Kronos Worldwide, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report, not a standalone Q4 filing; quarterly figures are included below where relevant. Kronos is a global producer of titanium dioxide (TiO₂), used mainly in coatings, plastics and paper. TiO₂ represented 94% of 2018 net sales. The company reported sales in approximately 100 countries and operated production facilities in Europe and North America.
Key financial results
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $1,661.9 million | $1,729.0 million |
| Gross margin | $562.2 million; 33.8% | $569.7 million; 33.0% |
| Income from operations | $330.1 million; 19.9% | $347.8 million; 20.1% |
| Income before income taxes | $293.8 million | $305.7 million |
| Income tax expense (benefit) | $88.8 million expense | $48.8 million benefit |
| Net income | $205.0 million; $1.77 per share | $354.5 million; $3.06 per share |
| Cash from operating activities | $188.5 million | $276.1 million |
| Capital expenditures | $56.3 million | $64.3 million |
| Cash dividends per share | $0.68 | $0.60 |
Balance sheet and liquidity at December 31, 2018: Cash and cash equivalents were $373.3 million, restricted cash was $1.4 million, total assets were $1,898.1 million, and stockholders’ equity was $839.8 million. Total debt was $456.6 million, including €400 million of 3.75% Senior Secured Notes due 2025. No borrowings were outstanding under either revolving credit facility; reported borrowing availability was $101.3 million in North America and $103.2 million in Europe. The company stated it was compliant with debt covenants.
Q4 2018: Net sales were $349.4 million, gross margin was $96.5 million and net income was $24.0 million, or $0.21 per share. Q4 2017 figures were $453.3 million, $176.3 million and $47.4 million, or $0.41 per share, respectively.
Material changes versus 2017
- Net sales declined 4%. Average TiO₂ selling prices rose 13%, adding an estimated $225 million to sales, but sales volumes fell 16%, reducing sales by an estimated $277 million. Currency changes added an estimated $49 million to sales.
- TiO₂ sales volume fell to 491,000 metric tons from a record 586,000; production declined 7% to 536,000 metric tons from 576,000. Management cited ERP-system implementation, inventory planning, product availability, customer inventory normalization, maintenance and a Belgian facility improvement project.
- Higher prices helped lift gross margin percentage to 33.8% from 33.0%, but operating income decreased $17.7 million. Higher feedstock and other production costs totaled an estimated $103 million of unfavorable impact; SG&A rose $27.7 million to $228.3 million, including ERP-related costs.
- Net income declined substantially, principally because 2017 included a net $136.5 million income tax benefit from deferred-tax valuation allowance reversals and other tax items. In 2018 the company recorded $88.8 million of income tax expense.
- Operating cash flow fell $87.6 million to $188.5 million, reflecting lower operating income, less favorable working-capital movements and higher cash taxes. Inventory rose to $497.9 million from $382.3 million; days inventory increased to 113 from 62.
- Cash and cash equivalents increased to $373.3 million from $322.0 million, while debt decreased to $456.6 million from $474.5 million. The 2018 statement of income also included a $7.3 million loss on marketable equity securities.
Outlook, risks and notable items
- For 2019, management expected slightly higher production and higher sales volumes, assuming global economic conditions continued. It expected sales to increase overall, but operating income to decline as lower expected average selling prices and higher feedstock costs were expected to outweigh volume gains.
- Management expected TiO₂ plants to operate near full practical capacity in 2019. Average selling prices had declined 6% during the second half of 2018; management cited possible further price decreases in Q1 2019 as customer inventories continued to normalize.
- 2019 capital expenditures were forecast at approximately $85 million, including about $25 million for environmental compliance and improvement. The company also expected approximately $17 million of pension contributions and $28 million of defined-benefit pension expense.
- Feedstock availability and cost are significant risks. Contractual minimum commitments at year-end included approximately $593.5 million for TiO₂ feedstock and $156.4 million for other long-term supply and service contracts. The company expected per-ton costs to rise in 2019.
- Other principal risks include TiO₂ market cyclicality and competitive pricing, customer demand and inventory levels, currency movements (including euro-denominated debt), energy and raw-material costs, environmental regulation, labor disruption, litigation, and the ability to maintain liquidity and refinance debt. About 86% of the workforce was covered by collective bargaining agreements.
- Unusual tax items: 2018 included $3.7 million of GILTI tax expense and $2.1 million of additional uncertain-tax-position expense. The unpaid Transition Tax balance was $62.6 million at year-end, payable over the remaining installment period. Management expected the 2019 effective tax rate to exceed the 21% U.S. federal statutory rate but be below the 2018 effective rate.
- Management reported effective disclosure controls and internal control over financial reporting; the independent auditor gave an unqualified opinion on the financial statements and internal control.
Most important facts for investors to verify
- Whether the forecast recovery in 2019 sales volumes materialized and whether selling prices declined as management anticipated.
- Actual feedstock cost increases, supplier renewals and performance against the company’s substantial purchase commitments.
- Whether elevated inventories convert to sales and cash, and whether operating cash flow recovers from the 2018 decline.
- Capacity utilization and production effects from maintenance, the Belgian project and the ERP-system implementation.
- Debt covenant headroom, access to revolving facilities, euro exchange-rate exposure and the company’s ability to fund debt service, dividends and planned capital spending.
- Future tax expense, Transition Tax installments and any effects from final U.S. tax regulations or changes in deferred-tax asset realizability.