Business context and reporting period
Kronos Worldwide, Inc. filed this Form 10-K for the fiscal year ended December 31, 2017. It is a global producer and marketer of titanium dioxide (TiO₂), which generated 94% of 2017 net sales. The company serves approximately 4,000 customers in 100 countries; Europe and North America are its primary markets.
Financial and operating performance
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $1,729.0 million | $1,364.3 million |
| Gross margin | $558.9 million; 32% of sales | $257.0 million; 19% of sales |
| Operating income | $330.4 million; 19% of sales | $81.1 million; 6% of sales |
| Net income | $354.5 million; $3.06 per share | $43.3 million; $0.37 per share |
| Cash from operating activities | $276.1 million | $89.6 million |
| Capital expenditures | $64.3 million | $53.0 million |
TiO₂ sales volume rose 5% to a record 586,000 metric tons, and production rose 5% to a record 576,000 metric tons. Plants operated at full practical capacity. Average TiO₂ selling prices increased 22% year over year; the company reported prices at year-end were 27% above year-end 2016.
At December 31, 2017, cash and cash equivalents were $322.0 million, restricted cash was $1.7 million, and total debt was $474.5 million. The debt balance was primarily the carrying value of €400 million of 3.75% Senior Secured Notes due 2025. The North American and European revolving facilities had no borrowings outstanding, with approximately $98.2 million and $107.7 million available, respectively. The company reported compliance with debt covenants.
Material changes versus the prior comparable period
- Sales increased 27%, primarily from higher TiO₂ prices, which contributed approximately $300 million, and higher sales volumes, which contributed approximately $68 million.
- Gross margin improved substantially as pricing and higher production volumes more than offset higher raw-material and other production costs. Operating income increased $249.3 million; currency movements reduced it by an estimated $18 million versus 2016.
- Net income included a net $136.5 million income-tax benefit. This included reversal of German and Belgian deferred-tax valuation allowances ($186.7 million benefit) and a further valuation-allowance reversal ($18.7 million benefit), partly offset by the $76.2 million provisional repatriation tax and a $4.5 million deferred-tax expense related to a change in reinvestment assumptions.
- In September 2017, Kronos issued the Senior Notes and repaid its approximately $338.6 million term-loan principal balance. The debt prepayment and related swap termination resulted in a $7.1 million loss.
- Cash from operations increased by $186.5 million, primarily reflecting improved operating income. Year-end cash and cash equivalents rose from $50.7 million to $322.0 million.
Unaudited fourth-quarter 2017 results were net sales of $453.3 million, gross margin of $173.5 million, and net income of $47.4 million, compared with $333.7 million, $85.6 million, and $23.2 million, respectively, in fourth-quarter 2016.
Outlook, risks, contingencies, and unusual items
- Management expected 2018 sales and operating income to exceed 2017, principally due to anticipated higher average selling prices, partly offset by higher feedstock costs. It expected 2018 production and sales volumes to be slightly below 2017 records and net income to be lower, in part because 2017 included the $136.5 million net tax benefit.
- Management expected 2018 cost of sales per metric ton to increase, mainly because of higher feedstock costs. It planned approximately $67 million of capital expenditures, including about $26 million for environmental programs, and expected plants to operate at full practical capacity.
- Management estimated approximately $433 million of contractual commitments payable in 2018, including debt, interest, leases, supply and service contracts, fixed-asset acquisitions, and estimated taxes. Feedstock purchase commitments totaled approximately $383 million over future periods; other supply and service commitments totaled approximately $128 million.
- Key risks include cyclical TiO₂ demand and pricing, competition, feedstock availability and costs, currency fluctuations, operational interruptions, labor disruption, environmental requirements, litigation, and the ability to maintain liquidity and refinance debt. The euro-denominated notes create foreign-exchange exposure; a hypothetical 10% adverse currency move would increase their U.S.-dollar equivalent by approximately $48 million.
- The Tax Cuts and Jobs Act amounts were provisional at year-end and subject to adjustment during the measurement period ending December 22, 2018. Management also noted potential tax exposure under other provisions of the Act and that the amount of certain unrecognized deferred tax liabilities could not be practicably determined.
- Kronos was defending a separate Home Depot antitrust lawsuit and said it believed the action was without merit. A related indirect-purchaser class action had a preliminary settlement for an immaterial amount, subject to final approval. The filing reported no material accrual for pending litigation.
- The company implemented the remaining portion of its new enterprise resource planning system in January 2018. Management identified potential system implementation and cybersecurity disruption as risks. Management and the auditor concluded internal control over financial reporting was effective at year-end.
Important facts for investors to verify
- Whether TiO₂ price increases and strong demand persist, and how higher feedstock costs affect 2018 margins.
- Whether the 2018 volume outlook, full-capacity operations, and planned capital spending are achieved.
- The final accounting and cash-payment schedule for the provisional $76.2 million repatriation tax and other Tax Act effects.
- Liquidity after contractual commitments, dividends, pension contributions, and capital expenditures; also review the euro exposure and debt covenants.
- Developments in the Home Depot litigation, final approval of the class-action settlement, and any material environmental or other contingencies.