Kronos Worldwide, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Kronos produces and markets titanium dioxide (TiO₂) pigments for paints, plastics, paper and other applications. All dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net sales | $459.6 | $499.8 | $1,587.8 | $1,443.4 |
| Gross margin | $84.0 (18%) | $123.0 (25%) | $353.8 (22%) | $327.7 (23%) |
| Income from operations | $30.8 (7%) | $57.3 (11%) | $179.3 (11%) | $135.1 (9%) |
| Net income | $21.0 | $36.0 | $124.4 | $81.3 |
| Diluted EPS | $0.18 | $0.31 | $1.08 | $0.70 |
- Q3: Sales fell 8%; average TiO₂ prices rose 21%, but sales volumes declined 20% and currency translation reduced sales by an estimated $31. Higher production costs, lower volumes and weaker fixed-cost absorption drove gross margin down to 18% and operating income down 46%.
- First nine months: Sales rose 10%, reflecting a 24% increase in average prices, partly offset by a 7% volume decline and an estimated $83 currency-related sales reduction. Operating income increased 33%; higher selling prices more than offset higher costs overall, although gross margin percentage slipped.
- TiO₂ production volumes declined 5% in Q3 and 1% for the nine months. Capacity utilization was 93% in Q3 and 96% for the nine-month period, compared with 100% and approximately 99%, respectively, in 2021.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $59.1, down from $126.0. The company cited unfavorable working-capital movements, including inventory, receivables, payables and accruals. Capital expenditures were $44.4, versus $35.9; operating cash flow less capital expenditures was approximately $14.7.
- Cash, cash equivalents and restricted cash totaled $344.4 at September 30, 2022, down from $412.6 at year-end 2021. Cash and cash equivalents alone were $338.5. Inventories increased to $511.7 from $432.3.
- Total debt was $392.2, including €400 million principal amount of 3.75% secured notes due September 2025, carried at $390.2, and approximately $2.0 of other debt. The company had no revolver borrowings and reported approximately $207 available under its $225 global revolver. It reported compliance with debt covenants.
- Stockholders’ equity was $878.9. The company paid $65.8 in dividends during the first nine months and spent $1.1 on share repurchases. The quarterly dividend was $0.19 per share.
- Management expected approximately $65 of 2022 capital expenditures; $44.4 had been spent through September.
Outlook, risks and unusual items
- Management said European and export-market demand weakened sharply late in Q3 as customers reduced production amid economic conditions and geopolitical uncertainty. North American and Latin American demand had been relatively stable, with some recent softening in North American architectural coatings.
- Management expects near-term sales volumes and operating results to be adversely affected by weaker demand and higher costs. Energy and feedstock costs rose substantially; the company expected feedstock costs to moderate. It began production curtailments at two European facilities in Q4 and said it would adjust production and inventories to demand. It described the industry’s long-term outlook as positive but gave no specific earnings or sales guidance.
- Q3 and nine-month results included a $2.7 insurance settlement gain related to the 2020 Hurricane Laura business interruption claim ($2.2 after tax). The company also recognized a $4.5 non-cash tax benefit in the first nine months from reducing a valuation allowance on business-interest carryforwards.
- Key exposures include cyclical TiO₂ demand and pricing, energy and raw-material costs and availability, customer inventory levels, foreign-exchange movements, operational interruptions, and geopolitical and broader economic conditions. The company also faces environmental, tax and other legal contingencies; it reported no litigation accrual for matters it considered potentially material.
- Management stated it expected liquidity to cover short- and long-term obligations, while noting that actual conditions differing from expectations could adversely affect liquidity. The filing reports no material expected tax impact from the Inflation Reduction Act.
Important facts for investors to verify
- Whether demand weakness in Europe and export markets persists, and how Q4 curtailments affect volumes, costs and inventories.
- Whether higher prices can continue to offset energy, feedstock and other manufacturing costs, and the pace of any cost moderation.
- Inventory levels, working-capital cash use and the conversion of reported earnings into operating cash flow.
- Foreign-exchange effects, particularly euro movements, and the sensitivity of reported sales and margins to currency changes.
- Liquidity and refinancing capacity ahead of the 2025 notes maturity, including continued covenant compliance and revolver availability.
- Capital spending, dividend sustainability and any additional share repurchases as demand and cash generation evolve.