Kronos Worldwide, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Kronos is a global producer and marketer of titanium dioxide (TiO₂) pigments, with manufacturing facilities in North America and Europe.
Financial performance
| Metric | Q1 2019 | Q1 2020 |
|---|---|---|
| Net sales | $436.5 million | $421.0 million |
| Gross margin | $109.3 million; 25% of sales | $88.1 million; 21% of sales |
| Income from operations | $49.0 million | $43.5 million |
| Net income | $30.3 million | $27.0 million |
| Diluted earnings per share | $0.26 | $0.23 |
| Operating cash flow | $7.0 million provided | $9.8 million used |
- Sales declined 4%, primarily reflecting a 5% decrease in TiO₂ sales volumes; average selling prices were comparable year over year. Volume weakness in North America, Latin America and export markets was partly offset by stronger European volumes.
- Cost of sales rose 2% despite lower volumes. Management attributed the increase principally to higher feedstock, energy and other production costs. Gross margin fell to 21% from 25%.
- Currency effects included an estimated $7 million reduction in sales from translation, but an estimated $11 million increase in operating income from currency transaction gains. Reported currency transaction income was $12.2 million, versus $0.9 million in Q1 2019.
- Q1 2020 net income included a $1.5 million pretax insurance settlement gain ($1.2 million after tax) related to property damage. A $1.5 million loss on marketable equity securities partly offset other non-operating income.
- Comprehensive loss was $12.0 million, including a $41.9 million currency translation loss, compared with comprehensive income of $32.4 million in Q1 2019.
Liquidity, debt and capital
- At March 31, 2020, cash and cash equivalents were $341.5 million; cash, cash equivalents and restricted cash totaled $342.9 million. Total debt was $437.7 million, including €400 million principal of 3.75% senior secured notes due September 2025. Debt covenants were met.
- Available borrowing capacity was approximately $117.2 million under the North American revolver and $99.0 million under the European revolver. Management said it could access the full amounts without violating existing covenants.
- Current assets were $1,163.4 million and current liabilities were $231.2 million. Total assets were $1,874.8 million and stockholders’ equity was $782.3 million.
- Operating cash use was $9.8 million, versus $7.0 million provided a year earlier, primarily reflecting lower operating income and less favorable changes in working capital. Capital expenditures were $15.3 million; financing cash use was $21.9 million, including $20.8 million of dividends.
- The quarterly dividend was $0.18 per share. The company repurchased 122,489 shares for $1.0 million during Q1, with 1,563,519 shares remaining under the repurchase authorization.
Outlook, risks and other matters
- Management expected COVID-19 to reduce 2020 sales and earnings below original plans, with the scale and duration uncertain. At filing, facilities remained open and near planned capacity, raw-material availability was not materially affected, and the pandemic had had limited Q1 operating impact. Management warned that weaker demand could reduce volumes and prices, lower production and raise unit costs; production curtailments or temporary closures were possible.
- Management expected sufficient liquidity to meet short- and long-term obligations, while reserving the option to reduce inventory, defer capital spending and take other cash-saving measures. Planned 2020 capital expenditures were approximately $60 million, including Q1 spending. Expected 2020 pension contributions were approximately $17 million; full-year interest expense was expected to be comparable to 2019.
- Other key risks include TiO₂ industry cyclicality, selling prices and customer inventories, raw-material and energy costs and availability, foreign-exchange movements, operational interruptions, credit-facility renewal and liquidity, environmental regulation, taxes, and COVID-19 impacts on the global economy and supply chain.
- The company reported no material changes to previously disclosed risk factors and no material litigation loss accrual. It stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
- After quarter-end, the filing reported the April 22, 2020 death of Serena Simmons Connelly. It stated that Lisa Simmons and the Family Trust may be deemed to control Contran and, indirectly, Kronos; specified voting arrangements were described in the filing.
Important facts for investors to verify
- Whether COVID-19 demand declines, pricing pressure or shutdowns materially affect subsequent sales, margins and cash generation.
- Whether higher production costs and lower volumes persist, and how much reported operating income continues to depend on currency transaction gains.
- Liquidity, revolver availability and covenant compliance as earnings and working-capital needs change.
- Execution of the approximately $60 million capital-spending plan, expected pension funding and continued dividend and repurchase activity.
- Subsequent developments in the controlling-shareholder arrangements and any material environmental, legal or tax contingencies.