Kronos Worldwide, Inc. — 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone quarterly filing; fourth-quarter figures are included where disclosed. Amounts are in U.S. dollars unless noted.
Business context
Kronos is a global producer and marketer of titanium dioxide pigment (TiO₂), used mainly in coatings, plastics and paper. TiO₂ accounted for 93% of 2020 net sales. Sales volumes were concentrated in Europe (46%) and North America (36%). The business is cyclical and sensitive to economic activity, industry pricing, raw-material costs and customer inventories.
Key financial metrics
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $1,638.8 million | $1,731.1 million |
| Gross margin | $351.2 million; 21% of sales | $386.2 million; 22% of sales |
| Income from operations | $116.2 million; 7% of sales | $145.8 million; 8% of sales |
| Net income | $63.9 million | $87.1 million |
| Diluted earnings per share | $0.55 | $0.75 |
| Cash from operating activities | $102.5 million | $160.3 million |
| Capital expenditures | $62.8 million | $55.1 million |
| Total debt | $487.4 million | $445.5 million |
| Cash and cash equivalents at year-end | $355.3 million | $390.8 million |
| Total assets / stockholders’ equity | $2,036.7 million / $796.5 million | $1,965.8 million / $816.1 million |
Net sales fell 5% year over year. TiO₂ sales volume declined 6%, average selling prices declined 2%, and product mix and other factors contributed a 2% increase; currency movements added approximately $9 million to sales. Production was 517,000 metric tons, down 5%, and capacity utilization was 92%, versus 98% in 2019. The filing reports quarterly 2020 net sales of $414.9 million and net income of $10.2 million for the fourth quarter, compared with $372.7 million and $9.4 million, respectively, in fourth-quarter 2019.
At year-end, Kronos had $6.7 million of restricted cash in addition to cash and cash equivalents. No borrowings were outstanding under its revolving facilities; reported available borrowing capacity was $107.6 million in North America and $110.3 million in Europe. The company reported compliance with debt covenants. Its principal debt was €400 million of 3.75% senior secured notes due September 2025.
Material changes versus 2019
- Lower TiO₂ demand during the COVID-19-driven economic contraction reduced annual sales volumes, prices, production and profitability. Management said demand strengthened in the second half.
- Gross margin declined by $35.0 million and operating income by $29.6 million. Lower selling prices and volumes and higher raw-material and production costs weighed on results; currency movements increased operating income by an estimated $6 million compared with 2019.
- Operating cash flow decreased $57.8 million, reflecting lower operating income and a less favorable working-capital effect, partly offset by lower cash taxes.
- Year-end debt rose by $41.9 million, mainly reflecting the U.S.-dollar value of euro-denominated notes. Cash and cash equivalents declined by $35.5 million.
- Accrued pension costs increased to $372.6 million from $307.4 million. The filing attributes the increase in pension underfunding primarily to lower discount rates and currency effects.
Outlook, commentary and risks
- Management expected 2021 sales and operating income to exceed 2020, principally from higher average TiO₂ prices and higher sales volumes. Production was expected to be slightly higher, with plants operating near full practical capacity; demand and the pandemic outlook remained uncertain.
- Management expected feedstock costs in 2021 to remain relatively consistent with average 2020 costs, and expected approximately $85 million of 2021 capital expenditures, including about $23 million for environmental programs. It also expected approximately $17 million of pension contributions and $31 million of pension expense.
- Cash dividends totaled $83.2 million in 2020, compared with $102.5 million of operating cash flow and $62.8 million of capital expenditures. The board declared a $0.18-per-share first-quarter 2021 dividend.
- Contractual commitments totaled $1.97 billion, including $1.17 billion for TiO₂ feedstock, $86.1 million for other supply and service contracts, and $492.1 million of debt principal. These commitments span multiple years and depend in part on estimated quantities and prices.
- The EU classified TiO₂ powder and certain mixtures as suspected carcinogens by inhalation; the regulation was scheduled to take effect October 1, 2021, requiring labels on specified products. Kronos disputed the scientific basis but stated it intended to comply.
- Hurricanes Laura and Delta temporarily halted production at the Louisiana joint venture in 2020. Kronos said impacts were limited and expected most covered losses to be recoverable through insurance; no recovery had been recognized for the Laura claim because amounts were not yet determinable.
- Other material risks include COVID-19 and cyclical demand, competitive pricing and possible capacity additions, limited sources of certain feedstocks, currency exposure, environmental and product regulation, refinancing and liquidity, and pension and tax estimates. One customer represented 10% of 2020 sales. The company reported no litigation accrual because management did not consider a material loss reasonably possible.
Unusual items included a $1.5 million pretax insurance settlement gain in 2020 and an immaterial $3.9 million fourth-quarter out-of-period adjustment to correct an overstated noncurrent water-control and monitoring liability. The 2020 income tax provision was $16.1 million; management highlighted significant judgment in measuring global tax balances and deferred tax assets. The auditor identified income taxes as a critical audit matter and gave unmodified opinions on the financial statements and internal control over financial reporting.
Investor facts to verify
- Whether the forecast recovery in TiO₂ prices, volumes and operating income materialized, and how the recovery compared with the strong second-half 2020 demand trend.
- Actual 2021 cash generation, capital expenditures, dividends and borrowing availability against management’s expectations and the company’s sizable contractual purchase commitments.
- Debt refinancing and covenant headroom, particularly ahead of the North American revolver’s January 2022 maturity and the European facility’s September 2022 maturity.
- Any effects of the EU TiO₂ classification on product labeling, customer demand, costs or regulatory requirements.
- Changes in pension funding status and assumptions, and the recoverability of German and Belgian tax-loss carryforwards.
- The final insurance recoveries for hurricane-related losses and developments in tax audits, environmental matters or other contingencies.