Business context and reporting period
Kronos Worldwide, Inc. is a global producer and marketer of titanium dioxide (TiO₂) pigments, used primarily in paints, plastics, paper and other products. This unaudited Form 10-Q covers the three months ended March 31, 2019, compared with the first quarter of 2018. The company reported that approximately half of first-quarter 2019 sales volume went to Europe.
Key financial metrics
| Metric | Q1 2018 | Q1 2019 |
|---|---|---|
| Net sales | $430.4 million | $436.5 million |
| Gross margin | $174.8 million; 41% of sales | $109.3 million; 25% of sales |
| Income from operations | $107.5 million; 25% of sales | $49.0 million; 11% of sales |
| Net income | $70.7 million | $30.3 million |
| Diluted EPS | $0.61 | $0.26 |
| Cash provided by operating activities | $58.2 million | $7.0 million |
- At March 31, 2019, cash, cash equivalents and restricted cash totaled $340.6 million. Total debt was $447.3 million, including $443.2 million of 3.75% senior secured notes due September 2025. The company reported no borrowings or repayments under its revolving facilities during the quarter.
- Available borrowing capacity was approximately $123.1 million under the North American revolver and $101.1 million under the European revolver. The company said it was in compliance with debt covenants.
- Total assets were $1.927 billion and stockholders’ equity was $851.3 million at March 31, 2019. Operating lease liabilities recognized under the new lease standard totaled $32.4 million.
- Capital expenditures were $16.0 million. Cash dividends paid were $20.9 million, or $0.18 per share. Cash declined by $34.1 million from year-end when including restricted cash.
Material changes versus the prior comparable period
- Sales increased 1%, as a 15% rise in sales volumes more than offset an 8% decline in average TiO₂ selling prices. Currency translation reduced sales by an estimated $15 million.
- Cost of sales rose 28% to $327.2 million. Management attributed the increase to higher sales volumes and approximately $46 million of higher raw-material and other production costs, partly offset by favorable currency effects.
- Operating income fell 54%, primarily because lower selling prices and higher feedstock and other production costs more than offset increased volume. Currency changes increased operating income by an estimated $8 million year over year.
- Operating cash flow fell to $7.0 million, principally reflecting lower operating income and lower joint-venture distributions; working-capital movements and lower cash taxes partly offset the decline.
- Production volumes were up 1%, and facilities operated at 97% of average practical capacity versus 95% a year earlier. Sales volume increased in all major markets.
Outlook, risks and unusual items
- For 2019, management expected production and sales volumes to be higher than in 2018, assuming stable global economic conditions. It expected full-year sales to increase, mainly from volume, but operating income to decline as lower prices and higher feedstock costs were expected to outweigh volume benefits.
- Management expected 2019 cost of sales per metric ton to exceed 2018 levels, primarily due to higher feedstock ore costs. It noted that prices had declined into Q1 and suggested that declining customer inventories could support price stabilization or minor increases later in 2019; this was an expectation, not a commitment.
- Management estimated 2019 capital expenditures of approximately $85 million and expected sufficient liquidity for short- and long-term obligations, while cautioning that actual developments could adversely affect liquidity.
- Key risks include TiO₂ supply, demand and pricing; cyclicality and customer inventories; ore, energy and other production costs; competition and capacity additions; currency movements; operating interruptions; environmental and regulatory matters; taxes; and access to financing.
- The company adopted lease accounting standard ASC 842 on January 1, 2019, recognizing $35.1 million of right-of-use assets and $34.5 million of lease liabilities at adoption, with no opening retained-earnings impact. The interim financial statements include only normal recurring adjustments, and management cautioned that quarterly results may not indicate full-year results.
- The company reported various legal and other claims but had not accrued litigation losses, stating that it did not consider a material loss reasonably possible. It also said there were no material changes to previously reported risk factors, and disclosure controls were effective.
Important facts for investors to verify
- Whether TiO₂ selling prices stabilize or recover after the reported decline, and how pricing and customer inventories develop across regions.
- Whether higher sales volumes can offset weaker prices and elevated feedstock costs, and whether the expected 2019 decline in operating income materializes.
- Cash conversion and working-capital trends, particularly receivables and inventory, given the sharp year-over-year fall in operating cash flow.
- Liquidity, revolver availability and covenant compliance as operating conditions change; also monitor the scheduled 2025 senior-note maturity and lease obligations.
- Actual 2019 capital spending, dividends and pension contributions versus expectations, including estimated pension contributions of approximately $17 million.