Kronos Worldwide, Inc. — Q1 2022 10-Q
Business context and period. Kronos produces and markets titanium dioxide (TiO₂) pigments for paints, plastics, paper and other uses. This unaudited report covers the three months ended March 31, 2022, compared with Q1 2021, and the balance sheet is compared with December 31, 2021.
Financial performance and position
| Metric | Q1 2021 | Q1 2022 |
|---|---|---|
| Net sales | $465.0 million | $562.9 million |
| Gross margin | $95.7 million (21% of sales) | $149.3 million (27%) |
| Income from operations | $34.0 million (7%) | $83.3 million (15%) |
| Net income / diluted EPS | $19.6 million / $0.17 | $57.5 million / $0.50 |
| Operating cash flow | $56.7 million | $(18.6) million |
| Capital expenditures | $10.8 million | $14.2 million |
- Sales increased 21% year over year. Management attributed the increase principally to 24% higher average TiO₂ selling prices (about $112 million of additional sales) and 2% higher sales volumes (about $9 million); currency translation reduced sales by an estimated $22 million.
- Production volumes rose 6%, and facilities operated at full practical capacity versus 97% utilization in Q1 2021. Higher selling prices and fixed-cost absorption more than offset increased production costs, including higher raw-material and energy costs.
- At March 31, cash and cash equivalents were $350.0 million, plus $6.2 million of restricted cash. Total debt was $445.2 million, including $442.9 million carrying value of 3.75% Senior Secured Notes due September 2025. The $225 million revolver was undrawn and fully available; the company reported compliance with debt covenants.
- Current assets were $1,279.5 million and current liabilities $281.1 million. Cash, cash equivalents and restricted cash totaled $356.2 million, down from $412.6 million at year-end 2021.
- Quarterly dividends were $0.19 per share, totaling $21.9 million. The company repurchased 73,881 shares for $1.1 million during the quarter.
Material changes versus the prior period
- Net sales rose $97.9 million; gross margin increased from 21% to 27% of sales, and operating margin from 7% to 15%.
- Net income nearly tripled, while operating cash flow shifted from $56.7 million provided to $18.6 million used. Management attributed the cash-flow decline primarily to working-capital movements: the relative cash impact of receivables, inventories, payables and accruals was $123.6 million less favorable than in Q1 2021, partly offset by higher operating income.
- Receivables increased to $416.4 million from $379.1 million and inventories to $464.2 million from $432.3 million at year-end. Long-term debt declined to $443.8 million from $449.8 million.
Outlook, commentary and risks
- Management expects 2022 sales and income from operations to exceed 2021 levels, with strong demand supporting further TiO₂ price increases. It expects production at full practical capacity, but anticipates lower 2022 sales volumes than 2021 based on current inventory levels.
- Feedstock, raw-material, shipping, energy and utility costs were rising; management expected feedstock costs to remain above 2021 averages and elevated production costs to continue through 2022. Price increases are expected to mitigate these cost pressures, but margins remain challenged.
- Supply-chain disruptions, third-party feedstock availability and transportation delays continued. Management reported minimal operational impact to date but expects disruptions to persist.
- Management planned approximately $95 million of 2022 capital expenditures, including $14.2 million spent through March 31, and expected sufficient liquidity for short- and long-term obligations, subject to actual developments.
- Key risks include TiO₂ demand and pricing cycles, customer and producer inventories, raw-material and energy costs and availability, currency movements, global economic and geopolitical conditions, operating disruptions, environmental regulation, tax matters, and the ability to maintain liquidity and refinance or renew credit facilities.
- The company reported tax examinations but believes its accruals are adequate and their resolution should not materially affect financial position, results or liquidity. It had not accrued litigation losses, stating that no material loss was reasonably possible. These are management assessments, not guarantees.
Important facts for investors to verify
- Whether selling-price gains can continue to offset higher feedstock, energy, logistics and other operating costs.
- Whether working-capital requirements and cash conversion improve after the Q1 operating cash outflow.
- Whether expected demand, full-capacity production and projected lower sales volumes align with inventory levels and actual market conditions.
- Liquidity, revolver availability and compliance with debt covenants, particularly if operating cash flow or costs diverge from expectations.
- Developments in supply-chain disruptions, currency exposure, tax examinations and environmental or other contingencies.
Interim results may not indicate full-year performance; the company cautions that actual results may differ materially from its forward-looking expectations.