Kronos Worldwide, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing. Amounts are in U.S. dollars unless noted.
Business context
Kronos is a global producer of titanium dioxide (TiO2) pigment, which generated approximately 94% of 2019 net sales. The company serves about 4,000 customers in 100 countries; Europe and North America are its principal markets. TiO2 demand and pricing are cyclical and sensitive to economic conditions, customer inventories, industry supply and raw-material costs.
Key financial and operating metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $1,731.1 million | $1,661.9 million |
| Gross margin | $386.2 million; 22% of sales | $562.2 million; 34% of sales |
| Income from operations | $145.8 million; 8% of sales | $330.1 million; 20% of sales |
| Net income | $87.1 million | $205.0 million |
| Diluted earnings per share | $0.75 | $1.77 |
| Cash provided by operating activities | $160.3 million | $188.5 million |
| Capital expenditures | $55.1 million | $56.3 million |
| Cash and cash equivalents | $390.8 million | $373.3 million |
| Total debt, including current maturities | $445.5 million | $456.6 million |
At year-end 2019, current assets were $1,219.7 million and current liabilities were $270.6 million. Restricted cash was $1.5 million. The company reported $104.8 million available under its North American revolving facility and the full €90 million (approximately $100.8 million) available under its European facility; neither facility had borrowings outstanding. It was in compliance with debt covenants.
TiO2 sales volume rose 15% to 566,000 metric tons, while production increased 2% to 546,000 metric tons; capacity utilization was 98%. The board paid $0.72 per share in dividends during 2019, totaling $83.4 million.
For the fourth quarter, net sales were $372.7 million, gross margin was $79.7 million, net income was $9.4 million and diluted EPS was $0.08. The comparable 2018 quarter recorded $349.4 million of sales, $96.5 million of gross margin, $24.0 million of net income and $0.21 diluted EPS.
Material changes versus 2018
- Sales increased 4%, primarily because TiO2 sales volume grew 15%; lower average selling prices, down 6%, and currency movements partly offset the volume increase.
- Cost of sales rose 22% to $1,344.9 million. Management attributed the increase to higher sales volume and approximately $122 million of higher raw-material and other production costs, including feedstock and energy.
- Gross margin fell by $176.0 million and operating income fell by $184.3 million. Net income declined by $117.9 million, reflecting lower operating income.
- Operating cash flow decreased $28.2 million to $160.3 million. Cash at year-end, including restricted cash, totaled $392.3 million, up from $374.7 million.
- Long-term pension obligations and accumulated pension-related losses were affected by actuarial changes; accrued pension costs increased to $307.4 million from $262.9 million.
Outlook, risks and unusual items
- For 2020, management expected production to be slightly higher, sales volume slightly lower, and operating income lower than in 2019, citing lower expected sales volume and higher feedstock costs. It expected TiO2 prices to remain stable in the first quarter, assuming then-current conditions.
- Management expected 2020 capital expenditures of approximately $75 million, including $25 million for environmental compliance, protection and improvement; pension contributions of approximately $17 million; and pension expense of approximately $32 million.
- The filing identified uncertainty from the coronavirus outbreak, including possible effects on demand, customers, supply chains and operations. The company stated that the eventual impact could not be predicted.
- On February 18, 2020, the EU published a classification of TiO2 powder and certain powder mixtures as suspected carcinogens by inhalation, effective October 1, 2021. Required hazard labels may affect compliance costs, customer perceptions or demand. This development occurred after the reporting year.
- Kronos planned to phase out sulfate production at its Leverkusen facility by the end of 2020 as part of its strategy to increase chloride-process production.
- Feedstock purchase commitments were approximately $897 million; other long-term service and supply commitments were approximately $73.7 million. Total disclosed contractual commitments due in 2020 were $580.6 million, including $490.7 million for feedstock. These are contractual commitments, not all debt maturities.
- Unusual 2019 items included a $2.6 million insurance settlement gain, a $3.0 million tax benefit from a favorable German settlement, and a $5.5 million non-cash tax expense related primarily to revaluation of a German deferred tax asset. The 2017 comparison included substantial tax benefits from valuation-allowance reversals, so reported earnings across those years are not directly comparable.
- Risks include TiO2 price and demand cyclicality, competition and capacity additions, raw-material availability and cost, foreign-exchange exposure, debt and liquidity needs, environmental regulation, litigation, labor disruption and cyber or operational interruptions. The company disclosed no material litigation accrual and stated its facilities were in substantial compliance with environmental laws.
Most important facts for investors to verify
- Whether sales volumes, pricing and margins develop as management forecast, particularly given expected lower 2020 sales volume and higher feedstock costs.
- The financial and market consequences of the EU TiO2 classification and required labeling.
- Liquidity against substantial feedstock commitments, planned capital spending, dividends and debt service; confirm facility availability and covenant compliance as conditions change.
- Exposure to the euro, including the euro-denominated €400 million senior secured notes due in 2025, and the company’s pension funding and actuarial assumptions.
- Execution and cost implications of the planned Leverkusen sulfate-process phase-out and the effect of any coronavirus-related disruption.
- Related-party arrangements and control: Valhi owned approximately 50% of Kronos and an NL Industries subsidiary approximately 30%; review affiliate transactions, tax-sharing arrangements and governance disclosures.