Kronos Worldwide, Inc. — Q3 2021 Form 10-Q
Business context and period. Unaudited results for the quarter and nine months ended September 30, 2021, compared with the same 2020 periods. Kronos is a global producer and marketer of titanium dioxide (TiO₂) pigments, with production facilities in North America and Europe.
Key financial results
| Metric (USD millions, except per-share data) | Q3 2020 | Q3 2021 | Nine months 2020 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | 416.9 | 499.8 | 1,223.9 | 1,443.4 |
| Gross margin | 80.6 | 123.0 | 264.5 | 327.7 |
| Income from operations | 19.3 | 57.3 | 95.8 | 135.1 |
| Net income | 8.1 | 36.0 | 53.7 | 81.3 |
| Net income per diluted share | $0.07 | $0.31 | $0.46 | $0.70 |
- Margins: Gross margin was 25% of sales in Q3 2021 versus 19% a year earlier; operating margin was 11% versus 5%. For the nine months, gross margin was 23% versus 22%, and operating margin was 9% versus 8%.
- Cash flow: Operating cash flow was $126.0 million for the first nine months of 2021, up from $56.1 million. Capital expenditures were $35.9 million; dividends paid were $62.4 million.
- Liquidity: September 30 cash, cash equivalents and restricted cash totaled $379.7 million. The company reported $225 million available under its new global revolver, with no borrowings outstanding.
- Debt: Total debt was $461.8 million, including $460.4 million carrying value of €400 million principal of 3.75% senior secured notes due September 2025. Debt was down from $487.4 million at December 31, 2020. The company reported covenant compliance.
Material changes and management commentary
- Q3 sales increased 20% year over year, driven by 11% higher average TiO₂ selling prices and 6% higher sales volumes; currency added an estimated $5 million. Nine-month sales rose 18%, reflecting 8% higher volumes, 4% higher prices and an estimated $47 million currency benefit.
- Higher prices, volumes and production utilization supported stronger margins and operating income. These gains were partly offset by higher raw-material, energy and other production costs. Currency movements reduced nine-month operating income by an estimated $15 million.
- Production capacity utilization averaged 99% for the first nine months of 2021 versus 92% in 2020. The company attributed the comparison partly to COVID-19-related demand weakness in 2020.
- Cash from operations improved partly because of working-capital movements and higher operating income; cash paid for taxes increased by $20.4 million year over year.
Outlook, risks and contingencies
- Management expected strong global customer demand to continue through the remainder of 2021, with full-year sales and production volumes, sales and operating income above 2020 levels. It expected TiO₂ selling prices to continue rising, while warning that increasing costs would challenge margins.
- Supply-chain disruptions, including feedstock and raw-material availability and transport delays, and higher raw-material, shipping and energy costs were expected to persist. Management said disruptions had so far had minimal operational impact.
- Management expected approximately $70 million of 2021 capital expenditures, including $35.9 million spent through September 30, and said projects could be delayed depending on market conditions. It expected sufficient liquidity for short- and long-term obligations, subject to actual developments.
- Key risks include cyclical TiO₂ demand and pricing, customer and producer inventories, supply-chain and operating interruptions, raw-material and energy costs, foreign exchange, COVID-19 effects, environmental and regulatory requirements, and access to liquidity or refinancing.
- The company disclosed that a dam at its Norwegian mine facilities was reclassified to the highest Norwegian dam classification level, bringing increased oversight and regulation. Potential effects on mine and sulfate pigment plant operations were unknown.
- Kronos reported various environmental, contractual, product-liability, intellectual-property, employment and other claims, but had not accrued a material litigation loss. Tax authorities were examining certain returns; management believed existing accruals were adequate and examinations would not materially affect financial position, results or liquidity.
Most important facts to verify
- Whether higher TiO₂ prices and volumes continue to offset rising feedstock, energy, shipping and other production costs.
- Whether supply-chain constraints or the Norwegian dam’s revised classification lead to material operating, regulatory or capital impacts.
- Cash generation, working-capital trends and the ability to sustain dividends and planned capital expenditures through the industry cycle.
- Debt covenant compliance and availability under the $225 million revolver; the filing reports full availability at quarter-end.
- Actual full-year 2021 results versus management’s outlook; interim results may not indicate full-year performance.