Kronos Worldwide, Inc. — Q1 2018 Form 10-Q
Business and period: Global producer and marketer of titanium dioxide (TiO₂) pigments, with production facilities in Europe and North America. This unaudited report covers the three months ended March 31, 2018; comparisons are with Q1 2017 unless stated otherwise. Figures are in U.S. dollars.
Financial performance and position
| Metric | Q1 2017 | Q1 2018 |
|---|---|---|
| Net sales | $369.8 million | $430.4 million |
| Gross margin | $106.0 million; 29% of sales | $174.8 million; 41% of sales |
| Income from operations | $56.4 million; 15% of sales | $107.5 million; 25% of sales |
| Net income | $36.8 million | $70.7 million |
| Diluted EPS | $0.32 | $0.61 |
| Operating cash flow | $41.6 million | $58.2 million |
| Capital expenditures | $11.9 million | $15.2 million |
- Q1 2018 sales rose 16%. Management attributed the change principally to 26% higher average TiO₂ selling prices and an approximately $31 million favorable currency-translation effect; sales volumes fell 13%, reducing sales by an estimated $48 million.
- Cost of sales declined 3% to $255.6 million despite approximately $12 million of higher raw-material and other production costs, primarily feedstock ore. Gross margin expanded as higher prices more than offset lower volumes and higher costs.
- Cash, cash equivalents and restricted cash totaled $365.9 million at March 31, 2018, versus $323.7 million at year-end 2017. Working capital was $934.4 million (current assets of $1,195.5 million less current liabilities of $261.1 million).
- Total debt was $488.1 million, including $484.9 million carrying value of the 3.75% Senior Secured Notes due September 2025. Cash less total debt was approximately $122 million, including restricted cash. Stockholders’ equity was $818.3 million.
- Available revolver capacity was $115.2 million in North America and $110.8 million in Europe. The company reported compliance with debt covenants and said it expected sufficient liquidity for near- and longer-term obligations.
Material changes and management commentary
- Average selling prices continued to rise: prices at Q1-end were 4% above year-end 2017; Q1-end 2017 prices had been 27% above year-end 2016. Sales volumes were lower in all major markets versus the prior-year quarter’s record levels.
- Production volumes declined 8%, with facilities operating at approximately 95% of practical capacity versus full practical capacity in Q1 2017. Management cited scheduled maintenance, a Belgian productivity project and a controlled ramp-up of a new enterprise resource planning (ERP) system; it also sought to preserve inventory for expected seasonal demand.
- SG&A increased to $58.4 million from $45.3 million, partly reflecting ERP implementation and higher sales-support costs. Net currency transaction losses were $5.0 million, compared with $0.2 million in Q1 2017; management estimated the net currency effect on operating income was positive by approximately $1 million.
- Operating cash flow increased by $16.6 million, but receivables and inventory absorbed cash. Days sales outstanding rose to 76 from 63 at year-end, and days sales in inventory rose to 77 from 62.
- Dividends were $0.17 per share, versus $0.15 in Q1 2017. The company had 1,951,000 shares available for repurchase under its authorized program.
Outlook, risks and unusual items
- For 2018, management expected sales and operating income to exceed 2017, principally on higher average selling prices, partly offset by higher raw-material costs. It expected sales and production volumes to be slightly below 2017 record levels, cost per metric ton to be moderately higher, and net income to be lower than 2017 because 2017 included an aggregate $136.5 million net income tax benefit. Management did not provide numeric earnings or revenue guidance.
- Feedstock ore purchased in Q1 cost more than in Q4 2017, with the higher costs expected to affect results beginning in Q2. Management said industry demand appeared strong and additional price increases were possible, but did not expect 2018 price increases to match 2017’s magnitude.
- The 2017 Tax Act’s estimated $76.2 million transition tax is payable over eight years; $70.1 million remained recorded as a noncurrent payable to affiliate at March 31, 2018. The company was still evaluating tax provisions and expected to complete the relevant accounting by December 22, 2018. Q1 2018 included a provisional $0.4 million deferred tax expense related to undistributed non-U.S. earnings and a $1.4 million noncash tax benefit from an intercompany APA settlement.
- Q1 2018 income tax expense was $29.0 million, compared with $11.0 million in Q1 2017. The prior-year quarter included a $5.0 million noncash tax benefit from a valuation-allowance decrease; the company also reported a substantial tax benefit in 2017 that affects the year-over-year net-income outlook.
- Material business risks include TiO₂ pricing and cyclical demand, competition and capacity additions, customer inventories, feedstock and energy costs, foreign-exchange movements, operating interruptions, liquidity and refinancing, tax matters, environmental regulation and litigation. Management reported no material changes to risk factors and said disclosure controls were effective. It stated that ERP implementation had not materially impaired financial reporting controls.
- The company reported a preliminarily approved, immaterial settlement of one indirect-purchaser TiO₂ antitrust case, subject to final approval expected in 2018. A separate Home Depot case remained in trial court; the company denied the allegations and said a material loss was not reasonably possible.
Important facts for investors to verify
- Whether higher TiO₂ prices persist and offset weaker volumes and rising feedstock costs.
- How ERP implementation, maintenance and production levels affect shipments, inventory and cash conversion.
- Final measurement of the transition tax and other 2017 Tax Act impacts, including the timing of affiliate payments.
- Liquidity, revolver availability and covenant compliance as operating conditions and working-capital needs change.
- Progress and outcome of the pending antitrust litigation, including final approval of the settlement.