Kronos Worldwide, Inc. — Q2 2019 Form 10-Q
Business context and reporting period: The filing covers the quarter and six months ended June 30, 2019. Kronos is a global producer and marketer of titanium dioxide (TiO2) pigments, with production facilities in Europe and North America. Figures below are in millions of dollars except per-share data, percentages and volumes.
Financial performance
| Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 |
|---|---|---|---|---|
| Net sales | $484.5 | $471.8 | $921.0 | $902.2 |
| Gross margin | $109.5 | $171.8 | $218.8 | $346.6 |
| Gross margin percentage | 23% | 36% | 24% | 38% |
| Income from operations | $46.5 | $119.9 | $95.5 | $227.4 |
| Net income | $29.5 | $77.7 | $59.8 | $148.4 |
| Diluted earnings per share | $0.25 | $0.67 | $0.52 | $1.28 |
- Sales increased 3% in Q2 and 2% in H1 year over year. Average TiO2 selling prices fell 8% in both periods, while sales volumes rose 15%; currency changes also reduced reported sales.
- Operating income declined 61% in Q2 and 58% in H1. Management attributed the deterioration principally to lower selling prices and higher raw-material and other production costs, especially third-party feedstock ore. Production volumes were approximately flat.
- Cash provided by operating activities was $26.0 in H1 2019, down from $169.7 in H1 2018. Capital expenditures were $25.5; dividends paid were $41.7. Cash, cash equivalents and restricted cash totaled $329.5 at June 30, 2019, versus $374.7 at year-end 2018.
- At June 30, total debt was $453.7, including $449.7 carrying value of 3.75% senior secured notes due September 2025. Debt was $456.6 at December 31, 2018. The company reported compliance with debt covenants.
- Current assets were $1,230.3 and current liabilities $249.1 at June 30. Available borrowing capacity was approximately $122.3 under the North American revolver and $102.5 under the European revolver. Management said it expects sufficient liquidity for near- and long-term obligations.
Material changes and notable items
- Trade receivables increased to $372.5 from $273.3 at year-end 2018; total accounts and other receivables rose to $400.6 from $312.5. Inventory was $488.6, down from $497.9.
- H1 operating cash flow was pressured by lower operating income, cash taxes paid and the timing of working-capital and joint-venture cash flows. Cash taxes paid were $29.5 versus $11.5 in H1 2018.
- Effective January 1, 2019, the company adopted the new lease accounting standard prospectively, recognizing $35.1 of right-of-use assets and $34.5 of lease liabilities at adoption, with no opening retained-earnings impact. At June 30, lease obligations totaled $31.3.
- The company paid quarterly dividends of $0.18 per share and repurchased 110,303 shares for $1.4 during Q2. Approximately 1.84 million shares remained authorized for repurchase.
- Valhi owned approximately 50% of Kronos and an NL subsidiary owned approximately 30%. The filing describes related-party control relationships and loans to Valhi; Kronos loaned $7.1 and collected $5.4 during H1.
Outlook, commentary and risks
- Management expected 2019 production and sales volumes to be slightly higher than in 2018, assuming stable global economic conditions. It expected full-year sales to increase, mainly from volume, partly offset by lower average selling prices.
- Management expected 2019 operating income to be lower than 2018 as higher volumes would be more than offset by lower average selling prices and higher raw-material costs. Cost of sales per metric ton was expected to exceed 2018 levels, principally due to feedstock costs.
- TiO2 prices rose 2% during Q2 from the end of Q1. Management said market conditions could support further price increases in the second half of 2019; this is an expectation, not a quantified price forecast. Estimated 2019 capital expenditures were approximately $78.
- Key risks include cyclical TiO2 demand and pricing, customer and producer inventories, competition and capacity additions, raw-material availability and cost, currency movements, operating interruptions, liquidity and refinancing, environmental compliance, taxes and litigation. The filing reported no material change in risk factors and no litigation accrual for matters management considered reasonably possible to result in a material loss.
- Management stated that disclosure controls and procedures were effective as of June 30, 2019, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether TiO2 selling prices and feedstock costs develop as management expected, and how they affect margins and operating income.
- Whether higher sales volumes persist and convert into operating cash flow, given the sharp year-over-year decline in H1 cash generation and higher receivables.
- Liquidity and covenant headroom, including revolver availability, debt service and the company’s stated ability to meet obligations.
- Execution of the 2019 capital expenditure plan, dividend commitments and any further share repurchases or related-party transactions.
- Developments in currency exposure, environmental matters, tax contingencies and other legal claims; the filing does not provide a clear quantified estimate of potential losses for these matters.