, primarily reflecting currency translation losses of $29.7 million. Stockholders’ equity was $903.6 million at June 30.
Outlook, commentary and risks
- Management described demand as strong through most of Q2 but noted weakening late in the quarter, particularly in European residential architectural coatings and export markets. The company said it was uncertain whether or how far the slowdown would continue; it maintained a positive long-term industry outlook and cited expected long-term TiO₂ demand growth of 2%–3% annually.
- Production ran at 95% of practical capacity in Q2 and 98% in the first half. Longer-than-expected maintenance shutdowns and limited availability of certain raw materials constrained production and sales of high-demand products.
- Management expected feedstock costs to increase moderately during the remainder of 2022. High energy costs, natural-gas availability concerns in Germany, supply-chain and logistics disruptions, and geopolitical and economic uncertainty could pressure costs, operations and demand.
- The company expected approximately $80 million of 2022 capital expenditures, including $30.5 million incurred through June 30, and approximately $19 million of pension contributions. It expected liquidity to cover short-term obligations and its five-year planning horizon, subject to actual developments.
- Risks include TiO₂ cyclicality and pricing, customer inventories and demand, raw-material and energy costs and availability, currency fluctuations, production interruptions, environmental and regulatory matters, tax examinations, and refinancing or liquidity needs. Management reported no litigation accrual for matters it considered reasonably likely to cause a material loss.
Important facts for investors to verify
- Whether selling-price increases continue to offset higher feedstock, energy and other manufacturing costs, and how margins develop.
- Whether late-quarter demand softness persists, particularly in Europe and export markets, and the effect on volumes and customer inventories.
- Whether raw-material availability, maintenance schedules and production utilization improve or constrain output.
- Working-capital and cash conversion trends, given lower first-half operating cash flow despite higher earnings.
- Currency effects on reported revenue, operating income and the euro-denominated notes, as well as available liquidity and covenant compliance.