Kronos Worldwide, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Kronos produces and markets titanium dioxide (TiO₂) pigments, with operations in Europe and North America. Financial amounts below are in U.S. dollars, millions except per-share data and where noted.
Financial performance
| Metric | Q3 2019 | Q3 2018 | First 9 months 2019 | First 9 months 2018 |
|---|---|---|---|---|
| Net sales | $437.4 | $410.3 | $1,358.4 | $1,312.5 |
| Gross margin | $87.7 (20%) | $119.1 (29%) | $306.5 (23%) | $465.7 (35%) |
| Income from operations | $33.1 (8%) | $58.1 (14%) | $128.6 (9%) | $285.5 (22%) |
| Net income | $17.9 | $32.6 | $77.7 | $181.0 |
| Diluted EPS | $0.16 | $0.28 | $0.67 | $1.56 |
| Operating cash flow | Not separately stated | Not separately stated | $123.8 | $199.0 |
- Q3 sales rose 7%; sales volume increased 17%, while average TiO₂ selling prices declined 5%. For the first nine months, sales rose 3% as volume increased 16% but average prices fell 7%.
- Profitability weakened as lower prices and higher production costs—particularly third-party feedstock—more than offset higher sales volumes. Cost of sales rose 20% in Q3 and 24% year to date. Management estimated higher raw materials and other production costs added about $24 million in Q3 and $101 million year to date.
- Foreign exchange reduced sales by an estimated $9 million in Q3 and $41 million year to date, while increasing operating income by approximately $6 million and $5 million, respectively.
Financial position and liquidity
- At September 30, cash and cash equivalents were $385.8 million, with restricted cash of $1.1 million; total cash, cash equivalents and restricted cash were $386.9 million. Current assets were $1,186.9 million and current liabilities $227.5 million.
- Total debt was $436.1 million, including $432.3 million carrying value of 3.75% senior secured notes due September 2025. Debt declined from $456.6 million at year-end 2018. The company reported compliance with all debt covenants.
- Available borrowing capacity was approximately $118.4 million under the North American revolver and $98.5 million under the European revolver. Management expected liquidity to cover short- and long-term obligations, subject to actual developments.
- Year-to-date capital expenditures were $34.2 million; the company estimated approximately $75 million for full-year 2019. Operating cash flow fell by $75.2 million year over year, primarily reflecting lower operating income. Dividends paid were $62.5 million; share repurchases totaled $3.0 million.
Outlook, risks and notable items
- Management expected 2019 production and sales volumes to exceed 2018 levels, assuming stable global economic conditions. It expected selling prices to remain stable for the rest of 2019, but full-year operating income to be lower than 2018 because lower prices and higher raw material and other operating costs were expected to outweigh volume gains.
- Management cited cyclicality, global economic conditions, TiO₂ supply and demand, customer inventories, competition, feedstock and energy costs, currency movements, production interruptions, liquidity and environmental matters as risks to results. It expects long-term TiO₂ demand growth of 2%–3% annually, but interim demand may vary.
- Operating lease accounting was adopted January 1, 2019, adding $35.1 million of right-of-use assets and $34.5 million of lease liabilities at adoption, with no opening retained-earnings impact. At September 30, lease liabilities totaled $29.5 million, including $23.1 million noncurrent.
- The filing reports various legal and other claims but no litigation accrual, stating that a material loss was not reasonably possible. Management said there were no material changes to previously disclosed risk factors and no material changes in market risks.
- Valhi held approximately 50% of the company’s shares and an NL subsidiary approximately 30%; the filing describes indirect control through Contran-related ownership. Transactions and balances with affiliates include a $5.0 million note receivable from Valhi and a $10.9 million year-to-date loan to Valhi, partly offset by $5.9 million collected.
Important facts for investors to verify
- Whether TiO₂ selling prices stabilize and whether volume growth can offset continuing feedstock, energy and other production-cost pressure.
- Whether operating cash flow and margins recover after the sharp year-over-year declines, and the effect of working-capital changes.
- Current borrowing availability, covenant headroom and the company’s ability to maintain liquidity through industry and economic volatility.
- Dividend and capital-allocation sustainability, including planned capital expenditures and remaining share-repurchase authorization.
- Developments in environmental, legal, tax and related-party matters; the filing does not identify a material accrued litigation loss.